NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
KBL Merger Corp. IV
(the “Company”) is a blank check company organized under the laws of the State of Delaware on September 7, 2016. The
Company was formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or
similar business combination with one or more businesses (“Business Combination”). Although the Company is not limited
to a particular industry or geographic region for purposes of consummating a Business Combination, the Company is focusing on the
healthcare and related wellness industry. The Company is an emerging growth company and, as such, the Company is subject to all
of the risks associated with early stage and emerging growth companies.
The Company has one
subsidiary, KBL Merger Sub, Inc., a wholly owned subsidiary of the Company incorporated in Delaware on July 3, 2019 (“Merger
Sub”) for the purpose of effecting the proposed acquisition of 180 Life Science Corp (see below). As of June 30, 2020, the
Merger Sub had no activity.
At June 30, 2020,
the Company had not yet commenced operations. All activity through June 30, 2020 relates to the Company’s formation, its
initial public offering (“Initial Public Offering”), which is described below, identifying a target company for a Business
Combination, and the proposed acquisition of 180 Life Sciences Corp. (formerly known as CannBioRx Life Sciences Corp.), a Delaware
corporation (“180”) (see Note 6). The Company will not generate any operating revenues until after completion of its
initial Business Combination, at the earliest. The Company generates non-operating income in the form of interest income from the
proceeds held in trust derived from the Initial Public Offering and the Private Placement (defined below).
The registration statement
for the Company’s Initial Public Offering was declared effective on June 1, 2017. On June 7, 2017, the Company consummated
the Initial Public Offering of 10,000,000 units at $10.00 per unit (“Units” and, with respect to the shares of the
Company’s common stock included in the Units offered, the “Public Shares”), generating gross proceeds of $100,000,000,
which is described in Note 3.
Simultaneously with
the closing of the Initial Public Offering, the Company consummated the private placement (“Private Placement”) of 450,000
units (“Private Units” and, with respect to the shares of the Company’s common stock included in the Private
Units offered, the “Private Shares”) at a price of $10.00 per Private Unit in a private placement to the Company’s
sponsor, KBL IV Sponsor LLC (the “Sponsor”), and the underwriters, generating gross proceeds of $4,500,000, which is
described in Note 3.
On June 23, 2017,
in connection with the underwriters’ election to fully exercise their over-allotment option, the Company consummated the
sale of an additional 1,500,000 Units at $10.00 per Unit and the sale of an additional 52,500 Private Units at $10.00 per Private
Unit, generating total gross proceeds of $15,525,000. Following the closing, an additional $15,150,000 of net proceeds ($10.10
per Unit) was placed in a trust account (“Trust Account”), resulting in $116,150,000 ($10.10 per Unit) held in the
Trust Account.
Transaction costs
amounted to $7,345,436, consisting of $2,875,000 of underwriting fees, $4,025,000 of deferred underwriting fees (see Note 6) and
$445,436 of Initial Public Offering costs.
Pursuant to the Company’s
amended and restated certificate of incorporation, the Company initially had until December 7, 2018 (the “Initial Date”)
to consummate a Business Combination, or March 7, 2019 if the Company had executed a letter of intent, agreement in principle or
definitive agreement for a Business Combination by the Initial Date but had not completed a Business Combination by such date.
Effective November 16, 2018, the Company entered into several non-binding letters of intent with various entities for a potential
Business Combination. As a result, the Company extended the time by which it must consummate a Business Combination until March
7, 2019.
On March 5, 2019,
the Company’s stockholders approved to extend the period of time for which the Company is required to consummate a Business
Combination until June 7, 2019 (or September 9, 2019 if the Company has executed a definitive agreement for a Business Combination
by June 7, 2019) or such earlier date (the “First Extension Amendment”, and such later date, the “First Extension
Combination Period”) as determined by the Company’s board of directors (the “Board”). The number of shares
of common stock presented for redemption in connection with the Extension Amendment was 5,128,523. The Company paid cash in the
aggregate amount of $52,829,304, or approximately $10.30 per share, to redeeming stockholders. As a result of the payment on the
shares of common stock presented for redemption in connection with the Extension Amendment, cash and marketable securities held
in the Trust Account decreased to $65,633,068. In addition, on March 8, 2019, an aggregate of $573,433 was loaned to the Company
and deposited into the Trust Account, which amount is equal to $0.09 for each of the 6,371,477 Public Shares that were not redeemed
(the “Initial Loan”). The Initial Loan was paid from funds loaned to the Company by the Sponsor in the aggregate amount
of $573,433.
