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SILO PHARMA, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)


You should read the following discussion and analysis of our financial condition
and plan of operations together with and our consolidated financial statements
and the related notes appearing elsewhere in this Annual Report on Form 10-K. In
addition to historical information, this discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results may differ materially from those discussed below. Factors
that could cause or contribute to such differences include, but are not limited
to, those identified below, and those discussed in the section titled “Risk
Factors” included elsewhere in this Annual Report on Form 10-K. All amounts in
this report are in U.S. dollars, unless otherwise noted.



                                       31





Overview


We are a developmental stage biopharmaceutical company focused on merging
traditional therapeutics with psychedelic research. We are committed to
developing innovative solutions to address a variety of underserved
conditions. In these uncertain times, the mental health of the nation and beyond
is being put to the test. More than ever, creative new therapies are needed to
address the health challenges of today. Combining our resources with world-class
medical research partners, we hope to make significant advances in the medical
and psychedelic space.




Rare Disease Therapeutics



We seek to acquire and/or develop intellectual property or technology rights
from leading universities and researchers to treat rare diseases, including the
use of psychedelic drugs, such as psilocybin, and the potential benefits they
may have in certain cases involving depression, mental health issues and
neurological disorders. We are focused on merging traditional therapeutics with
psychedelic research for people suffering from indications such as depression,
post-traumatic stress disorder (“PTSD”), Parkinson’s, and other rare
neurological disorders. Our mission is to identify assets to license and fund
the research which we believe will be transformative to the well-being of
patients and the health care industry.

Psilocybin is considered a serotonergic hallucinogen and is an active ingredient
in some species of mushrooms. Recent industry studies using psychedelics, such
as psilocybin, have been promising, and we believe there is a large unmet need
with many people suffering from depression, mental health issues and
neurological disorders. While classified as a Schedule I substance under the
Controlled Substances Act (“CSA”), there is an accumulating body of evidence
that psilocybin may have beneficial effects on depression and other mental
health conditions. Therefore, the U.S. Food and Drug Administration (“FDA”) and
U.S. Drug Enforcement Agency (“DEA”) have permitted the use of psilocybin in
clinical studies for the treatment of a range of psychiatric conditions.

The potential of psilocybin therapy in mental health conditions has been
demonstrated in a number of academic-sponsored studies over the last decade. In
these early studies, it was observed that psilocybin therapy provided rapid
reductions in depression symptoms after a single high dose, with antidepressant
effects lasting for up to at least six months for a number of patients. These
studies assessed symptoms related to depression and anxiety through a number of
widely used and validated scales. The data generated by these studies suggest
that psilocybin is generally well-tolerated and has the potential to treat
depression when administered with psychological support.

We have engaged in discussions with a number of world-renowned educational
institutions and advisors regarding potential opportunities and have formed a
scientific advisory board that is intended to help advise management regarding
potential acquisition and development of products.

In addition, as more fully described below, we have entered into a license
agreement with the University of Baltimore, Maryland, and have entered into a
joint venture with Zylo Therapeutics, Inc., with respect to certain intellectual
property and technology that may be used for targeted delivery of potential
novel treatments. In addition, we have recently entered into a sponsored
research agreement with Columbia University pursuant to which we have been
granted an option to license certain patents and inventions relating to the
treatment of Alzheimer’s disease and stress-induced affective disorders using
Ketamine in combination with certain other compounds.

We plan to actively pursue the acquisition and/or development of intellectual
property or technology rights to treat rare diseases, and to ultimately expand
our business to focus on this new line of business.

License Agreements between the Company and a Vendor

Vendor License Agreement with the University of Baltimore, Maryland for CNS
Homing Peptide

On February 12, 2021, we entered into a Master License Agreement (the “UMB
License Agreement”) with the University of Maryland, Baltimore (“UMB”) pursuant
to which UMB granted us an exclusive, worldwide, sublicensable, royalty-bearing
license to certain intellectual property (i) to make, have made, use, sell,
offer to sell, and import certain licensed products and (ii) to use the
invention titled, “Central nervous system-homing peptides in vivo and their use
for the investigation and treatment of multiple sclerosis and other
neuroinflammatory pathology” (the “Invention”) and UMB’s confidential
information to develop and perform certain licensed processes for the
therapeutic treatment of neuroinflammatory disease. The term of the License
Agreement shall commence on the UMB Effective Date and shall continue until the
latest of (i) ten years from the date of First Commercial Sale (as defined in
the Sublicense Agreement) of the Licensed Product in such country and (ii) the
date of expiration of the last to expire claim of the Patent Rights (as defined
in the UMB License Agreement) covering such Licensed Product in such country, or
(iii) the expiration of data protection, new chemical entity, orphan drug
exclusivity, regulatory exclusivity, or other legally enforceable market
exclusivity, if applicable, unless terminated earlier pursuant to the terms of
the agreement. Pursuant to the UMB License Agreement, we agreed to pay UMB (i) a
license fee of $75,000, (ii) certain event-based milestone payments, (iii)
royalty payments, depending on net revenues, (iv) minimum royalty payments, and
(v) a tiered percentage of sublicense income. The UMB License Agreement will
remain in effect until the later of: (a) the last patent covered under the UMB
License Agreement expires, (b) the expiration of data protection, new chemical
entity, orphan drug exclusivity, regulatory exclusivity, or other legally
enforceable market exclusivity, if applicable, or (c) ten years after the first
commercial sale of a licensed product in that country, unless earlier terminated
in accordance with the provisions of the UMB License Agreement. The term of the
UMB License Agreement shall expire 15 years after the effective date in which
(a) there were never any patent rights, (b) there was never any data protection,
new chemical entity, orphan drug exclusivity, regulatory exclusivity, or other
legally enforceable market exclusivity or (c) there was never a first commercial
sale of a licensed product. On January 28, 2022, the Company and University of
Maryland, Baltimore
(“UMB”) entered into a second amendment to the commercial
evaluation and license agreement dated February 26, 2021 (“Second Amendment”).
The Second Amendment to extend the term of the original license agreement until
December 31, 2022. However, if the Company exercises the Exclusive Option, the
License Agreement shall expire at the end of the negotiation period (as defined
in the License Agreement) or upon execution of a master license agreement,
whichever occurs first.

