NOTE 2 - GOING CONCERN AND MANAGEMENT’S
PLANS
The Company has not generated any revenues and has incurred significant
losses since inception. For the nine months ended September 30, 2022, the Company used cash in operations of $9,200,830. As of September
30, 2022, the Company has an accumulated deficit of $85,666,267 and working capital of $1,789,844. On July 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 the
July 2022 Offering were $6,499,737 (see Note 9 – Stockholder’s Equity). The July 2022 Offering closed on July 20, 2022.
On March 11, 2020, the World
Health Organization declared COVID-19 a pandemic. 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, 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 in the United States and abroad in an effort to curb the spread of the virus, all of which are uncertain
and difficult to predict.
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 on December 1, 2021 and the data was published on April 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 ended December 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 in the 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 nine months ended September
30, 2022, are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending
December 31, 2022. For further information, refer to the financial statements and footnotes included in the Company’s annual
financial statements for the fiscal year ended December 31, 2021, which are included in the Company’s annual report on Form 10-K filed
with the Securities and Exchange Commission (“SEC”) on March 31, 2022.
Use of Estimates
The preparation of financial
statements in conformity with U.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.
Foreign Currency Translation
The Company’s reporting
currency is the United States dollar. The functional currency of certain subsidiaries was the Canadian Dollar (“CAD”) (0.7874
CAD to 1 US dollar as of December 31, 2021) or British Pound (“GBP”) (1.1150 and 1.3510 GBP to 1 US dollar, each as of September
30, 2022 and December 31, 2021, respectively), while expense accounts are translated at the weighted average exchange rate for the period
(0.7941 CAD and 0.7992 CAD to 1 US dollar for each of the three and nine months ended September 30, 2021, respectively, 1.1772 and 1.3784
GBP to 1 US dollar for each of the three months ended September 30, 2022 and 2021, respectively, and 1.2597 and 1.3847 GBP to 1 US dollar
for each of the nine months ended September 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 ended September 30, 2022 and 2021, the Company recorded
other comprehensive loss of ($1,871,072) and ($530,817), respectively, as a result of foreign currency translation adjustments. During
the nine months ended September 30, 2022 and 2021, the Company recorded other comprehensive (loss) income of ($4,507,204) and $65,018,
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 ($14,031) and ($14,151) of foreign currency transaction losses for the three and nine months ended
September 30, 2022, respectively, and recognized ($218,834) and ($200,264) of foreign currency transaction losses for the three and nine
months ended September 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).
Impairment of Long-Lived Assets and Goodwill
The Company reviews long-lived
assets and certain identifiable assets for impairment whenever circumstances and situations change such that there is an indication that
the carrying amounts may not be recovered. An impairment exists when the carrying value of the long-lived asset is not recoverable and
exceeds its estimated fair value.
Goodwill represents the difference
between the purchase price and the fair value of assets and liabilities acquired in a business combination. The Company reviews goodwill
yearly, or more frequently whenever circumstances and situations change such that there is an indication that the carrying amounts may
not be recovered, for impairment by initially considering qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it is necessary
to perform a quantitative analysis. If it is determined that it is more likely than not that the fair value of reporting unit is less
than its carrying amount, a quantitative analysis is performed to identify goodwill impairment. If it is determined that it is not more
likely than not that the fair value of the reporting unit is less than its carrying amount, it is unnecessary to perform a quantitative
analysis. The Company may elect to bypass the qualitative assessment and proceed directly to performing a quantitative analysis. As of
December 31, 2021, the Company elected to bypass the qualitative assessment and conducted a quantitative assessment whereby it was determined
the fair value of the reporting unit (which the Company concluded was the consolidated entity), exceeded the carrying value and, accordingly,
there was no impairment of goodwill.
During the quarter, the market
value of the Company’s single reporting unit had significantly declined and as such, the Company elected to conduct a quantitative
analysis of goodwill to assess for impairment. As of September 30, 2022, the market value of the Company’s publicly traded stock
was $0.67 per share; the Company determined the fair market value of its single reporting unit as of that date to be $26,102,105, which
represents the value per share multiplied by 39,251,286 shares (consisting of 39,246,011 shares of common stock outstanding as of September
30, 2022 plus 5,275 special voting shares which are exchangeable into common stock for no additional consideration). The carrying amount
of the reporting unit as of September 30, 2022 was $44,974,955 (total assets of $53.2 million less total liabilities of $8.2 million).
As of this measurement date, the carrying value exceeded the fair market value by $18,872,850 and as such, management determined that
the goodwill of the reporting unit was impaired by this amount. To recognize the impairment of goodwill, the Company recorded a loss (which
appears as an expense on the income statement) for $18,872,850, which reduced the goodwill of its CannBioRex Pharmaceuticals Corp. (“CBR”)
and 180 Therapeutics LP (“180T”) subsidiaries by $11,264,612 and $7,608,238, respectively.
The following is a summary
of goodwill activity for the nine months ended September 30, 2022 for the Company’s single reporting unit, which includes the recorded
loss on goodwill impairment described above.
| |
CBR Goodwill | | |
180T Goodwill | | |
Consolidated Goodwill | |
| |
| | |
| | |
| |
Balance, December 31, 2021 | |
$ | 23,749,631 | | |
$ | 13,238,255 | | |
$ | 36,987,886 | |
Currency translation | |
| (664,353 | ) | |
| - | | |
| (664,353 | ) |
| |
| | | |
| | | |
| | |
Balance, March 31, 2022 | |
| 23,085,278 | | |
| 13,238,255 | | |
| 36,323,533 | |
Currency translation | |
| (1,734,582 | ) | |
| - | | |
| (1,734,582 | ) |
| |
| | | |
| | | |
| | |
Balance, June 30, 2022 | |
| 21,350,696 | | |
| 13,238,255 | | |
| 34,588,951 | |
Currency translation | |
| (1,750,386 | ) | |
| - | | |
| (1,750,386 | ) |
Balance before impairment | |
| 19,600,310 | | |
| 13,238,255 | | |
| 32,838,565 | |
Impairment of goodwill | |
| (11,264,612 | ) | |
| (7,608,238 | ) | |
| (18,872,850 | ) |
| |
| | | |
| | | |
| | |
Balance, September 30, 2022 | |
$ | 8,335,698 | | |
$ | 5,630,017 | | |
$ | 13,965,715 | |
The Company will continue
to perform goodwill/intangible assets and In-Process Research and Development (“IPR&D”) assets impairment testing on an
annual basis, or as needed if there are changes to the composition of its reporting unit. As of September 30, 2022, there have been no
changes to the composition of the reporting unit.
