180 LIFE SCIENCES CORP. The Company has not generated any revenues and has incurred significant losses since inception. For the six months endedJune 30, 2022 , the Company used cash in operations of$5,604,464 . As ofJune 30, 2022 , the Company has an accumulated deficit of$64,179,289 and a working capital deficit of$2,318,714 . OnJuly 17, 2022 , the Company entered into a Securities Purchase Agreement with certain purchasers, pursuant to which the Company agreed to sell an aggregate of 3,500,000 shares of common stock, pre-funded warrants to purchase up to an aggregate of 2,632,076 shares of common stock ("July 2022 Pre-Funded Warrants"), and common stock warrants to purchase up to an aggregate of 6,132,076 shares of common stock (the "July 2022 Common Warrants"), at a combined purchase price of$1.06 per share and warrant (the "July 2022 Offering"). Aggregate gross proceeds from theJuly 2022 Offering were approximately$6.5 million (see Note 11 - Subsequent Events). TheJuly 2022 Offering closed onJuly 20, 2022 . OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic. The global spread and impact of COVID-19 has created significant volatility, uncertainty and economic disruption. The extent of COVID-19's effect on the Company's operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic (including any resurgences), the impact of variants of the virus that causes COVID-19, the wide distribution and public acceptance of COVID-19 vaccines, labor needs at the Company as well as in the supply chain, compliance with government or employer COVID-19 vaccine mandates and the resulting impact on available labor, and the level of social and economic restrictions imposed inthe United States and abroad in an effort to curb the spread of the virus, all of which are uncertain and difficult to predict. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on the Company's business, results of operations, financial condition or liquidity. While the ultimate health and economic impact of COVID-19 continues to be highly uncertain, the Company does not currently expect an adverse impact on its business related to of COVID-19. Future events and effects related to the COVID-19 pandemic cannot be determined with precision and actual results could significantly differ from estimates or forecasts. 6
Management has evaluated, and will continue to evaluate, the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company's financial position or results of its operations, the specific impact is not readily determinable as of the date of these unaudited condensed consolidated financial statements (the "condensed consolidated financial statements"). The follow-up time for patient data and the statistical analysis for the Phase 2b Dupuytren's Contracture clinical trial was delayed as a result of COVID-19, but such follow-up and statistical analyses are now complete. The Company announced the top-line data results from the Phase 2b trial onDecember 1, 2021 and the data was published onApril 29, 2022 in a peer-reviewed journal. The Company may experience similar delays in other clinical trials due to the continued future impact of COVID-19. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These condensed consolidated financial statements have been prepared under the assumption of a going concern, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company's ability to continue its operations is dependent upon obtaining new financing for its ongoing operations. Future financing options available to the Company include equity financings and loans and if the Company is unable to obtain such additional financing timely, or on favorable terms, the Company may have to curtail its development, marketing and promotional activities, which would have a material adverse effect on its business, financial condition and results of operations, and it could ultimately be forced to discontinue its operations and liquidate. These matters raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time, which is defined as within one year after the date that the condensed consolidated financial statements are issued. Realization of the Company's assets may be substantially different from the carrying amounts presented in these condensed consolidated financial statements and the accompanying condensed consolidated financial statements do not include any adjustments that may become necessary, should the Company be unable to continue as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies
There have been no material changes to the Company's significant accounting policies as set forth in the Company's audited consolidated financial statements included in the Annual Report on Form 10-K for the year endedDecember 31, 2021 under Note 3 - Summary of Significant Accounting Policies, except as disclosed in this note. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a going concern basis in accordance with accounting principles generally accepted inthe United States of America (GAAP) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three and six months endedJune 30, 2022 , are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year endingDecember 31, 2022 . For further information, refer to the financial statements and footnotes included in the Company's annual financial statements for the fiscal year endedDecember 31, 2021 , which are included in the Company's annual report on Form 10-K filed with theSEC onMarch 31, 2022 . Use of Estimates The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the condensed consolidated financial statements. The Company's significant estimates and assumptions used in these condensed consolidated financial statements include, but are not limited to, the collectability of an insurance claims receivable, the fair value of financial instruments warrants, options and equity shares, the valuation of stock-based compensation, and the estimates and assumptions related to impairment analysis of goodwill and other intangible assets. Certain of the Company's estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company's estimates and may cause actual results to differ from those estimates. 7 Foreign Currency Translation The Company's reporting currency isthe United States dollar. The functional currency of certain subsidiaries was the Canadian Dollar ("CAD") (0.7874 CAD to1 US dollar as ofDecember 31, 2021 ) or British Pound ("GBP") (1.2146 and1.3510 GBP to1 US dollar , each as ofJune 30, 2022 andDecember 31, 2021 , respectively), while expense accounts are translated at the weighted average exchange rate for the period (0.8139 CAD and0.8018 CAD to1 US dollar for each of the three and six months endedJune 30, 2021 , respectively, 1.2571 and1.3973 GBP to1 US dollar for each of the three months endedJune 30, 2022 and 2021, respectively, and 1.2995 and1.3879 GBP to1 US dollar for each of the six months endedJune 30, 2022 and 2021, respectively). Equity accounts are translated at historical exchange rates. The resulting translation adjustments are recognized in stockholders' equity as a component of accumulated other comprehensive income. Comprehensive income (loss) is defined as the change in equity of an entity from all sources other than investments by owners or distributions to owners and includes foreign currency translation adjustments as described above. During the three months endedJune 30, 2022 and 2021, the Company recorded other comprehensive (loss) income of ($1,908,051 ) and$406,487 , respectively, as a result of foreign currency translation adjustments. During the six months endedJune 30, 2022 and 2021, the Company recorded other comprehensive (loss) income of ($2,636,132 ) and$595,835 , respectively, as a result of foreign currency translation adjustments. Foreign currency gains and losses resulting from transactions denominated in foreign currencies, including intercompany transactions, are included in results of operations. The Company recognized$22 and ($120 ) of foreign currency transaction gains (losses) for the three and six months endedJune 30, 2022 , respectively, and recognized$7,395 and$18,543 of foreign currency transaction gains for the three and six months endedJune 30, 2021 , respectively. Such amounts have been classified within general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income (loss). Accrued Issuable Equity The Company records accrued issuable equity when it is contractually obligated to issue shares and sometimes there are administrative delays in the issuance of such shares. Accrued issuable equity is recorded and carried at fair value with changes in its fair value recognized in the Company's condensed consolidated statement of operations. Once the underlying shares of common stock are issued, the accrued issuable equity is reclassified as of the share issuance date at the then current fair market value of the common stock.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding, plus
the number of additional common shares that would have been outstanding if the
common share equivalents had been issued (computed using the treasury stock or
if converted method), if dilutive.
The following table details the net income (loss) per share calculation,
reconciles between basic and diluted weighted average shares outstanding, and
presents the potentially dilutive shares that are excluded from the calculation
of the weighted average diluted common shares outstanding, because their
inclusion would have been anti-dilutive:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Numerator:
Net income (loss) $ 2,939,284 $ (23,459,136 ) $ 4,502,997 $ (39,657,721 )
Weighted average shares outstanding
(denominator for basic earnings per
share) 34,112,566 31,459,199 34,086,392 29,597,488
Weighted average shares and assumed potential common shares (denominator for diluted earnings per share, treasury method) 34,112,566 31,459,199
34,086,392 29,597,488
Basic earnings per share$ 0.09 $ (0.75 ) $ 0.13 $ (1.33 ) Diluted earnings per share$ 0.09 $ (0.75 ) $ 0.13 $ (1.33 ) 8
The following common share equivalents are excluded from the calculation of weighted average common shares outstanding, because their inclusion would have been anti-dilutive:
For the Three Months Ended June 30, For the Six Months Ended June 30,
2022 2021 2022 2021
Options 3,259,121 - 3,259,121 1,630,000
Warrants 11,153,908 6,001,250 11,153,908 8,628,908
Convertible debt(a) - 63,425 - 63,425
Total potentially dilutive shares 14,413,029 6,064,675 14,413,029 10,322,333
a) Represents shares issuable upon conversion of debt at various conversion
prices, some of which were calculated using the fair value of the Company's
common stock at the respective balance sheet date.
