The following discussion and analysis of the results of operations and financial
condition of 180 Life Sciences Corp. as of and for the years ended December 31,
2022 and 2021 should be read in conjunction with our consolidated financial
statements and the notes to those consolidated financial statements that are
included elsewhere in this Annual Report. This Management's Discussion and
Analysis of Financial Condition and Results of Operations contains statements
that are forward-looking. See "Cautionary Statement Regarding Forward-Looking
Information" above. Actual results could differ materially because of the
factors discussed in "Risk Factors" elsewhere in this Annual Report, and other
factors that we may not know.
As of December 31, 2022, we had an accumulated deficit of $107,408,545 and
working capital of $3,270,608, and for the year ended December 31, 2022, a net
loss of $38,726,259 and cash used in operating activities of $12,127,585. The
accompanying 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 capital in August 2021, July
2022 and December 2022, there is no assurance that we will be able to raise
additional needed capital or that such capital will be available under favorable
terms.
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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 ever 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 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 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
prospectus 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:
? Business Overview and Recent Events. A summary of the Company's business and
certain material recent events.
? Significant Financial Statement Components. A summary of the Company's
significant financial statement components.
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? Results of Operations. An analysis of our financial results comparing the
twelve months ended December 31, 2022 and 2021.
? Liquidity and Capital Resources. An analysis of changes in our balance sheets
and cash flows and discussion of our financial condition.
? Critical Accounting Policies and Estimates. Accounting estimates that we
believe are important to understanding the assumptions and judgments
incorporated in our reported financial results and forecasts.
Business Overview and Recent Events
This MD&A and the related financial statements for the year ended December 31,
2022 primarily covers the operations 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:
? fibrosis and anti-tumor necrosis factor ("TNF");
? drugs which are derivatives of cannabidiol ("CBD"); and
? alpha 7 nicotinic acetylcholine receptor ("?7nAChR").
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 up 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.
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: (1) fibrosis and anti-TNF; (2) drugs which are derivatives of CBD,
and (3) ?7nAChR. Research and development expenses consist primarily of costs
associated with those three product platforms, which include:
? expenses incurred under agreements with 180's collaboration partners and
third-party contract organizations, investigative clinical trial sites that
conduct research and development activities on its behalf, and consultants;
? costs related to production of clinical materials, including fees paid to
contract manufacturers;
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? laboratory and vendor expenses related to the execution of preclinical and
clinical trials;
? employee-related expenses, which include salaries, benefits and stock-based
compensation; and
? facilities and other expenses, which include expenses for rent and maintenance
of facilities, depreciation and amortization expense and other supplies.
We expense all research and development costs in the periods in which they are
incurred. We accrue for costs incurred as services are provided by monitoring
the status of each project and the invoices received from our external service
providers. We adjust our accrual as actual costs become known. When contingent
milestone payments are owed to third parties under research and development
arrangements or license agreements, the milestone payment obligations are
expensed when the milestone results are achieved.
Research and development activities are central to our business model. Product
candidates in later stages of clinical development generally have higher
development costs than those in earlier stages of clinical development,
primarily due to the increased size and duration of later-stage clinical trials.
We expect that research and development expenses will increase over the next
several years as clinical programs progress and as we seek to initiate clinical
trials of additional product candidates. It is also expected that increased
research and development expenses will be incurred as additional product
candidates are selectively identified and developed. However, it is difficult to
determine with certainty the duration and completion costs of current or future
preclinical programs and clinical trials of product candidates.
The duration, costs and timing of clinical trials and development of product
candidates will depend on a variety of factors that include, but are not limited
to, the following:
? per patient trial costs;
? the number of patients that participate in the trials;
? the number of sites included in the trials;
? the countries in which the trials are conducted;
? the length of time required to enroll eligible patients;
? the number of doses that patients receive;
? the drop-out or discontinuation rates of patients;
? potential additional safety monitoring or other studies requested by
regulatory agencies;
? the impact of COVID-19 on the length of our trials;
? the duration of patient follow-up; and
? the efficacy and safety profile of the product candidates.
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.
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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.
Other Income
Other income primarily represents fees earned for research and development work
performed for other companies, some of which are related parties.
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.
Loss on Goodwill Impairment
Loss on goodwill impairment represents the excess of the carrying value of the
asset over its estimated fair market value during the reporting period which is
not recoverable.