On June 5, 2019, the
Company’s stockholders approved to further extend the period of time for which the Company is required to consummate a Business
Combination from June 7, 2019 to September 9, 2019 (or December 9, 2019 if the Company has executed a definitive agreement for
a Business Combination by September 9, 2019) or such earlier date as determined by the Board (the “Second Extension Amendment”).
On July 25, 2019 the Company entered into a Business Combination Agreement thereby extending the period of time for which the Company
is required to consummate a Business Combination to December 9, 2019. The number of shares of common stock presented for redemption
in connection with the Second Extension Amendment was 1,580,762. The Company paid cash in the aggregate amount of $16,476,233,
or approximately $10.42 per share, to redeeming stockholders. As a result of the payment on the shares of common stock presented
for redemption in connection with the Second Extension Amendment, cash and marketable securities held in the Trust Account decreased
to $49,993,473.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
On December 6, 2019,
the Company’s stockholders approved to further extend the period of time for which the Company is required to consummate
a Business Combination from September 9, 2019 (or December 9, 2019 if the Company has executed a definitive agreement for a Business
Combination by September 9, 2019) to April 9, 2020 or such earlier date as determined by the Board (the “Third Extension
Amendment”). The number of shares of common stock presented for redemption in connection with the Third Extension Amendment
was 3,676,448. The Company paid cash in the aggregate amount of $39,121,812, or approximately $10.64 per share, to redeeming stockholders.
As a result of the payment on the shares of common stock presented for redemption in connection with the Third Extension Amendment,
cash and marketable securities held in the Trust Account decreased to $11,857,136 at December 6, 2019.
The Sponsor
or its designees has agreed to loan the Company $0.0225 for each Public Share that is not redeemed for each calendar month commencing
on June 7, 2019, and on the 7th day of each subsequent month, or portion thereof, that is needed by the Company to complete a Business
Combination from June 7, 2019 until April 9, 2020 (the “Additional Loans” and, collectively with the Initial Loan,
the “Loans”). The Loans will not bear interest and will be repayable by the Company to the Sponsor or its designees
upon consummation of a Business Combination. The Sponsor or its designees will have the sole discretion whether to continue
extending Additional Loans for additional calendar months until April 9, 2020 and if the Sponsor determines not to continue extending
Additional Loans for additional calendar months, its obligation to extend Additional Loans following such determination will terminate.
Through June 30, 2020, an aggregate of $735,889 was deposited into the Trust Account, of which $89,142 was deposited during the
six months ended June 30, 2020.
On April 8, 2020,
the Company’s stockholders approved to further extend the period of time for which the Company is required to consummate
a Business Combination (the “Fourth Extension Amendment”) from April 9, 2020 to July 9, 2020 or such earlier date as
determined by the Board. The number of shares of common stock presented for redemption in connection with the Fourth Extension
Amendment was 67,665. The Company paid cash in the aggregate amount of $728,884, or approximately $10.77 per share, to redeeming
stockholders. As a result of the payment on the shares of common stock presented for redemption in connection with the Fourth Extension
Amendment, cash and marketable securities held in the Trust Account decreased to $11,273,945 at April 9, 2020.
The Company agreed
to deposit $0.05217 for each Public Share that is not redeemed for each calendar month commencing on April 9, 2020 that is needed
by the Company to complete a Business Combination from April 9, 2020 through June 9, 2020. In July 2020, the Company deposited
an aggregate of $163,797 into the Trust Account.
On July 9, 2020, the
Company’s stockholders approved to further extend the period of time for which the Company is required to consummate a Business
Combination (the “Fifth Extension Amendment”) from July 9, 2020 to November 9, 2020 or such earlier date as determined
by the Board (the “Combination Period”). The number of shares of common stock presented for redemption in connection
with the Fifth Extension Amendment was 106,186. The Company paid cash in the aggregate amount of $1,160,695, or approximately $10.93
per share, to redeeming stockholders. As a result of the payment on the shares of common stock presented for redemption in connection
with the Fifth Extension Amendment, cash and marketable securities held in the Trust Account decreased to $10,279,476 at July 9,
2020.
