| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis
of Presentation The
Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) and
reflect the financial position, results of operations and cash flows for all periods presented. Principles
of Consolidation The
consolidated financial statements include the accounts of TFF Pharmaceuticals, Inc. and its wholly owned subsidiary, TFF Australia. All
material intercompany accounts and transactions have been eliminated in consolidation. Foreign
Currency The
currency of TFF Australia, the Company’s international subsidiary, is in Australian dollars. Foreign currency denominated assets
and liabilities are translated into U.S. dollars using the exchange rates in effect at each balance sheet date. Results of operations
and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation
of assets and liabilities is included as a separate component of stockholders’ equity in accumulated other comprehensive income
(loss). Geographic
Concentrations The
Company conducts business in the U.S. and Australia. As of December 31, 2023 and 2022, the Company maintained 100% of its net property
and equipment in the U.S. Cash
and Cash Equivalents The
Company maintains its operating accounts in financial institutions in the U.S. and in Australia. The balances are insured up to specified
limits. The Company’s cash is maintained in checking accounts and money market funds with maturities of less than three months
when purchased, which are readily convertible to known amounts of cash, and which in the opinion of management are subject to insignificant
risk of loss in value. As of December 31, 2023 and 2022, the Company had cash in Australia of AUD$285,827 (US$194,734) and AUD$1,028,616
(US$699,977), respectively. Property
and Equipment, net Property and equipment are stated at cost less
accumulated depreciation and amortization. The Company calculates depreciation using the straight-line method over the estimated useful
lives of the assets, which range from two to five years for furniture, fixtures, lab and computer equipment and software. Assets held
within construction in progress are not depreciated. Construction in progress is related to the construction or development of property
and equipment that have not yet been placed in service for its intended use. As of December 31, 2023 and 2022, approximately $0.7 million
and $1.5 million, respectively, of the Company’s property and equipment consisted of lab equipment that are considered construction
in progress. Expenditures for repairs and maintenance of assets are charged to expense as incurred. Leases At
the inception of an arrangement, the Company determines whether an arrangement is or contains a lease based on the facts and circumstances
present in the arrangement. An arrangement is or contains a lease if the arrangement conveys the right to control the use of an identified
asset for a period of time in exchange for consideration. Leases with a term greater than one year are recognized on the consolidated
balance sheets as operating lease right-of-use assets and current and long-term operating lease liabilities, as applicable. The Company
has elected not to recognize on the consolidated balance sheets leases with terms of 12 months or less. The Company typically only includes
the initial lease term in its assessment of a lease arrangement. Options to extend a lease are not included in the Company’s assessment
unless there is reasonable certainty that the Company will renew. Operating
lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected
remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as prepaid or accrued rent. The interest
rate implicit in the Company’s leases is typically not readily determinable. As a result, the Company utilizes its incremental
borrowing rate, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments
in the same currency, for a similar term, in a similar economic environment. Fair
Value Option - Convertible Note Receivable The
guidance in Accounting Standards Codification (“ASC”) 825, Financial Instruments The
decision to elect the fair value option is determined on an instrument-by-instrument basis and must be applied to an entire instrument
and is irrevocable once elected. Pursuant to this guidance, assets and liabilities are measured at fair value based, in part, on general
economic and stock market conditions and those characteristics specific to the underlying investments. The carrying value is adjusted
to estimated fair value at the end of each quarter, required to be reported separately in our consolidated balance sheets from those
instruments using another accounting method. Fair
Value of Financial Instruments Authoritative
guidance requires disclosure of the fair value of financial instruments. The Company measures the fair value of certain of its financial
assets and liabilities on a recurring basis. A fair value hierarchy is used to rank the quality and reliability of the information used
to determine fair values. Financial assets and liabilities carried at fair value which is not equivalent to cost will be classified and
disclosed in one of the following three categories: Level
1 - Quoted prices (unadjusted) in active markets for identical assets and liabilities. Level
2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as unadjusted quoted prices for similar assets
and liabilities, unadjusted quoted prices in the markets that are not active, or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities. Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities. Income
Taxes In
accordance with authoritative guidance, deferred tax assets and liabilities are recorded for temporary differences between the financial
reporting and tax bases of assets and liabilities using the current enacted tax rate expected to be in effect when the differences are
expected to reverse. A valuation allowance is recorded on deferred tax assets unless realization is considered more likely than not. The
Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine
whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not
deemed to meet the “more-likely-than-not” threshold are not recorded as a tax benefit or expense in the current year. The
Company recognizes interest and penalties, if any, related to uncertain tax positions in interest expense. No interest and penalties
related to uncertain tax positions were accrued at either December 31, 2023 or 2022. The
Company follows authoritative guidance which requires the evaluation of existing tax positions. The Company files in the federal and
various state jurisdictions. Management has analyzed all open tax years, as defined by the statute of limitations, for all major jurisdictions.