As described below, the Company has entered into an investigator sponsored
research agreement with UMB related to a clinical study to examine a novel
peptide-guided drug delivery approach for the treatment of Multiple Sclerosis.



                                       32




Commercial Evaluation License and Option Agreement with UMB for Joint Homing
Peptide

Effective as of February 26, 2021, the Company, through its wholly-subsidiary,
Silo Pharma, Inc., and University of Maryland, Baltimore (“UMB”), entered into a
commercial evaluation license and option agreement (“License Agreement”), which
granted the Company an exclusive, non-sublicensable, non-transferable license to
with respect to the exploration of the potential use of joint-homing peptides
for use in the investigation and treatment of arthritogenic processes. The
License Agreement also granted the Company an exclusive option to negotiate and
obtain an exclusive, sublicensable, royalty-bearing license (“Exclusive Option”)
to with respect to the subject technology. The License Agreement had a term of
six months from the effective date. Both parties could have terminated the
License Agreement within thirty days by giving a written notice.

On July 6, 2021, the Company entered into a First Amendment Agreement (“Amended
License Agreement”) with UMB to extend the term of the original License
Agreement by an additional six months such that the Amended License Agreement
was effective until February 25, 2022 however, if the Company exercises the
Exclusive Option, the License Agreement shall expire at the end of the
negotiation period (as defined in the License Agreement) or upon execution of a
master license agreement, whichever occurs first. The Company paid a license fee
of $10,000 to UMB in March 2021 pursuant to the License Agreement, which was
expensed, since the Company could not conclude that such costs would be
recoverable for this early-stage venture.

On January 28, 2022, the Company and University of Maryland, Baltimore (“UMB”)
entered into a second amendment to the commercial evaluation and license
agreement dated February 26, 2021 (“Second Amendment”). The Second Amendment to
extend the term of the original license agreement until December 31, 2022.
However, if the Company exercises the Exclusive Option, the License Agreement
shall expire at the end of the negotiation period (as defined in the License
Agreement) or upon execution of a master license agreement, whichever occurs
first.

Joint Venture Agreement with Zylö Therapeutics, Inc. for Z-pod™ Technology

On April 22, 2021, the Company entered into a Joint Venture Agreement with Zylö
Therapeutics, Inc. (“ZTI”) pursuant to which the parties agreed to form a joint
venture entity, to be named Ketamine Joint Venture, LLC, to, among other things,
focus on the clinical development of ketamine using ZTI’s Z-pod™ technology.
Pursuant to the Joint Venture Agreement, the Company shall act as the manager of
the Joint Venture. The Venture shall terminate if the development program does
not meet certain specifications and milestones as set forth in the Joint Venture
Agreement within 30 days of the date set forth in the Joint Venture Agreement.
Notwithstanding the foregoing, the Manager may, in its sole discretion,
terminate the Venture at any time.

Pursuant to the terms of the Joint Venture Agreement, (A) the Company shall
contribute (1) $225,000 and (2) its expertise and the expertise of its science
advisory board and (B) ZTI shall contribute (1) certain rights to certain of its
patented technology as set forth in the JV Agreement, (2) a license to the
know-how and trade secrets with respect to its Z-pod™ technology for the loading
and release of ketamine, (3) ketamine to be used for clinical purposes, (4)
reasonable use of its facilities and permits and (5) its expertise and know-how.
Pursuant to the Joint Venture Agreement, 51% of the interest in the Joint
Venture shall initially be owned by the Company and 49% of the interest in the
Joint Venture shall initially be owned by ZTI, subject to adjustment in the
event of additional contributions by either party. Notwithstanding the
foregoing, in no event shall either party own more than 60% of the interest in
the Joint Venture. As of December 31, 2021 and as of the current date of this
registration statement, the joint venture entity has not been formed yet.

Furthermore, pursuant to the terms of the JV Agreement, ZTI shall grant the
Joint Venture a sublicense pursuant to its license agreement (the “License
Agreement”) with Albert Einstein College of Medicine dated November 27, 2017, in
the event that the Company or a third party makes a request indicating that the
patented technology (the “Patented Technology”) licensed to ZTI pursuant to the
License Agreement is needed to advance the development of the Joint Venture or
it is contemplated or determined that the Patented Technology will be sold.
Furthermore, pursuant to the JV Agreement, ZTI granted the Company an exclusive
option to enter into a separate joint venture for the clinical development of
psilocybin using ZTI’s Z-pod™ technology on the same terms and conditions set
forth in the JV Agreement, which option shall expire 24 months after the JV
Effective

Investigator-Sponsored Study Agreements between the Company and Vendors

Sponsored Research Agreement with Columbia University for the Study of Ketamine
in Combination with Other Drugs for Treatment of Alzheimer’s and Depression
Disorders