Warrant, Option and Convertible Instrument Valuation
The Company has computed the fair value of warrants and options using a Black-Scholes model. The expected term used for warrants is the contractual life and the expected term used for options issued is the estimated period of time that options granted are expected to be outstanding. The Company utilizes the "simplified" method to develop an estimate of the expected term of "plain vanilla" option grants. The Company is utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields fromU.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued. Subsequent Events
The Company has evaluated events that have occurred after the balance sheet date but before these condensed consolidated financial statements were issued. Based upon that evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 11 - Subsequent Events.
Recently Issued Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective,
accounting pronouncements, if currently adopted, would have a material effect on
the Company's unaudited condensed consolidated financial statements.
9
NOTE 4 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses consist of the following as ofJune 30, 2022 andDecember 31, 2021 : June 30, December 31, 2022 2021 Insurance$ 892,147 $ 2,151,487
Research and development expense tax credit receivable 417,246
644,513
Insurance claims receivable (1) 1,516,963 - Professional fees 83,685 80,783 Value-added tax receivable 75,162
24,411
Taxes 25,634 25,634
Other 11,068 49,755
$ 3,021,905 $ 2,976,583 (1) See Note 8 - Commitments and Contingencies - Legal Matters.
NOTE 5 - ACCRUED EXPENSES Accrued expenses consist of the following as ofJune 30, 2022 andDecember 31, 2021 : June 30, December 31, 2022 2021 Consulting fees$ 342,923 $ 548,281 Professional fees 84,742 252,973 Accrued legal fees (1) 233,030 300,000 Employee and director compensation 1,065,561 725,569 Research and development fees 117,236 91,737 Interest 30,736 25,433 Other 5,578 20,587$ 1,879,806 $ 1,964,580
(1) See Note 8 - Commitments and Contingencies, Legal Matters.
As of
10
NOTE 6 - DERIVATIVE LIABILITIES
The following table sets forth a summary of the changes in the fair value of
Level 3 derivative liabilities (except the Public SPAC Warrants as defined
below, which are Level 1 derivative liabilities) that are measured at fair value
on a recurring basis:
Warrants
Public Private
SPAC SPAC PIPE Other Total
Balance as of January 1, 2022 $ 8,048,850 $ 467,325 $ 6,516,300 $ 187,892 $ 15,220,367
Change in fair value of
derivative liabilities (1,852,650 ) (251,250 ) (3,044,800 ) (81,414 ) (5,230,114 )
Balance as of March 31, 2022 $ 6,196,200 $ 216,075 $ 3,471,500 $ 106,478 $ 9,990,253
Change in fair value of
derivative liabilities (4,357,350 ) (185,925 )
(2,849,900 ) (94,363 ) (7,487,538 )
Balance as of
The fair value of the derivative liabilities as ofJune 30, 2022 andDecember 31, 2021 was estimated using the Black Scholes option pricing model, with the following assumptions used:June 30, 2022 Risk-free interest rate 2.90% - 3.00% Expected term in years 2.09 - 3.65 Expected volatility 91.00% - 91.50% Expected dividends 0% Market Price$0.85 December 31, 2021 Risk-free interest rate 0.85% - 1.14% Expected term in years 2.59 - 4.15 Expected volatility 98.5% Expected dividends 0% Market Price$3.90 SPAC Warrants Public SPAC Warrants Participants in KBL's initial public offering received an aggregate of 11,500,000 warrants ("Public SPAC Warrants"). Each Public SPAC Warrant entitles the holder to purchase one-half of one share of the Company's common stock at an exercise price of$5.75 per half share ($11.50 per whole share) untilNovember 6, 2025 , subject to adjustment. No fractional shares will be issued upon exercise of the Public SPAC Warrants. Management has determined that the Public SPAC Warrants contain a tender offer provision which could result in the Public SPAC Warrants settling for the tender offer consideration (including potentially cash) in a transaction that didn't result in a change-in-control. This feature results in the Public SPAC Warrants being precluded from equity classification. Accordingly, the Public SPAC Warrants are classified as liabilities measured at fair value, with changes in fair value each period reported in earnings. The Public SPAC Warrants were revalued onJune 30, 2022 at$1,838,850 , which resulted in decreases of$4,357,350 and$6,210,000 in the fair value of the derivative liabilities during the three and six months endedJune 30, 2022 ,
respectively.
11
Private SPAC Warrants
Participants in KBL's initial private placement in connection with its initial
public offering received an aggregate of 502,500 warrants ("Private SPAC
Warrants"). Each Private SPAC Warrant entitles the holder to purchase one-half
of one share of the Company's common stock at an exercise price of $5.75 per
half share ($11.50 per whole share) until November 6, 2025 , subject to
adjustment. No fractional shares will be issued upon exercise of the Private
SPAC Warrants. Management has determined that the Private SPAC Warrants contain
a tender offer provision which could result in the Private SPAC Warrants
settling for the tender offer consideration (including potentially cash) in a
transaction that didn't result in a change-in-control. This feature (amongst
others) results in the Private SPAC Warrants being precluded from equity
classification. Accordingly, the Private SPAC Warrants are classified as
liabilities measured at fair value, with changes in fair value each period
reported in earnings. The Private SPAC Warrants were revalued on June 30, 2022
at $30,150 , which resulted in decreases of $185,925 and $437,175 in the fair
value of the derivative liabilities during the three and six months ended June
30, 2022 , respectively.
PIPE Warrants
On February 23, 2021 , the Company issued five-year warrants (the "PIPE
Warrants") to purchase 2,564,000 shares of common stock at an exercise price of
$5.00 per share in connection with a private placement offering. The PIPE
Warrants did not meet the requirements for equity classification due to the
existence of a tender offer provision that could potentially result in cash
settlement of the PIPE Warrants that didn't meet the limited exception in the
case of a change-in-control. Accordingly, the PIPE Warrants are
liability-classified and the Company recorded the $7,294,836 fair value of the
PIPE Warrants, which was determined using the Black-Scholes option pricing
model, as derivative liabilities. The PIPE Warrants were revalued on June 30,
2022 at $621,600 , which resulted in decreases of $2,849,900 and $5,894,700 in
the fair value of the derivative liabilities during the three and six months
ended June 30, 2022 , respectively.
Other Warrants
AGP Warrant
In connection with the transactions contemplated by the Company's Business Combination Agreement (as amended, the "Business Combination Agreement"), dated as ofJuly 25, 2019 (the "Business Combination"), onNovember 6, 2020 , the Company became obligated to assume five-year warrants for the purchase of 63,658 shares of the Company's common stock at an exercise price of$5.28 per share (the "Alliance Global Partners Warrant Liability" or "AGP Warrant Liability") that had originally been issued by KBL to an investment banking firm in connection with a prior private placement. OnMarch 12, 2021 , the Company issued a warrant toAlliance Global Partners ("AGP" and the "AGP Warrant") to purchase up to an aggregate of 63,658 shares of the Company's common stock at a purchase price of$5.28 per share, subject to adjustment, in full satisfaction of the AGP Warrant Liability. The exercise of the AGP Warrant is limited at any given time to prevent AGP from exceeding beneficial ownership of 4.99% of the then total number of issued and outstanding shares of the Company's common stock upon such exercise. The warrant is exercisable at any time betweenMay 2, 2021 andMay 2, 2025 . The AGP Warrant did not meet the requirements for equity classification due to the existence of a tender offer provision that could potentially result in cash settlement of the AGP Warrant that did not meet the limited exception in the case of a change-in-control. Accordingly, the AGP Warrant will continue to be liability-classified. The AGP Warrant was revalued onJune 30, 2022 at$10,395 , which resulted in decreases of$76,052 and$133,936 in the fair value of the derivative liabilities during the three and six months endedJune 30, 2022 ,
respectively.