Open tax years are those that are open for examination by taxing authorities. The Company’s tax years since its incorporation in
2019 and forward are subject to examination by tax authorities due to the carryforward of unutilized net operating losses and research
and development credits. Revenue
Recognition Feasibility
Agreements The
Company has entered into feasibility and material transfer agreements (“Feasibility Agreements”) with third parties that
provide the Company with funds in return for certain research and development activities. Revenue from the Feasibility Agreements is
recognized in the period during which the related qualifying services are rendered and costs are incurred, provided that the applicable
conditions under the Feasibility Agreements have been met. The
Feasibility Agreements are on a best-effort basis and do not require scientific achievement as a performance obligation. All fees received
under the Feasibility Agreements are non-refundable. The costs associated with the Feasibility Agreements are expensed as incurred and
are reflected as a component of research and development expense in the accompanying consolidated statements of operations. Funds
received from the Feasibility Agreements are recorded as revenue as the Company is the principal participant in the arrangement because
the activities under the Feasibility Agreements are part of the Company’s development programs. In those instances where the Company
first receives consideration in advance of providing underlying services, the Company classifies such consideration as deferred revenue
until (or as) the Company provides the underlying services. In those instances where the Company first provides the underlying services
prior to its receipt of consideration, the Company records a grant receivable. Grants The
Company accounts for grants awarded from a government-sponsored entity for research and development related activities that provide for
payments for reimbursed costs, which includes overhead and general and administrative costs, as well as an administrative fee. The Company
recognizes revenue from grants as it performs services under the arrangements. Associated expenses are recognized when incurred as research
and development expense. Revenue and related expenses are presented gross in the consolidated statements of operations. Collaborative
Arrangements The
Company considers the nature and contractual terms of arrangements and assesses whether an arrangement involves a joint operating activity
pursuant to which the Company is an active participant and is exposed to significant risks and rewards dependent on the commercial success
of the activity. If the Company is an active participant and is exposed to significant risks and rewards dependent on the commercial
success of the activity, the Company accounts for such arrangement as a collaborative arrangement under Accounting Standards Codification
(“ASC”) 808, Collaborative Arrangements For
arrangements determined to be within the scope of ASC 808 where a collaborative partner is not a customer for certain research and development
activities, the Company accounts for payments received for the reimbursement of research and development costs as a contra-expense in
the period such expenses are incurred. This reflects the joint risk sharing nature of these activities within a collaborative arrangement.
The Company classifies payments owed or receivables recorded as other current liabilities or prepaid expenses and other current assets,
respectively, in the Company’s consolidated balance sheets. Please refer to Note 5, “Joint Development Agreement” for
additional details regarding the Company’s joint development agreement (“JDA”) with Augmenta Bioworks, Inc. (“Augmenta”),
which was suspended as of January 1, 2023. If
payments from the collaborative partner to the Company represent consideration from a customer in exchange for distinct goods and services
provided, then the Company accounts for those payments within the scope of ASC 606, Revenue from Contracts with Customers Research and Development Expenses and Related Prepaid and Accrued
Expenses Research and development (“R&D”) expenses consist of
costs incurred for R&D of its product candidate and are recorded to operating expenses when incurred. The Company’s R&D
expenses consist primarily of costs incurred in performing R&D activities, including personnel-related expenses such as salaries,
stock-based compensation and benefits, as well as facilities costs, dues and subscriptions and external costs of outside vendors engaged
as contract research organization, contract manufacturers, consultants and other third parties to conduct and support our clinical trials.