On October 1, 2021, the Company entered into a sponsored research agreement with
Columbia University (“Columbia”) pursuant to which Columbia shall conduct two
different studies related to all uses of Ketamine or its metabolites in
combination with Prucalopride, one of which is related to Alzheimer’s and the
other of which is related to Depression, PTSD and Stress Projects. In addition,
Company has been granted an option to license certain assets currently under
development, including Alzheimer’s disease. The term of the option will commence
on the effective date of this agreement and will expire upon the earlier of (i)
90 days after the date of the Company’s receipt of a final research report for
each specific research proposal as defined in the agreement or (ii) termination
of the research. If the Company elects to exercise the option, both parties will
commence negotiation of a license agreement and will execute a license agreement
no later than 3 months after the dated of the exercise of the option. Columbia
University
and the Company will work towards developing a therapeutic treatment
for patients suffering from Alzheimer’s disease to posttraumatic stress
disorder. During a one-year period from the date of this agreement, the Company
shall pay a total of $1,436,082 to Columbia University for the support of the
research according to the payment schedule as follows: (i) 30% at signing, (ii)
30% at four and half months after the start of the project, (iii) 30% at nine
months after the start of the project and, (iv)10% at completion of the project.
The Company paid the first payment of $430,825 in November 2021.



                                       33




Sponsored Research Agreement with University of Maryland, Baltimore for the
Study of Targeted liposomal drug delivery for rheumatoid arthritis

On July 6, 2021, we entered into a sponsored research agreement (the “July 2021
Sponsored Research Agreement”) with UMB pursuant to which UMB shall evaluate the
pharmacokinetics of dexamethasone delivered to arthritic rats via liposome. The
research pursuant to the July 2021 Sponsored Research Agreement commenced on
September 1, 2021 and will continue until the substantial completion thereof,
subject to renewal upon written consent of the parties with a project timeline
of twelve months. The July 2021 Sponsored Research Agreement may be terminated
by either party upon 30 days’ prior written notice to the other party. In
addition, if either party commits any material breach of or defaults with
respect to any terms or conditions of the July 2021 Sponsored Research Agreement
and fails to remedy such default or breach within 10 business days after written
notice from the other party, the party giving notice may terminate the July 2021
Sponsored Research Agreement as of the date of receipt of such notice by the
other party. If the Company terminates the July 2021 Sponsored Research
Agreement for any reason other than an uncured material breach by UMB, we shall
relinquish any and all rights it may have in the Results (as defined in the July
2021
Sponsored Research Agreement) to UMB. In addition, if the July 2021
Sponsored Research Agreement is terminated early, we, among other things, will
pay all costs incurred and accrued by UMB as of the date of termination.
Pursuant to the terms of the July 2021 Sponsored Research Agreement, UMB granted
us an option (the “Option”) to negotiate and obtain an exclusive license to any
UMB Arising IP (as defined in the July 2021 Sponsored Research Agreement) and
UMB’s rights in any Joint Arising IP (as defined in the July 2021 Sponsored
Research Agreement) (collectively, the “UMB IP”). We may exercise the Option by
giving UMB written notice within 60 days after it receives notice from UMB of
the UMB IP. We shall pay total fees of $276,285 as set forth in the July 2021
Sponsored Research Agreement.

The Company paid the first payment of $92,095 on September 1, 2021.

Sponsored Research Agreement with The Regents of the University of California
for the Effect of Psilocybin on Inflammation in the Blood

On June 1, 2021, the Company entered into a sponsored research agreement
(“Sponsored Research Agreement”) with The Regents of the University of
California
, on behalf of its San Francisco Campus (“UCSF”) pursuant to which
UCSF shall conduct a study to examine psilocybin’s effect on inflammatory
activity in humans to accelerate its implementation as a potential treatment for
Parkinson’s Disease, chronic pain, and bipolar disorder. The purpose of this is
to show what effect psilocybin has on inflammation in the blood. The Company
believe that this study will help support the UMB homing peptide study. Pursuant
to the Agreement, we shall pay UCSF a total fee of $342,850 to conduct the
research over the two-year period. The Agreement shall be effective for a period
of two years from the effective date, subject to renewal or earlier termination
as set forth in the Sponsored Research Agreement. The Company paid the first
payment of $40,000 pursuant to the payment schedule on the Sponsored Research
Agreement on June 15, 2021, second payment of $40,000 on September 9, 2021 and
$20,570 on November 18, 2021.

Investigator-Sponsored Study Agreement with UMB for CNS Homing Peptide

On January 5, 2021, we entered into an investigator-sponsored study agreement
with UMB. The research project is a clinical study to examine a novel
peptide-guided drug delivery approach for the treatment of Multiple Sclerosis
(“MS”). More specifically, the study is designed to evaluate (1) whether
MS-1-displaying liposomes can effectively deliver dexamethasone to the central
nervous system and (2) whether MS-1-displaying liposomes are superior to plain
liposomes, also known as free drug, in inhibiting the relapses and progression
of Experimental Autoimmune Encephalomyelitis. Pursuant to the agreement, the
research commenced on March 1, 2021 and will continue until substantial
completion, subject to renewal upon mutual written consent of the parties. The
total cost under the investigator-sponsored study agreement shall not exceed
$81,474 which is payable in two equal installments of $40,737 upon execution of
the Sponsored Study Agreement and $40,737 upon completion of the project with an
estimated project timeline of nine months. The Company paid $40,737 on January
13, 2021
. Currently, the project has not been completed due to the delays cause
by the Covid-19 pandemic.