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 September 30, | | |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Numerator: | |
| | |
| | |
| | |
| |
Net (loss) income | |
$ | (21,486,978 | ) | |
$ | 18,296,856 | | |
$ | (16,983,981 | ) | |
$ | (21,360,865 | ) |
Less: decrease in fair value of dilutive warrants | |
| - | | |
| 10,487,783 | | |
| - | | |
| - | |
(Loss) income available to common stockholders - diluted | |
$ | (21,486,978 | ) | |
$ | 7,809,073 | | |
$ | (16,983,981 | ) | |
$ | (21,360,865 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding (denominator for basic earnings per share) | |
| 39,181,736 | (1) | |
| 32,727,965 | | |
| 35,803,504 | (1) | |
| 30,491,082 | |
| |
| | | |
| | | |
| | | |
| | |
Effects of dilutive securities: | |
| | | |
| | | |
| | | |
| | |
Assumed exercise of stock options, treasury stock method | |
| - | | |
| 182,727 | | |
| - | | |
| - | |
Assumed exercise of warrants, treasury stock method | |
| - | | |
| 798,892 | | |
| - | | |
| - | |
Dilutive potential common shares | |
| - | | |
| 981,619 | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares and assumed potential common shares (denominator for diluted earnings per share, treasury method) | |
| 39,181,736 | (1) | |
| 33,709,584 | | |
| 35,803,504 | (1) | |
| 30,491,082 | |
| |
| | | |
| | | |
| | | |
| | |
Basic earnings per share | |
$ | (0.55 | ) | |
$ | 0.56 | | |
$ | (0.47 | ) | |
$ | (0.70 | ) |
Diluted earnings per share | |
$ | (0.55 | ) | |
$ | 0.23 | | |
$ | (0.47 | ) | |
$ | (0.70 | ) |
| (1) | This amount includes 1,085,000 of unexercised, pre-funded penny
warrants. |
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 September 30, | | |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Options | |
| 3,259,121 | | |
| 436,000 | | |
| 3,259,121 | | |
| 2,066,000 | |
Warrants | |
| 17,285,984 | (1) | |
| 8,526,250 | | |
| 17,285,984 | (1) | |
| 11,153,908 | |
Total potentially dilutive shares | |
| 20,545,105 | | |
| 8,962,250 | | |
| 20,545,105 | | |
| 13,219,908 | |
| (1) | This amount excludes 1,085,000 of unexercised, pre-funded warrants,
which are not considered to be anti-dilutive, as they are penny warrants. |
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 from U.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.
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT
ASSETS
Prepaid expenses consist of
the following as of September 30, 2022 and December 31, 2021:
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Insurance | |
$ | 378,009 | | |
$ | 2,151,487 | |
Research and development expense tax credit receivable | |
| 601,265 | | |
| 644,513 | |
Insurance claims receivable (1) | |
| 1,836,940 | | |
| - | |
Professional fees | |
| 38,311 | | |
| 80,783 | |
Value-added tax receivable | |
| 46,059 | | |
| 24,411 | |
Taxes | |
| 25,618 | | |
| 25,634 | |
Other | |
| - | | |
| 49,755 | |
| |
$ | 2,926,202 | | |
$ | 2,976,583 | |
| (1) | See
Note 8 – Commitments and Contingencies – Legal Matters. |
NOTE 5 – ACCRUED EXPENSES
Accrued expenses consist of
the following as of September 30, 2022 and December 31, 2021:
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Consulting fees | |
$ | 402,315 | | |
$ | 548,281 | |
Professional fees | |
| 26,738 | | |
| 252,973 | |
Accrued legal fees (1) | |
| 218,217 | | |
| 300,000 | |
Employee and director compensation | |
| 1,236,014 | | |
| 725,569 | |
Research and development fees | |
| 168,172 | | |
| 91,737 | |
Interest | |
| 33,523 | | |
| 25,433 | |
Other | |
| 7,050 | | |
| 20,587 | |
| |
$ | 2,092,029 | | |
$ | 1,964,580 | |
(1) | See Note 8 - Commitments and Contingencies, Legal Matters. |
As of September 30, 2022 and
December 31, 2021, accrued expenses - related parties were $158,467 and $18,370, respectively. See Note 10 - Related Parties for details.
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 June 30, 2022 | |
| 1,838,850 | | |
| 30,150 | | |
| 621,600 | | |
| 12,115 | | |
| 2,502,715 | |
Change in fair value of derivative liabilities | |
| (1,246,600 | ) | |
| (10,050 | ) | |
| (188,000 | ) | |
| (5,258 | ) | |
| (1,449,908 | ) |
Balance as of September 30, 2022 | |
$ | 592,250 | | |
$ | 20,100 | | |
$ | 433,600 | | |
$ | 6,857 | | |
$ | 1,052,807 | |
The fair value of the derivative
liabilities as of September 30, 2022 and December 31, 2021 was estimated using the Black Scholes option pricing model, with the following
assumptions used:
| |
September 30, 2022 | |
Risk-free interest rate | |
| 4.16% - 4.24 | % |
Expected term in years | |
| 1.84 - 3.40 | |
Expected volatility | |
| 76.00% - 95.00 | % |
Expected dividends | |
| 0 | % |
Market Price | |
$ | 0.67 | |
| |
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) until November 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 on September 30, 2022 at $592,250, which resulted in decreases of $1,246,600 and $7,456,600 in the fair value of the derivative
liabilities during the three and nine months ended September 30, 2022, respectively.
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 September 30, 2022 at $20,100,
which resulted in decreases of $10,050 and $447,225 in the fair value of the derivative liabilities during the three and nine months ended
September 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 September 30, 2022 at $433,600, which resulted in decreases of $188,000 and $6,082,700
in the fair value of the derivative liabilities during the three and nine months ended September 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 of July 25, 2019 (the “Business Combination”), on November 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.
On March 12, 2021, the Company
issued a warrant to Alliance 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 between May 2, 2021 and May 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 on September 30, 2022 at $6,633, which resulted in decreases of $3,762 and $137,698 in the fair value of the derivative
liabilities during the three and nine months ended September 30, 2022, respectively.
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 September 30, 2022 at $224, which resulted in decreases of $1,496 and $43,337 in the fair value of the
derivative liabilities during the three and nine months ended September 30, 2022, respectively.