12
Alpha Warrant
In connection with that certain Mutual Release and Settlement Agreement dated
July 31, 2021 (agreed to on July 29, 2021 ) between the Company and Alpha Capital
Anstalt ("Alpha" and the "Alpha Settlement Agreement"), the Company issued a
three-year warrant for the purchase of 25,000 shares of the Company's common
stock at an exercise price of $7.07 per share (the "Alpha Warrant Liability" and
the "Alpha Warrant"). The exercise of shares of the Alpha Warrant is limited at
any given time to prevent Alpha from exceeding a beneficial ownership of 4.99%
of the then total number of issued and outstanding shares of the Company's
common stock upon such exercise. The warrant is exercisable until August 2,
2024 . The Alpha Warrant did not meet the requirements for equity classification
due to the existence of a tender offer provision that could potentially result
in cash settlement of the Alpha Warrant that did not meet the limited exception
in the case of a change-in-control. Accordingly, the Alpha Warrant is
liability-classified and the Company recorded the $95,677 fair value of the
Alpha Warrant, which was determined using the Black-Scholes option pricing
model, as a derivative liability. The Alpha Warrant was revalued on June 30,
2022 at $1,720 , which resulted in decreases of $18,311 and $41,841 in the fair
value of the derivative liabilities during the three and six months ended June
30, 2022 , respectively.
Warrant Activity
A summary of the warrant activity (including certain warrants granted in August
2021 as part of a private offering, which are equity-classified) during the six
months ended June 30, 2022 is presented below:
Weighted
Average
Weighted Remaining
Number of Average Life in Intrinsic
Warrants Exercise Price Years Value
Outstanding, December 31, 2021 11,153,908 $ 9.06 4.1
Issued - -
Exercised - -
Cancelled - -
Expired - -
Outstanding, June 30, 2022 11,153,908 $ 9.06 3.6 -
Exercisable, June 30, 2022 11,153,908 $ 9.06 3.6 -
A summary of outstanding and exercisable warrants as of June 30, 2022 is
presented below:
Warrants Outstanding Warrants Exercisable
Weighted
Average
Exercise Number of Remaining Number of
Price Shares Life in Years Shares
$ 5.00 2,564,000 3.7 2,564,000
$ 5.28 63,658 2.8 63,658
$ 7.07 25,000 2.1 25,000
$ 7.50 2,500,000 4.2 2,500,000
$ 11.50 6,001,250 3.4 6,001,250
11,153,908 3.6 11,153,908
13
NOTE 7 - LOANS PAYABLE
Loans Payable
The following table summarizes the activity of loans payable during the six
months ended June 30, 2022 :
Principal Effect of Principal
Balance at Principal Foreign Balance at
December 31, Repaid in Exchange June 30,
2021 Forgiveness Cash Adjustment Rates 2022
Paycheck Protection
Program $ 41,312 $ - $ (41,312 ) $ - $ - $ - Bounce Back Loan Scheme
61,169 - (5,810 ) - (6,179 ) 49,180
First Assurance Funding 1,618,443 - (962,641 ) (14,042 ) (1) - 641,760
Other loans payable 155,320 - - (5,000 ) (2) - 150,320
Total loans payable $ 1,876,244 $ - $ (1,009,763 ) $ (19,042 ) $ (6,179 ) $ 841,260
Less: loans payable -
current portion 1,828,079 803,917
Loans payable -
noncurrent portion $ 48,165 $ 37,343 (1) Note that this amount was related to finance charges and was reclassified.
(2) Note that this amount was reclassified to related party payables.
During the three months endedJune 30, 2022 , the Company paid$481,321 in partial satisfaction of the First Assurance Funding loan,$2,914 for the Bounce Back Loan Scheme, and$10,403 to satisfy the Paycheck Protection Program loan. During the six months endedJune 30, 2022 , the Company paid an aggregate of$962,641 and$5,810 in partial satisfaction of the First Assurance Funding loan and the Bounce Back Loan Scheme, respectively, and paid$41,312 in full satisfaction of the Paycheck Protection Program loan.
Loans Payable - Related Parties
The below table summarizes the activities of loans payable - related parties during the six months endedJune 30, 2022 (see Note 10 - Related Parties for additional details): Principal Effect of Principal Balance at Reclass Foreign Balance at December 31, from
Loans Exchange
2021 Payable Rates 2022
Loans payable issued between
Interest Expense on Loans Payable
For the three months endedJune 30, 2022 and 2021, the Company recognized interest expense associated with loans payable of$7,355 and$9,926 , respectively, and interest expense - related parties associated with loans payable of$1,531 and$10,228 , respectively. During the six months endedJune 30, 2022 and 2021, the Company recognized interest expense associated with loans payable of$14,769 and$18,183 , respectively, and interest income (expense) - related parties associated with loans payable of$3,031 and ($20,331 ), respectively. As ofJune 30, 2022 , the Company had accrued interest and accrued interest - related parties associated with loans payable of$29,984 and$14,185 , respectively. As ofDecember 31, 2021 , the Company had accrued interest and accrued interest - related parties associated with loans payable of$24,212 and$812 , respectively. See Note 10 - Related Parties for additional details. 14
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Litigation and Other Loss Contingencies
The Company records liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company has no liabilities recorded for loss contingencies as ofDecember 31, 2021 . See Legal Matters - Action Against Former Executive of KBL below for information related to aJune 30, 2022 accrual. Legal Matters
Action Against Former Executive of KBL
OnSeptember 1, 2021 , the Company initiated legal action in theChancery Court of Delaware against Dr.Marlene Krauss ("Dr. Krauss") and two of her affiliated companies,KBL IV Sponsor, LLC andKBL Healthcare Management, Inc. (collectively, the "KBL Affiliates") for, among other things, engaging in monetary transfers of the Company's assets, non-disclosure of financial liabilities in the Company's Consolidated Financial Statements, issuing shares of stock without authorization; and allowing stockholder redemptions to take place. The Company's complaint alleges causes of action againstDr. Krauss and/or the KBL Affiliates for breach of fiduciary duties, ultra vires acts, unjust enrichment, negligence and declaratory relief, and seeks compensatory damages in excess of$11,286,570 , together with interest, attorneys' fees and costs. There can be no assurance that the Company will be successful in its legal actions. As ofJune 30, 2022 , the Company has a legal accrual of$183,031 recorded to cover the legal expenses of the former executives of KBL. OnOctober 5, 2021 ,Dr. Krauss and the KBL Affiliates filed an Answer, Counterclaims and Third-Party Complaint (the "Krauss Counterclaims") against the Company and twelve individualswho are, or were, directors and/or officers of the Company, i.e.,Marc Feldmann ,Lawrence Steinman ,James N. Woody ,Teresa DeLuca , Frank Knuettel II,Pamela Marrone ,Lawrence Gold ,Donald A. McGovern , Jr., Russell T. Ray,Richard W. Barker ,Shoshana Shendelman andOzan Pamir (collectively, the "Third-Party Defendants"). OnOctober 27, 2021 , the Company andOzan Pamir filed an Answer to the Krauss Counterclaims, and all of the other Third-Party Defendants filed a Motion to Dismiss as to the Third-Party Complaint. OnJanuary 28, 2022 , in lieu of filing an opposition to the Motion to Dismiss,Dr. Krauss and the KBL Affiliates filed a Motion for leave to file amended counterclaims and third-party complaint, and to dismiss six of the current and former directors previously named, i.e., to dismissTeresa DeLuca , Frank Knuettel II,Pamela Marrone , Russell T. Ray,Richard W. Barker andShoshana Shendelman . The Motion was granted by stipulation and, onFebruary 24, 2022 ,Dr. Krauss filed an amended Answer, Counterclaims and Third-Party Complaint (the "Amended Counterclaims"). In essence, the Amended Counterclaims allege (a) that the Company and the remaining Third-Party Defendants breached fiduciary duties toDr. Krauss by making alleged misstatements againstDr. Krauss inSEC filings and failing to register her shares in the Company so that they could be traded, and (b) the Company breached contracts between the Company andDr. Krauss for registration of such shares, and also failed to pay toDr. Krauss the amounts alleged to be owing under a promissory note in the principal amount of$371,178 , plus an additional$300,000 underDr. Krauss's resignation agreement. The Amended Counterclaims seek unspecified amounts of monetary damages, declaratory relief, equitable and injunctive relief, and attorney's fees and costs. OnMarch 16, 2022 ,Donald A. McGovern , Jr. andLawrence Gold filed a Motion to Dismiss the Amended Counterclaims against them, and the Company and the remaining Third-Party Defendants filed an Answer to the Amended Counterclaims denying the same. The Company and the Third-Party Defendants intend to continue to vigorously defend against all of the Amended Counterclaims, however, there can be no assurance that they will be successful in the legal defense of such Amended Counterclaims. InApril 2022 ,Donald A. McGovern , Jr. andLawrence Gold were dismissed from the lawsuit as parties. Discovery has not yet commenced
in
the case.