Investigator-Sponsored Study Agreement with Maastricht University of the
Netherlands

On November 1, 2020, we entered into an investigator-sponsored study agreement
with Maastricht University of the Netherlands. The research project is a
clinical study to examine the effects of repeated low doses of psilocybin
and lysergic acid diethylamide on cognitive and emotional dysfunctions in
Parkinson’s disease and to understand its mechanism of action. The agreement
shall terminate on October 31, 2024, unless earlier terminated pursuant to the
terms thereof. We shall pay a total fee of 433,885 Euros ($507,602 USD)
exclusive of value added tax based on a payment schedule set forth in the
agreement. In December 2020, the Company paid the first payment of $101,520. In
September 2021, we notified Maastricht University of Netherlands for an early
termination of this agreement. Maastricht University of Netherlands has not
reached the second phase which is to obtain approval from ethical committee. We
have no further obligation after the termination.



                                       34




Other License Agreements between the Company and a Customer

Customer Patent License Agreement with Aikido Pharma Inc.

On January 5, 2021, we entered into a Patent License Agreement (the “Aikido
License Agreement”) with our wholly-owned subsidiary, Silo Pharma, Inc., and
Aikido Pharma Inc. (“Aikido”) pursuant to which we granted Aikido an exclusive,
worldwide, sublicensable, royalty-bearing license to certain intellectual
property (i) to make, have made, use, provide, import, export, lease,
distribute, sell, offer for sale, develop and advertise certain licensed
products and (ii) to develop and perform certain licensed processes for the
treatment of cancer and symptoms caused by cancer. The Aikido License Agreement
relates to the rights which we had obtained under the UMB Option Agreement.
Pursuant to the Aikido License Agreement, we agreed that if we exercised the UMB
Option, we would grant Aikido a non-exclusive sublicense to certain UMB patent
rights in the field of neuroinflammatory diseases occurring in patients
diagnosed with cancer. The UMB Option was exercised on January 13, 2021.
Accordingly, on April 6, 2021, we entered into a sublicense agreement with
Aikido pursuant to which we granted Aikido a worldwide exclusive sublicense to
our licensed patents under the UMB License Agreement (see below “Sublicense with
Aikido Pharma Inc.”).

Customer Sublicense Agreement with Aikido Pharma Inc.

On April 6, 2021 (“Effective Date”), we entered into a sublicense agreement (the
“Sublicense Agreement”) with Aikido pursuant to which we granted Aikido an
exclusive worldwide sublicense to (i) make, have made, use, sell, offer to sell
and import the Licensed Products (as defined below) and (ii) in connection
therewith to (A) use the Invention that was sublicensed to us pursuant to the
UMB License Agreement and (B) practice certain patent rights as set forth in the
Sublicense Agreement (the “Patent Rights”) for the therapeutic treatment of
neuroinflammatory disease in cancer patients. “Licensed Products” means any
product, service, or process, the development, making, use, offer for sale,
sale, importation, or providing of which: (i) is covered by one or more claims
of the Patent Rights; or (ii) contains, comprises, utilizes, incorporates, or is
derived from the Invention or any technology disclosed in the Patent Rights.
Pursuant to the Sublicense Agreement, Aikido shall agree to pay the Company (i)
an upfront license fee of $50,000, (ii) the same sales-based royalty payments
that we are subject to under the UMB License Agreement and (iii) total milestone
payments of up to $1.9 million. The Sublicense Agreement shall continue on a
Licensed Product-by-Licensed Product and country-by-country basis until the
later of (i) the date of expiration of the last to expire claim of the Patent
Rights covering such Licensed Product in such country, (ii) the expiration of
data protection, new chemical entity, orphan drug exclusivity, regulatory
exclusivity or other legally enforceable market exclusivity, if applicable and
(iii) 10 years after the first commercial sale of a Licensed Product in that
country, unless terminated earlier pursuant to the terms of the Sublicense
Agreement. Furthermore, the Sublicense Agreement shall expire 15 years after the
Effective Date with respect to any country in which (i) there were never any
Patent Rights, (ii) there was never any data protection, new chemical entity,
orphan drug exclusivity, regulatory exclusivity or other legally enforceable
market exclusivity with respect to a Licensed Product and (ii) there was never a
commercial sale of a Licensed Product, unless such agreement is earlier
terminated pursuant to its terms. The Company collected the upfront license fee
of $50,000 in April 2021.



                                       35





COVID-19


The outbreak of the novel Coronavirus (COVID-19) evolved into a global pandemic.
The Coronavirus has spread to many regions of the world. The extent to which the
Coronavirus impacts the Company’s business and operating results will depend on
future developments that are highly uncertain and cannot be accurately
predicted, including new information that may emerge concerning the Coronavirus
and the actions to contain the Coronavirus or treat its impact, among others.

As a result of the continuing spread of the Coronavirus, certain aspects of the
Company’s business operations may be delayed or subject to interruptions.
Specifically, as a result of the shelter-in-place orders and other mandated
local travel restrictions, among other things, the research and development
activities of certain of the Company’s partners may be affected, which may
result in delays to the Company’s clinical trials, and the Company can provide
no assurance as to when such trials, if delayed, will resume at this time or the
revised timeline to complete trials once resumed.