Warrant Activity
A summary of the warrant activity
(including certain warrants granted in August 2021 and July 2022 as part of private offerings, both of which are equity-classified) during
the nine months ended September 30, 2022 is presented below:
| |
Number of
Warrants | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Life in
Years | | |
Intrinsic Value | |
| |
| | |
| | |
| | |
| |
Outstanding, December 31, 2021 | |
| 11,153,908 | | |
$ | 9.06 | | |
| 4.1 | | |
$ | - | |
Issued | |
| 8,764,152 | | |
| 0.74 | | |
| 5.3 | | |
| 1,750,067 | |
Exercised | |
| (1,547,076 | ) | |
| 0.0001 | | |
| - | (1) | |
| (1,028,651 | ) |
Cancelled | |
| - | | |
| - | | |
| - | | |
| - | |
Expired | |
| - | | |
| - | | |
| - | | |
| - | |
Outstanding, September 30, 2022 | |
| 18,370,984 | | |
$ | 5.77 | | |
| 3.8 | (1) | |
$ | 721,417 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable, September 30, 2022 | |
| 12,238,908 | | |
$ | 8.13 | | |
| 3.0 | | |
| 721,417 | |
| (1) | Note that the July 2022 Pre-funded Warrants are exercisable until
they are exercised in full and have no expiration date; as such, they have been excluded from this calculation. |
A summary of outstanding and
exercisable warrants as of September 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 |
|
|
|
3.4 |
|
|
|
2,564,000 |
|
$ |
5.28 |
|
|
|
63,658 |
|
|
|
2.6 |
|
|
|
63,658 |
|
$ |
7.07 |
|
|
|
25,000 |
|
|
|
1.8 |
|
|
|
25,000 |
|
$ |
7.50 |
|
|
|
2,500,000 |
|
|
|
3.9 |
|
|
|
2,500,000 |
|
$ |
11.50 |
|
|
|
6,001,250 |
|
|
|
3.1 |
|
|
|
6,001,250 |
|
$ |
1.06 |
|
|
|
6,132,076 |
|
|
|
- |
(1) |
|
|
- |
(1) |
$ |
0.0001 |
|
|
|
1,085,000 |
|
|
|
- |
(2) |
|
|
1,085,000 |
|
|
|
|
|
|
18,370,984 |
|
|
|
3.3 |
(1) |
(2) |
|
12,238,908 |
|
| (1) | Note that the July 2022 Common Warrants are exercisable for 5
years following the initial exercise date, which is six months following the closing of the July 2022 Offering, or January 20, 2023. |
| (2) | Note that the July 2022 Pre-funded Warrants are exercisable until
they are exercised in full and have no expiration date; as such, they have been excluded from this calculation. |
NOTE 7 - LOANS PAYABLE
Loans Payable
The following table summarizes
the activity of loans payable during the nine months ended September 30, 2022:
| |
Principal Balance at December 31, 2021 | | |
Forgiveness | | |
Principal Repaid in Cash | | |
Adjustment | | |
Effect of Foreign Exchange Rates | | |
Principal Balance at September 30, 2022 | |
Paycheck Protection Program | |
$ | 41,312 | | |
$ | - | | |
$ | (41,312 | ) | |
$ | - | | |
$ | - | | |
$ | - | |
Bounce Back Loan Scheme | |
| 61,169 | | |
| - | | |
| (6,711 | ) | |
| - | | |
| (12,000 | ) | |
| 42,458 | |
First Assurance Funding | |
| 1,618,443 | | |
| - | | |
| (1,443,963 | ) | |
| (14,042 | )(1) | |
| - | | |
| 160,438 | |
Other loans payable | |
| 155,320 | | |
| - | | |
| - | | |
| (5,000 | )(2) | |
| - | | |
| 150,320 | |
Total loans payable | |
$ | 1,876,244 | | |
$ | - | | |
$ | (1,491,986 | ) | |
$ | (19,042 | ) | |
$ | (12,000 | ) | |
$ | 353,216 | |
Less: loans payable - current portion | |
| 1,828,079 | | |
| | | |
| | | |
| | | |
| | | |
| 321,694 | |
Loans payable - noncurrent portion | |
$ | 48,165 | | |
| | | |
| | | |
| | | |
| | | |
$ | 31,522 | |
| (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 ended
September 30, 2022, the Company paid $481,321 and $2,692 in partial satisfaction of the First Assurance Funding loan and the Bounce Back
Loan Scheme, respectively. During the nine months ended September 30, 2022, the Company paid an aggregate of $1,443,963 and $6,711 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 nine months ended September 30, 2022 (see Note 10 – Related Parties
for additional details):
| |
Principal Balance at December 31, 2021 | | |
Reclass from Loans Payable | | |
Effect of Foreign Exchange Rates | | |
Principal Balance at September 30, 2022 | |
Loans payable issued between | |
| | |
| | |
| | |
| |
September 18, 2019 through November 4, 2020 | |
$ | 81,277 | | |
$ | 5,000 | | |
$ | (1,521 | ) | |
$ | 84,756 | |
Interest Expense on Loans Payable
For the three months ended
September 30, 2022 and 2021, the Company recognized interest expense associated with loans payable of $7,348 and $2,315, respectively,
and interest expense — related parties associated with loans payable of $1,536 and $10,566, respectively. During the nine months
ended September 30, 2022 and 2021, the Company recognized interest expense associated with loans payable of $22,117 and $20,498, respectively,
and interest income (expense) — related parties associated with loans payable of $1,495 and ($30,898), respectively.
As of September 30, 2022,
the Company had accrued interest and accrued interest — related parties associated with loans payable of $32,914 and $16,676,
respectively. As of December 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.
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 of December 31, 2021. See Legal Matters – Action Against Former Executive of KBL below for information related to a September
30, 2022 accrual.
Legal Matters
Action Against Former Executive of KBL
On September 1, 2021, the
Company initiated legal action in the Chancery Court of Delaware against Dr. Marlene Krauss, the Company’s former Chief Executive
Officer and director (“Dr. Krauss”) and two of her affiliated companies, KBL IV Sponsor, LLC and KBL Healthcare Management,
Inc. (collectively, the “KBL Affiliates”) for, among other things, engaging in unauthorized monetary transfers of the
Company’s assets, non-disclosure of financial liabilities within the Company’s Consolidated Financial Statements, issuing
shares of stock without proper authorization; and improperly allowing stockholder redemptions to take place. The Company’s complaint
alleges causes of action against Dr. 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 of September 30, 2022, the Company has
a legal accrual of $218,217 recorded to cover the legal expenses of the former executives of KBL.
On October 5, 2021, Dr. Krauss
and the KBL Affiliates filed an Answer, Counterclaims and Third-Party Complaint (the “Krauss Counterclaims”) against the Company
and twelve individuals who 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 and
Ozan Pamir (collectively, the “Third-Party Defendants”). On October 27, 2021, the Company and Ozan 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.
On January 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 dismiss Teresa DeLuca,
Frank Knuettel II, Pamela Marrone, Russell T. Ray, Richard W. Barker and Shoshana Shendelman. The Motion was granted by stipulation
and, on February 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 to
Dr. Krauss by making alleged misstatements against Dr. Krauss in SEC 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 and Dr. Krauss for registration of such shares, and also
failed to pay to Dr. Krauss the amounts alleged to be owing under a promissory note in the principal amount of $371,178, plus an additional
$300,000 under Dr. 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.
On March 16, 2022, Donald
A. McGovern, Jr. and Lawrence 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. On April 19, 2022, Dr. Krauss stipulated to
dismiss all of her counterclaims and allegations against both Donald A. McGovern, Jr. and Lawrence Gold, thereby mooting their Motion
to Dismiss the Amended Counterclaims against them. 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. In April 2022, Donald A. McGovern, Jr. and Lawrence Gold were dismissed from the lawsuit as parties. Discovery
has not yet commenced in the case.
Action Against the Company by Dr. Krauss
On August 19, 2021, Dr. Krauss
initiated legal action in the Chancery 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,
to Dr. Krauss for the costs of defending against the SEC and certain Subpoenas served by the SEC on Dr. Krauss; and (2) it alleged that
the Company is also required to reimburse Dr. Krauss for the costs of bringing this lawsuit against the Company. On or about
September 3, 2021, Dr. Krauss filed an Amended and Supplemental Complaint (the “Amended Complaint”) in this action, which
added the further claims that Dr. 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 Capital LLC action referenced below, and the costs of
defending against the Company’s own Complaint against Dr. Krauss as described above. On or about September 23, 2021,
the Company filed its Answer to the Amended Complaint in which the Company denied each of Dr. Krauss’ claims and further raised
numerous affirmative defenses with respect thereto.
On November 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 on December 7, 2021, and, on March 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 on March 29,
2022. The parties are now engaging in proceedings set forth in that implementing Order. The Court granted Dr. Krauss’s request
for advancement of some of the legal fees which Dr. Krauss requested in her Motion, and the Company was required to pay a portion of those
fees while it objects to the remaining portion of disputed fees. These legal fees have been accrued on the Company’s balance sheet
as of September 30, 2022. On October 10, 2022, Dr. Krauss filed an Application to compel the Company to pay the full amount of fees requested
by Dr. Krauss for May-July 2022, and to modify the Court’s Order. The Company has filed its Opposition thereto, but no hearing has
yet been scheduled by the Court for the Application. Notwithstanding any requirement by the Court for the Company to advance attorneys’
fees to Dr. Krauss, no adjudication has yet been made as to whether Dr. 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 by AmTrust International” below.