15
Action Against the Company by
OnAugust 19, 2021 ,Dr. Krauss initiated legal action in theChancery Court of Delaware against the Company. The original Complaint sought expedited relief and made the following two claims: (1) it alleged that the Company is obligated to advance expenses including, attorney's fees, toDr. Krauss for the costs of defending against theSEC and certain Subpoenas served by theSEC onDr. Krauss ; and (2) it alleged that the Company is also required to reimburseDr. Krauss for the costs of bringing this lawsuit against the Company. On or aboutSeptember 3, 2021 ,Dr. Krauss filed an Amended and Supplemental Complaint (the "Amended Complaint") in this action, which added the further claims thatDr. Krauss is also allegedly entitled to advancement by the Company of her expenses, including attorney's fees, for the costs of defending against the Third-Party Complaint in the Tyche action referenced below, and the costs of defending against the Company's own Complaint againstDr. Krauss as described above. On or aboutSeptember 23, 2021 , the Company filed its Answer to the Amended Complaint in which the Company denied each ofDr. Krauss' claims and further raised numerous affirmative defenses with respect thereto. OnNovember 15, 2021 ,Dr. Krauss filed a Motion for Summary Adjudication as to certain of the issues in the case, which was opposed by the Company. A hearing on such Motion was held onDecember 7, 2021 , and, onMarch 7, 2022 , the Court issued a decision in the matter denying the Motion for Summary Adjudication in part and granting it in part. The Court then issued an Order implementing such a decision onMarch 29, 2022 . The parties are now engaging in proceedings set forth in that implementing Order. The Court grantedDr. Krauss's request for advancement of certain legal fees and the Company was required to pay a portion of those fees while it objects to the remaining portion of the fees. These legal fees have been accrued on the Company's balance sheet as ofJune 30, 2022 . Notwithstanding any requirement by the Court for the Company to advance attorneys' fees toDr. Krauss , no adjudication has yet been made as to whetherDr. Krauss will ultimately be entitled to permanently retain such advancements. The Company is seeking payment for a substantial portion of such amounts from its director and officers' insurance policy, of which no assurance can be provided that the directors and officers insurance policy will cover such amounts. See "Declaratory Relief Action Against the Company byAmTrust International " below.
The Company commenced and filed an action against defendantTyche Capital LLC ("Tyche") in theSupreme Court of New York , in the County ofNew York , onApril 15, 2021 . In its Complaint, the Company alleged claims against Tyche arising out of Tyche's breach of its written contractual obligations to the Company as set forth in a "Guarantee And Commitment Agreement" datedJuly 25, 2019 , and a "Term Sheet For KBL Business Combination With CannBioRex" datedApril 10, 2019 (collectively, the "Subject Guarantee"). The Company alleges in its Complaint that, notwithstanding demand having been made on Tyche to perform its obligations under the Subject Guarantee, Tyche has failed and refused to do so, and is currently in debt to the Company for such failure in the amount of$6,776,686 , together with interest accruing thereon at the rate set forth in the Subject Guarantee. On or aboutMay 17, 2021 , Tyche responded to the Company's Complaint by filing an Answer and Counterclaims against the Company alleging that it was the Company, rather than Tyche, that had breached the Subject Guarantee. Tyche also filed a Third-Party Complaint against six third-party defendants, including three members of the Company's management, SirMarc Feldmann , Dr.James Woody , andOzan Pamir (collectively, the "Individual Company Defendants"), claiming that they allegedly breached fiduciary duties to Tyche with regards to the Subject Guarantee. In that regard, onJune 25, 2021 , each of the Individual Company Defendants filed a Motion to Dismiss Tyche's Third-Party Complaint against them. OnNovember 23, 2021 , the Court granted the Company's request to issue an Order of attachment against all of Tyche's shares of the Company's stock that had been held in escrow. In so doing, the Court found that the Company had demonstrated a likelihood of success on the merits of the case based on the facts alleged in the Company's Complaint. OnFebruary 18, 2022 , Tyche filed an Amended Answer, Counterclaims and Third-Party Complaint. OnMarch 22, 2022 , the Company and each of the Individual Company Defendants filed a Motion to Dismiss all of Tyche's claims. A hearing on such Motion to Dismiss is scheduled by the Court forAugust 25, 2022 . The Company and the Individual Company Defendants intend to continue to vigorously defend against all of Tyche's claims, however, there can be no assurance that they will be successful in the legal defense of such claims. Written discovery proceedings have commenced among the parties.