Trust Account
Following the closing
of the Initial Public Offering and the Private Placement, an amount of $116,150,000 ($10.10 per Unit) from the net proceeds of
the sale of the Units in the Initial Public Offering and the Private Units was placed in the Trust Account and invested in U.S.
government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended (the
“Investment Company Act”), with a maturity of 180 days or less or in any open-ended investment company that holds itself
out as a money market fund selected by the Company meeting the conditions of Rule 2a-7 of the Investment Company Act, as determined
by the Company.
The Company’s
amended and restated certificate of incorporation provides that, other than the withdrawal of interest to pay income taxes, if
any, none of the funds held in the Trust Account will be released until the earlier of: (i) the completion of a Business Combination
or (ii) the distribution of the Trust Account, as described below.
The Company’s
management has broad discretion with respect to the specific application of the net proceeds of its Initial Public Offering and
Private Units, although substantially all of the net proceeds are intended to be applied generally toward consummating a Business
Combination. There is no assurance that the Company will be able to complete a Business Combination successfully. The Company must
complete one or more initial Business Combinations having an aggregate fair market value of at least 80% of the assets held in
the Trust Account (excluding the deferred underwriting commissions and taxes payable on income earned on the Trust Account) at
the time of the agreement to enter into the initial Business Combination. However, the Company will only complete a Business Combination
if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires
a controlling interest in the target sufficient for it not to be required to register as an investment company under the Investment
Company Act.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
The Company will provide
holders of the outstanding Public Shares (“public stockholders”) with the opportunity to redeem all or a portion of
their Public Shares upon the completion of a Business Combination either (i) in connection with a stockholder meeting called to
approve the Business Combination or (ii) by means of a tender offer. The decision as to whether the Company will seek stockholder
approval of a Business Combination or conduct a tender offer will be made by the Company, solely in its discretion. The public
stockholders will be entitled to redeem their Public Shares for a pro rata portion of the amount then in the Trust Account (initially
$10.10 per share, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to the Company
for tax obligations). The per-share amount to be distributed to public stockholders who redeem their Public Shares will not be
reduced by the deferred underwriting commissions the Company will pay to the underwriters (as discussed in Note 6). The Company
will proceed with a Business Combination if the Company has net tangible assets of at least $5,000,001 upon consummation of such
Business Combination and, if the Company seeks stockholder approval, a majority of the shares voted are voted in favor of the Business
Combination.
If a stockholder vote
is not required by law and the Company does not decide to hold a stockholder vote for business or other legal reasons, the Company
will, pursuant to its amended and restated certificate of incorporation, conduct the redemptions pursuant to the tender offer rules
of the Securities and Exchange Commission (“SEC”), and file tender offer documents with the SEC prior to completing
a Business Combination. If, however, stockholder approval of the transactions is required by law, or the Company decides to obtain
stockholder approval for business or legal reasons, the Company will offer to redeem shares in conjunction with a proxy solicitation
pursuant to the proxy rules and not pursuant to the tender offer rules. Additionally, each public stockholder may elect to redeem
their Public Shares irrespective of whether they vote for or against the proposed transaction. If the Company seeks stockholder
approval in connection with a Business Combination, the initial stockholder (as defined below), officers and directors have agreed
to vote their Founder Shares (as defined in Note 4), Private Shares, and any Public Shares purchased during or after the Initial
Public Offering in favor of a Business Combination. In addition, the initial stockholder, officers and directors have agreed to
waive their redemption rights with respect to their Founder Shares, Private Shares and Public Shares in connection with the completion
of a Business Combination.
Notwithstanding the
foregoing, the Company’s amended and restated certificate of incorporation provides that a public stockholder, together with
any affiliate of such stockholder or any other person with whom such stockholder is acting in concert or as a “group”
(as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted
from redeeming its shares with respect to more than an aggregate of 15% or more of the Public Shares.
The Sponsor (the “initial
stockholder”), officers and directors agreed not to propose an amendment to the Company’s amended and restated article
of incorporation that would affect the substance or timing of the Company’s obligation to redeem 100% of its Public Shares
if the Company does not complete a Business Combination, unless the Company provides the public stockholders with the opportunity
to redeem their shares of the Company’s common stock in conjunction with any such amendment.