The Company accrues expenses related to development activities performed by third parties based on an evaluation of services received
and efforts expended pursuant to the terms of the contractual arrangements. Payments under some of these contracts depend on clinical
trial milestones. There may be instances in which payments made to the Company’s vendors will exceed the level of services provided
and result in a prepayment of expenses. In accruing service fees, the Company estimates the time period over which services will be performed
and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies
from the estimate, the Company will adjust the accrual or prepaid expense accordingly. Research
and Development Tax Incentive The
Company is eligible to obtain a cash refund from the Australian Taxation Office for eligible research and development expenditures under
the Australian R&D Tax Incentive Program (the “Australian Tax Incentive”). The Company recognizes the Australian Tax
Incentive when there is reasonable assurance that the cash refund will be received, the relevant expenditure has been incurred, and the
consideration can be reliably measured. As
the Company has determined that it has reasonable assurance that it will receive the cash refund for eligible research and development
expenditures, the Company records the Australian Tax Incentive as a reduction to research and development expenses as the Australian
Tax Incentive is not dependent on the Company generating future taxable income, the Company’s ongoing tax status, or tax position.
At each period end, management estimates the refundable tax offset available to the Company based on available information at the time.
This percentage of eligible research and development expenses reimbursable under the Australian Tax Incentive is 43.5% for the years
ended December 31, 2023 and 2022. In addition, the Company is also eligible to receive amounts from the United States Internal Revenue
Service (“IRS”) related to research and development tax credits for expenditures. The
research and development incentive receivable represents an amount due in connection with the Australian Tax Incentive and from the IRS.
The Company has recorded a research and development tax incentive receivable of $433,852 and $186,507 as of December 31, 2023 and 2022,
respectively, in the consolidated balance sheets. The Company recorded a reduction to research and development expenses of $259,797 and
$274,863 during the years ended December 31, 2023 and 2022, respectively. Basic
and Diluted Earnings per Common Share Basic
net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the
period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and dilutive
share equivalents outstanding for the period, determined using the treasury-stock and if-converted methods. Since the Company has had
net losses for all periods presented, all potentially dilutive securities are anti-dilutive. For
the years ended December 31, 2023 and 2022, the Company had the following potential common stock equivalents outstanding which were not
included in the calculation of diluted net loss per common share because inclusion thereof would be anti-dilutive:
Years
Ended
2023 2022
Stock
Options 233,340 116,362
Warrants 248,216 230,069
481,556 346,431 Use
of Estimates The
preparation of condensed consolidated financial statements in conformity with GAAP requires the Company’s 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 expenses during the reporting period. Significant estimates include the
fair value of the convertible note receivable, stock-based compensation and warrants and the valuation allowance against deferred tax
assets. Actual results could differ from those estimates. Common
Stock Warrants The
Company classifies as equity any warrants that (i) require physical settlement or net-share settlement or (ii) provide the Company with
a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies
as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract
if an event occurs and if that event is outside the Company’s control), (ii) gives the counterparty a choice of net-cash settlement
or settlement in shares (physical settlement or net-share settlement) or (iii) that contain reset provisions that do not qualify for
the scope exception. The Company assesses classification of its common stock warrants and other freestanding derivatives at each reporting
date to determine whether a change in classification between assets and liabilities is required. The Company evaluated these warrants
to assess their proper classification and determined that the common stock warrants meet the criteria for equity classification in the
consolidated balance sheet. The warrants issued for services provided to the Company are measured at fair value, which the Company determines
using the Black-Scholes-Merton option-pricing model. Stock-Based
Compensation The
Company computes stock-based compensation in accordance with authoritative guidance. The Company uses the Black-Scholes-Merton option-pricing
model to determine the fair value of its stock options. The Black-Scholes-Merton option-pricing model includes various assumptions, including
the fair market value of the common stock of the Company, expected life of stock options, the expected volatility and the expected risk-free
interest rate, among others. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based
on market conditions generally outside the control of the Company. As
a result, if other assumptions had been used, stock-based compensation cost, as determined in accordance with authoritative guidance,
could have been materially impacted. Furthermore, if the Company uses different assumptions on future grants, stock-based compensation
cost could be materially affected in future periods. Recent
Accounting Standards In
August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging -Contracts in Entity’ Own
Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’ Own Equity In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial
Instruments In
October 2023, the FASB issued ASU 2023-06, Disclosure Improvements, Codification Amendments in Response to the SEC’s Disclosure
Update and Simplification Initiative In
November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures In
December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures The
Company’s management does not believe that any other recently issued, but not yet effective, accounting standards if currently
adopted would have a material effect on the consolidated financial statements. |