Action Against
The Company and two of its wholly-owned subsidiaries,Katexco Pharmaceuticals Corp. andCannBioRex Pharmaceuticals Corp. (collectively, the "Company Plaintiffs"), initiated legal action againstRonald Bauer andSamantha Bauer , as well as two of their companies,Theseus Capital Ltd. andAstatine Capital Ltd. (collectively, the "Bauer Defendants"), in theSupreme Court of British Columbia onFebruary 25, 2022 . The Company Plaintiffs are seeking damages against the Bauer Defendants for misappropriated funds and stock shares, unauthorized stock sales, and improper travel expenses, in the combined sum of at least$4,395,000 CAD [$3,460,584 USD ] plus the additional sum of$2,721,036 USD . Service of process has been effected on each of the Bauer Defendants, and the Bauer Defendants filed an answer onMay 6, 2022 . There can be no assurance that the Company Plaintiffs will be successful in this legal action. 16
Declaratory Relief Action Against the Company by
OnJune 29, 2022 , Amtrust International Underwriters DAC ("Amtrust"), which was the premerger directors and officers insurance policy underwriter for KBL, filed a declaratory relief action against the Company in theU.S. District Court for the Northern District of California (the "Declaratory Relief Action") seeking declaration of AmTrust's obligations under the directors and officers insurance policy. In the Declaratory Relief Action, Amtrust is claiming that as a result of the merger the Company is no longer the insured under the subject insurance policy, notwithstanding the fact that the fees which the Company seeks to recover from AmTrust relate to matters occurring prior to the merger. The Company has engaged insurance litigation counsel in relation to this matter and plans to file counterclaims against Amtrust to recover those amounts which the Company has advanced and/or anticipates will advance to former officers and directors of the Company. As ofJune 30, 2022 , the Company has recorded an insurance claims receivable of$1,516,963 , which it believes is the net recoverable amount advanced to former directors and officers of the Company as ofJune 30, 2022 . While the Company believes it has a strong case against AmTrust, there can be no assurance that the Company will prevail in this action. NOTE 9 - STOCKHOLDERS' EQUITY Common Stock
Common Stock Issued for Services
During the three and six months endedJune 30, 2022 , the Company issued an aggregate 56,579 and 107,898, respectively, of immediately vested shares of the Company's common stock as compensation to consultants, directors, and officers, with an aggregate issuance date fair value of$75,627 and$225,346 , respectively, which was charged immediately to the condensed consolidated statement of operations for the three and six months endedJune 30, 2022 . Restricted Stock Shares During the three and six months endedJune 30, 2022 , the Company issued 12,000 restricted shares of the Company's common stock, or Restricted Stock Shares, as of the end of both periods as compensation to consultants with an issuance date fair value of$48,600 as of the end of both periods. Per the two year consulting agreement, the Restricted Stock Shares are issued at the beginning of the contract term and annually and vest monthly over a period of 24 months. The Company recognized stock-based compensation expense related to the amortization of the Restricted Stock Shares of$8,100 and$14,175 for the three and six months endedJune 30, 2022 .
Below is a table summarizing the Restricted Stock Shares granted and outstanding
as of and for the six months ended
Weighted
Unvested Average Grant
Restricted Date
Stock FV PriceUnvested as ofJanuary 1, 2022
- $ - Granted 12,000 4.05 Vested 3,500 4.05 Unvested as of June 30, 2022 8,500 4.05 Total unrecognized expense remaining $
34,425
Weighted-average years expected to be recognized over 1.5 - Stock Options A summary of the option activity during the six months endedJune 30, 2022 is presented below: Weighted Weighted Average Average Number of Exercise Remaining Intrinsic Options Price Term (Years) Value
Outstanding, January 1, 2022 2,741,000 4.77 9.4
70,500
Granted 518,121 1.36
Exercised - -
Expired - -
Forfeited - -
Outstanding, June 30, 2022 3,259,121 4.23 9.1 $ -
Exercisable, June 30, 2022 1,473,391 4.10 9.0 $ -
For options issued during the six months ended
Risk-free interest rate 2.88% Expected term in years 5.00-5.77 Expected volatility 91.00% Expected dividends 0% A summary of outstanding and exercisable stock options as ofJune 30, 2022 is presented below: Stock Options Outstanding Stock Options Exercisable Weighted Average Exercise Number of Remaining Number of Price Shares Life in Years Shares$ 2.49 50,000 8.4 50,000$ 4.43 1,580,000 8.7 877,778$ 7.56 436,000 9.1 99,917$ 3.95 675,000 9.4 255,729$ 1.36 518,121 9.9 189,967 3,259,121 9.0 1,473,391 17 The Company recognized stock-based compensation expense of$855,674 and$1,601,854 for the three and six months endedJune 30, 2022 , respectively, related to the amortization of stock options and Restricted Stock Shares. Expense of$711,264 and$1,375,673 is included within general and administrative expenses on the condensed consolidated statements of operations for the three and six month periods, respectively, and expense of$144,410 and$226,181 is included within research and development expenses on the condensed consolidated statements of operations for the three and six month periods, respectively. The full amount of stock-based compensation recognized for the three and six month periods endedJune 30, 2022 is considered to be related party expense. Stock-based compensation expense related to the amortization of stock options for the three and six months endedJune 30, 2021 was$344,095 and$1,436,494 , respectively; these expenses were included within general and administrative expenses on the condensed consolidated statement of operations for both of those periods. The full amount of stock-based compensation recognized for the three and six month periods endedJune 30, 2021 , respectively, was considered to be related party expense. As ofJune 30, 2022 , there was$5,432,652 of unrecognized stock-based compensation expense related to stock options that will be recognized over the weighted average remaining vesting period of 2.6 years, as well as$34,425 of unrecognized expense related to Restricted Stock Shares that will be recognized over the weighted average remaining vesting period of 1.5 years. NOTE 10 - RELATED PARTIES
Accrued Expenses - Related Parties
Accrued expenses - related parties was$103,494 as ofJune 30, 2022 and consists of$14,185 of interest accrued on loans due to a certain investor in the Company and$89,309 of accrued consulting fees for services provided by certain directors and consultants of the Company. Accrued expenses - related parties of$18,370 as ofDecember 31, 2021 , consists of interest accrued on loans and convertible notes due to certain officers and directors of the Company.
Loans Payable - Related Parties
Loans payable - related parties consists of$85,398 and$81,277 as ofJune 30, 2022 andDecember 31, 2021 , respectively. See Note 7 - Loans Payable for more information.
Research and Development Expenses - Related Parties
Research and Development Expenses - Related Parties of$57,336 and$747,883 during the three months endedJune 30, 2022 and 2021, respectively, and$105,054 and$988,704 during the six months endedJune 30, 2022 and 2021, respectively, are related to consulting and professional fees paid to current or former officers, directors or greater than 5% stockholders, or affiliates thereof.
General and Administrative Expenses - Related Parties
General and Administrative Expenses - Related Parties during the three months endedJune 30, 2022 and 2021 were$0 and$340,442 , respectively. These expenses relate to professional fees paid to current or former officers, directors or greater than 5% stockholders, or affiliates thereof. General and Administrative Expenses - Related Parties during the six months endedJune 30, 2022 and 2021 were$5,261 and$379,562 , respectively. These expenses relate to professional fees paid to current or former officers, directors or greater than 5% stockholders, or affiliates thereof.
