180 LIFE SCIENCES CORP. The Company has not generated any revenues and has incurred significant losses since inception. For the nine months endedSeptember 30, 2021 , the Company incurred a net loss of$21,360,865 and used cash in operations of$14,343,898 . As ofSeptember 30, 2021 , the Company has an accumulated deficit of$69,718,503 and a working capital deficit of$10,591,080 . The Company expects to invest a significant amount of capital to fund research and development. As a result, the Company expects that its operating expenses will increase significantly, and consequently will require significant revenues to become profitable. Even if the Company does become profitable, it may not be able to sustain or increase profitability on a quarterly or annual basis. The Company cannot predict when, if ever, it will be profitable. There can be no assurance that the intellectual property of the Company, or other technologies it may acquire, will meet applicable regulatory standards, obtain required regulatory approvals, be capable of being produced in commercial quantities at reasonable costs, or be successfully marketed. The Company plans to undertake additional laboratory studies with respect to the intellectual property, and there can be no assurance that the results from such studies or trials will result in a commercially viable product or will not identify unwanted side effects. 7180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) A worsening of the levels of market disruption and volatility seen in the recent past as the result of the COVID-19 pandemic could have an adverse effect on the Company's ability to access capital, on the Company's business, results of operations and financial condition. Management continues to monitor the developments and has taken active measures to protect the health of the Company's employees, their families and the Company's communities. The ultimate impact will depend heavily on the duration of the COVID-19 pandemic and public health responses, including seasonal outbreaks, the efficacy of vaccines, the effect of mutations of the virus on such efficacy, the availability of vaccines and boosters, and the willingness of individuals to receive such vaccines and boosters, as well as the substance and pace of macroeconomic recovery, all of which are uncertain and difficult to predict considering the continuing evolving landscape of the COVID-19 pandemic and the public health responses to contain it.
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"). To date, only the follow-up time for patient data and the statistical analysis for the Phase 2b Dupuytren's disease clinical trial has been delayed as a result of COVID-19, but such follow-up is now completed and the statistical analysis is underway. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These condensed consolidated financial statements have been prepared under the assumption of a going concern, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company's ability to continue its operations is dependent upon obtaining new financing for its ongoing operations. Future financing options available to the Company include equity financings and loans and if the Company is unable to obtain such additional financing timely, or on favorable terms, the Company may have to curtail its development, marketing and promotional activities, which would have a material adverse effect on its business, financial condition and results of operations, and it could ultimately be forced to discontinue its operations and liquidate. These matters raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time, which is defined as within one year after the date that the condensed consolidated financial statements are issued. Realization of the Company's assets may be substantially different from the carrying amounts presented in these condensed consolidated financial statements and the accompanying condensed consolidated financial statements do not include any adjustments that may become necessary, should the Company be unable to continue as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies
There have been no material changes to the Company's significant accounting policies as set forth in the Company's audited consolidated financial statements included in the Annual Report on Form 10-K for the year endedDecember 31, 2020 under Note 3 - Summary of Significant Accounting Policies, except as disclosed in this note.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP") for interim financial information. Accordingly, they do not include all of the information and disclosures required byU.S. GAAP for annual consolidated financial statements. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as ofSeptember 30, 2021 , and for the three and nine months endedSeptember 30, 2021 and 2020. The results of operations for the three and nine months endedSeptember 30, 2021 are not necessarily indicative of the operating results for the full year endingDecember 31, 2021 or any other period. For additional information, these condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements of and notes thereto included in the Company's Annual Report on Form 10-K filed with theSEC onJuly 9, 2021 . 8180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) OnNovember 6, 2020 (the "Closing Date"), the Company consummated a business combination (the "Business Combination") pursuant to which, among other things, a subsidiary of the Company merged with and into 180, with 180 continuing as the surviving entity and a wholly-owned subsidiary of the Company (the "Merger", and the Company prior to the Merger sometimes referred to herein as "KBL"). The Business Combination was accounted for as a reverse recapitalization, and 180 is deemed to be the accounting acquirer. Consequently, the assets and liabilities and the historical operations that are reflected in these condensed consolidated financial statements prior to the Business Combination are those of 180 Life Corp. and its subsidiaries. The preferred stock, common stock, additional paid in capital and earnings per share amount in these condensed consolidated financial statements for the period prior to the Business Combination have been restated to reflect the recapitalization in accordance with the shares issued to the shareholders of the former parent, 180 Life Corp. as a result of the Business Combination. The condensed consolidated financial statements include the historical accounts of 180 Life Corp. as accounting acquirer along with its wholly-owned subsidiaries, and, effective with the closing of the Business Combination, 180LS as the accounting acquiree. All intercompany transactions and balances have
been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the consolidated financial statements. The Company's significant estimates and assumptions used in these financial statements include, but are not limited to, 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 long-lived 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 isthe United States dollar. The functional currency of certain subsidiaries is the Canadian Dollar ("CAD") (0.7867 and0.7847 CAD to1 US dollar each as ofSeptember 30, 2021 andDecember 31, 2020 , respectively or British Pound ("GBP") (1.3458 and1.3649 GBP to1 US dollar , each as ofSeptember 30, 2021 andDecember 31, 2020 , respectively), while expense accounts are translated at the weighted average exchange rate for the period (0.7992 and0.7391 CAD , to1 US dollar and 1.3847 and1.2708 GBP to1 US dollar for each of the nine months endedSeptember 30, 2021 and 2020, respectively, and 0.7941 and0.7504 CAD to1 US dollar and 1.3784 and1.2914 GBP to1 US dollar for each of the three months endedSeptember 30, 2021 and 2020, 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 nine months endedSeptember 30, 2021 and 2020, the Company recorded other comprehensive income (loss) of$65,018 and ($562,626 ), respectively, as a result of foreign currency translation adjustments. During the three months endedSeptember 30, 2021 and 2020, the Company recorded other comprehensive income (loss) of ($530,817 ) and$414,335 , respectively, as a result of foreign currency translation adjustments. 9180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) Foreign currency gains and losses resulting from transactions denominated in foreign currencies, including intercompany transactions, are included in results of operations. The Company recognized ($218,834 ) and ($200,264 ) of foreign currency transaction gains (losses) for the three and nine months endedSeptember 30, 2021 , respectively, and recognized$3,254 and$1,822 of foreign currency transaction gains (losses) for the three and nine months endedSeptember 30, 2020 , respectively. Such amounts have been classified within general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive loss.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period, plus 1 share each of Class C and Class K Special Voting Shares ("Special
Voting Shares") exchangeable into an aggregate of 465,368 and 635,163 shares of
180LS common stock as of September 30, 2021 and 2020, respectively, without
payment of additional consideration. Diluted net income (loss) per common share
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding, plus the number of additional common shares that
would have been outstanding if the common share equivalents had been issued
(computed using the treasury stock or if converted method), if dilutive.
The following table details the net income (loss) per share calculation,
reconciles between basic and diluted weighted average shares outstanding, and
presents the potentially dilutive shares that are excluded from the calculation
of the weighted average diluted common shares outstanding, because their
inclusion would have been anti-dilutive:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020Numerator:
Net income (loss)$ 18,296,856 $ (829,418 ) $ (21,360,865 ) $ (2,943,294 ) Less: decrease in fair value of dilutive warrants 10,487,783 - - - Income (loss) available to common stockholders - diluted$ 7,809,073 $ (829,418
)
Weighted average shares outstanding (denominator for basic earnings per share) 32,727,965 16,850,379
30,491,082 16,847,069
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) 33,709,584 16,850,379
30,491,082 16,847,069
Basic earnings per share $ 0.56$ (0.05 ) $ (0.70 ) $ (0.17 ) Diluted earnings per share $ 0.23$ (0.05 ) $ (0.70 ) $ (0.17 ) 10 180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited)
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 For the Nine Months Ended
2021 2020 2021 2020
Options 436,000 - 2,066,000 -
Warrants 8,526,250 - 11,153,908 -
Convertible debt(a) - 586,833 - 586,833Total potentially dilutive shares 8,962,250 586,833
13,219,908 586,833
a) Represents shares issuable upon conversion of debt at various conversion
prices, some of which were calculated using the fair value of the Company's
common stock at the respective balance sheet date.
Warrant, Option and Convertible Instrument Valuation
The Company has computed the fair value of warrants and options using a Black-Scholes model, while the embedded features associated with the convertible notes and convertible preferred stock issued were valued using theMonte-Carlo model. 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 fromU.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued. Subsequent Events
The Company has evaluated events that have occurred after the balance sheet date but before these condensed consolidated financial statements were issued. Based upon that evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 12 - Subsequent Events. Reclassification
Certain prior year balances have been reclassified in order to conform to current year presentation. These reclassifications have no effect on previously reported results of operations or loss per share.