Furthermore, site initiation, participant recruitment and enrollment,
participant dosing, distribution of clinical trial materials, study monitoring
and data analysis may be delayed due to changes in hospital or university
policies, federal, state or local regulations, prioritization of hospital
resources toward pandemic efforts, or other reasons related to the pandemic. If
the Coronavirus continues to spread, some participants and clinical
investigators may not be able to comply with clinical trial protocols. For
example, quarantines or other travel limitations (whether voluntary or required)
may impede participant movement, affect sponsor access to study sites, or
interrupt healthcare services, and the Company may be unable to conduct its
clinical trials.

Infections and deaths related to the pandemic may disrupt the United States’
healthcare and healthcare regulatory systems. Such disruptions could divert
healthcare resources away from, or materially delay U.S. Food and Drug
Administration
review and/or approval with respect to the Company’s clinical
trials. It is unknown how long these disruptions could continue, were they to
occur. Any elongation or de-prioritization of the Company’s clinical trials or
delay in regulatory review resulting from such disruptions could materially
affect the development and study of the Company’s product candidates.

The spread of the Coronavirus, which has caused a broad impact globally,
including restrictions on travel and quarantine policies put into place by
businesses and governments, may have a material economic effect on the Company’s
business. While the potential economic impact brought by and the duration of the
pandemic may be difficult to assess or predict, it has already caused, and is
likely to result in further, significant disruption of global financial markets,
which may negatively impact the Company’s ability to access capital on favorable
terms, if at all. In addition, a recession, depression or other sustained
adverse market event resulting from the spread of the Coronavirus could
materially and adversely affect the Company’s business and the value of its
common stock.

The ultimate impact of the current pandemic, or any other health epidemic, is
highly uncertain and subject to change. The Company does not yet know the full
extent of potential delays or impacts on its business, its clinical trials, its
research programs, healthcare systems or the global economy as a whole. However,
these effects could have a material impact on the Company’s operations, and the
Company will continue to monitor the situation closely.



Equity Investments


At December 31, 2021 and 2020, equity investments, at cost of $419,995 and $200,
respectively, comprised mainly of nonmarketable common stock and stock warrants,
are recorded at cost, as adjusted for other than temporary impairment
write-downs and are evaluated for impairment periodically.



Results of Operations


Comparison of Our Results of Operations for the Years Ended December 31, 2021
and 2020




The following table summarizes the results of operations for the years ending
December 31, 2021 and 2020 and were based primarily on the comparative audited
financial statements, footnotes and related information for the periods
identified and should be read in conjunction with the consolidated financial
statements and the notes to those statements that are included elsewhere in this
report.



                                                         Years Ended
                                                        December 31,
                                                    2021             2020
Revenues                                        $     71,264     $          -
Cost of sales                                          5,004                -
Gross profit                                          66,260                -
Operating expenses                                 2,810,603        2,201,719

Operating loss from continuing operations (2,744,343 ) (2,201,719 )
Other income (expense), net

                        6,926,327         (464,550 )
Provision for income taxes                           (24,876 )              -

Loss from discontinued operations, net of tax (253,367 ) (371,248 )
Net income (loss)

                               $  3,903,741     $ (3,037,517 )




Revenues


During the years ended December 31, 2021 and 2020, we generated minimal revenues
from operations. For the year ended December 31, 2021, revenues consisted of
revenues on licensing fees related to our biopharmaceutical operation of
$71,264, as compared to $0 for the year ended December 31, 2020.



                                       36





Cost of Revenues


During the year ended December 31, 2021, cost of revenues on license fees
related to our biopharmaceutical operation amounted to $5,004, as compared to $0
for the year ended December 31, 2020. The primary components of cost of revenues
on license fees include the cost of the license fees primarily related to the
UMB License and Sublicense Agreement.



Operating Expenses



For the years ended December 31, 2021 and 2020, total operating expenses
consisted of the following:



                                                   For the Years Ended
                                                      December 31,
                                                  2021            2020
Compensation expense                           $   395,123     $   755,993
Professional fees                                1,598,367       1,173,717
Research and development                           693,910          26,250
Insurance expense                                  108,750          30,191
Bad debt (recovery) expense                       (148,500 )       165,376
Selling, general and administrative expenses       162,953          50,192
Total                                          $ 2,810,603     $ 2,201,719




? Compensation Expense:

For the years ended December 31, 2021 and 2020, compensation expense was

$395,123 and $755,993, respectively, a decreased of $360,870 or 48%. This

decrease was primarily attributable to a decrease in stock-based compensation

related to the issuance of stock to our chief executive officer for his

employment agreement of $610,476 in 2020 offset by an increase of our Chief

Executive Officer’s compensation and related benefits expense of $63,605,

increase in other compensation expense of $4,500 and bonuses paid to our Chief

Executive Officer and directors of an aggregate amount of $181,500.




? Professional Fees:

For the years ended December 31, 2021 and 2020, professional fees were

$1,598,367 and $1,173,717, respectively, an increase of $424,650 or 36%. The

increase was primarily attributable to an increase other consulting fees of

$565,720, an increase in legal fees of $122,412, an increase in investor

relation fees of $170,652, an increase in option fees of $10,000, and an

increase in accounting fees of $46,362 offset by a decrease in auditing fees of

$19,542 and a decrease in stock-based consulting fees of $470,954 related to

the issuance of shares to consultants for business advisory and strategic

  planning services.



? Research and Development:

For the year ended December 31, 2021 and 2020, we incurred $693,910 and

$26,250, respectively, an increase of $667,660 or 2,544%. The increase was a

result of increase in research and development costs in connection with the

Investigator-sponsored Study Agreement with Maastricht University, UCSF, UMB

  and Columbia University.