If the Company is
unable to complete a Business Combination by the Combination Period, the Company will (i) cease all operations except for the purpose
of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the Public Shares,
at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest (which
interest shall be net of taxes payable and less up to $50,000 of interest to pay dissolution expenses), divided by the number of
then outstanding Public Shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including
the right to receive further liquidation distributions, if any), subject to applicable law, and (iii) as promptly as reasonably
possible following such redemption, subject to the approval of the remaining stockholders and the Board, dissolve and liquidate,
subject in the case of clauses (ii) and (iii) to the Company’s obligations under Delaware law to provide for claims of creditors
and the requirements of other applicable law. There are no redemption rights or liquidating distributions with respect to the Company’s
Rights, Warrants, Private Placement Warrants (as defined in Note 3) and the rights underlying the Private Units, which will expire
worthless if the Company fails to complete its Business Combination within the Combination Period.
In connection with
the redemption of 100% of the Company’s outstanding Public Shares for a portion of the funds held in the Trust Account, each
holder will receive a full pro rata portion of the amount then in the Trust Account, plus any pro rata interest earned on the funds
held in the Trust Account and not previously released to the Company for taxes payable and up to $50,000 of interest to pay dissolution
expenses.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
The initial stockholder,
officers, directors and underwriters agreed to waive their liquidation rights with respect to the Founder Shares and Private Shares
if the Company fails to complete a Business Combination within the Combination Period. However, if they should acquire Public Shares
in or after the Initial Public Offering, they will be entitled to liquidating distributions from the Trust Account with respect
to such Public Shares if the Company fails to complete a Business Combination within the Combination Period. The underwriters agreed
to waive their rights to their deferred underwriting commission (see Note 6) held in the Trust Account in the event the Company
does not complete a Business Combination within the Combination Period and, in such event, such amounts will be included with the
other funds held in the Trust Account that will be available to fund the redemption of the Company’s Public Shares. In the
event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution
(including Trust Account assets) will be only $10.19 per share initially held in the Trust Account. In order to protect the amounts
held in the Trust Account, the Sponsor agreed to be liable to the Company if and to the extent any claims by a vendor for services
rendered or products sold to the Company, or a prospective target business with which the Company has discussed entering into a
transaction agreement, reduce the amount of funds in the Trust Account. This liability will not apply with respect to any claims
by a third party who executed a waiver of any right, title, interest or claim of any kind in or to any monies held in the Trust
Account or to any claims under the Company’s indemnity of the underwriters of the Initial Public Offering against certain
liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Moreover, in
the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsor will not be responsible to the
extent of any liability for such third-party claims. The Company will seek to reduce the possibility that the Sponsor will have
to indemnify the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers (except for the
Company’s independent registered public accountants), prospective target businesses or other entities with which the Company
does business, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held
in the Trust Account.
Going Concern and Liquidity
As of June 30, 2020,
the Company had a cash balance of approximately $258,000, which excludes interest income of approximately $386,000 from the Company’s
investments in the Trust Account which is available to the Company for tax obligations. Through June 30, 2020, the Company has
withdrawn approximately $1,156,000 of interest income from the Trust Account to pay its income and franchise taxes, of which no
amounts were withdrawn during the six months ended June 30, 2020.
On March 15, 2019,
the Company issued the Sponsor a promissory note (the “March Promissory Note”), pursuant to which all outstanding advances
were converted into loans under the March Promissory Note. The March Promissory Note is unsecured, non-interest bearing and due
on the earlier of (i) the consummation of a Business Combination or (ii) the liquidation of the Company. Up to $1,000,000 of the
loans under the March Promissory Note may be converted, at the Sponsor’s discretion, into units of the post-Business Combination
entity at a price of $10.00 per unit. The units would be identical to the Private Units (see Note 4). As of June 30, 2020, there
was $337,301 outstanding under the March Promissory Note (see Note 4).
In connection with
a non-binding term sheet (the “Term Sheet”) for a Business Combination transaction with 180 entered into on April 10,
2019, Tyche Capital LLC (“Tyche), a stockholder of 180, paid the Sponsor $650,000 to purchase such obligations owed to the
Sponsor (the “Tyche Note”) under the March Promissory Note (see Note 6). In December 2019, the Tyche Note was transferred
to 180. As of June 30, 2020, there was no outstanding balance owed under the Tyche Note.