Interest (Expense) Income - Related Parties
During the three and six months ended
During the three months and six months endedJune 30, 2021 , the Company recorded$14,129 and$28,078 , respectively, of interest expense - related parties, of which$3,901 and$7,747 , respectively, related to interest on certain convertible notes held by officers and directors of the Company and$10,228 and$20,331 , respectively, related to interest expense on loans from officers, directors greater than 5% stockholders, or affiliates thereof, of the Company. 18
NOTE 11 - SUBSEQUENT EVENTS
Oxford University Agreement - 2022
OnJuly 1, 2022 , the Company's subsidiary,Cannbiorex Pharma Ltd. , entered into an agreement with The Chancellor Masters and Scholars of theUniversity of Oxford ("Oxford University ") to provide support for a feasibility trial which will compare the severity of delirium symptomatology between hip fracture patients 60 years and over treated with a peri-operative infusion of anti-TNF or placebo. The term of the agreement is for three years; upon signing the agreement, a payment of £142,500 ($173,077 ) is due, with the same amount due at 6 months and one year after the signing of the agreement. A final payment in the same amount will be due upon submission of a final written report to Cannbiorex.July 2022 Offering
OnJuly 17, 2022 , the Company entered into a Securities Purchase Agreement with certain purchasers, pursuant to which the Company agreed to sell an aggregate of 3,500,000 shares of common stock, pre-funded warrants to purchase up to an aggregate of 2,632,076 shares of common stock ("July 2022 Pre-Funded Warrants"), and common stock warrants to purchase up to an aggregate of 6,132,076 shares of common stock (the "July 2022 Common Warrants"), at a combined purchase price of$1.06 per share and warrant (the "July 2022 Offering"). Aggregate gross proceeds from theJuly 2022 Offering were approximately$6.5 million . TheJuly 2022 Offering closed onJuly 20, 2022 . TheJuly 2022 Pre-Funded Warrants have an exercise price equal to$0.0001 , are immediately exercisable and are subject to customary anti-dilution adjustments for stock splits or dividends or other similar transactions. The exercise price of theJuly 2022 Pre-Funded Warrants will not be subject to adjustment as a result of subsequent equity issuances at effective prices lower than the then-current exercise price. TheJuly 2022 Pre-Funded Warrants are exercisable until they are exercised in full. TheJuly 2022 Pre-Funded Warrants are subject to a provision prohibiting the exercise of suchJuly 2022 Pre-Funded Warrants to the extent that, after giving effect to such exercise, the holder of suchJuly 2022 Pre-Funded Warrants (together with the holder's affiliates, and any other persons acting as a group together with the holder or any of the holder's affiliates), would beneficially own in excess of 9.99% of the Company's outstanding common stock (which may be increased or decreased, with 61 days prior written notice by the holder). Although theJuly 2022 Pre-Funded Warrants have a tender offer provision, theJuly 2022 Pre-Funded Warrants were determined to be equity-classified because they met the limited exception in the case of a change-in-control. Because theJuly 2022 Pre-Funded Warrants are equity-classified, the placement agent fees and offering expenses will be accounted for as a reduction of additional paid in capital. TheJuly 2022 Common Warrants have an exercise price equal to$1.06 per share, are exercisable 6 months following the closing of theJuly 2022 Offering (the "Initial Exercise Date") and are subject to customary anti-dilution adjustments for stock splits or dividends or other similar transactions. The exercise price of theJuly 2022 Common Warrants will not be subject to adjustment as a result of subsequent equity issuances at effective prices lower than the then-current exercise price. TheJuly 2022 Common Warrants are exercisable for 5 years following the Initial Exercise Date. TheJuly 2022 Common Warrants are subject to a provision prohibiting the exercise of suchJuly 2022 Common Warrants to the extent that, after giving effect to such exercise, the holder of suchJuly 2022 Common Warrants (together with the holder's affiliates, and any other persons acting as a group together with the holder or any of the holder's affiliates), would beneficially own in excess of 4.99% of the Company's outstanding common stock (which may be increased or decreased, with 61 days prior written notice by the holder). Although theJuly 2022 Common Warrants have a tender offer provision, theJuly 2022 Common Warrants were determined to be equity-classified because they met the limited exception in the case of a change-in-control. Because theJuly 2022 Common Warrants are equity-classified, the placement agent fees and offering expenses will be accounted for as a reduction of additional paid in capital. Directors' Compensation OnJuly 28, 2022 , the Board of Directors of the Company approved the issuance of 55,112 shares of$0.0001 par value common stock, in lieu of cash compensation, to certain independent directors under the Company's 2020 Omnibus Incentive Plan as consideration for services rendered during the second quarter of 2022. The shares were valued at the closing sales price onJuly 27, 2022 , the date such issuances were approved by the Board of Directors. 19
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Report"), including "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contains forward-looking statements, within the federal securities laws,
including the Private Securities Litigation Reform Act of 1995, regarding future
events and the future results of the Company that are based on current
expectations, estimates, forecasts, and projections about the industry in which
the Company operates and the beliefs and assumptions of the management of the
Company. Words such as "expects," "anticipates," "targets," "goals," "projects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words,
and similar expressions are intended to identify such forward-looking
statements. These forward-looking statements are only predictions and are
subject to risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual results may differ materially and adversely from those
expressed in any forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
elsewhere in this Report, including under "Risk Factors", and in other reports
the Company files with the Securities and Exchange Commission ("SEC"), including
the Company's Annual Report on Form 10-K for the year ended December 31, 2021 ,
as filed with the SEC on March 31, 2022 (under the heading "Risk Factors" and in
other parts of that report), and include, but are not limited to, statements
about:
? Expectations for the clinical and preclinical development, manufacturing,
regulatory approval, and commercialization of our product candidates;
? regulatory developments in
? our success in retaining or recruiting, or changes required in, our officers,
key employees or directors;
? current negative operating cash flows and our potential ability to obtain
additional financing to advance our business and the terms of any further
financing, which may be highly dilutive and may include onerous terms;
? the continued impact of the COVID-19 pandemic on our business operations and
our research and development initiatives;
? the accuracy of our estimates regarding expenses, future revenues and capital
requirements;
? estimates of the sufficiency of our existing capital resources combined with
future anticipated cash flows to finance our operating requirements;
? our ability to maintain our listing on Nasdaq; and
? other risks and uncertainties, including those listed under "Risk Factors",
below.
All forward-looking statements speak only at the date of the filing of this Report. The reader should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Report are reasonable, we provide no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Report and our Annual Report on Form 10-K for the year endedDecember 31, 2021 . These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. 20 General Information
The following discussion is based upon our unaudited Condensed Consolidated Financial Statements included elsewhere in this Report, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Report, and in other reports we file with theSEC , and in our most recent Annual Report on Form 10-K. All references to years relate to the calendar year endedDecember 31st of the particular year. This information should be read in conjunction with the interim unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and "Part II. Other Information - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission onMarch 31, 2022 (the "Annual Report").
Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited condensed consolidated financial statements included above under "Part I - Financial Information" - "Item 1. Financial Statements".
Please see the section entitled "Glossary" beginning on page ii of our Annual Report for a list of abbreviations and definitions commonly used in the pharmaceutical and biotechnology industry which are used throughout this Report.
Our logo and some of our trademarks and tradenames are used in this Report. This
Report also includes trademarks, tradenames and service marks that are the
property of others. Solely for convenience, trademarks, tradenames and service
marks referred to in this Report may appear without the ®, ™ and SM symbols.
References to our trademarks, tradenames and service marks are not intended to
indicate in any way that we will not assert to the fullest extent under
applicable law our rights or the rights of the applicable licensors if any, nor
that respective owners to other intellectual property rights will not assert, to
the fullest extent under applicable law, their rights thereto. We do not intend
the use or display of other companies' trademarks and trade names to imply a
relationship with, or endorsement or sponsorship of us by, any other companies.
The market data and certain other statistical information used throughout this
Report are based on independent industry publications, reports by market
research firms or other independent sources that we believe to be reliable
sources. Industry publications and third-party research, surveys and studies
generally indicate that their information has been obtained from sources
believed to be reliable, although they do not guarantee the accuracy or
completeness of such information. We are responsible for all of the disclosures
contained in this Report, and we believe these industry publications and
third-party research, surveys and studies are reliable. While we are not aware
of any misstatements regarding any third-party information presented in this
Report, their estimates, in particular, as they relate to projections, involve
numerous assumptions, are subject to risks and uncertainties, and are subject to
change based on various factors, including those discussed under, and
incorporated by reference in, the section entitled "Item 1A. Risk Factors" of
this Report. These and other factors could cause our future performance to
differ materially from our assumptions and estimates. Some market and other data
included herein, as well as the data of competitors as they relate to the
Company, is also based on our good faith estimates.
See also "Cautionary Statement Regarding Forward-Looking Statements", above,
which includes information on forward-looking statements used herein and other
matters which are applicable to this Report, including, but not limited to this
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
21
Unless the context requires otherwise, references to the "Company," "we," "us,"
"our," "180 Life", "180LS" and "180 Life Sciences Corp. " refer specifically to
180 Life Sciences Corp. and its consolidated subsidiaries. References to "KBL"
refer to the Company prior to the November 6, 2020 Business Combination.