Loss on IP R&D assets impairment
Loss on IP R&D assets impairment represents the excess of the carrying value of
the assets over its estimated fair market value during the reporting period
which is not recoverable.
Change in Fair Value of IR R&D assets
Change in fair value of IP R&D assets represents the non-cash change in fair
value of the assets during the reporting period.
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Change in Fair Value of Derivative Liabilities
Change in fair value of derivative liabilities represents the non-cash change in
fair value of derivative liabilities during the reporting period. Gains/losses
resulting from change in fair value of derivative liabilities during the years
ended December 31, 2022 and 2021, were driven by decreases/increases in stock
price during the period, resulting in a lower/higher 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 Private Investment
in Public Equity ("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
Consolidated Results of Operations
For the Year Ended December 31, 2022 Compared to the Year Ended December 31,
2021
For the Years Ended
December 31,
2022 2021
Operating Expenses:
Research and development $ 2,191,834 $ 1,000,769
Research and development - related parties 240,731 2,947,536
General and administrative 15,459,788 11,230,118
General and administrative - related parties 5,612 462,580
Total Operating Expenses 17,897,965 15,641,003
Loss From Operations (17,897,965 ) (15,641,003 )
Other (Expense) Income:
Gain on settlement of liabilities - 926,829
Other expense - (146,822 )
Interest expense (28,175 ) (135,953 )
Interest expense - related parties 1,508 (50,255 )
Loss on extinguishment of convertible notes payable, net - (9,737 )
Loss on goodwill impairment (33,547,278 ) -
Loss on IP R&D assets impairment (3,342,084 ) -
Change in fair value of derivative liabilities 15,144,986 (4,677,388 )
Change in fair value of accrued issuable equity - (9,405 )
Offering costs allocated to warrant liabilities - (604,118 )
Total Other Expense, Net (21,771,043 ) (4,706,849 )
Loss Before Income Taxes (39,669,008 ) (20,347,852 )
Income tax benefit 942,749 23,204
Net Loss $ (38,726,259 ) $ (20,324,648 )
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Research and Development
During the year ended December 31, 2022, we incurred research and development
expenses of $2,191,834 compared to $1,000,769 incurred for the year ended
December 30, 2021, representing an increase of $1,191,065 or 119%. The increase
includes a $1,000,000 increase in stock-based compensation expense, a $430,000
increase in expenses related to Oxford University agreements, a $290,000
increase in salaries expense, a $270,000 increase in expenses related to the
Scientific Advisory Board, an increase in consulting expenses of $120,000, as
well as increases of $100,000 related to patents and licenses. This activity was
offset by decreases in expenses related to contracts with Yissum and Gallily
Ruth of $460,000 and $250,000, respectively, a decrease related to a tax credit
of $210,000 and a decrease in related-party consulting expenses of $110,000.
Research and Development - Related Parties
During the year ended December 31, 2022, we incurred research and development
expenses - related parties of $240,731 compared to $2,947,536 incurred for the
year ended December 31, 2021, representing a decrease of $2,706,805 or 92%. The
decrease includes a decrease in stock-based compensation expense of $2,300,000;
this decrease is comprised of approximately $800,000 paid to Jagdeep Nanchahal
in the prior year for his research in the Phase 2b clinical trial for
Dupuytren's Contracture (RIDD), as well as stock-based compensation expense of
approximately $1,400,000 paid to Mr. Nanchahal in the prior year as well. There
was also a decrease in consulting expenses of $460,000.
General and Administrative
During the year ended December 31, 2022, we incurred general and administrative
expenses of $15,459,788 compared to $11,230,118 incurred for the year ended
December 31, 2021, representing an increase of $4,229,670 or 38%. The increase
is attributable to an increase in legal fees of $3,700,000, an increase of
$880,000 in directors' and officers' insurance expenses as well as an increase
in salaries expense of $550,000, offset by decreases in exchange-related
penalties of $530,000, a decrease in settlement expenses of $360,000, a decrease
in stock-based compensation expense of $180,000 and a decrease in consulting
expenses of $40,000.