                                       37





? Insurance Expense:

For the year ended December 31, 2021 and 2020, insurance expense was $108,750

and $30,191, respectively, increased by $78,559 or 260%. The increase was a

result of increases in the cost of renewal of certain insurance policies.

? Bad Debt (Recovery) Expense, net:

For the year ended December 31, 2021 and 2020, we recorded bad debt recovery

(expense) of $148,500 and ($165,376). For the year ended December 31, 2021, we

recorded bad debt recovery of $148,500 from the collection of a previously

written off notes receivable deemed uncollectible. For the year ended December

31, 2020, the Company recorded bad debt (expense) of ($174,376) and bad debt

recovery of $9,000 for a net recorded bad debt (expense) of ($165,376).

? Selling, General and Administrative Expenses:

Selling, general and administrative expenses include advertising and

promotion, patent related expenses, public company expenses, custodian fees,

bank service charges, travel, and other office expenses.

For the year ended December 31, 2021 and 2020, selling, general and

administrative expenses were $162,953 and $50,192, respectively, an increase

of $112,761, or 225%. The increase was primarily attributed to an increase in

public company expenses of $62,908, an increase in annual meeting proxy

expense of $20,000, an increase in patent related expenses of $21,015 and an

increase in other office expenses of $8,838.

Operating Loss from Continuing Operations

For the years ended December 31, 2021 and 2020, operating loss from continuing
operations amounted to $2,744,343 and $2,201,719, respectively, an increase of
$542,624 or 25%. The increase was primarily a result of the changes in operating
expenses discussed above.

Other Income (Expenses), net

For the year ended December 31, 2021 and 2020, other income, net amounted to
$6,926,327 and other (expenses), net amounted to ($464,550), respectively, an
increase of $7,390,877 or 1,591%. The change in other income (expenses), net was
primarily due to an increase in gain on forgiveness of PPP note payable of
$19,082, an increase in net realized gain on equity investments of $6,660,483
resulting from sale of our equity investments and an increase in net unrealized
gain of $257,782 offset by a decrease of net interest expense of $255,898
resulting from the increase in fair value of our equity investments, offset by a
decrease in other income of $3,000, a decrease of foreign exchange loss of
$2,950 and a decrease in loss on debt extinguishment of $197,682 incurred in
2020.



                                       38




Loss from Discontinued Operations

For the year ended December 31, 2021 and 2020, loss from discontinued operations
amounted to $253,367 and $371,248, respectively, a decrease of $117,881 or 32%.
The decrease was primarily due to a sale of the Company’s NFID business in
September 2021.




Preferred Stock Dividend



For the year ended December 31, 2021 and 2020, dividends amounted to $1,403,997
and $69,000, respectively, an increase of $1,334,997 or 1,935%.

For the year ended December 31, 2020, the Company recorded $69,000 of deemed
dividends in connection with exchange agreement dated April 15, 2020 whereby
shares of Series B preferred stock and accompanying warrants were converted at a
rate of $0.08 instead of the original rate of $0.20 resulting in the issuance of
additional shares of common stock valued at $69,000 which was recorded as deemed
dividends.

For the year ended December 31, 2021, the Company recorded $1,403,997 of deemed
dividends resulting from the beneficial conversion feature in connection with
the issuance of these Series C Convertible Preferred Stock.

Net Income (Loss) Available to Common Stockholders

For the years ended December 31, 2021 and 2020, net income available to common
stockholders amounted to $2,499,744 or $0.04 per common share (basic and
diluted), and net (loss) $(3,106,517), or $(0.05) per common share (basic and
diluted), respectively, a change of $5,606,261, or 180%. The increase was
primarily a result of the increase in operating expenses, and offset by other
income, net discussed above.

Liquidity and Capital Resources




Liquidity is the ability of an enterprise to generate adequate amounts of cash
to meet its needs for cash requirements. We had a working capital of $9,912,281
and $9,837,001 in cash and cash equivalents as of December 31, 2021 and working
capital of $1,284,941 and $1,128,389 in cash and cash equivalents as of December
31, 2020.



                                       39





                                                                   Working
                            December 31,       December 31,        Capital        Percentage
                                2021               2020            Change           Change
Working capital:
Total current assets        $  10,402,320     $    1,426,664     $ 8,975,656              629 %
Total current liabilities        (490,039 )         (141,723 )      (348,316 )            246 %
Working capital:            $   9,912,281     $    1,284,941     $ 8,627,340              671 %



The increase in working capital of $8,627,340 was primarily attributable to an
increase in current assets of $8,975,656 primarily due to increase in cash of
$8.7 million and an increase in current liabilities of $348,316.



Cash Flows


A summary of cash flow activities is summarized as follows:



                                                 Year Ended
                                                December 31,
                                            2021             2020

Cash used in operating activities $ (2,278,016 ) $ (1,156,996 )
Cash provided by investing activities 7,192,526

           39,000

Cash provided by financing activities 3,794,102 2,134,633
Net increase in cash

                    $  8,708,612     $  1,016,637




Net Cash Used in Operating Activities

Net cash used in operating activities for the years ended December 31, 2021 and
2020 were $2,278,016 and $1,156,996, respectively, an increase of $1,121,020 or
97%.