In addition, unless the context otherwise requires and for the purposes of this Report only:
"CAD" refers to Canadian dollars;
"Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
"£" or "GBP" refers to British pounds sterling;
"SEC" or the "Commission" refers to the
"Securities Act" refers to the Securities Act of 1933, as amended.
Going Concern and Management Liquidity Plans
As ofJune 30, 2022 , we had an accumulated deficit of$64,179,289 and a working capital deficit of$2,318,714 . In addition, for the six months endedJune 30, 2022 ,$5,606,464 of cash was used in operations and total cash decreased by$6,599,267 . The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. As we are not generating revenues, we need to raise a significant amount of capital in order to pay our debts and cover our operating costs. While the Company raised money inAugust 2021 andJuly 2022 (see Note 2 - Going Concern and Management's Plans and Note 11 - Subsequent Events), there is no assurance that we will be able to raise additional needed capital or that such capital will be available under favorable terms.
We are subject to all the substantial risks inherent in the development of a new business enterprise within an extremely competitive industry. Due to the absence of a long-standing operating history and the emerging nature of the markets in which we compete, we anticipate operating losses until we can successfully implement our business strategy, which includes all associated revenue streams. We may never achieve profitable operations or generate significant revenues. We currently have a minimum monthly cash requirement spend of approximately$900,000 . We believe that in the aggregate, we will require significant additional capital funding to support and expand the research and development and marketing of our products, fund future clinical trials, repay debt obligations, provide capital expenditures for additional equipment and development costs, payment obligations, office space and systems for managing the business, and cover other operating costs until our planned revenue streams from products are fully-implemented and begin to offset our operating costs, if ever. Since our inception, we have funded our operations with the proceeds from equity and debt financings. We have experienced liquidity issues due to, among other reasons, our limited ability to raise adequate capital on acceptable terms. We have historically relied upon the issuance of equity and promissory notes that are convertible into shares of our common stock to fund our operations and have devoted significant efforts to reduce that exposure. We anticipate that we will need to issue equity to fund our operations and repay our outstanding debt for the foreseeable future. If we are unable to achieve operational profitability or we are not successful in securing other forms of financing, we will have to evaluate alternative actions to reduce our operating expenses and conserve cash. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The consolidated financial statements included in this prospectus also include a going concern footnote. 22
Additionally, wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock, preferred stock or warrants to purchase shares of our common stock. Our Board of Directors has authority, without action or vote of the shareholders, but subject to NASDAQ rules and regulations (which generally require shareholder approval for any transactions which would result in the issuance of more than 20% of our then outstanding shares of common stock or voting rights representing over 20% of our then outstanding shares of stock), to issue all or part of the authorized but unissued shares of common stock, preferred stock or warrants to purchase such shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market in the future. These actions will result in dilution of the ownership interests of existing shareholders, may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management's ability to maintain control of us, because the shares may be issued to parties or entities committed to supporting existing management.Organization of MD&A
Our Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A") is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
? Business Overview and Recent Events. A summary of the Company's business and
certain material recent events.
? Significant Financial Statement Components. A summary of the Company's
significant financial statement components.
? Results of Operations. An analysis of our financial results comparing
the three and six months ended June 30, 2022 and 2021.
? Liquidity and Capital Resources. An analysis of changes in our balance
sheets and cash flows and discussion of our financial condition.
? Critical Accounting Policies and Estimates. Accounting estimates that
we believe are important to understanding the assumptions andjudgments
incorporated in our reported financial results and forecasts.
Business Overview and Recent Events
OnNovember 6, 2020 ("Closing Date"), the Business Combination was consummated following a special meeting of stockholders, where the stockholders of KBL considered and approved, among other matters, a proposal to adopt the Business Combination Agreement. Pursuant to the Business Combination Agreement,KBL Merger Sub, Inc. merged with 180, with 180 continuing as the surviving entity and becoming a wholly-owned subsidiary of KBL. As part of the Business Combination, KBL issued 17,500,000 shares of common stock and equivalents to the stockholders of 180, in exchange for all of the outstanding capital stock of 180. The Business Combination became effectiveNovember 6, 2020 and in connection therewith, 180 filed a Certificate of Amendment of its Certificate of Incorporation inDelaware to change its name to 180 Life Corp., and KBL changed its name to180 Life Sciences Corp. Following the Closing of the Business Combination, we transitioned our operations to those of 180, which is a clinical stage biotechnology company headquartered inPalo Alto, California , focused on the development of therapeutics for unmet medical needs in chronic pain, inflammation, fibrosis and other inflammatory diseases, where anti-TNF therapy will provide a clear benefit to patients, by employing innovative research, and, where appropriate, combination therapy. We have three product development platforms: ? fibrosis and anti-tumor necrosis factor ("TNF"); ? drugs which are derivatives of cannabidiol ("CBD"); and ? alpha 7 nicotinic acetylcholine receptor ("?7nAChR"). 23 We have several future product candidates in development, including one product candidate which has recently completed a successful Phase 2b clinical trial in theUnited Kingdom for Dupuytren's Contracture, a condition that affects the development of fibrous connective tissue in the palm of the hand. 180 was founded by several world-leading scientists in the biotechnology and pharmaceutical sectors. We intend to invest resources to successfully complete the clinical programs that are underway, discover new drug candidates, and develop new molecules to build on our existing pipeline to address unmet clinical needs. The product candidates are designed via a platform comprised of defined unit operations and technologies. This work is performed in a research and development environment that evaluates and assesses variability in each step of the process in order to define the most reliable production conditions. We may rely on third-party contract manufacturing organizations ("CMOs") and other third parties for the manufacturing and processing of the product candidates in the future. We believe the use of contract manufacturing and testing for the first clinical product candidates is cost-effective and has allowed us to rapidly prepare for clinical trials in accordance with our development plans. We expect that third-party manufacturers will be capable of providing and processing sufficient quantities of these product candidates to meet anticipated clinical trial demands.July 2022 Offering
OnJuly 17, 2022 , the Company entered into a Securities Purchase Agreement with certain purchasers, pursuant to which the Company agreed to sell an aggregate of 3,500,000 shares of common stock, pre-funded warrants to purchase up to an aggregate of 2,632,076 shares of common stock ("July 2022 Pre-Funded Warrants"), and common stock warrants to purchase up to an aggregate of 6,132,076 shares of common stock (the "July 2022 Common Warrants"), at a combined purchase price of$1.06 per share and warrant (the "July 2022 Offering"). Aggregate gross proceeds from theJuly 2022 Offering were approximately$6.5 million . TheJuly 2022 Offering closed onJuly 20, 2022 . TheJuly 2022 Pre-Funded Warrants have an exercise price equal to$0.0001 , are immediately exercisable and are subject to customary anti-dilution adjustments for stock splits or dividends or other similar transactions. The exercise price of theJuly 2022 Pre-Funded Warrants will not be subject to adjustment as a result of subsequent equity issuances at effective prices lower than the then-current exercise price. TheJuly 2022 Pre-Funded Warrants are exercisable until they are exercised in full. TheJuly 2022 Pre-Funded Warrants are subject to a provision prohibiting the exercise of suchJuly 2022 Pre-Funded Warrants to the extent that, after giving effect to such exercise, the holder of suchJuly 2022 Pre-Funded Warrants (together with the holder's affiliates, and any other persons acting as a group together with the holder or any of the holder's affiliates), would beneficially own in excess of 9.99% of the Company's outstanding common stock (which may be increased or decreased, with 61 days prior written notice by the holder). Although theJuly 2022 Pre-Funded Warrants have a tender offer provision, theJuly 2022 Pre-Funded Warrants were determined to be equity-classified because they met the limited exception in the case of a change-in-control. Because theJuly 2022 Pre-Funded Warrants are equity-classified, the placement agent fees and offering expenses will be accounted for as a reduction of additional paid in capital. 