On April 15, 2019,
the Company received $400,000 in loans from the 180 Parties to fund the Operating Expenses (see Note 6). Through December 31, 2019,
the Company received additional loans in the aggregate amount of $649,825 from the 180 Parties to fund Operating Expenses and Extension
Expenses (see Note 6). As of June 30, 2020, there was $1,379,815 due to 180, inclusive of the $650,000 transferred to 180 from
Tyche.
Through December 31,
2019, the Company received an aggregate of $1,209,512 in advances from the Sponsor to fund working capital needs. An aggregate
of $314,509 of such advances were converted into loans during the year ended December 31, 2019 (see Note 4). As of June 30, 2020,
there was $795,003 of advances outstanding.
If the Company is
unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include,
but not necessarily be limited to, suspending the pursuit of a Business Combination. The Company cannot provide any assurance that
new financing will be available to it on commercially acceptable terms, if at all.
As a result of the above,
in connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standard
Board’s Accounting Standards Update (“ASU”) 2014-15, “Disclosures of Uncertainties about an Entity’s
Ability to Continue as a Going Concern,” management has determined that the liquidity condition and mandatory liquidation
and subsequent dissolution raises substantial doubt about the Company’s ability to continue as a going concern.
The liquidity condition
and date for mandatory liquidation and dissolution raise substantial doubt about the Company’s ability to continue as a going
concern through November 9, 2020 (approved extension date), the scheduled liquidation date of the Company if it does not complete
a Business Combination prior to such date. These consolidated financial statements do not include any adjustments relating to the
recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to
continue as a going concern.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information or footnote
disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant
to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion
of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of a
normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows
for the periods presented.
The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for
the year ended December 31, 2019 as filed with the SEC on April 7, 2020, which contains the audited financial statements and notes
thereto. The financial information as of December 31, 2019 is derived from the audited financial statements presented in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2019. The interim results for the three and six months ended June 30,
2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future interim
periods.
Principles of Consolidation
The accompanying condensed
consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
Emerging Growth Company
The Company is an
“emerging growth company” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding
executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1)
of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards
until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not
have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting
standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements
that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt
out of such extended transition period which means that when a standard is issued or revised and it has different application dates
for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time
private companies adopt the new or revised standard. This may make comparison of the Company’s consolidated financial statements
with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using
the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Use of Estimates
The preparation of
condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting periods.
Making estimates requires
management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition,
situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered
in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual
results could differ significantly from our estimates.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
Cash and Marketable Securities Held in Trust Account
At June 30, 2020 and
December 31, 2019, assets held in the Trust Account were comprised of $11,276,350 and $11,877,654, respectively, in money market
funds which are invested in U.S. Treasury Securities.
Common Stock Subject to Possible Redemption
The Company accounts
for its common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”)
Topic 480 “Distinguishing Liabilities from Equity.” Common stock subject to mandatory redemption are classified as
liability instruments and are measured at fair value. Conditionally redeemable common stock (including common stock that feature
redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events
not solely within the Company’s control) are classified as temporary equity. At all other times, common stock is classified
as stockholders’ equity. The Company’s common stock features certain redemption rights that are considered to be outside
of the Company’s control and subject to occurrence of uncertain future events. Accordingly, 396,781 and 33,618 shares of
common stock subject to possible redemption at June 30, 2020 and December 31, 2019, respectively, are presented as temporary
equity, outside of the stockholders’ equity section of the Company’s condensed consolidated balance sheets.
Income Taxes
The Company complies
with the accounting and reporting requirements of ASC Topic 740 “Income Taxes,” which requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences
between the consolidated financial statement and tax bases of assets and liabilities that will result in future taxable or deductible
amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As of June 30, 2020 and December 31, 2019, the Company had a deferred tax asset of approximately $537,000 and $407,000, respectively,
which had a full valuation allowance recorded against it of approximately $537,000 and $407,000, respectively.