Recently Adopted Accounting Pronouncements
InDecember 2019 , theFinancial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 effective forJanuary 1, 2021 and its adoption did not have a material impact on the Company's condensed consolidated financial statements and related disclosures. 11180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited)
Recently Issued Accounting Pronouncements
OnMay 3, 2021 , FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning afterDecember 15, 2021 , including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company
is evaluating this new standard. NOTE 4 - ACCRUED EXPENSES Accrued expenses consist of the following as ofSeptember 30, 2021 andDecember 31, 2020 : September 30, December 31, 2021 2020 Consulting fees$ 627,020 $ 1,718,559 Professional fees 561,599 1,261,751 Litigation accrual (1) 450,000 - Employee and director compensation 437,343 878,292 Research and development fees 106,891 17,817 Interest 22,538 184,576 Other - 45,321 Travel expenses - 4,600$ 2,205,391 $ 4,110,916
(1) See Note 8 - Commitments and Contingencies, Potential Legal Matters.
As of
12
180 LIFE SCIENCES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in US Dollars, except share amounts)
(unaudited)
NOTE 5 - 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:
For the
Nine Months Ended
Warrants
Public Private Convertible
SPAC SPAC PIPE Other Notes TotalBalance as of January 1, 2021$ 3,795,000 $ 256,275 $ -$ 165,895 $ 225,800 $ 4,442,970 Extinguishment of derivative liabilities in connection with conversion of debt [1] - - - - (591,203 ) (591,203 ) Warrants issued in connection with the financing - - 7,294,836 - - 7,294,836 Change in fair value of derivative liabilities 7,130,000 624,600 4,581,868 237,436 655,404 13,229,308 Balance as of March 31, 2021 10,925,000 880,875 11,876,704 403,331 290,001 24,375,911 Change in fair value of derivative liabilities 10,350,000 629,325 7,712,770 55,025 409,300 19,156,420 Balance as of June 30, 2021 21,275,000 1,510,200 19,589,474 458,356 699,301 43,532,331 Warrants issued relates to Alpha settlement [1] - - - 95,677 - 95,677 Extinguishment of derivative liabilities in connection with the Alpha settlement [1] - - - - (699,301 ) (699,301 ) Change in fair value of derivative liabilities (10,695,000 ) (831,825 ) (10,232,374 ) (284,192 ) - (22,043,391 ) Balance as of September 30, 2021$ 10,580,000 $ 678,375 $
9,357,100$ 269,841 $ -$ 20,885,316
[1] See Note 7 - Convertible Notes Payable.
The fair value of the derivative liabilities as ofSeptember 30, 2021 were estimated using the Black Scholes option pricing model, with the following assumptions used:September 30, 2021 Risk-free interest rate 0.53% - 0.85% Expected term in years 2.84 - 4.40 Expected volatility 85% - 90% Expected dividends 0% SPAC Warrants Public SPAC Warrants Participants in KBL's initial public offering received an aggregate of 11,500,000 Public SPAC Warrants ("Public SPAC Warrants"). Each Public SPAC Warrant entitles the holder to purchase one-half of one share of the Company's common stock at an exercise price of$5.75 per half share ($11.50 per whole share) untilNovember 6, 2025 , subject to adjustment. No fractional shares will be issued upon exercise of the Public SPAC Warrants. Management has determined that the Public SPAC Warrants contain a tender offer provision which could result in the Public SPAC Warrants settling for the tender offer consideration (including potentially cash) in a transaction that didn't result in a change-in-control. This feature results in the Public SPAC Warrants being precluded from equity classification. Accordingly, the Public SPAC Warrants are classified as liabilities measured at fair value, with changes in fair value each period reported in earnings. The Public SPAC Warrants were revalued onSeptember 30, 2021 at$10,580,000 , which resulted in a$10,695,000 decrease and a$6,785,000 increase in the fair value of the derivative liabilities during the three and nine months endedSeptember 30, 2021 , respectively. 13180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) Private SPAC Warrants Participants in KBL's initial private placement received an aggregate of 502,500 Private SPAC 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) untilNovember 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 onSeptember 30, 2021 at$678,375 , which resulted in a$831,825 decrease and a$422,100 increase in the fair value of the derivative liabilities during the three and nine months endedSeptember 30, 2021 , respectively. PIPE Warrants OnFebruary 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 the private offering (see Note 9 - Stockholders' Equity, Common Stock). 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 onSeptember 30, 2021 at$9,357,100 , which resulted in a$10,232,374 decrease and a$2,062,264 increase in the fair value of the derivative liabilities during the three and nine months endedSeptember 30, 2021 , respectively. The following assumptions were used to value the PIPE Warrants at issuance:
February 23, 2021 Risk-free interest rate 0.59% Expected term in years 5.00 Expected volatility 85% Expected dividends 0% Other Warrants AGP Warrant In connection with the closing of the Business Combination onNovember 6, 2020 , the Company became obligated to assume five-year warrants for the purchase of 63,658 shares of the Company's common stock at an exercise price of$5.28 per share (the "AGP Warrant Liability") that had originally been issued by KBL to an investment banking firm in connection with a prior private placement. OnMarch 12, 2021 , the Company issued a warrant to AGP (the "AGP Warrant") to purchase up to an aggregate of 63,658 shares of the Company's common stock at a purchase price of$5.28 per share, subject to adjustment, in full satisfaction of the AGP Warrant Liability. The exercise of the AGP Warrant is limited at any given time to prevent AGP from exceeding beneficial ownership of 4.99% of the then total number of issued and outstanding shares of the Company's common stock upon such exercise. The warrant is exercisable at any time betweenMay 2, 2021 andMay 2, 2025 . The newly issued 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 onSeptember 30, 2021 at$202,947 , which resulted in a$255,409 decrease and a$37,052 increase in the fair value of the derivative liabilities during the three and nine months endedSeptember 30, 2021 , respectively. 14180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) Alpha Warrant In connection with the Alpha Settlement Agreement (see Note 7 - Convertible Notes Payable) that was agreed to onJuly 29, 2021 (signed onJuly 31, 2021 ), 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 untilAugust 2, 2024 . The newly issued 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 onSeptember 30, 2021 at$66,894 , which resulted in a$28,783 decrease in the fair value of the derivative liabilities during the three and nine months endedSeptember 30, 2021 . The following assumptions were used to value the Alpha Warrant at issuance:July 29, 2021 Risk-free interest rate 0.37% Expected term in years 3.00 Expected volatility 85% Expected dividends 0% Convertible Notes The convertible notes issued in 2020 had embedded features that were bifurcated and recorded as derivative liabilities. BetweenJanuary 15, 2021 andFebruary 5, 2021 , the fair value of derivative liabilities extinguished in connection with the conversion of debt was estimated using theMonte-Carlo and Black Scholes option pricing models with the following assumptions used:January 15, 2021 toFebruary 5, 2021 Risk-free interest rate 0.00% - 0.14% Expected term in years 0.02 - 0.18 Expected volatility 120% - 161% Expected dividends 0%
As ofJune 30, 2021 , the Alpha Capital Note (see Note 7 - Convertible Notes Payable) that was the only convertible note with an outstanding balance and the full amount of theJuly 31, 2021 Alpha Settlement Agreement was accrued as of that date. As ofJuly 31, 2021 , the Company recorded the extinguishment of the Alpha Capital Note, the related derivative liabilities and the balance of the settlement accrual. See Note 7, Convertible Notes Payable for additional details. 15 180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) Warrant Activity A summary of the warrant activity (including theAugust 2021 PIPE Warrants which are equity-classified; see Note 9, Stockholders' Equity, Sale of Common Stock and Warrants in theAugust 2021 Offering) during the nine months endedSeptember 30, 2021 is presented below: Weighted Average Weighted Remaining Number of Average Life in Warrants Exercise Price Years Intrinsic Value Outstanding, December 31, 2020 6,001,250 11.50 Issued 5,152,658 6.23 Exercised - - Cancelled - - Expired - - Outstanding, September 30, 2021 11,153,908 $ 9.06 4.3$ 1,059,516 Exercisable, September 30, 2021 11,153,908 $ 9.06 4.3$ 1,059,516 A summary of outstanding and exercisable warrants as ofSeptember 30, 2021 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 4.4 2,564,000$ 5.28 63,658 3.6 63,658$ 7.07 25,000 2.8 25,000$ 7.50 2,500,000 4.9 2,500,000$ 11.50 6,001,250 4.1 6,001,250 11,153,908 4.3 11,153,908 16 180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) NOTE 6 - LOANS PAYABLE Loans Payable
The following table summarizes the activity of loans payable during the nine
months ended
Principal Effect of Principal
Balance at Principal Foreign Balance at
December 31, Repaid in Exchange September 30,
2020 Forgiveness Cash Adjustment Rates 2021
Kingsbrook $ 150,000 $ - $ (150,000 ) $ - $ - $ -
Paycheck Protection
Program 53,051 (9,670 ) - (2,000 ) - 41,381
Bounce Back Loan Scheme 68,245 - (3,168 ) - (954 ) 64,123
First Assurance Funding 655,593 - (585,031 ) - - 70,562
Other loans payable 155,320 - - - - 155,320
Total loans payable 1,082,209 $ (9,670 ) $ (738,199 ) $ (2,000 ) $ (954 ) 331,386
Less: loans payable -
current portion 968,446 279,290
Loans payable
- non-current portion $ 113,763 $ 52,096 On
During the nine months endedSeptember 30, 2021 , the Company paid an aggregate of$585,031 and$3,168 in partial satisfaction of the First Assurance Funding and the Bounce Back Loan Scheme, respectively.