Action Against Tyche Capital LLC
The Company commenced and
filed an action against defendant Tyche Capital LLC (“Tyche”) in the Supreme Court of New York, in the County of New York,
on April 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” dated July 25, 2019, and a “Term
Sheet For KBL Business Combination With CannBioRex” dated April 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 about May 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, Sir Marc Feldmann, Dr. James Woody, and Ozan Pamir (collectively, the “Individual
Company Defendants”), claiming that they allegedly breached fiduciary duties to Tyche with regards to the Subject Guarantee. In
that regard, on June 25, 2021, each of the Individual Company Defendants filed a Motion to Dismiss Tyche’s Third-Party Complaint
against them.
On November 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.
On February 18, 2022, Tyche
filed an Amended Answer, Counterclaims and Third-Party Complaint. On March 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 was held on August 25,
2022, and the Court granted the Motion to Dismiss entirely as to each of the Individual Company Defendants, and also as to three of the
four Counterclaims brought against the Company, only leaving Tyche’s declaratory relief claim. On September 9, 2022, Tyche filed
a Notice of Appeal as to the Court’s decision, which has not yet been briefed or adjudicated. On August 26, 2022, Tyche filed a
Motion to vacate or modify the Company’s existing attachment Order against Tyche’s shares of the Company’s stock held
in escrow. The Company has filed its Opposition thereto, and a hearing on such Motion has been set for January 5, 2023. 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 Ronald Bauer & Samantha
Bauer
The Company and two of its
wholly-owned subsidiaries, Katexco Pharmaceuticals Corp. and CannBioRex Pharmaceuticals Corp. (collectively, the “Company Plaintiffs”),
initiated legal action against Ronald Bauer and Samantha Bauer, as well as two of their companies, Theseus Capital Ltd. and Astatine Capital
Ltd. (collectively, the “Bauer Defendants”), in the Supreme Court of British Columbia on February 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 [$3,178,025 USD] plus the additional sum of $2,721,036 USD. The Bauer Defendants
filed an answer to the Company Plaintiffs’ claims on May 6, 2022. There can be no assurance that the Company Plaintiffs will be
successful in this legal action.
Declaratory Relief Action Against the Company
by AmTrust International
On June 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 the U.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.
On September 20, 2022, the
Company filed its Answer and Counterclaims against AmTrust for bad faith breach of AmTrust’s insurance coverage obligations to the
Company under the subject directors and officers insurance policy, and seeking damages of at least $2 million in compensatory damages,
together with applicable punitive damages. In addition, the Company brought a Third-Party Complaint against its excess insurance carrier,
Freedom Specialty Insurance Company (“Freedom”) seeking declaratory relief that Freedom will also be required to honor its
policy coverage as soon as the amount of AmTrust’s insurance coverage obligations to the Company have been exhausted. On October
25, 2022, AmTrust filed its Answer to the Company’s Counterclaims, however, Freedom’s response to the Third-Party Complaint
is not yet due. As of September 30, 2022, the Company has recorded an insurance claims receivable of $1,836,940, which it believes is
the net recoverable amount advanced to former directors and officers of the Company as of September 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 nine
months ended September 30, 2022, the Company issued an aggregate 55,112 and 151,010, 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 $60,622
and $270,967, respectively, which was charged immediately to the condensed consolidated statement of operations for the three and nine
months ended September 30, 2022.
Restricted Stock Shares
During the three and nine months
ended September 30, 2022, the Company issued zero and 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 zero and $48,600 as of the end
of both periods. Per the two year consulting agreement which evidences the issuance of the 12,000 restricted shares during the nine months
ended September 30, 2022, 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 $6,075 and $20,250 for the three and nine months ended September 30, 2022.
Below is a table summarizing
the Restricted Stock Shares granted and outstanding as of and for the nine months ended September 30, 2022:
| |
Unvested
Restricted | | |
Weighted
Average
Grant
Date | |
| |
Stock | | |
FV Price | |
Unvested as of January 1, 2022 | |
| - | | |
$ | - | |
Granted | |
| 12,000 | | |
| 4.05 | |
Vested | |
| 5,000 | | |
| 4.05 | |
Unvested as of September 30, 2022 | |
| 7,000 | | |
| 4.05 | |
Total unrecognized expense remaining | |
$ | 28,350 | | |
| | |
Weighted-average years expected to be recognized over | |
| 1.25 | | |
| - | |
Stock Options
A summary of the option activity
during the nine months ended September 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, September 30, 2022 | |
| 3,259,121 | | |
| 4.23 | | |
| 8.8 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable, September 30, 2022 | |
| 1,660,057 | | |
| 4.16 | | |
| 8.7 | | |
$ | - | |
For options issued during
the nine months ended September 30, 2022, the assumptions used in the Black Scholes valuation method were as follows:
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 of September 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 | | |
| 8.2 | | |
| 50,000 | |
$ | 4.43 | | |
| 1,580,000 | | |
| 8.4 | | |
| 983,111 | |
$ | 7.56 | | |
| 436,000 | | |
| 8.8 | | |
| 127,167 | |
$ | 3.95 | | |
| 675,000 | | |
| 9.2 | | |
| 301,042 | |
$ | 1.36 | | |
| 518,121 | | |
| 9.6 | | |
| 198,737 | |
| | | |
| 3,259,121 | | |
| 8.7 | | |
| 1,660,057 | |
The Company recognized stock-based
compensation expense of $672,083 and $2,273,947 for the three and nine months ended September 30, 2022, respectively, related to the issuance
of shares to consultants and directors for services provided, as well as for the amortization of stock options and restricted stock shares.
Expense of $584,237 and $1,959,919 is included within general and administrative expenses on the condensed consolidated statements of
operations for the three and nine month periods, respectively, and expense of $87,846 and $314,028 is included within research and development
expenses on the condensed consolidated statements of operations for the three and nine month periods, respectively. The full amount of
stock-based compensation recognized for the three and nine month periods ended September 30, 2022 is considered to be related party expense.
Stock-based compensation expense related to the amortization of stock options for the three and nine months ended September 30, 2021 was
$434,979 and $1,871,473, respectively; these expenses were included within general and administrative expenses or research and development
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 nine month periods ended September 30, 2021, respectively, was considered to be related party expense. As
of September 30, 2022, there was $4,827,266 of unrecognized stock-based compensation expense related to stock options that will be recognized
over the weighted average remaining vesting period of 2.3 years, as well as $28,350 of unrecognized expense related to Restricted Stock
Shares that will be recognized over the weighted average remaining vesting period of 1.3 years.
July 2022 Offering
On July 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 the July 2022 Offering were $6,499,737. The July 2022 Offering closed on July 20, 2022.
The July 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 the July 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. The July 2022 Pre-Funded Warrants
are exercisable until they are exercised in full. The July 2022 Pre-Funded Warrants are subject to a provision prohibiting the exercise
of such July 2022 Pre-Funded Warrants to the extent that, after giving effect to such exercise, the holder of such July 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 the July 2022 Pre-Funded Warrants have a tender offer provision,
the July 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 the July 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.