24 TheJuly 2022 Common Warrants have an exercise price equal to$1.06 per share, are exercisable 6 months following the closing of theJuly 2022 Offering (the "Initial Exercise Date") and are subject to customary anti-dilution adjustments for stock splits or dividends or other similar transactions. The exercise price of theJuly 2022 Common Warrants will not be subject to adjustment as a result of subsequent equity issuances at effective prices lower than the then-current exercise price. TheJuly 2022 Common Warrants are exercisable for 5 years following the Initial Exercise Date. TheJuly 2022 Common Warrants are subject to a provision prohibiting the exercise of suchJuly 2022 Common Warrants to the extent that, after giving effect to such exercise, the holder of suchJuly 2022 Common Warrants (together with the holder's affiliates, and any other persons acting as a group together with the holder or any of the holder's affiliates), would beneficially own in excess of 4.99% of the Company's outstanding common stock (which may be increased or decreased, with 61 days prior written notice by the holder). Although theJuly 2022 Common Warrants have a tender offer provision, theJuly 2022 Common Warrants were determined to be equity-classified because they met the limited exception in the case of a change-in-control. Because theJuly 2022 Common Warrants are equity-classified, the placement agent fees and offering expenses will be accounted for as a reduction of additional paid in capital. COVID-19 Pandemic OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic. The global spread and impact of COVID-19 has created significant volatility, uncertainty and economic disruption. The extent of COVID-19's effect on the Company's operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic (including any resurgences), the impact of variants of the virus that causes COVID-19, the wide distribution and public acceptance of COVID-19 vaccines, labor needs at the Company as well as in the supply chain, compliance with government or employer COVID-19 vaccine mandates and the resulting impact on available labor, and the level of social and economic restrictions imposed inthe United States and abroad in an effort to curb the spread of the virus, all of which are uncertain and difficult to predict. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on the Company's business, results of operations, financial condition or liquidity. While the ultimate health and economic impact of COVID-19 continues to be highly uncertain, the Company does not currently expect an adverse impact on its business related to of COVID-19. Future events and effects related to the COVID-19 pandemic cannot be determined with precision and actual results could significantly differ from estimates or forecasts. The follow up time for patient data and the statistical analysis for the Phase 2b Dupuytren's Contracture clinical trial was delayed as a result of COVID-19, but such follow-up and statistical analysis are now completed and the Company announced the top-line data results from the Phase 2b trial onDecember 1, 2021 and the data was published onApril 29, 2022 in a peer-reviewed journal. Additionally, COVID-19 has delayed the initiation of certain clinical trials and may delay the initiation of other clinical trials in the future or otherwise have a material adverse effect on our future operations. 25
Significant Financial Statement Components
Research and Development
To date, 180's research and development expenses have related primarily to discovery efforts and preclinical and clinical development of its three product platforms: fibrosis and anti-TNF; drugs which are derivatives of CBD, and ?7nAChR. Research and development expenses consist primarily of costs associated with those three product platforms, which include:
? expenses incurred under agreements with 180's collaboration partners
and third-party contract organizations, investigative clinical trial
sites that conduct research and development activities on its behalf,
and consultants;
? costs related to production of clinical materials, including fees paid
to contract manufacturers;
? laboratory and vendor expenses related to the execution of preclinical
and clinical trials;
? employee-related expenses, which include salaries, benefits and
stock-based compensation; and
? facilities and other expenses, which include expenses for rent and
maintenance of facilities, depreciation and amortization expense and
other supplies.
We expense all research and development costs in the periods in which they are incurred. We accrue for costs incurred as services are provided by monitoring the status of each project and the invoices received from our external service providers. We adjust our accrual as actual costs become known. When contingent milestone payments are owed to third parties under research and development arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are achieved. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that research and development expenses will increase over the next several years as clinical programs progress and as we seek to initiate clinical trials of additional product candidates. It is also expected that increased research and development expenses will be incurred as additional product candidates are selectively identified and developed. However, it is difficult to determine with certainty the duration and completion costs of current or future preclinical programs and clinical trials of product candidates. The duration, costs and timing of clinical trials and development of product candidates will depend on a variety of factors that include, but are not limited to, the following: ? per patient trial costs; ? the number of patients that participate in the trials; ? the number of sites included in the trials; ? the countries in which the trials are conducted; ? the length of time required to enroll eligible patients; ? the number of doses that patients receive; ? the drop-out or discontinuation rates of patients;
? potential additional safety monitoring or other studies requested by
regulatory agencies;
? the impact of COVID-19 on the length of our trials;
? the duration of patient follow-up; and
? the efficacy and safety profile of the product candidates.
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In addition, the probability of success for each product candidate will depend
on numerous factors, including competition, manufacturing capability and
commercial viability. We will determine which programs to pursue and fund in
response to the scientific and clinical success of each product candidate, as
well as an assessment of each product candidate's commercial potential.
Because the product candidates are still in clinical and preclinical development
and the outcome of these efforts is uncertain, we cannot estimate the actual
amounts necessary to successfully complete the development and commercialization
of product candidates or whether, or when, we may achieve profitability. Due to
the early-stage nature of these programs, we do not track costs on a
project-by-project basis. As these programs become more advanced, we intend to
track the external and internal cost of each program.
General and Administrative
General and administrative expenses consist primarily of salaries and other staff-related costs, including stock-based compensation for shares of common stock issued and options granted to founders, directors and personnel in executive, commercial, finance, accounting, legal, investor relations, facilities, business development and human resources functions and include vesting conditions.
Other significant general and administrative costs include costs relating to facilities and overhead costs, legal fees relating to corporate and patent matters, litigation,SEC filings, insurance, investor relations costs, fees for accounting and consulting services, and other general and administrative costs. General and administrative costs are expensed as incurred, and we accrue amounts for services provided by third parties related to the above expenses by monitoring the status of services provided and receiving estimates from our service providers and adjusting our accruals as actual costs become known. It is expected that the general and administrative expenses will increase over the next several years to support our continued research and development activities, manufacturing activities, potential commercialization of our product candidates and the increased costs of operating as a public company. These increases are anticipated to include increased costs related to the hiring of additional personnel, developing commercial infrastructure, fees to outside consultants, lawyers and accountants, and increased costs associated with being a public company, as well as expenses related to services associated with maintaining compliance with Nasdaq listing rules andSEC requirements, insurance and investor relations costs. Interest Expense
Interest expense consists primarily of interest expense related to debt instruments.
Gain (Loss) on Extinguishment of Convertible Notes
Gain (loss) on extinguishment of convertible notes represents the shortfall (excess) of the reacquisition cost of convertible notes as compared to their carrying value.
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Change in Fair Value of Derivative Liabilities
Change in fair value of derivative liabilities represents the non-cash change in fair value of derivative liabilities during the reporting period. Gains resulting from change in fair value of derivative liabilities during the three and six months endedJune 30, 2022 , were driven by decreases in stock price during the period, resulting in a lower fair value of the underlying liability.
Offering Costs Allocated to Warrant Liabilities
Change in offering costs allocated to warrant liabilities represents placement agent fees and offering expenses which were allocated to theFebruary 2021 PIPE Warrants and expensed immediately as they are liability classified.
Change in Fair Value of Accrued Issuable Equity
Change in fair value of accrued issuable equity represents the non-cash change in fair value of accrued equity prior to its formal issuance.
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