On
OnSeptember 30, 2021 , the Company adjusted a portion of the PPP loan of$2,000 to other income since that was a grant that was given to 180LS by the government and it does not need to be repaid.
Loans Payable - Related Parties
The below table summarizes the activities of loans payable - related parties
during the nine months ended
Principal
Principal Exchanged Effect of Principal
Balance at into Foreign Balance at
December 31, Common Exchange September 30,
2020 Stock Rates 2021
Loans payable issued between
OnFebruary 10, 2021 , the Company entered into amended loan agreements to modify the terms of certain loan agreements in the aggregate principal amount of$432,699 , previously entered into with SirMarc Feldmann and Dr.Lawrence Steinman , the Co-Executive Chairmen of the Board of Directors. The loan agreements were extended and modified to be paid back at the Company's discretion, either by 1) repayment in cash, or 2) by converting the outstanding amounts into shares of common stock at the same price per share as the next financing transaction. Subsequently, onFebruary 25, 2021 , and effective as of the date of the originalFebruary 10, 2021 amendments, the Company determined that such amendments were entered into in error and each ofSir Feldmann andDr. Steinman rescinded suchFebruary 10, 2021 amendments pursuant to their entry into Confirmations of Rescission acknowledgements. As such, the amendments to allowSir Feldmann andDr. Steinman the option to convert such loans into shares of common stock were never effective. 17180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) OnApril 12, 2021 , the Company entered into amended loan agreements with SirMarc Feldmann and Dr.Lawrence Steinman , the Co-Executive Chairman of the Board of Directors, which extended the maturity date of all of their outstanding loan agreements toSeptember 30, 2021 .
Exchanges of Related Party Loans
OnSeptember 30, 2021 , certain related party noteholders elected to exchange an aggregate principal of$433,374 and aggregate accrued interest of$61,530 into an aggregate of 82,484 shares of the Company's common stock at a price of$6.00 per share, pursuant to the terms of the agreement. (see Note 9 - Stockholders' Equity, Exchanges of Related Party Loans and Convertible Notes)
Interest Expense on Loans Payable
During the three months endedSeptember 30, 2021 and 2020, the Company recognized interest expense associated with loans payable of$2,315 and$5,724 , respectively, and interest expense associated with loans payable - related parties of$10,566 and$9,402 , respectively. During the nine months endedSeptember 30, 2021 and 2020, the Company recognized interest expense associated with loans payable of$20,498 and$40,583 , respectively, and recognized interest expense associated with loans payable - related parties of$30,898 and$24,193 , respectively. As ofSeptember 30, 2021 , the Company had accrued interest and accrued interest - related parties associated with loans payable of$22,453 and$10,719 , respectively. As ofDecember 31, 2020 , the Company had accrued interest and accrued interest - related parties associated with loans of$24,824 and$37,539 , respectively. See Note 10 - Related Parties for additional details.
NOTE 7 - CONVERTIBLE NOTES PAYABLE
The table below summarizes the activity of convertible notes payable during the
nine months ended
Principal Balance
December 31, Converted to September 30,
2020 Equity Extinguished 2021
Dominion $ 833,334 $ (833,334 ) $ - $ -
Kingsbrook 101,000 (101,000 ) - -
Alpha 616,111 (300,000 ) (316,111 ) -
Sub-Total 1,550,445 (1,234,334 ) (316,111 ) -
Bridge Notes 365,750 (365,750 ) - -
Total $ 1,916,195 $ (1,600,084 ) $ (316,111 ) $ -
Dominion, Kingsbrook and Alpha - Conversions ("KBL Debt")
During the nine months endedSeptember 30, 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 467,123 shares of the Company's common stock at conversion prices ranging from$2.45-$3.29 per share. The shares issued upon the conversion of the convertible promissory notes had a fair value at issuance of$1,941,125 . In connection with the conversion of the convertible notes payable, derivative liabilities in the amount of$591,203 related to the bifurcated embedded conversion feature of such notes were extinguished. The Company recorded a loss on extinguishment of convertible notes payable of$9,737 during the nine months endedSeptember 30, 2021 as a result of the conversion of debt and the extinguishment of the related derivative liabilities (also see Note 5 - Derivative Liabilities). 18180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited)
Bridge Notes - Conversions ("180 Debt")
During the nine months endedSeptember 30, 2021 , certain noteholders elected to exchange bridge notes with an aggregate principal balance of$365,750 and an aggregate accrued interest balance of$66,633 into an aggregate of 158,383 shares of the Company's common stock at a conversion price of$2.73 per share. Alpha - Extinguishment
OnFebruary 3, 2021 , an event of default was triggered under a convertible note held by Alpha Capital Anstalt ("Alpha" and the "Alpha Capital Note"), which resulted in an increase in the fair value of the bifurcated derivative liability (the default provision) associated with the remaining principal of the Alpha Capital Note. OnJuly 29, 2021 , the Company reached a settlement agreement with Alpha (the "Alpha Settlement Agreement"), which was signed onJuly 31, 2021 , which provided for Alpha to convert the remaining principal and accrued interest associated with the convertible note in exchange for 150,000 shares of the Company's common stock plus a three-year warrant to purchase 25,000 additional shares of the Company's common stock at an exercise price of$7.07 per share. The Company determined that the shares and warrants had an aggregate value of$1,156,177 as ofJuly 29, 2021 , which exceeded the aggregate$1,109,008 carrying value of the combined principal, accrued interest and derivative liability associated with the Alpha Capital Note as ofJuly 29, 2021 . Because the settlement amount provides additional information about a situation that existed as ofJuly 29, 2021 , the Company recorded an accrual as ofJune 30, 2021 for the$47,169 difference between the value of the securities offered in settlement and the carrying value of the liabilities, which was reflected within (loss) gain on settlement of liabilities in the accompanying condensed consolidated statements of operations. OnJuly 29, 2021 , the$1,156,177 aggregate carrying value of the principal, accrued interest, derivative liability and settlement accrual associated with the Alpha Capital Note were extinguished while the$1,060,500 fair value of the common stock was recorded within equity and the$95,677 fair value of the Alpha Warrant was recorded as a derivative liability (see Note 5, Derivative Liabilities for additional information).
Convertible Notes - Related Parties
During the nine months ended
OnSeptember 30, 2021 , the$260,000 remaining principal balance of convertible notes payable owed to a related party, plus$96,208 of related accrued interest, was converted into 59,368 shares of the Company's common stock, pursuant to a debt conversion agreement datedSeptember 30, 2021 .
Interest on Convertible Notes
During the three months endedSeptember 30, 2021 and 2020, the Company recognized interest expense associated with convertible notes payable of$628 and$69,674 , respectively, and recognized interest expense associated with convertible notes payable - related parties of$3,633 and$11,915 , respectively. During the nine months endedSeptember 30, 2021 and 2020, the Company recognized interest expense associated with convertible notes payable of$109,767 and$340,759 , respectively, and recognized interest expense associated with convertible notes payable - related parties of$11,380 and$38,794 , respectively.
As of
19
180 LIFE SCIENCES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in US Dollars, except share amounts)
(unaudited)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Litigation and Other Loss Contingencies
The Company records liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company has no liabilities recorded for loss contingencies as ofDecember 31, 2020 . See Potential Legal Matters - Action Against Former Executives of KBL andCantor Fitzgerald & Co. Breach of Contractbelow for information related to aSeptember 30, 2021 accrual. Potential Legal Matters
Action Against Former Executives of KBL
The Company has initiated legal action against former executives of KBL for non-disclosure in the original KBLJune 30, 2020 andSeptember 30, 2020 Quarterly Reports on Form 10-Q of the matters disclosed in Note 14 (as restated) of the Company'sSeptember 30, 2020 financial statements in the Company's amended Quarterly Report on Form 10-Q filed onFebruary 5, 2021 . The Company is seeking damages resulting from unauthorized monetary transfers by the former CEO of KBL, Dr.Marlene Krauss ("Dr. Krauss"), discrepancies in the financial statements of KBL, and inappropriate redemption of the shares associated with KBL. There can be no assurance that the Company will be successful in its legal actions. As ofSeptember 30, 2021 , the Company recorded a settlement accrual of$250,000 to cover the legal expenses of the former executives of KBL. OnOctober 5, 2021 ,Dr. Krauss and her affiliate companies filed an Answer, Counterclaims and Third-Party Complaint against the Company and twelve current or former directors and/or officers of the Company, alleging that the Company and the Third-Party Defendants breached fiduciary duties toDr. Krauss , and that the Company breached contracts between the Company andDr. Krauss . OnOctober 27, 2021 , the Company and one of its executives filed an Answer to the Krauss Claims, and the other Third-Party Defendants filed a motion to dismiss as to the Third-Party Complaint, for which a hearing has not yet been set. The Company and the Third-Party Defendants will vigorously defend against all ofDr. Krauss' claims, however, there can be no assurance that they will be successful in the legal defense of such claims.