General and Administrative - Related Parties
During the year ended December 31, 2022, we incurred general and administrative
expenses - related parties of $5,612 compared to $462,580 incurred for the year
ended December 31, 2021, representing a decrease of $456,968, or 99%. The
decrease is primarily related to a decrease in related party consulting expenses
of $125,000, as well as a decrease in bad debt expense of $300,000 incurred in
connection with a receivable from related parties.
Other Expense, Net
During the year ended December 31, 2022, we incurred other expenses, net of
$21,771,043 compared to $4,706,849 for the year ended December 31, 2021,
representing an increase in other expenses of $17,064,194 or 363%. The increase
in expenses was primarily due to the following: i) an impairment to goodwill in
the current year of $33,547,278, ii) an impairment to IP R&D assets in the
current year of $3,342,084 and iii) a gain on the settlement of liabilities of
$926,829 in the prior year that was absent from the current year, offset by iv)
a change in the current year in the fair value of derivative liabilities of
$19,822,374 and v) $604,118 of warrant costs due to an offering in the prior
year.
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Liquidity and Capital Resources
As of December 31, 2022 and 2021, we had cash balances of $6,970,110 and
$8,224,508, respectively, and working capital of $3,270,608 and a working
capital deficit of $8,498,193, respectively.
For the years ended December 31, 2022 and 2021, cash used in operating
activities was $12,127,585 and $19,371,428, respectively. Our cash used in
operations for the year ended December 31, 2022 was primarily attributable to
our net loss of $38,726,259, adjusted for non-cash expenses in the aggregate
amount of $23,876,048, as well as $2,722,626 of net cash used in changes in the
levels of operating assets and liabilities. A significant portion of the
non-cash expenses during the year relates to $36.9 million of non-recurring
expenses associated with the impairment of goodwill and IP R&D assets (see Note
5 - Intangible Assets and Impairment of Long-lived Assets), offset by changes in
fair value of derivative liabilities of $15,144,986 for the year. Our cash used
in operations for the year ended December 31, 2021 was primarily attributable to
our net loss of $20,324,648, adjusted for non-cash expenses in the aggregate
amount of $9,760,161, as well as $8,806,941 of net cash used in changes in the
levels of operating assets and liabilities. A significant portion of cash used
in operations during the year relates to $4.8 million of non-recurring expenses
associated with the business combination.
For the years ended December 31, 2022 and 2021, there was no cash provided by
investing activities.
For the years ended December 31, 2022 and 2021, cash provided by financing
activities was $10,873,606 and $25,411,919, respectively. Cash provided by
financing activities during the year ended December 31, 2022 was primarily
comprised of proceeds from the sale of July 2022 common stock and common stock
warrants of $6,499,737, proceeds from the sale of December 2022 common stock and
common warrants of $5,999,851 and proceeds from loans payable of $1,060,890,
partially offset by offering costs paid in connection with our July 2022 and
December 2022 Offerings of $529,982 and $484,991, respectively, and repayments
of loans payable and loans payable - related parties of $1,591,035 and $81,277,
respectively. Cash provided by financing activities during the year ended
December 31, 2021 was comprised of proceeds from the sale of common stock and
warrants of $26,666,200 and proceeds from loans payable in the amount of
$1,618,443, partially offset by repayments of convertible debt and loans payable
of ($10,000) and ($807,594), respectively, and offering costs paid of
($2,055,130).
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, payments related to the
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, amount to approximately $10,000,000 for 2023 and
$27,000,000 for the years 2024 through 2027.
115
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.
We have not yet achieved profitability and expect to continue to incur cash
outflows from operations. It is expected that our research and development and
general and administrative expenses will continue to increase and, as a result,
we will eventually need to raise additional capital to fund our operations. If
we are unable to obtain adequate funds on reasonable terms, we may be required
to significantly curtail or discontinue operations or obtain funds by entering
into financing agreements on unattractive terms. Our operating needs include the
planned costs to operate our business, including amounts required to fund
working capital and capital expenditures. As of December 31, 2022, the
conditions outlined above indicated that there was a substantial doubt about our
ability to continue as a going concern within one year after the financial
statement issuance date. However, in August 2021, July 2022 and December 2022,
the Company raised additional capital of approximately $13.9 million, $6.0
million and $5.5 million, respectively, and with current cash on hand of
approximately $2.7 million as of March 29, 2023, the Company expects to be able
to continue as a going concern through the third quarter of 2023.