The July 2022 Common Warrants
have an exercise price equal to $1.06 per share, are exercisable 6 months following the closing of the July 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 the July 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. The July 2022 Common Warrants are exercisable for 5 years following the Initial Exercise
Date. The July 2022 Common Warrants are subject to a provision prohibiting the exercise of such July 2022 Common Warrants to the extent
that, after giving effect to such exercise, the holder of such July 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 the July 2022 Common Warrants have a tender offer provision, the July 2022 Common Warrants were determined to be equity-classified
because they met the limited exception in the case of a change-in-control. Because the July 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.
As of September 30, 2022,
1,547,076 of the July 2022 Pre-Funded Warrants have been exercised for a value of $155; there are 1,085,000 unexercised July 2022 Pre-Funded
Warrants remaining as of the end of the period. No July 2022 Common Warrants have been exercised as of September 30, 2022.
NOTE 10 - RELATED PARTIES
Accrued Expenses - Related Parties
Accrued expenses - related
parties was $158,467 as of September 30, 2022 and consists of $16,676 of interest accrued on loans due to a certain investor in the Company
and $141,791 of accrued consulting fees for services provided by certain directors and consultants of the Company. Accrued expenses -
related parties of $18,370 as of December 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
totaled $84,756 and $81,277 as of September 30, 2022 and December 31, 2021, respectively. See Note 7 - Loans Payable for more information.
Research and Development Expenses - Related
Parties
Research and Development Expenses
– Related Parties of $53,347 and $298,879 during the three months ended September 30, 2022 and 2021, respectively, and $158,401
and $1,287,583 during the nine months ended September 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 ended September 30, 2022 and 2021 were $0 and $82,519, 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 nine months ended September 30, 2022 and 2021 were $5,261 and $462,081,
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 nine
months ended September 30, 2022, the Company recorded ($1,536) and $1,495, respectively, of interest (expense) income - related parties
related to loans from greater than 5% stockholders or affiliates of the Company.
During the three months and
nine months ended September 30, 2021, the Company recorded $14,201 and $42,279, respectively, of interest expense - related parties, of
which $3,633 and $11,380, respectively, related to interest on certain convertible notes held by officers and directors of the Company
and $10,567 and $30,899, respectively, related to interest expense on loans from officers, directors greater than 5% stockholders, or
affiliates thereof, of the Company.
NOTE 11 - SUBSEQUENT EVENTS
Oxford University Research Agreement
On October 24, 2022, the Company
entered into a new research agreement with Oxford University related to the license agreement signed in November 2021, whereby it was
granted rights to certain patents related to the HMGB1 molecule for liver regeneration. Pursuant to this agreement, the term of the contract
is for one year, beginning on January 1, 2023; the financial terms of the contract are a commitment of £125,000 per quarter, with
the first payment due in April 2023. Any outstanding amounts will earn interest at a rate of 4% per annum.
Directors’ Compensation
On October 31, 2022, the Board
of Directors of the Company approved the issuance of 129,483 shares of $0.0001 par value common stock, in lieu of cash compensation, to
certain independent directors under the Company’s 2022 Omnibus Incentive Plan as consideration for services rendered during the third
quarter of 2022. The shares were valued at the closing sales price on October 31, 2022, the date such issuances were approved by the Board
of Directors.
Exercise of July 2022 Pre-funded Warrants
On November 1, 2022, the remainder,
or 1,085,000, of the July 2022 Pre-Funded Warrants were exercised for a value of $109; there are no remaining outstanding July 2022 Pre-Funded
Warrants.
Notice of a Special Meeting of Stockholders
to Effect a Reverse Stock Split
On November 4, 2022, the Company
filed a Pre-Schedule 14A with the SEC providing notice of a special meeting of stockholders of the Company on December 15, 2022 to approve
an amendment to the Second Amended and Restated Certificate of Incorporation, as amended, to effect a reverse stock split of the issued
and outstanding shares common stock, par value $0.0001 per share, by a ratio of between one-for-four to one-for-twenty, inclusive, with
the exact ratio to be set at a whole number to be determined by the Board of Directors or a duly authorized committee thereof in its discretion,
at any time after the approval of the amendment and prior to December 15, 2023.
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:
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Expectations for the clinical and preclinical development, manufacturing, regulatory approval, and commercialization of our product candidates; |
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the uncertainties associated with the clinical development and regulatory approval of the Company’s drug candidates, including potential delays in the enrollment and completion of clinical trials, issues raised by the U.S. Food and Drug Administration (FDA) and the U.K. Medicines and Healthcare products Regulatory Agency (MHRA); |
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regulatory developments in the United States and foreign countries; |
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our success in retaining or recruiting, or changes required in, our officers, key employees or directors; |
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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; |
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the continued impact of the COVID-19 pandemic on our business operations and our research and development initiatives; |
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the accuracy of our estimates regarding expenses, future revenues and capital requirements; |
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the Company’s reliance on third parties
to conduct its clinical trials, enroll patients, and manufacture its preclinical and clinical drug supplies;
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the ability to come to mutually agreeable terms
with such third parties and partners, and the terms of such agreements;
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estimates of patient populations for the Company’s
planned products;
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unexpected adverse side effects or inadequate
therapeutic efficacy of drug candidates that could limit approval and/or commercialization, or that could result in recalls or product
liability claims;
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the Company’s ability to fully comply with numerous federal, state and local laws and regulatory requirements, as well as rules and regulations outside the United States, that apply to its product development activities; |
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challenges and uncertainties inherent in product research and development, including the uncertainty of clinical success and of obtaining regulatory approvals; uncertainty of commercial success; |
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the ability of the Company to execute its plans to develop and market new drug products and the timing and costs of these development programs; |
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high inflation, increasing interest rates and economic downturns, including potential recessions, as well as macroeconomic, geopolitical, health and industry trends, pandemics, acts of war (including the ongoing Ukraine/Russian conflict) and other large-scale crises; |
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estimates of the sufficiency of our existing capital resources combined with future anticipated cash flows to finance our operating requirements; |
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our ability to maintain our listing on NASDAQ (including that we are not currently in compliance with NASDAQ’s continued listing requirements); and |
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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 ended December 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.
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
with U.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 the SEC, and in our most recent
Annual Report on Form 10-K. All references to years relate to the calendar year ended December 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 ended December 31, 2021, filed with the Securities and Exchange Commission on March 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.”
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 United States Securities and Exchange Commission; and
“Securities Act” refers to the Securities
Act of 1933, as amended.
Additional Information
We file annual, quarterly,
and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet
at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports are
filed with or furnished to the SEC, on the “Investors”—“SEC Filings”—“All SEC
Filings” page of our website at www.180lifesciences.com. Copies of documents filed by us with the SEC are also available
from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth
on the cover page of this Report. Our website address is www.180lifesciences.com/. The information on, or that may be accessed
through, our website is not incorporated by reference into this Report and should not be considered a part of this Report.
Going Concern and Management Liquidity Plans
As of September 30, 2022, we had an accumulated deficit of $85,666,267
and working capital of $1,789,844. In addition, for the nine months ended September 30, 2022, $9,200,830 of cash was used in operations
and total cash decreased by $4,635,869. 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 in August 2021 and July 2022 (see Note 2 – Going Concern
and Management’s Plans), we expect to require additional funding in the future and 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 in the 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 report also include a going concern footnote.