Action Against the Company by
Dr. Krauss initiated legal action against the Company onAugust 19, 2021 , alleging that the Company is obligated to advance expenses including, attorney's fees, toDr. Krauss for the costs of defending against, inter alia: (a) Third-Party Complaint in the Tyche action referenced below, and (b) the Company's Complaint againstDr. Krauss as referenced above. OnSeptember 23, 2021 , the Company filed its Answer and denied each of such claims, as well as raising numerous affirmative defenses. The Company will vigorously defend against all ofDr. Krauss' claims, however, there can be no assurance that the Company will be successful in its legal defense of this action.
The Company initiated legal action againstTyche Capital LLC ("Tyche") onApril 15, 2021 , for breaching its obligations under a Term Sheet entered into between KBL,KBL IV Sponsor, LLC , 180 and Tyche onApril 10, 2019 and for breaching its obligations under the Guarantee and Commitment Agreement entered into between KBL and Tyche onJuly 25, 2019 (the "Guarantee"). The Company is seeking damages to bring the net tangible asset balance of KBL as ofNovember 6, 2020 , the closing date of the Business Combination, to$5,000,001 . There can be no assurance that the Company will be successful in its legal action. OnMay 17, 2021 , Tyche filed a counterclaim against the Company alleging that it was the Company, rather than Tyche, that had breached the Guarantee, and also filed a Third-Party Complaint against six third-party defendants, including three members of the Company's management, SirMarc Feldman , Dr.James Woody , andOzan Pamir , claiming that they allegedly breached fiduciary duties to Tyche with regards to the Guarantee and seeking compensatory damages. The Company denies all of such claims, as do the three individual members of the Company's management, and will vigorously defend against all of Tyche's claims. The Company has brought a motion to dismiss the three individual defendants and a hearing has been set on such motion forFebruary 14, 2022 . The Company and the Third-Party Defendants will 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.
Cantor Fitzgerald & Co. ("Cantor") initiated legal action against the Company onApril 22, 2021 in theSupreme Court of the State of New York , County ofNew York (Index No. 652709/2021), alleging causes of action against the Company relating to the claimed breach of a fee agreement between the parties which required the Company to pay Cantor a transaction fee in cash in the event the Company completed a business transaction, as well as the alleged breach of a settlement agreement subsequently entered into with Cantor, both described below. The fee agreement was entered into onFebruary 27, 2018 , and provided that Cantor would receive a transaction fee in cash arising out of any contemplated business combination by the Company. OnJuly 25, 2019 , KBL entered into the Business Combination Agreement whereby Cantor became entitled to a transaction fee of$1,500,000 (the "Transaction Fee"). OnNovember 6, 2020 , the Company and Cantor entered into a settlement agreement (the "Settlement Agreement") whereby Cantor agreed to release the Company from the obligation to pay the Transaction Fee in cash and to instead accept 150,000 fully paid shares of the Company's common stock, but only if the Company would take all necessary action to permit the sale of the shares by filing with theSecurities and Exchange Commission (the "SEC") a shelf registration statement within 30 days following the closing of the merger. OnNovember 6, 2020 , the Company closed the merger but did not file a registration statement with theSEC within 30 days of theNovember 6, 2020 closing, due to the need to restate the previously filed KBL financial statements. Although the Company was served with the complaint in the action, it did not respond pursuant to an extension that was granted to file a response. The Company subsequently settled this matter in full afterSeptember 30, 2021 (See Note 12, Subsequent Events,Cantor Fitzgerald & Co. Litigation Settlement for an update on this legal matter). 20180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) Operating Leases The Company leased office space inLondon, UK , through an operating lease agreement, which was terminated pursuant to the terms of the lease inAugust 2020 . Total operating lease expenses were$16,203 and$38,452 for the three and nine months endedSeptember 30, 2020 , respectively. The expense is recorded in general and administrative expenses on the condensed consolidated statements of operations. Consulting Agreement
Related Party Consulting Agreement
On
Pursuant to the Consulting Agreement, the Company agreed to pay the Consultant15,000 British Pounds (GBP) per month (approximately$20,800 ) during the term of the agreement, increasing to23,000 GBP per month (approximately$32,000 ) on the date (a) of publication of the data from the phase 2b clinical trial for Dupuytren's disease (RIDD) and (b) the date that the Company has successfully raised over$15 million in capital. The Company also agreed to pay the Consultant the following bonus amounts:
? The sum of £100,000 (approximately
disease clinical trial data for publication in a peer-reviewed journal ("Bonus
1");
? The sum of £434,673 GBP (approximately
and payable upon the Company raising a minimum of
funding, through the sale of debt or equity, after
"Vesting Date"). Bonus 2 is payable within 30 days of the Vesting Date and
shall not be accrued, due or payable prior to the Vesting Date. Bonus 2 is
payable, at the election of the Consultant, at least 50% (fifty percent) in
shares of the Company's common stock, at the lower of (i)
(ii) the trading price on the date of the grant, with the remainder paid in
GBP;
? The sum of £5,000 (approximately
the phase 2 frozen shoulder trial ("Bonus 3"); and
? The sum of £5,000 (approximately
the phase 2 delirium/POCD trial ("Bonus 4").
The Consulting Agreement has an initial term of three years, and renews
thereafter for additional three-year terms, until terminated as provided in the
agreement. The Consulting Agreement can be terminated by either party with 12
months prior written notice (provided the Company's right to terminate the
agreement may only be exercised if the Consultant fails to perform his required
duties under the Consulting Agreement), or by the Company immediately under
certain conditions specified in the Consulting Agreement if (a) the Consultant
fails or neglects efficiently and diligently to perform the services required
thereunder or is guilty of any breach of its or his obligations under the
agreement (including any consent granted under it); (b) the Consultant is guilty
of any fraud or dishonesty or acts in a manner (whether in the performance of
the services or otherwise) which, in the reasonable opinion of the Company, has
brought or is likely to bring the Consultant, the Company or any of its
affiliates into disrepute or is convicted of an arrestable offence (other than a
road traffic offence for which a non-custodial penalty is imposed); or (c) the
Consultant becomes bankrupt or makes any arrangement or composition with his
creditors. If the Consulting Agreement is terminated by the Company for any
reason other than cause, the Consultant is entitled to a lump sum payment of 12
months of his fee as of the date of termination.
21
180 LIFE SCIENCES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in US Dollars, except share amounts)
(unaudited)
EffectiveMarch 30, 2021 , in satisfaction of amounts owed to the Consultant for 50% of Bonus 2, the Company issued 100,699 shares of the Company's common stock to the Consultant. Additionally, onApril 15, 2021 , in satisfaction of amounts owed to the Consultant for an additional 19% of Bonus 2, the Company issued 37,715 of the Company's common stock to the Consultant. EffectiveAugust 27, 2021 , in satisfaction of amounts owed to the Consultant for the remainder of Bonus 2, the Company issued 61,535 shares of the Company's common stock to the Consultant since the Company raised$15 million in a financing transaction, as per the agreement. All issuances were made under the Company's 2020 Omnibus Incentive Plan. See Note 9 - Stockholders' Equity, Common Stock. Larsen Consulting Agreement OnApril 29, 2021 , the Company entered into a consulting agreement withGlenn Larsen , the former Chief Executive Officer of 180 LP, to act in the capacity as negotiator for the licensing of four patents. In consideration for services provided, the Company agreed to compensateMr. Larsen with$50,000 of its restricted common stock (valued based on the closing sales price of the Company's common stock on the date the Board of Directors approved the agreement, which shares have not been issued to date). The fully vested shares will be issued toMr. Larsen pursuant to the 2020 Omnibus Incentive Plan, upon the Company entering into a licensing transaction with the assistance ofMr. Larsen . OnNovember 2, 2021 , the Company andOxford University entered into a license agreement and therefore the shares are now due toMr. Larsen (see Note 12 - Subsequent Events, New License Technology Agreement withOxford University ).