? Net cash used in operating activities for the year ended December 31, 2021

primarily reflected a net income of $3,903,741 adjusted for the add-back of

non-cash items such net realized gain on equity investments of $6,660,483, net

unrealized gain on equity investments of $248,588, bad debt recovery of

$148,500, amortization of prepaid stock-based compensation of $107,970,

stock-based compensation of $83,728, gain on forgiveness of PPP note payable of

$19,082, gain on disposal of assets from discontinued operations of $1,553 and

changes in operating asset and liabilities primarily consisting of an increase

in prepaid expenses and other current assets of $38,862, an increase in assets

of discontinued operations of $24,963, an increase of interest receivable of

$1,210, an increase in accounts payable and accrued expenses of $291,050 and an

increase in deferred revenue of $478,736.

? Net cash used in operating activities for the year ended December 31, 2020

primarily reflected a net loss of $3,037,517 adjusted for the add-back of

non-cash items such as net bad debt expense of $165,376, total stock-based

compensation of $610,476, amortization of debt discount of $268,125, inventory

write-down of $137,947, net unrealized loss of $9,194, loss from debt

extinguishment of $197,682 and changes in operating asset and liabilities

primarily consisting of an increase in prepaid expenses and other current

assets of $144,663, an increase in inventory of $15,065 and an increase in

accounts payable and accrued expenses of $72,525.

Net Cash Provided by Investing Activities

Net cash provided by investing activities for the years ended December 31, 2021
and 2020 were $7,192,526 and $39,000, respectively, an increase of $7,153,526 or
18,342%.

? Net cash provided by investing activities for the year ended December 31, 2021

was $7,192,526 which consisted of aggregate proceeds from sale of equity

investments in Aikido and DatChat, Inc. of $7,020,526, proceeds from collection

of previously written off notes receivable of $7,500 and procced from notes

receivable collection of $164,500.

? Net cash provided by investing activities for the year ended December 31, 2020

was $39,000 from collection notes receivable.




                                       40




Net Cash Provided by Financing Activities

Net cash provided by financing activities for the years ended December 31, 2021
and 2020 were $3,794,102 and $2,134,633, respectively, an increase of $1,659,469
or 78%.

? Net cash provided by financing activities for the year ended December 31, 2021

was $3,794,102 which consisted of net proceeds from sale of preferred stock of

$3,794,102, proceeds from a related party advance of $2,366 offset by repayment

of the related party advance of $2,366.

? Net cash provided by financing activities for the year ended December 31, 2020

was $2,134,633 which consisted of proceeds from note payable – related party of

$35,000, proceeds from note payable of $18,900. Proceeds from sale of common

stock of $2,115,733 offset by repayment of note payable – related party of

   $35,000.




Cash Requirements


The Company believes that the proceeds from the sale of our equity investments
of $7,020,526 and the proceeds from the sale of our preferred stock of
$3,794,102 amounting to aggregate proceeds of $10,814,628, during the year ended
December 31, 2021, will provide sufficient cash required to meet our obligations
for a minimum of twelve months from the date of this filing.

We currently have no material commitments for any capital expenditures.



Liquidity


As reflected in the accompanying consolidated financial statements, the Company
generated a net income of $3,903,741 and used cash in operations of $2,278,016,
for the year ended December 31, 2021. Additionally, the Company has an
accumulated deficit of $3,262,577 at December 31, 2021. During the year ended
December 31, 2021, the Company has received gross proceeds of approximately
$7,020,526 from the sale of equity investments. As of December 31, 2021, the
Company had working capital of $9,912,281.

These events served to mitigate the conditions that historically raised
substantial doubt about the Company’s ability to continue as a going concern.
The Company believes the proceeds received during the year ended December 31,
2021
will provide sufficient cash flows to meet its obligations for a minimum of
twelve months from the date of this filing.

Off-Balance Sheet Arrangements



None.



Critical Accounting Policies



Use of Estimates


The preparation of consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Making estimates requires
management to exercise significant judgment. It is at least reasonably possible
that the estimate of the effect of a condition, situation or set of
circumstances that existed at the date of the financial statements, which
management considered in formulating its estimate could change in the near term
due to one or more future events. Accordingly, the actual results could differ
significantly from estimates. Significant estimates during the years ended
December 31, 2021 and 2020 include the collectability of notes receivable, the
valuation of equity investments, estimates for obsolete and slow-moving
inventory, estimates of the deemed dividend, valuation allowances for deferred
tax assets, the fair value of warrants issued with debt and for services, and
the fair value of shares issued for services and in settlements.



Revenue Recognition


The Company applies ASC Topic 606, Revenue from Contracts with Customers (“ASC
606”). ASC 606 establishes a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most
of the existing revenue recognition guidance. This standard requires an entity
to recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services and also requires
certain additional disclosures.



                                       41




The Company records interest and dividend income on an accrual basis to the
extent that the Company expects to collect such amounts.

For the license and royalty income, revenue is recognized when the Company
satisfies the performance obligation based on the related license agreement.
Payments received from the licensee that are related to future periods are
recorded as deferred revenue to be recognized as revenues over the term of the
related license agreement.

Product sales were recognized when the NFID products were shipped to the
customer and title was transferred and were recorded net of any discounts or
allowances which are separately reported as “discontinued operations” on the
consolidated statements of operations.



Stock-Based Compensation


Stock-based compensation is accounted for based on the requirements of ASC 718 –
“Compensation – Stock Compensation”, which requires recognition in the financial
statements of the cost of employee, director, and non-employee services received
in exchange for an award of equity instruments over the period the employee,
director, or non-employee is required to perform the services in exchange for
the award (presumptively, the vesting period). The ASC also requires measurement
of the cost of employee, director, and non-employee services received in
exchange for an award based on the grant-date fair value of the award. The
Company has elected to recognize forfeitures as they occur as permitted under
Accounting Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based
Payment.