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:
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Business Overview and Recent Events. A summary of the Company’s business and certain material recent events. |
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Significant Financial Statement Components. A summary of the Company’s significant financial statement components. |
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Results of Operations. An analysis of our financial results comparing the three and nine months ended September 30, 2022 and 2021. |
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Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows and discussion of our financial condition. |
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Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. |
Business Overview and Recent Events
On November 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 a 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 effective November 6, 2020 and in connection therewith, 180
filed a Certificate of Amendment of its Certificate of Incorporation in Delaware to change its name to 180 Life Corp., and KBL changed
its name to 180 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 in
Palo 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:
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fibrosis and anti-tumor necrosis factor (“TNF”); |
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drugs which are derivatives of cannabidiol (“CBD”); and |
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alpha 7 nicotinic acetylcholine receptor (“α7nAChR”). |
We have several future product
candidates in development, including one product candidate which has recently completed a successful Phase 2b clinical trial in the United
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
On July 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 the July 2022 Offering were $6,499,737. The July 2022 Offering closed on July 20, 2022.
The July 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 the July 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. The July 2022
Pre-Funded Warrants are exercisable until they are exercised in full. The July 2022 Pre-Funded Warrants are subject to a provision prohibiting
the exercise of such July 2022 Pre-Funded Warrants to the extent that, after giving effect to such exercise, the holder of such July
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 the July 2022 Pre-Funded Warrants have a tender
offer provision, the July 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 the July 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.
The July 2022 Common Warrants
have an exercise price equal to $1.06 per share, are exercisable 6 months following the closing of the July 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 the July 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. The July 2022 Common Warrants are exercisable for 5 years following the Initial Exercise
Date. The July 2022 Common Warrants are subject to a provision prohibiting the exercise of such July 2022 Common Warrants to the extent
that, after giving effect to such exercise, the holder of such July 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 the July 2022 Common Warrants have a tender offer provision, the July 2022 Common Warrants were determined to be equity-classified
because they met the limited exception in the case of a change-in-control. Because the July 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
On March 11, 2020, the World
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 in the 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
on December 1, 2021 and the data was published on April 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.
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 α7nAChR. Research and development
expenses consist primarily of costs associated with those three product platforms, which include:
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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; |
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costs related to production of clinical materials, including fees paid to contract manufacturers; |
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laboratory and vendor expenses related to the execution of preclinical and clinical trials; |
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employee-related expenses, which include salaries, benefits and stock-based compensation; and |
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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:
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per patient trial costs; |
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the number of patients that participate in the trials; |
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the number of sites included in the trials; |
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the countries in which the trials are conducted; |
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the length of time required to enroll eligible patients; |
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the number of doses that patients receive; |
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the drop-out or discontinuation rates of patients; |
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potential additional safety monitoring or other studies requested by regulatory agencies; |
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the impact of COVID-19 on the length of our trials; |
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the duration of patient follow-up; and |
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the efficacy and safety profile of the product candidates. |
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 and SEC 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.
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 nine months ended September 30, 2022, were driven
by decreases in stock price during the periods, 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 the February 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.
CONSOLIDATED RESULTS OF OPERATIONS
For the Three Months
Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021
| |
For the Three Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
Operating Expenses: | |
| | |
| |
Research and development | |
$ | 583,177 | | |
$ | 316,473 | |
Research and development - related parties | |
| 53,347 | | |
| 298,879 | |
General and administrative | |
| 3,418,628 | | |
| 3,519,605 | |
General and administrative - related parties | |
| - | | |
| 82,519 | |
Total Operating Expenses | |
| 4,055,152 | | |
| 4,217,476 | |
Loss From Operations | |
| (4,055,152 | ) | |
| (4,217,476 | ) |
| |
| | | |
| | |
Other (Expenses) Income: | |
| | | |
| | |
Gain on settlement of liabilities | |
| - | | |
| 472,677 | |
Other income | |
| - | | |
| 12,308 | |
Interest expense | |
| (7,348 | ) | |
| (5,455 | ) |
Interest expense - related parties | |
| (1,536 | ) | |
| (14,201 | ) |
Loss on impairment of goodwill | |
| (18,872,850 | ) | |
| - | |
Change in fair value of derivative liabilities | |
| 1,449,908 | | |
| 22,043,391 | |
Total Other (Expenses) Income, Net | |
| (17,431,826 | ) | |
| 22,508,720 | |
(Loss) Income Before Income Taxes | |
| (21,486,978 | ) | |
| 18,291,244 | |
Income tax benefit | |
| - | | |
| 5,612 | |
Net (Loss) Income | |
$ | (21,486,978 | ) | |
$ | 18,296,856 | |
Research and Development
We incurred research and development
expenses of $583,177 for the three months ended September 30, 2022, compared to $316,473 for the three months ended September 30, 2021,
representing an increase of $266,704 or 84%. The increase includes an increase in salary expenses of $140,000, an increase in research
and development expenses of $125,000 related to our agreements with Oxford University, and an increase in stock-based compensation expenses
of approximately $100,000, as well as an increase due to a reduction of a tax credit of $220,000. These increases in expenses were offset
by a decrease in contract expenses of $365,000 related to the 2018 Yissum Agreement.
Research and Development – Related Parties
We incurred research and development
expenses – related parties of $53,347 for the three months ended September 30, 2022, compared to $298,879 for the three months ended
September 30, 2021, representing a decrease of $245,532, or 82%. The decrease is primarily attributable to a decrease in stock-based compensation
expenses of $980,000, offset by a prior year period reclassification of $570,000, an increase in consulting expenses of $85,000 and an
increase due to the reduction of a tax credit of $80,000.
General and Administrative
We incurred general and administrative expenses of $3,418,628 and $3,519,605
for the three months ended September 30, 2022 and 2021, respectively, representing a decrease of $100,977 or 3%. The decrease resulted
from a decrease in settlement expenses of $250,000, a decrease due to a reclass in the prior period between cost centers (from general
and administrative to research and development – related parties) of $630,000 and a decrease to gains/losses on foreign exchange
of $200,000 (see Note 3, Summary of Significant Accounting Policies, “Foreign Currency Translation”), offset by increases
in stock-based compensation expenses, insurance expenses and salaries expenses of $850,000, $270,000 and $65,000, respectively.
General and Administrative – Related
Parties
We incurred general and administrative
expenses - related parties of $0 and $82,519 for the three months ended September 30, 2022 and 2021, respectively, representing a decrease
of $82,519, or 100%. The decrease is attributable to a change in cost center for consulting fees (from general and administrative to research
and development) from the prior period of approximately $42,000 and $40,000 in bad debt expenses from the prior year.
Other (Expenses) Income, Net
We incurred other (expenses),
net of ($17,431,826) during the three months ended September 30, 2022, as compared to other income, net of $22,508,720 for the three months
ended September 30, 2021, representing an increase in other expenses of $39,940,546 or 177%. The increase was primarily attributable to
the non-cash change in fair value of the Company’s derivative liabilities from the prior period of $20,593,483 (see Note 6 –
Derivative Liabilities), as well as the loss on impairment of goodwill of $18,872,850 (see Note 3, Summary of Significant Accounting Policies,
“Impairment of Long-Lived Assets and Goodwill”).