OnMay 24, 2021 , the Company entered into a research agreement with theUniversity of Oxford ("Oxford" and the "Fifth Oxford Agreement"), pursuant to which the Company will sponsor work at theUniversity of Oxford to conduct a multi-center, randomized, double blind, parallel group, feasibility study of anti-TNF injection for the treatment of adults with frozen shoulder during the pain-predominant phase. As consideration, the Company agreed to make the following payments to Oxford: Amount Due Milestone (excluding VAT) Upon signing of the Fifth Oxford Agreement £ 70,546
6 months post signing of the Fifth Oxford Agreement £ 70,546
12 months post signing of the Fifth Oxford Agreement £ 70,546
24 months post signing of the Fifth Oxford Agreement £ 70,546
The Company paid the first milestone of$97,900 (£70,546) onSeptember 3, 2021 , which was due upon signing of the Fifth Oxford Agreement, which was recorded to prepaid expenses and will be amortized over the term of the agreement on a straight-line basis. During the three and nine months endedSeptember 30, 2021 , the Company recorded$48,949 and$65,266 , respectively, of research and development expenses. As ofSeptember 30, 2021 , the Company has a prepaid balance of$31,647 related to the Fifth Oxford Agreement.
Employment Agreement of Chief Executive Officer
OnFebruary 25, 2021 , the Company entered into an amended agreement with Dr.James Woody , the Chief Executive Officer of the Company (the "CEO") (the "A&R Agreement"), datedFebruary 24, 2021 , and effectiveNovember 6, 2020 , which replaced the CEO's prior agreement with the Company. Pursuant to the A&R Agreement, the CEO agreed to serve as an officer of the Company for a term of three years, which is automatically renewable thereafter for additional one-year periods, unless either party provides the other at least 90 days written notice of their intent to not renew the agreement. The CEO's annual base salary under the agreement will initially be$450,000 per year, with automatic increases
of 5% per annum. As additional consideration for the CEO agreeing to enter into the agreement, the Company awarded him options to purchase 1,400,000 shares of the Company's common stock, which have a term of 10 years, and an exercise price of$4.43 per share (the closing sales price on the date the board of directors approved the grant (February 26, 2021 )). The options as subject to the Company's 2020 Omnibus Incentive Plan and vest at the rate of (a) 1/5th of such options on the grant date; and (b) 4/5th of such options vesting ratably on a monthly basis over the following 36 months on the last day of each calendar month; provided, however, that such options vest immediately upon the CEO's death or disability, termination without cause or a termination by the CEO for good reason (as defined in the agreement), a change in control of the Company or upon a sale of the Company. 22180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) The CEO is also eligible to receive an annual bonus, with a target bonus equal to 45% of his then-current base salary, based upon the Company's achievement of performance and management objectives as set and approved by the Board of Directors and/or Compensation Committee in consultation with the CEO. At the CEO's option, the annual bonus can be paid in cash or the equivalent value of the Company's common stock or a combination. The Board of Directors, as recommended by the Compensation Committee, may also award the CEO bonuses from time to time (in stock, options, cash, or other forms of consideration) in its discretion. Under the A&R Agreement, the CEO is also eligible to participate in any stock option plans and receive other equity awards, as determined by the Board of Directors from time to time. As ofSeptember 30, 2021 , the Company recorded$151,875 of accrued bonus payable to the CEO. The A&R agreement can be terminated any time by the Company for cause (subject to the cure provisions of the agreement), or without cause (with 60 days prior written notice to the CEO), by the CEO for good reason (as described in the agreement, and subject to the cure provisions of the agreement), or by the CEO without good reason. The agreement also expires automatically at the end of the initial term or any renewal term if either party provides notice of non-renewal as discussed above.
In the event the A&R Agreement is terminated without cause by the Company, or by the CEO for good reason, the Company agreed to pay him the lesser of 18 months of salary or the remaining term of the agreement, the payment of any accrued bonus from the prior year, his pro rata portion of any current year's bonus and health insurance premiums for the same period that he is to receive severance payments (as discussed above).
The A&R Agreement contains standard and customary invention assignment, indemnification, confidentiality and non-solicitation provisions, which remain in effect for a period of 24 months following the termination of his agreement.
Employment Agreement of Chief Financial Officer
OnFebruary 25, 2021 , the Company entered into an Employment Agreement (the "CFO Agreement") datedFebruary 24, 2021 , and effectiveNovember 6, 2020 , with the Company's Interim Chief Financial Officer,Ozan Pamir . Pursuant to the agreement, the CFO agreed to serve as the Interim Chief Financial Officer ("CFO") of the Company for an initial salary of$300,000 per year, subject to increase to a mutually determined amount upon the closing of a new financing as well as annual increases. As additional consideration for the CFO agreeing to enter into the agreement, the Company awarded him options to purchase 180,000 shares of the Company's common stock, which have a term of 10 years, and an exercise price of$4.43 per share (the closing sales price on the date the board of directors approved the grant (February 26, 2021 )). The options are subject to the Company's 2020 Omnibus Incentive Plan and vest at the rate of (a) 1/5th of such options upon the grant date; and (b) 4/5th of such options vesting ratably on a monthly basis over the following 36 months on the last day of each calendar month; provided, however, that such options vest immediately upon the CFO's death or disability, termination without cause or a termination by the CFO for good reason (as defined in the agreement), a change in control of the Company or upon a sale of the Company. Under the agreement, the CFO is eligible to receive an annual bonus, in a targeted amount of 30% of his then salary, based upon the Company's achievement of performance and management objectives as set and approved by the CEO, in consultation with the CFO. The bonus amount is subject to adjustment. The Board of Directors, as recommended by theCompensation Committee of the Company (and/or the Compensation Committee), may also award the CFO bonuses from time to time (in stock, options, cash, or other forms of consideration) in its discretion. Under the CFO Agreement, the CFO is also eligible to participate in any stock option plans and receive other equity awards, as determined by the Board of Directors from time to time. As ofSeptember 30, 2021 , the Company recorded$67,500 of accrued bonus payable to the CFO. The agreement can be terminated any time by the Company with or without cause with 60 days prior written notice and may be terminated by the CFO at any time with 60 days prior written notice. The agreement may also be terminated by the Company with six days' notice in the event the agreement is terminated for cause under certain circumstances. Upon the termination of the CFO's agreement by the Company without cause or by the CFO for good reason, the Company agreed to pay him three months of severance pay.
The agreement contains standard and customary invention assignment, indemnification, confidentiality and non-solicitation provisions, which remain in effect for a period of 24 months following the termination of his agreement.
23
180 LIFE SCIENCES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in US Dollars, except share amounts)
(unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY
Common Stock
Sale of Common Stock and Warrants in the
OnFebruary 19, 2021 , the Company entered into a Securities Purchase Agreement with certain purchasers (the "Purchasers"), pursuant to which the Company agreed to sell an aggregate of 2,564,000 shares of common stock (the "PIPE Shares") and warrants to purchase up to an aggregate of 2,564,000 shares of common stock (the "PIPE Warrants"), at a combined purchase price of$4.55 per share and PIPE Warrant (the "Offering"). Aggregate gross proceeds from the offering were approximately$11.7 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$10.7 million . The PIPE Warrants have an exercise price equal to$5.00 per share, were immediately exercisable and are subject to customary anti-dilution adjustments for stock splits or dividends or other similar transactions. However, the exercise price of the PIPE 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 PIPE Warrants are exercisable for 5 years following the closing date. The PIPE Warrants are subject to a provision prohibiting the exercise of such PIPE Warrants to the extent that, after giving effect to such exercise, the holder of such PIPE Warrant (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 to 9.99% on a holder by holder basis, with 61 days prior written consent of the applicable holder). The PIPE Warrants were determined to be liability-classified (see Note 5, Derivative Liabilities, PIPE Warrants). Of the$968,930 of placement agent fees and offering expenses,$364,812 was allocated to the PIPE Shares and$604,118 was allocated to the PIPE Warrant. Because the PIPE Warrants are liability classified, the$604,118 allocated to the warrants was immediately expensed. In connection with the offering, the Company also entered into a Registration Rights Agreement, dated as ofFebruary 23, 2021 , with the Purchasers (the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with theSEC on or prior toApril 24, 2021 to register the resale of the PIPE Shares and the shares of common stock issuable upon exercise of the PIPE Warrants (the "PIPE Warrant Shares"), and to cause such registration statement to be declared effective on or prior toJune 23, 2021 (or, in the event of a "full review" by theSEC ,August 22, 2021 ). The Company was in default of the terms of the Registration Rights Agreement as the registration statement to register the PIPE Shares and PIPE Warrant Shares was not filed byApril 24, 2021 ; provided that such registration statement has been filed. As a result of this default, the Company was required to pay damages to the Purchasers in the aggregate amount of$174,993 each month, up to a maximum of$583,310 . The Company incurred$524,979 of damages during the nine months endedSeptember 30, 2021 , which amount was paid, and as a result the Company is no longer in default.
Common Stock Issued for Settlement of Liabilities
OnApril 23, 2021 , the Company settled the amounts due pursuant to a certain finder agreement entered into withEarlyBird Capital, Inc. ("EarlyBird") onOctober 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 Early Bird 225,000 shares of the Company's restricted common stock with a grant date value of$1,973,250 , 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.