Our 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
consolidated financial statements do not necessarily purport to represent
realizable or settlement values. The consolidated financial statements do not
include any adjustment that might result from the outcome of this uncertainty.
Recent Financing and Settlement Transactions
Convertible Debt Conversions
From November 27, 2020 to February 5, 2021, the holders of the Company's
convertible promissory notes converted an aggregate of $4,782,107 owed under
such convertible notes into an aggregate of 99,338 shares of common stock,
pursuant to the terms of such notes, as amended, at conversion prices of between
$40.00 and $65.80 per share.
During the third quarter of 2021, certain noteholders elected to convert certain
convertible notes payable with an aggregate principal balance of $1,234,334 and
an aggregate accrued interest balance of $105,850 into an aggregate of 23,357
shares of the Company's common stock at conversion prices ranging from
$49.00-$65.80 per share. The shares issued upon the conversion of the
convertible promissory notes had a fair value at issuance of $1,941,125.
February 2021 Offering
On February 19, 2021, the Company entered into a Securities Purchase Agreement
with a number of institutional investors (the "Purchasers") pursuant to which
the Company agreed to sell to the Purchasers an aggregate of 128,200 shares (the
"Shares") of the Company's common stock and warrants to purchase up to an
aggregate of 128,200 shares of the Company's common stock (the "SPA Warrants"),
at a combined purchase price of $91.00 per Share and accompanying SPA Warrant
(the "Offering"). Aggregate gross proceeds from the Offering were approximately
$11.7 million, prior to deducting placement agent fees and estimated offering
expenses payable by the Company. Net proceeds to the Company from the Offering,
after deducting the placement agent fees and offering expenses payable by the
Company, were approximately $10.8 million. The Offering closed on February 23,
2021.
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Maxim Group LLC (the "Placement Agent") acted as exclusive placement agent in
connection with the Offering pursuant to an Engagement Letter between the
Company and the Placement Agent dated January 26, 2021 (as amended on February
18, 2021). Pursuant to the Engagement Letter, the Placement Agent received a
commission equal to seven percent (7%) of the aggregate gross proceeds of the
Offering, or $816,634.
Conversion of Bridge Notes
On March 8, 2021, the holders of the Company's convertible bridge notes, which
were issued on December 27, 2019 and January 3, 2020 to various purchasers,
converted an aggregate of $432,383, which included accrued interest of $66,633
owed under such convertible bridge notes, into an aggregate of 7,920 shares of
common stock pursuant to the terms of such notes, as amended, at a conversion
price of $54.60 per share.
Earlybird Capital Settlement Agreement
On April 23, 2021, the Company settled the amounts due pursuant to a certain
finder agreement entered into with EarlyBird Capital, Inc. ("EarlyBird") on
October 17, 2017 (the "Finder Agreement"). The Company's Board of Directors
determined it was in the best interests to settle all claims which had been made
or could be made with respect to the Finder Agreement and entered into a
settlement agreement (the "Settlement Agreement"). Pursuant to the Settlement
Agreement, the Company paid EarlyBird a cash payment of $275,000 and issued
11,250 shares of the Company's restricted common stock with a grant date value
of $1,973,250 to EarlyBird, in full satisfaction of accounts payable in the
amount of $1,750,000. The Company recorded a loss of $223,250 in connection with
the Settlement Agreement, which is included in (loss) gain on settlement of
liabilities in the accompanying condensed consolidated statements of operations.
Alpha Capital Settlement Agreement
On July 31, 2021, the Company reached an agreement to settle the amounts
allegedly due pursuant to a certain convertible note agreement entered into with
Alpha Capital Anstalt ("Alpha") on September 8, 2020 (the "Alpha Note"). The
Company's Board of Directors determined it was in the best interest of the
Company to settle all claims which had been made or could be made with respect
to the Alpha Note and entered into a settlement agreement ("Alpha Settlement
Agreement"). Pursuant to the Alpha Settlement Agreement, the Company issued
7,500 shares of common stock and three-year warrants to purchase 1,250 shares of
the Company's common stock at an exercise price of $141.40 per share, in
exchange for full and complete satisfaction of the Alpha Note.