For the Nine Months
Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
| |
For the Nine Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
Operating Expenses: | |
| | |
| |
Research and development | |
$ | 1,688,474 | | |
$ | 689,172 | |
Research and development - related parties | |
| 158,401 | | |
| 1,287,583 | |
General and administrative | |
| 10,405,933 | | |
| 8,740,067 | |
General and administrative - related parties | |
| 5,261 | | |
| 462,081 | |
Total Operating Expenses | |
| 12,258,069 | | |
| 11,178,948 | |
Loss From Operations | |
| (12,258,069 | ) | |
| (11,178,948 | ) |
| |
| | | |
| | |
Other Expenses: | |
| | | |
| | |
Gain on settlement of liabilities | |
| - | | |
| 927,698 | |
Other income | |
| - | | |
| 12,308 | |
Interest expense | |
| (22,117 | ) | |
| (130,634 | ) |
Interest income (expense) - related parties | |
| 1,495 | | |
| (42,279 | ) |
Loss on extinguishment of convertible notes payable, net | |
| - | | |
| (9,737 | ) |
Loss on impairment of goodwill | |
| (18,872,850 | ) | |
| - | |
Change in fair value of derivative liabilities | |
| 14,167,560 | | |
| (10,342,337 | ) |
Change in fair value of accrued issuable equity | |
| - | | |
| (9,405 | ) |
Offering costs allocated to warrant liabilities | |
| - | | |
| (604,118 | ) |
Total Other Expenses, Net | |
| (4,275,912 | ) | |
| (10,198,504 | ) |
Loss Before Income Taxes | |
| (16,983,981 | ) | |
| (21,377,452 | ) |
Income tax benefit | |
| - | | |
| 16,587 | |
Net Loss | |
$ | (16,983,981 | ) | |
$ | (21,360,865 | ) |
Research and Development
We incurred research and development
expenses of $1,688,474 for the nine months ended September 30, 2022, compared to $689,217 for the nine months ended September 30, 2021,
representing an increase of $999,257 or 145%. The increase includes a $305,000 increase in consulting expenses for the Scientific Advisory
Board, an increase in salaries expenses of $520,000, an increase in research and development expenses of $270,000 related to our agreements
with Oxford University, a $70,000 increase in Anti-TNF therapies expenses, and an increase in stock-based compensation expenses of approximately
$250,000, as well as a change due to various accruals from the prior year reversing for a net increase of $700,000. These increases were
offset by a decrease in contract expenses of $1,000,000 related to the 2018 Yissum Agreement.
Research and Development – Related Parties
We incurred research and development
expenses – related parties of $158,401 for the nine months ended September 30, 2022, compared to $1,287,583 for the nine months
ended September 30, 2021, representing a decrease of $1,129,182, or 88%. The decrease is primarily attributable to a decrease in stock-based
compensation expenses of $925,000 as well as a decrease in consultancy expenses totaling $440,000, offset by a decrease in the research
and development tax credit for the period, which resulted in an increase of $240,000.
General and Administrative
We incurred general and
administrative expenses of $10,405,933 and $8,740,067 for the nine months ended September 30, 2022 and 2021, respectively,
representing an increase of $1,665,866 or 19%. The increase is attributable to an increase in professional fees, primarily legal, of
approximately $1,800,000 and an increase in insurance expenses of $825,000, offset by decreases in settlement expenses and Anti-TNF
therapies expenses of $270,000 and $525,000, respectively, as well as a decrease to gains/losses on foreign exchange of $185,000
(see Note 3, Summary of Significant Accounting Policies, “Foreign Currency Translation”).
General and Administrative – Related
Parties
We incurred general and administrative
expenses - related parties of $5,261 and $462,081 for the nine months ended September 30, 2022 and 2021, respectively, representing a
decrease of $456,820, or 99%. The decrease is attributable to a decrease in consultancy expenses totaling $125,000 and $340,000 in bad
debt expenses from the prior year.
Other Expenses, Net
We incurred other expenses,
net of $4,725,912 during the nine months ended September 30, 2022, as compared to other expenses, net of $10,198,504 for the nine months
ended September 30, 2021, representing a decrease in other expenses of approximately $5,472,592 or 54%. The decrease was primarily attributable
to the non-cash change in fair value of the Company’s derivative liabilities from the prior period of $24,509,897 (see Note 6 –
Derivative Liabilities), which was offset by a loss on the impairment of goodwill in the amount of $18,872,850 (see Note 3, Summary of
Significant Accounting Policies, “Impairment of Long-Lived Assets and Goodwill”).
Liquidity and Capital Resources
As of September 30, 2022 and
December 31, 2021, we had cash balances of $3,588,639 and $8,244,508, respectively, and working capital (deficit) of $1,789,844 and ($8,498,193),
respectively.
For the nine months ended September 30, 2022 and 2021, cash used in
operating activities was $9,200,830 and $14,343,898, respectively. Our cash used in operations for the nine months ended September 30,
2022 was primarily attributable to our net loss of $16,983,981, adjusted for non-cash expenses in the aggregate amount of $7,050,633,
as well as $732,518 of net cash provided by changes in the levels of operating assets and liabilities. Our cash used in operations for
the nine months ended September 30, 2021 was primarily attributable to our net loss of $21,360,865, adjusted for non-cash expenses in
the aggregate amount of $14,424,088 as well as $7,407,121 of net cash used to fund changes in the levels of operating assets and liabilities.
For the nine months ended September 30, 2022 and 2021, cash provided
by financing activities was $4,477,924 and $23,862,871, respectively. Cash provided by financing activities during the nine months ended
September 30, 2022 was due to proceeds from the sale of common stock, warrants and pre-funded warrants, net of issuance costs, in the
amount of $5,969,910, as well as repayments of loans payable in the amount of $1,491,986. Cash provided by financing activities during
the nine months ended September 30, 2021 was due to $24,611,070 of net proceeds from our February 2021 private offering of common stock
and warrants, partially offset by the repayment of loans and convertible debt in the aggregate amount of $748,199.
Our
product candidates may never achieve commercialization and we anticipate that we will continue to incur losses for the foreseeable future.
We expect that our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase.
As a result, until such time, if ever, as we are able to generate substantial product revenue, we expect to finance our cash needs through
a combination of equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other
similar arrangements, which may not be available on favorable terms, if at all. The sale of additional equity or debt securities, if accomplished,
may result in dilution to our then stockholders. Our primary uses of capital are, and we expect will continue to be, compensation and
related expenses, third-party clinical research and development services, license payments or milestone obligations that may arise, laboratory
and related supplies, clinical costs, potential manufacturing costs, legal and other regulatory expenses and general overhead costs.
Our material cash requirements
and time periods of such requirements from known contractual and other obligations include milestone and royalty payments related to license
agreements with Oxford University and Yissum Research Development Company of the Hebrew University of Jerusalem, Ltd., payments related
to directors and officers (“D&O”) insurance, payments to consultants and payments related to outside consulting firms,
such as legal counsel, auditors, accountants, etc. These cash requirements, in the aggregate, are expected to amount to approximately
$1,040,000 for the remainder of 2022 and $33,800,000 for the years 2023 through 2026.
Further,
our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials
and other research and development activities. We currently have no credit facility or committed sources of capital. Because of the numerous
risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the
amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.
Our
condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“U.S. GAAP”), which contemplate continuation of the Company as a going concern and the realization of assets
and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the condensed
consolidated financial statements do not necessarily purport to represent realizable or settlement values. The condensed consolidated
financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Recent Financing and
Settlement Transactions
July 2022 Offering
On July 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 the July 2022 Offering were $6,499,737. The July 2022 Offering closed on July 20, 2022.
The July 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 the July 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. The July 2022 Pre-Funded Warrants
are exercisable until they are exercised in full. The July 2022 Pre-Funded Warrants are subject to a provision prohibiting the exercise
of such July 2022 Pre-Funded Warrants to the extent that, after giving effect to such exercise, the holder of such July 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 the July 2022 Pre-Funded Warrants have a tender offer provision,
the July 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 the July 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.