Sale of Common Stock and Warrants in the
OnAugust 23, 2021 , the Company entered into a Securities Purchase Agreement with certain purchasers, pursuant to which the Company agreed to sell an aggregate of 2,500,000 shares of common stock and warrants to purchase up to an aggregate of 2,500,000 shares of common stock (the "August 2021 PIPE Warrants"), at a combined purchase price of$6.00 per share andAugust 2021 PIPE Warrant (the "August 2021 Offering"). Aggregate gross proceeds from theAugust 2021 Offering were approximately$15,000,000 . Net proceeds to the Company from theAugust 2021 Offering, after deducting the placement agent fees and estimated offering expenses payable by the Company, were approximately$13.9 million .
24
180 LIFE SCIENCES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in US Dollars, except share amounts)
(unaudited)
The August 2021 PIPE Warrants have an exercise price equal to $7.50 per share,
are immediately exercisable and are subject to customary anti-dilution
adjustments for stock splits or dividends or other similar transactions.
However, the exercise price of the August 2021 PIPE 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 August 2021 PIPE Warrants are
exercisable for 5 years following the closing date. The August 2021 PIPE
Warrants are subject to a provision prohibiting the exercise of such August 2021
PIPE Warrants to the extent that, after giving effect to such exercise, the
holder of such August 2021 PIPE Warrant (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 to 9.99% on a holder by holder
basis, with 61 days prior written consent of the applicable holder). Although
the PIPE Warrants have a tender offer provision, the August 2021 PIPE Warrants
were determined to be equity-classified because they met the limited exception
in the case of a change-in-control. Because the August 2021 PIPE Warrants are
equity-classified, the $1,120,000 of placement agent fees and offering expenses
were fully accounted for as a reduction of additional paid in capital.
In connection with the August 2021 Offering, the Company also entered into a
Registration Rights Agreement, dated as of August 23, 2021 , with the 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 shares and the shares of common stock issuable upon exercise of the
August 2021 PIPE Warrants (the "Warrant Shares") sold in the August 2021
Offering, 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 on August 31, 2021 and
the SEC declared it effective on September 9, 2021 , prior to the deadline set
forth in the August 2021 Registration Rights Agreement.
Common Stock Issued for Services
During the three and nine months endedSeptember 30, 2021 , the Company issued an aggregate 71,289 and 306,594, respectively, of immediately vested shares of the Company's common stock, respectively, as compensation to consultants, directors, and officers, with an aggregate issuance date fair value of$431,996 and$2,099,581 , respectively, which was charged immediately to the condensed consolidated statement of operations for the three and nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2021 , the Company issued 24,685 shares of common stock that were not part of the Omnibus Incentive Plan. Special Voting Shares The Special Voting Shares were issued to the former shareholders of CBR Pharma and Katexco in connection with the reorganization of 180 prior to the Business Combination. The Special Voting Shares are exchangeable by the holder for shares of the Company's common stock and vote together as a single class with the Company's common stockholders. Special Voting Shares are not entitled to receive any dividend of distributions.
During the nine months ended
The following table summarizes the Special Voting Shares activity during the
nine months ended
Balance,January 1, 2021 1,469,417 Shares issued - Shares exchanged (1,004,049 ) Balance,September 30, 2021 465,368 Convertible Note Conversions During the nine months endedSeptember 30, 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 467,123 shares of the Company's common stock at conversion prices ranging from$2.45-$3.29 per share, pursuant to the terms of such notes. (see Note 7 - Convertible Notes Payable). 25180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited)
During the nine months endedSeptember 30, 2021 , the Company issued 150,000 shares of common stock and warrants to purchase 25,000 shares in connection with a settlement entered into withAlpha Capital . (see Note 7, Convertible Notes Payable). Bridge Note Conversions During the nine months endedSeptember 30, 2021 , certain noteholders elected to convert bridge notes with an aggregate principal balance of$365,750 and an aggregate accrued interest balance of$66,633 into an aggregate of 158,383 shares of the Company's common stock at a conversion price of$2.73 per share, pursuant to the terms of such notes. (see Note 7, Convertible Notes Payable).
Exchanges of Related Party Loans and Convertible Notes
OnSeptember 30, 2021 , Dr.Lawrence Steinman and SirMarc 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 141,852 shares of the Company's common stock at the conversion price of$6.00 per share, pursuant to the terms of the agreement, which conversion rate was above the closing consolidated bid price of the Company's common stock on the date the binding agreement was entered into. (See Note 6, Loans Payable and Note 7, Convertible Notes Payable for more information.) Stock Options A summary of the option activity during the nine months endedSeptember 30, 2021 is present below: Weighted Weighted Average Average Number of Exercise Remaining Intrinsic Options Price Term (Yrs) Value Outstanding, January 1, 2021 50,000 2.49 Granted 2,016,000 5.11 Exercised - - Expired - - Forfeited - - Outstanding, September 30, 2021 2,066,000 5.04
9.50
Exercisable, September 30, 2021 617,444 4.40 9.23$ 660,042 A summary of outstanding and exercisable stock options as ofSeptember 30, 2021 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 9.2 37,500$ 4.43 1,580,000 9.4 561,778$ 7.56 436,000 9.8 18,167 2,066,000 9.5 617,444 OnFebruary 26, 2021 , the Company issued ten-year options to purchase an aggregate of 1,580,000 shares of the Company's common stock to two officers of the Company, pursuant to the 2020 Omnibus Incentive Plan. The options have an exercise price of$4.43 per share and vest at the rate of 20% on the date of grant and the remaining 80% on a monthly basis thereafter over the following 36 months. The options had a grant date fair value of$5,280,632 , which will be recognized over the vesting term. 26 180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited)
OnAugust 4, 2021 , the Company granted ten-year options for the purchase of an aggregate of 436,000 shares of common stock at an exercise price of$7.56 per share, to six independent directors of the Company, pursuant to the 2020 Omnibus Incentive Plan. The options had an aggregate grant date value of$2,181,219 , and vest monthly over four years.
The assumptions used in the Black-Scholes valuation method were as follows:
Risk free interest rate 0.75% - 0.96% Expected term (years) 5.27 - 6.02 Expected volatility 84% - 100% Expected dividends 0% The Company recognized stock-based compensation expense of$434,979 and$1,871,473 for the three and nine months endedSeptember 30, 2021 , respectively, related to the amortization of stock options. The expense is included within general and administrative expenses or research and development expenses on the condensed consolidated statements of operations. There was no stock option amortization expense for the three and nine months endedSeptember 30, 2020 . As ofSeptember 30, 2021 , there was$5,206,048 of unrecognized stock-based compensation expense that will be recognized over the weighted average remaining vesting period of 2.98 years. NOTE 10 - RELATED PARTIES Due from Related Parties
Due from related parties of$300,000 as ofDecember 31, 2020 consisted of a receivable due from a research and development company that has shared officers and directors. Management now believes that the receivable is not collectible, and the receivable is fully reserved as ofSeptember 30, 2021 .
Accounts Payable - Related Parties
Accounts payable - related parties was$4,447 as ofSeptember 30, 2021 and represents amounts due for consulting services provided by a director of the Company. Accounts payable - related parties was$215,495 as ofDecember 31, 2020 and consists of$196,377 for professional services provided by the Company's directors and$19,118 for accounting fees for services provided by a former director and his company.
Accrued Expenses - Related Parties
Accrued expenses - related parties was$130,548 as ofSeptember 30, 2021 and consists of$10,343 of interest accrued on loans and convertible notes due to certain officers and directors of the Company and$120,205 of accrued professional fees for services provided by certain directors of the Company. Accrued expenses - related parties of$454,951 as ofDecember 31, 2020 , consists of$124,833 of interest accrued on loans and convertible notes due to certain officers and directors of the Company and$330,118 of accrued professional fees for services provided by certain directors of the Company.
Loans Payable - Related Parties
Loans payable - related parties consists of$81,244 and$513,082 as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. See Note 6, Loans Payable for
more information.
Convertible Notes Payable - Related Parties
Convertible notes payable - related parties of$0 as ofSeptember 30, 2021 and$270,000 as ofDecember 31, 2020 represents the principal balance of convertible notes owed to certain officers and directors of the Company. See Note 7, Convertible Notes Payable for more information. 27180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited)
Research and Development Expenses - Related Parties
Research and Development Expenses - Related Parties of$298,879 and$112,652 during the three months endedSeptember 30, 2021 and 2020, respectively, and$1,287,583 and$223,321 during the nine months endedSeptember 30, 2021 and 2020, respectively, is related to consulting and professional fees paid to current or former officers, directors or greater than 10% investors, or affiliates thereof.