August 2021 Offering
On August 23, 2021, the Company entered into a Securities Purchase Agreement
with certain purchasers (the "August 2021 Purchasers"), pursuant to which the
Company agreed to sell an aggregate of 125,000 shares of common stock (the
"August 2021 Shares") and warrants to purchase up to an aggregate of 125,000
shares of common stock (the "August 2021 PIPE Warrants"), at a combined purchase
price of $120.00 per share and August 2021 PIPE Warrant (the "August 2021
Offering"). Aggregate gross proceeds from the offering were approximately $15
million. Net proceeds to the Company from the offering, after deducting the
placement agent fees and estimated offering expenses payable by the Company,
were approximately $13.9 million. The placement agent fees and offering expenses
were accounted for as a reduction of additional paid in capital. The Placement
Agent received a commission equal to seven percent (7%) of the aggregate gross
proceeds of the Offering, or $1,050,000. The offering closed on August 23, 2021.
In connection with the August 2021 Offering, the Company also entered into a
Registration Rights Agreement, dated as of August 23, 2021, with the August 2021
Purchasers (the "August 2021 Registration Rights Agreement"). Pursuant to the
August 2021 Registration Rights Agreement, the Company agreed to file a
registration statement with the SEC on or prior to September 12, 2021 to
register the resale of the August 2021 Shares and the shares of common stock
issuable upon exercise of the August 2021 PIPE Warrants (the "Warrant Shares"),
and to cause such registration statement to be declared effective on or prior to
October 22, 2021 (or, in the event of a "full review" by the SEC, November 21,
2021). The registration statement was filed with the SEC on August 31, 2021 and
the SEC declared it effective on September 9, 2021.
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Exchanges of Related Party Loans and Convertible Notes
On September 30, 2021, Dr. Lawrence Steinman and Sir Marc Feldmann, Ph.D., each
of whom serve as Co-Executive Chairmen of the Company's Board of Directors,
agreed with the Company to convert amounts owed under outstanding loans with an
aggregate principal balance of $693,371 and an aggregate accrued interest
balance of $157,741 into an aggregate of 7,093 shares of the Company's common
stock at the conversion price of $120.00 per share, pursuant to the terms of the
agreement, which conversion rate was above the closing consolidated bid price of
the Company's common stock on the date the binding agreement was entered into.
(See Note 9 - Loans Payable and Note 10 - Convertible Notes Payable for more
information.)
Mintz Levin Settlement
In September 2021, the Company entered into a settlement agreement with Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C. ("Mintz"), whereby the Company
agreed to pay $800,000 to Mintz for legal services rendered. Mintz had billed
the Company an aggregate of $1,454,240 before factoring any interest charges.
The Company recorded a gain of approximately $650,000 after making payment
pursuant to the settlement agreement.
Cantor Fitzgerald& Co. Litigation Settlement
On October 12, 2021, the Company and Cantor Fitzgerald & Co. entered into a
settlement agreement, whereby the Company agreed to pay to Cantor $200,000 in
return for dismissal of the case against the Company. The Company sent the funds
to Cantor on October 13, 2021. As of September 30, 2021, the Company recorded an
accrual for the settlement amount as per the agreement.
On October 21, 2021, the Company received a notice of discontinuance and as a
result, the matter between the Company and Cantor is settled and closed.
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
175,000 shares of common stock, pre-funded warrants to purchase up to an
aggregate of 131,604 shares of common stock ("July 2022 Pre-Funded Warrants"),
and common stock warrants to purchase up to an aggregate of 306,604 shares of
common stock (the "July 2022 Common Warrants"), at a combined purchase price of
$21.20 per share and warrant (the "July 2022 Offering"). Aggregate gross
proceeds from the July 2022 Offering were $6,499,737. Net proceeds to the
Company from the offering, after deducting the placement agent fees and other
estimated offering expenses payable by the Company, were approximately $6.0
million. The placement agent fees and offering expenses of approximately
$530,000 were accounted for as a reduction of additional paid in capital. The
July 2022 Offering closed on July 20, 2022.