The July 2022 Common Warrants
have an exercise price equal to $1.06 per share, are exercisable 6 months following the closing of the July 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 the July 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. The July 2022 Common Warrants are exercisable for 5 years following the Initial Exercise
Date. The July 2022 Common Warrants are subject to a provision prohibiting the exercise of such July 2022 Common Warrants to the extent
that, after giving effect to such exercise, the holder of such July 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 the July 2022 Common Warrants have a tender offer provision, the July 2022 Common Warrants were determined to be equity-classified
because they met the limited exception in the case of a change-in-control. Because the July 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.
Critical Accounting Policies and Estimates
The
Company’s condensed consolidated financial statements are prepared in accordance with accounting principles that are generally accepted
in the United States. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions
that affect the reported amounts of its assets, liabilities, revenue and expenses. The Company has identified certain policies and estimates
as critical to its business operations and the understanding of its past or present results of operations related to (i) goodwill and
(ii) intangible assets and in-process research and development. These policies and estimates are considered critical because they had
a material impact, or they have the potential to have a material impact, on the Company’s condensed consolidated financial statements
and because they require management to make significant judgments, assumptions or estimates. The Company believes that the estimates,
judgments and assumptions made when accounting for the items described below were reasonable, based on information available at the time
they were made. However, actual results may differ from those estimates, and these differences may be material.
Goodwill/Intangible Assets and In-Process Research
and Development (“IPR&D”)
The Company has a significant
amount of goodwill, intangible assets and IPR&D assets that are assessed at least annually for impairment. Prior to the interim testing
of goodwill for impairment, goodwill, intangible assets and IPR&D assets totaled $46.7 million or 88% of the Company’s total
assets as of September 30, 2022, and totaled $51.5 million, or 82% of the Company’s total assets as of December 31, 2021. The impairment
analyses of these assets are considered critical because of their significance to the Company. Intangible assets arising from business
combinations or acquisitions, such as goodwill, patents and IPR&D assets are initially recorded at estimated fair value. Licensed
patents are amortized over the remaining life of the patent. IPR&D assets are considered to be indefinite-lived until the completion
or abandonment of the associated research and development projects. Our goodwill was derived from acquisitions where the purchase price
exceeded the fair value of the net assets acquired. The Company is required to reassign goodwill to reporting units whenever reorganizations
of the internal reporting structure change the composition of its reporting units. The Company identified one reporting unit which represents
its sole operating segment.
The Company is required to
assess goodwill/intangible assets and IPR&D assets at least annually, or more frequently, if an event occurs or circumstances change
that indicates it is more likely than not the fair value of the Company’s reporting unit was less than its carrying value. In assessing
goodwill/intangible assets and IPR&D assets for impairment, the Company may first assess qualitative factors to determine whether
it is more likely than not that the fair value of its reporting unit is less than its carrying value. For December 31, 2021, the Company
elected to bypass the qualitative analysis and proceeded directly to the two- step test.
The first step of the goodwill/intangible
assets and IPR&D assets impairment test used to identify potential impairment compares the fair value of the reporting unit with its
carrying amount, including goodwill/intangible assets and IPR&D assets. The Company determined the fair market value of its single
reporting unit as of December 31, 2021 to be its market capitalization of $132,760,680, which represents $3.90 per share (the market close
price on December 31, 2021) multiplied by 34,021,200 shares (consisting of 34,035,925 shares of common stock plus 5,275 special voting
shares which are exchangeable into common stock for no additional consideration) on December 31, 2021. The carrying amount of the reporting
unit as of December 31, 2021 was $39,322,695 (total assets of $62.7 million less total liabilities of $23.4 million).
Since the fair value of the
Company ($132,760,680) exceeded the carrying value of the Company ($39,322,695) as of December 31, 2021, and the carrying value of the
Company is greater than zero, management concluded the goodwill/intangible assets and IPR&D assets of the reporting unit were not
impaired.
During the quarter, the market
value of the Company’s single reporting unit had significantly declined (see Note 3 – Summary of Significant Accounting Policies).
As of September 30, 2022, the market value of the Company’s publicly traded stock was $0.67 per share; the Company determined the
fair market value of its single reporting unit as of that date to be $26,102,105, which represents the value per share multiplied by 39,251,286
shares (consisting of 39,246,011 shares of common stock outstanding as of September 30, 2022 plus 5,275 special voting shares which are
exchangeable into common stock for no additional consideration). The carrying amount of the reporting unit as of September 30, 2022 was
$44,974,955 (total assets of $53.2 million less total liabilities of $8.2 million). As of this measurement date, the carrying value exceeded
the fair market value by $18,872,850, and management believed that the goodwill of the reporting unit was impaired by this amount. To
recognize the impairment of goodwill, the Company recorded a loss (which appears as an expense on the income statement) for $18,872,850,
which reduced the goodwill of its CBR and 180T subsidiaries by $11,264,612 and $7,608,238, respectively.
The Company will continue
to perform goodwill/intangible assets and IPR&D assets impairment testing on an annual basis, or as needed if there are changes to
the composition of its reporting unit. As of September 30, 2022, there have been no changes to the composition of the reporting unit.
Derivative Liabilities
The Company evaluates its
debt and equity issuances to determine if those contracts or embedded components of those contracts qualify as derivatives requiring separate
recognition in the Company’s financial statements. As of September 30, 2022 and December 31, 2021, derivative liabilities totaled
$1.1 million and $15.2 million, or 13% and 65%, respectively, of the Company’s total liabilities. The analyses of these liabilities
are considered critical because of their significance to the Company. Entities must consider whether to classify contracts that may be
settled in its own stock, such as warrants, as equity of the entity or as an asset or liability. If an event that is not within the entity’s
control could require net cash settlement, then the contract should be classified as an asset or a liability rather than as equity.
The result of this accounting
treatment is that the fair value of the embedded derivative is marked-to-market at each balance sheet date and recorded as a liability
and the change in fair value is recorded in other (expense) income, net in the consolidated statements of operations. In circumstances
where there are multiple embedded instruments that are required to be bifurcated, the bifurcated derivative instruments are
accounted for as a single, compound derivative instrument. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity instruments that are initially
classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the
reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether
or not net-cash settlement of the derivative instrument is expected within twelve months of the balance sheet date.
If the embedded conversion
options do not require bifurcation, the Company then evaluates for the existence of a beneficial conversion feature by comparing the fair
value of the Company’s underlying stock as of the commitment date to the effective conversion price of the instrument (the intrinsic
value).
The Company has computed the
fair value of warrants, options, convertible notes and convertible preferred stock issued using the Monte-Carlo and Black-Scholes option
pricing models. The expected term used for warrants, convertible notes and convertible preferred stock are 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 from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term
of the instrument being valued.
The Company evaluated the
terms of its AGP Warrants (see Note 6 – Derivative Liabilities) when they were originally earned and determined that the AGP Warrants
should initially be liability-classified at their fair value at issuance with subsequent remeasurement (mark-to-market) at period ends.
As of September 30, 2022, the Company has concluded that its warrants should remain liability-classified as of that date due to the presence
of the tender offer provision combined with the existence of the exchangeable shares that have voting rights consistent with common stockholders.
Recently Issued Accounting Pronouncements
See Note 3 – Summary
of Significant Accounting Policies of our consolidated financial statements included within our 2021 Annual Report on Form 10-K for a
summary of recently issued accounting pronouncements.