General and Administrative Expenses - Related Parties
General and Administrative Expenses - Related Parties during the three months endedSeptember 30, 2021 and 2020, were$82,519 and$25,078 , respectively. Of the expenses incurred through the three months endedSeptember 30, 2021 approximately$38,600 represents bad debt expenses incurred in connection with a receivable from a related party and approximately$45,400 relates to professional fees paid to current or former officers, directors or greater than 10% investors, or affiliates thereof. Of the expenses incurred through the three months endedSeptember 30, 2020 approximately 25,000 relates to professional fees paid to current or former officers, directors or greater than 10% investors, or affiliates thereof. General and Administrative Expenses - Related Parties during the nine months endedSeptember 30, 2021 and 2020, were$462,081 and$85,052 , respectively. Of the expenses incurred through the nine months endedSeptember 30, 2021 approximately$338,000 represents bad debt expense incurred in connection with a receivable from related parties, and approximately$123,499 represents professional fees paid to current or former officers, directors or greater than 10% investors, or affiliates thereof. Of the expenses incurred through the nine months endedSeptember 30, 2020 ,$85,052 represents services for professional and consulting fees earned by current or former officers, directors or greater than 10% investors of the Company, or affiliates thereof.
Other Income - Related Parties
During the nine months endedSeptember 30, 2020 , the Company recorded$240,000 of other income related to a one-year research and development agreement with a companywho shares common officers and directors with the Company. There was no other income - related parties recorded during the three and nine months endedSeptember 30, 2021 or the three months endedSeptember 30, 2020 .
Interest Expense - Related Parties
During the three months endedSeptember 30, 2021 and 2020, the Company recorded$14,201 and$23,088 , respectively, of interest expense - related parties, of which$3,633 and$11,915 , respectively, related to interest on certain convertible notes held by officers and directors of the Company and$10,567 and$9,402 , respectively, related to interest expense on loans from officers, directors and a greater than 10% investor of the Company. During the nine months endedSeptember 30, 2021 and 2020, the Company recorded$42,279 and$64,758 , respectively, of interest expense - related parties, of which$11,380 and$40,565 , respectively related to interest on certain convertible notes held by officers and directors of the Company and$30,899 and$24,193 , respectively related to interest expense on loans from officers, directors and a greater than 10% investor of the Company.
NOTE 11 - CORRECTION OF AN ERROR
In finalizing the financial reporting close process for the three months endedJune 30, 2021 , the Company discovered an error resulting in the understatement in the amount of$363,523 of stock-based compensation in connection with shares issued for services during the three months endedMarch 31, 2021 . The Company recorded$363,523 of stock-based compensation during the three months endedJune 30, 2021 in order to correct the error. Accordingly, this adjustment represents a timing error, such that the expense for the six-month period has been reported correctly and no other periods are impacted by this error. In evaluating and determining the appropriateness of applying theSEC's Staff Accounting Bulletin ("SAB") No. 108 to this error, the Company considered materiality both quantitatively and qualitatively as prescribed bySAB 99, and concluded that the error was not qualitatively or quantitatively material to the financial statements taken as whole.SAB 108 does not require restatement of previously filed financial statements for corrections of immaterial errors. During the three months endedSeptember 30, 2021 , there has been no change or modification related to the correction of an error. 28180 LIFE SCIENCES CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in US Dollars, except share amounts) (unaudited) NOTE 12 - SUBSEQUENT EVENTS Common Stock
Subsequent to
OnOctober 12, 2021 , the Company and Cantor entered into a settlement agreement, whereby the Company agreed to pay to Cantor$200,000 in return for dismissal of its case against the Company. The Company sent the funds to Cantor onOctober 13, 2021 . As ofSeptember 30, 2021 , the Company recorded an accrual for the settlement amount as per the agreement. OnOctober 21, 2021 , the Company received a notice of discontinuance and as a result, the matter between the Company and Cantor is settled and closed. See Note 8, Commitments and Contingencies, Potential Legal Matters for more details (see Note 8 - Commitments and Contingencies,Cantor Fitzgerald & Co. Breach
of Contract for more details).
Employment Agreement of Chief Operating Officer/Chief Business Officer
OnOctober 29, 2021 , the Company entered into an Employment Agreement (the "COO/CBO Agreement ") datedOctober 27, 2021 , and effectiveNovember 1, 2021 , withQuan Vu . Pursuant to the agreement,Mr. Vu agreed to serve as the Chief Operating Officer/Chief Business Officer ("COO/CBO") of the Company for an initial salary of$390,000 per year, subject to a$10,000 increase upon completion of a$50 Million financing and a yearly increase of five percent (5%) on each start-day anniversary. As additional consideration for the COO/CBO agreeing to enter into the agreement, the Company awarded him options to purchase 275,000 shares of the Company's common stock, which have a term of 10 years, and an exercise price equal to the Fair Market Value of the Company's common stock on the date of grant which is still to be determined. The options are subject to the Company's 2020 Omnibus Incentive Plan and vest ratably on a monthly basis over the following 48 months on the last day of each calendar month; provided, however, that such options vest immediately upon the COO/CBO death or disability, termination without cause or a termination by the COO/CBO for good reason (as defined in the agreement), a change in control of the Company or upon a sale of the Company.
Under the agreement, the COO/CBO is eligible to receive an annual bonus, in a targeted amount of 50% of his then salary, based upon the Company's achievement of performance and management objectives as set and approved by the CEO, in consultation with the CFO. The annual bonus shall be paid on or beforeMarch 31 of the year following the year in which the bonus is earned. At the choice of the Executive, the annual bonus can be paid in cash or the equivalent value of the Company's common stock or a combination of both. For calendar 2021, such Bonus payment, if any, will be prorated for the approximately 2 months after the Start Date. The CEO, as approved by the Compensation Committee, may also award the Executive a bonus from time to time (in stock, options, cash, or other forms of consideration) in his discretion. The agreement can be terminated any time by the Company with or without cause with 30 days prior written notice and may be terminated by the COO/CBO at any time with 30 days prior written notice. The agreement may also be terminated by the Company with ten days' notice in the event the agreement is terminated for cause under certain circumstances. Upon the termination of the COO/CBO's agreement by the Company without cause or by the COO/CBO for good reason, the Company agreed to pay him twelve months of severance pay, except if Executive separates from the Company prior to a one year anniversary.
The agreement contains standard and customary invention assignment, indemnification, confidentiality and non-solicitation provisions, which remain in effect for a period of 24 months following the termination of his agreement.
New License Technology Agreement with
OnNovember 2, 2021 , the Company andOxford University entered into a twenty-year licensed technology agreement of the HMGB1 molecule, which is related to tissue regeneration, wherebyOxford University agreed to license the technology to the Company for research, development and use of the licensed patents. The Company agreed to payOxford University for past patent costs$66,223 (£49,207), an initial License fee of$13,458 (£10,000), future royalties based on sales and milestones, and an annual maintenance fee of$4,037 (£3,000). The Company has the option to terminate the agreement after the third anniversary of the agreement. 29
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General Information This information should be read in conjunction with the interim unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and "Part II. Other Information - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission onJuly 9, 2021 (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 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 Note Regarding Forward-Looking Statements", above, which includes information on forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, 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 "180Life Sciences Corp. " refer specifically to180 Life Sciences Corp. and its consolidated subsidiaries. References to "KBL" refer to the Company prior to theNovember 6, 2020 Business Combination. 30
In addition, unless the context otherwise requires and for the purposes of this Report only:
"CAD" refers to Canadian dollars;
"Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
"£" or "GBP" refers to British pounds sterling;
"SEC" or the "Commission" refers to the
"Securities Act" refers to the Securities Act of 1933, as amended.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with theSEC . OurSEC filings are available to the public over the Internet at theSEC's website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to theSEC , on the "Investors"-"SEC Filings"-"All SEC Filings" page of our website at www.180lifesciences.com. Copies of documents filed by us with theSEC 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.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 condensed 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;
? Consolidated Results of Operations. An analysis of our financial results
comparing the three and nine months ended
? Liquidity and Capital Resources. An analysis of changes in our balance sheets
and cash flows and discussion of our financial condition; and
? 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.