December 2022 Offering
On December 20, 2022, the Company entered into a Securities Purchase Agreement
with certain purchasers, pursuant to which the Company agreed to sell an
aggregate of 215,000 shares of common stock, pre-funded warrants to purchase up
to an aggregate of 1,499,286 shares of common stock ("December 2022 Pre-Funded
Warrants"), and common stock warrants to purchase up to an aggregate of
2,571,429 shares of common stock (the "December 2022 Common Warrants"), at a
combined purchase price of $3.50 per share and warrant (the "December 2022
Offering"). Aggregate gross proceeds from the December 2022 Offering were
$5,999,851. Net proceeds to the Company from the offering, after deducting the
placement agent fees and other estimated offering expenses payable by the
Company, were approximately $5.5 million. The placement agent fees and offering
expenses of approximately $500,000 were accounted for as a reduction of
additional paid in capital. The December 2022 Offering closed on December 22,
2022.
118
Critical Accounting Policies and Estimates
The Company's consolidated financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States. The
preparation of these 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 ("IP R&D"). 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
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
The Company has a significant amount of goodwill, intangible assets and IP R&D
assets that are assessed at least annually for impairment. 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 IP R&D assets are initially recorded
at estimated fair value. Licensed patents are amortized over the remaining life
of the patent. IP R&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 IP R&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 IP R&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.
Goodwill Impairment. The first step of the goodwill asset impairment test used
to identify potential impairment compares the fair value of the reporting unit
with its carrying amount, including goodwill assets. The Company determined the
fair market value of its single reporting unit as of December 31, 2021 to be its
market capitalization of $132,760,914, which represents $78.00 per share (the
market close price) multiplied by 1,702,063 shares (consisting of 1,701,799
shares of common stock plus 264 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 ($132,760,914) 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 assets of
the reporting unit was not impaired.
The Company's publicly traded stock closed at $78.00 per share as of December
31, 2021; during 2022, the market value of the Company's single reporting unit
significantly declined. As of March 31, 2022, June 30, 2022, September 30, 2022
and December 31, 2022, the market value of the Company's publicly traded stock
fell to $51.80, $16.96, $13.30 and $3.39, per share, respectively, and as such,
the Company elected to conduct a quantitative analysis of goodwill to assess for
impairment as of September 30, 2022 and December 31, 2022. The Company
determined the fair market value of its single reporting unit and compared that
value with the carrying amount of the reporting unit and determined that
goodwill was impaired as of both measurement dates. As of September 30, 2022 and
December 31, 2022, the carrying value exceeded the fair market value by
$18,872,850 and $14,674,428, respectively. To recognize the impairment of
goodwill, the Company recorded losses for these amounts at the end of the third
and fourth quarters, which appear as a loss on goodwill impairment of
$33,547,278 on the income statement for the year ended December 31, 2022. See
Note 5 - Intangible Assets and Impairment of Long-lived Assets for further
information.
119
IP R&D Assets Impairment
As of December 31, 2022, the carrying amount of the IP R&D assets on the balance
sheet was $12,405,084 (which consists of carrying value of $1,462,084 and
$10,943,000 related to the Company's CBR Pharma subsidiary and its 180 LP
subsidiary, respectively). Per the valuation obtained from a third party as of
year-end, the fair market value of the Company's IP R&D assets was determined to
be $9,063,000 (which consists of fair market values of $0 and $9,063,000 related
to the Company's CBR Pharma subsidiary and 180 LP subsidiary, respectively). As
of this measurement date, the carrying value of the CBR Pharma and 180 LP
subsidiaries' assets exceeded their fair market values by $1,462,084 and
$1,880,000, respectively. As such, management determined that the consolidated
IP R&D assets were impaired by $3,342,084 and, in order to recognize the
impairment, the Company recorded a loss for this amount during the fourth
quarter of 2022, which appears as a loss on impairment of IP R&D assets on the
income statement. This reduced the IP R&D asset balances of its CBR Pharma
subsidiary and its 180 LP subsidiary to zero and $9,063,000, respectively, as of
December 31, 2022; the total consolidated IP R&D asset balance is $9,063,000
after impairment. See Note 5 - Intangible Assets and Impairment of Long-lived
Assets for further information.
The Company will continue to perform goodwill/intangible assets and IP R&D
assets Impairment testing on an annual basis, or as needed if there are changes
to the composition of its reporting unit.
Recently Issued Accounting Pronouncements
See Note 3 - Summary of Significant Accounting Policies of our consolidated
financial statements included within this Annual Report for a summary of
recently issued and adopted accounting pronouncements.
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180 LIFE SCIENCES CORP. 