Leases


The Company accounts for its leases using the method prescribed by ASC 842 –
Lease Accounting. The Company assess whether the contract is, or contains, a
lease at the inception of a contract which is based on (i) whether the contract
involves the use of a distinct identified asset, (ii) whether the Company obtain
the right to substantially all the economic benefit from the use of the asset
throughout the period, and (iii) whether the Company has the right to direct the
use of the asset. The Company allocates the consideration in the contract to
each lease component based on its relative stand-alone price to determine the
lease payments. The Company has elected not to recognize right-of-use (“ROU”)
assets and lease liabilities for short-term leases that have a term of 12 months
or less.

Operating lease ROU assets represents the right to use the leased asset for the
lease term. Operating lease liabilities are recognized based on the present
value of the future minimum lease payments over the lease term at commencement
date. As most leases do not provide an implicit rate, the Company uses an
incremental borrowing rate based on the information available at the adoption
date in determining the present value of future payments. Lease expense for
minimum lease payments is amortized on a straight-line basis over the lease term
and is included in general and administrative expenses in the consolidated
statements of operations.

Fair Value of Financial Instruments and Fair Value Measurements

We use the guidance of ASC Topic 820 for fair value measurements which clarifies
the definition of fair value, prescribes methods for measuring fair value, and
establishes a fair value hierarchy to classify the inputs used in measuring fair
value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical
assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities
in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, inputs other than quoted prices that are
observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash, prepaid expenses
and other current assets, accounts payable and accrued expenses, approximate
their fair market value based on the short-term maturity of these instruments.



                                       42




Recent Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06-Debt-Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and edging-Contracts in Entity’s Own
Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity (“ASU 2020-06”) to simplify the accounting for
convertible instruments by removing certain separation models in Subtopic 470-
20, Debt with Conversion and Other Options, for convertible instruments. Under
the amendments in ASU 2020-06, the embedded conversion features no longer are
separated from the host contract for convertible instruments with conversion
features that are not required to be accounted for as derivatives under Topic
815, Derivatives and Hedging, or that do not result in substantial premiums
accounted for as paid-in capital. Consequently, a convertible debt instrument
will be accounted for as a single liability measured at its amortized cost and a
convertible preferred stock will be accounted for as a single equity instrument
measured at its historical cost, as long as no other features require
bifurcation and recognition as derivatives. By removing those separation models,
the interest rate of convertible debt instruments typically will be closer to
the coupon interest rate when applying the guidance in Topic 835, Interest. The
amendments in ASU 2020-06 provide financial statement users with a simpler and
more consistent starting point to perform analyses across entities. The
amendments also improve the operability of the guidance and reduce, to a large
extent, the complexities in the accounting for convertible instruments and the
difficulties with the interpretation and application of the relevant guidance.
To further improve the decision usefulness and relevance of the information
being provided to users of financial statements, amendments in ASU 2020-06
increased information transparency by making the following amendments to the
disclosure for convertible instruments:

1. Add a disclosure objective

2. Add information about events or conditions that occur during the reporting

period that cause conversion contingencies to be met or conversion terms to be

significantly changed

3. Add information on which party controls the conversion rights

4. Align disclosure requirements for contingently convertible instruments with

disclosure requirements for other convertible instruments

5. Require that existing fair value disclosures in Topic 825, Financial

   Instruments, be provided at the individual convertible instrument level rather
   than in the aggregate.



Additionally, for convertible debt instruments with substantial premiums
accounted for as paid-in capital, amendments in ASU 2020-06 added disclosures
about (1) the fair value amount and the level of fair value hierarchy of the
entire instrument for public business entities and (2) the premium amount
recorded as paid-in capital.

The amendments in ASU 2020-06 are effective for public business entities,
excluding entities eligible to be smaller reporting companies as defined by the
SEC, for fiscal years beginning after December 15, 2021, including interim
periods within those fiscal years. For all other entities, the amendments are
effective for fiscal years beginning after December 15, 2023, including interim
periods within those fiscal years. Early adoption is permitted, but no earlier
than fiscal years beginning after December 15, 2020, including interim periods
within those fiscal years. Entities should adopt the guidance as of the
beginning of its annual fiscal year and are allowed to adopt the guidance
through either a modified retrospective method of transition or a fully
retrospective method of transition. In applying the modified retrospective
method, entities should apply the guidance to transactions outstanding as of the
beginning of the fiscal year in which the amendments are adopted. Transactions
that were settled (or expired) during prior reporting periods are unaffected.
The cumulative effect of the change should be recognized as an adjustment to the
opening balance of retained earnings at the date of adoption. If an entity
elects the fully retrospective method of transition, the cumulative effect of
the change should be recognized as an adjustment to the opening balance of
retained earnings in the first comparative period presented. The Company is
evaluating the impact of the revised guidance and believes that it will not have
a significant impact on its consolidated financial statements.

In May 2021, the FASB issued ASU 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). The new ASU addresses issuer’s accounting for certain
modifications or exchanges of freestanding equity-classified written call
options. This amendment is effective for all entities, for fiscal years
beginning after December 15, 2021, including interim periods within those fiscal
years. Early adoption is permitted. The Company is evaluating the impact of the
revised guidance and believes that it will not have a significant impact on its
consolidated financial statements.

Management does not believe that any other recently issued, but not yet
effective accounting pronouncements, if adopted, would have a material effect on
the Company’s consolidated financial statements.




                                       43

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