31
Business Overview and Recent Events
OnNovember 6, 2020 (the "Closing Date"), the previously announced Business Combination was consummated following a special meeting of stockholders, where the stockholders of KBL considered and approved, among other matters, a proposal to adopt the Business Combination Agreement. Pursuant to the Business Combination Agreement,KBL Merger Sub, Inc. merged with 180 Life Corp (f/k/a180 Life Sciences Corp. ), with 180 continuing as the surviving entity and becoming a wholly owned subsidiary of KBL. As part of the Business Combination, KBL issued 17,500,000 shares of common stock and equivalents to the stockholders of 180, in exchange for all of the outstanding capital stock of 180. The Business Combination became effectiveNovember 6, 2020 and 180 filed a Certificate of Amendment of its Certificate of Incorporation inDelaware to change its name to 180 Life Corp., and KBL changed its name to180 Life Sciences Corp. This MD&A and the related financial statements for the three and nine months endedSeptember 30, 2021 included herein includes the combined operations of KBL and 180 because the results are combined after the Closing Date. This MD&A and the related financial statements for the three and nine months endedSeptember 30, 2020 includes the combined operations of 180 and its three operating entities but does not include KBL because this period precedes the Business Combination. Following the Closing of the Business Combination, we transitioned our operations to those of 180, which is a clinical stage biotechnology company headquartered inPalo Alto, California , focused on the development of therapeutics for unmet medical needs in chronic pain, inflammation, fibrosis and other inflammatory diseases, where anti-TNF (defined below) 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 in a Phase 2b/3 clinical trial in theUnited Kingdom for Dupuytren's disease, 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 our existing pipeline with the goal of addressing 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 our product candidates in the future, to the extent we determine to move forward with the manufacturing of such candidates, and subject to applicable approvals. 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. 32 COVID-19 Pandemic InDecember 2019 , a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported inWuhan, China . TheWorld Health Organization declared COVID-19 a "Public Health Emergency of International Concern" onJanuary 30, 2020 and a global pandemic onMarch 11, 2020 . The effects of the COVID-19 pandemic and the responses to combat such pandemic have included government-mandated closures, stay-at-home orders and other related measures, the majority of which have since expired, but which, together with COVID-19 itself, have significantly impacted global economic activity and business investment in general, including causing supply chain issues and continuing disruptions in the labor markets. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, and on our business, results of operations and financial condition. We have been closely monitoring the developments and have taken active measures to protect the health of our employees, their families, and our communities. The ultimate impact of the pandemic on us, our operations and prospects, will depend heavily on the continued duration of the COVID-19 pandemic and public health responses, including, vaccine availability and efficacy, the willingness of individuals to be vaccinated and to obtain booster shots, and virus mutations and seasonal outbreaks, as well as the substance and pace of macroeconomic recovery, all of which are uncertain and difficult to predict at this time. As ofSeptember 30, 2021 , only the follow-up time for patient data for the Phase 2b Dupuytren's disease clinical trial has been delayed as a result of COVID-19, but such follow-up is now completed and the statistical analysis is underway. However, COVID-19 may delay the initiation of certain clinical trials in the future or otherwise have a material adverse effect on our future operations. Close of Business Combination As described above, onNovember 6, 2020 (the "Closing Date"), the Company consummated the previously announced business combination The Business Combination was accounted for as a reverse recapitalization of 180. All of 180's capital stock outstanding immediately prior to the merger was exchanged for (i) 15,736,348 shares of 180LS common stock, and (ii) 2 shares of Class C and Class K Special Voting Shares exchangeable into 1,763,652 shares of 180LS common stock which are presented as outstanding in the accompanying Statement of Changes in Stockholders' Equity due to the reverse recapitalization. KBL's 6,928,645 outstanding shares of common stock are presented as being issued on the date of the Business Combination. Recent Financing Private Offering OnFebruary 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 2,564,000 shares (the "Shares") of the Company's common stock and warrants to purchase up to an aggregate of 2,564,000 shares of the Company's common stock (the "SPA Warrants"), at a combined purchase price of$4.55 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 onFebruary 23, 2021 . 33
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 datedJanuary 26, 2021 (as amended onFebruary 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 .August 2021 Offering OnAugust 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 2,500,000 shares of common stock (the "August 2021 Shares") and warrants to purchase up to an aggregate of 2,500,000 shares of common stock (the "August 2021 PIPE Warrants"), at a combined purchase price of$6.00 per share andAugust 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 onAugust 23, 2021 . In connection with theAugust 2021 Offering, the Company also entered into a Registration Rights Agreement, dated as ofAugust 23, 2021 , with theAugust 2021 Purchasers (the "August 2021 Registration Rights Agreement"). Pursuant to theAugust 2021 Registration Rights Agreement, the Company agreed to file a registration statement with theSEC on or prior toSeptember 12, 2021 to register the resale of theAugust 2021 Shares and the shares of common stock issuable upon exercise of theAugust 2021 PIPE Warrants (the "Warrant Shares"), and to cause such registration statement to be declared effective on or prior toOctober 22, 2021 (or, in the event of a "full review" by theSEC ,November 21, 2021 ). The registration statement was filed with theSEC onAugust 31, 2021 and theSEC declared it effective onSeptember 9, 2021 . Conversion of Bridge Notes OnMarch 8, 2021 , the holders of the Company's convertible bridge notes, which were issued onDecember 27, 2019 andJanuary 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 158,383 shares of common stock pursuant to the terms of such notes, as amended, at a conversion price of$2.73 per share. Convertible Debt Conversions FromNovember 27, 2020 toFebruary 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 1,986,751 shares of common stock, pursuant to the terms of such notes, as amended, at conversion prices of between$2.00 and$3.29 per share. 34
Alpha Capital Settlement Agreement
OnJuly 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") onSeptember 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 150,000 shares of common stock and three-year warrants to purchase 25,000 shares of the Company's common stock at an exercise price of$7.07 per share, in exchange for full and complete satisfaction of the Alpha Note.
Stock Options and Compensation Shares
OnAugust 4, 2021 , the Company granted 10-year options for the purchase of an aggregate of 436,000 shares of common stock at an exercise price of$7.56 per share, to six independent directors of the Company, pursuant to the 2020 Omnibus Incentive Plan. The options had an aggregate grant date value of$2,181,219 , and vest monthly over four years.
On
Mintz Levin Settlement InSeptember 2021 , the Company entered into a settlement agreement withMintz, 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$1,454,239.57 before factoring any interest charges. The Company recorded a gain of approximately$650,000 after making payment pursuant to the settlement agreement.
OnOctober 12, 2021 , the Company andCantor 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 onOctober 13, 2021 . As ofSeptember 30, 2021 , the Company recorded an accrual for the settlement amount as per the agreement.
On
Significant Financial Statement Components
Research and Development
To date, 180's research and development expenses have related primarily to discovery efforts and preclinical and clinical development of its three product platforms: fibrosis and anti-TNF; drugs which are derivatives of CBD, and ?7nAChR. Research and development expenses consist primarily of costs associated with those three product platforms, which include:
? expenses incurred under agreements with 180's collaboration partners and
third-party contract organizations, investigative clinical trial sites that
conduct research and development activities on its behalf, and consultants;
35
? costs related to production of clinical materials, including fees paid to
contract manufacturers;
? laboratory and vendor expenses related to the execution of preclinical and
clinical trials;
? employee-related expenses, which include salaries, benefits and stock-based
compensation; and
? facilities and other expenses, which include expenses for rent and maintenance
of facilities, depreciation and amortization expense and other supplies.
We expense all research and development costs in the periods in which they are incurred. We accrue for costs incurred as services are provided by monitoring the status of each project and the invoices received from our external service providers. We adjust our accrual as actual costs become known. When contingent milestone payments are owed to third parties under research and development arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are achieved. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that research and development expenses will increase over the next several years as clinical programs progress and as we seek to initiate clinical trials of additional product candidates. It is also expected that increased research and development expenses will be incurred as additional product candidates are selectively identified and developed. However, it is difficult to determine with certainty the duration and completion costs of current or future preclinical programs and clinical trials of product candidates. The duration, costs and timing of clinical trials and development of product candidates will depend on a variety of factors that include, but are not limited to, the following: ? per patient trial costs;
? the number of patients that participate in the trials;
? the number of sites included in the trials;
? the countries in which the trials are conducted;
? the length of time required to enroll eligible patients;
? the number of doses that patients receive;
? the drop-out or discontinuation rates of patients;
? potential additional safety monitoring or other studies requested by regulatory
agencies;
? the 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.
36
Because the product candidates are still in clinical and preclinical development
and the outcome of these efforts is uncertain, we cannot estimate the actual
amounts necessary to successfully complete the development and commercialization
of product candidates or whether, or when, we may achieve profitability. Due to
the early-stage nature of these programs, we do not track costs on a
project-by-project basis. As these programs become more advanced, we intend to
track the external and internal cost of each program.
General and Administrative
General and administrative expenses consist primarily of salaries and other staff-related costs, including stock-based compensation for shares of common stock issued and options granted to founders, directors and personnel in executive, commercial, finance, accounting, legal, investor relations, facilities, business development and human resources functions and include vesting conditions.
Other significant general and administrative costs include costs relating to facilities and overhead costs, legal fees relating to corporate and patent matters, litigation, SEC Filings, insurance, investor relations costs, fees for accounting and consulting services, and other general and administrative costs. General and administrative costs are expensed as incurred, and we accrue amounts for services provided by third parties related to the above expenses by monitoring the status of services provided and receiving estimates from our service providers and adjusting our accruals as actual costs become known. It is expected that the general and administrative expenses will increase over the next several years to support our continued research and development activities, manufacturing activities, potential commercialization of our product candidates and the increased costs of operating as a public company. These increases are anticipated to include increased costs related to the hiring of additional personnel, developing commercial infrastructure, fees to outside consultants, lawyers and accountants, and increased costs associated with being a public company, as well as expenses related to services associated with maintaining compliance with Nasdaq listing rules andSEC requirements, insurance and investor relations costs.
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 endedSeptember 30, 2021 were driven by decreases in stock price during the period, resulting in a lower fair value of the underlying liability. 37
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