The Company’s
currently taxable income primarily consists of interest income on the Trust Account. The Company’s general and administrative
costs are generally considered start-up costs and are not currently deductible. During the three and six months ended June 30,
2020, the Company recorded income tax benefit (expense) of approximately $1,500 and $(3,800), respectively, primarily related to
interest income earned on the Trust Account. During the three and six months ended June 30, 2019, the Company recorded income tax
expense of approximately $70,000 and $166,000, respectively, primarily related to interest income earned on the Trust Account.
The Company’s effective tax rate for the three and six months ended June 30, 2020 was approximately 0.1% and 0.2%, respectively,
which differs from the expected income tax rate due to the start-up costs (discussed above) which are not currently deductible,
as well as permanent differences due to the non-cash interest and the non-cash loss on the issuance of the convertible promissory
notes. The Company’s effective tax rate for the three and six months ended June 30, 2019 was approximately 118% and 43%,
respectively, which differs from the expected income tax rate due to the start-up costs (discussed above) which are not currently
deductible.
ASC Topic 740 prescribes
a recognition threshold and a measurement attribute for the consolidated financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. The Company’s management determined that Delaware is the Company’s
major tax jurisdiction. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax
expense. As of June 30, 2020 and December 31, 2019, there were no unrecognized tax benefits and no amounts accrued for interest
and penalties. The Company is currently not aware of any issues under review that could result in significant payments, accruals
or material deviation from its position.
The Company may be
subject to potential examination by federal or state taxing authorities in the areas of income taxes. These potential examinations
may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance
with federal and state tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits
will materially change over the next twelve months.
In assessing the realization
of the deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which temporary differences representing net future deductible amounts become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making
this assessment. After consideration of all of the information available, management believes that significant uncertainty exists
with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
Net (Loss) Income Per Common Share
Net (loss) income
per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Shares
of common stock subject to possible redemption at June 30, 2020 and 2019 have been excluded from the calculation of basic (loss)
income per share for the three and six months ended June 30, 2020 and 2019 since such shares, if redeemed, only participate in
their pro rata share of the Trust Account earnings. The Company has not considered the effect of (1) warrants sold in the Initial
Public Offering and Private Placement to purchase 6,001,250 shares of common stock and (2) rights sold in the Initial Public Offering
and Private Placement that convert into 1,200,250 shares of common stock, in the calculation of diluted income per share, since
the exercise of the warrants and the conversion of the rights into shares of common stock is contingent upon the occurrence of
future events and the inclusion of such warrants and rights would be anti-dilutive under the treasury stock method.
Derivative Liabilities
The Company evaluates
its debt and equity issuances to determine if those contracts or embedded components of those contracts qualify as derivatives
requiring separate recognition in the Company’s financial statements. The result of this accounting treatment is that the
fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability and the change in
fair value is recorded in other (expense) income, net in the consolidated statements of operations. In circumstances where there
are multiple embedded instruments that are required to be bifurcated, the bifurcated derivative instruments are accounted
for as a single, compound derivative instrument. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity instruments that are
initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument
on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument is expected within twelve months of the balance sheet date.
When the Company has determined
that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary,
discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences
between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion
price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated
date of redemption and are classified in interest expense in the condensed consolidated statements of operations.
Concentration of Credit Risk
Financial instruments
that potentially subject the Company to concentration of credit risk consist of a cash account in a financial institution which,
at times may exceed the Federal depository insurance coverage of $250,000. At June 30, 2020 and December 31, 2019, the Company
had not experienced losses on this account and management believes the Company is not exposed to significant risks on such account.
Fair Value of Financial Instruments
The fair value of
the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,”
approximates the carrying amounts represented in the accompanying condensed consolidated balance sheets, primarily due to their
short-term nature.
Recently Issued Accounting Standards
Management does not
believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect
on the Company’s condensed consolidated financial statements.
3. INITIAL PUBLIC OFFERING AND PRIVATE PLACEMENT
Initial Public Offering
Pursuant to the Initial
Public Offering, the Company sold 11,500,000 Units at a purchase price of $10.00 per Unit, inclusive of 1,500,000 Units sold to
the underwriters on June 23, 2017 upon the underwriters’ election to fully exercise their over-allotment option, generating
gross proceeds of $115,000,000. Each Unit consists of one share of the Company’s common stock, one right to receive one-tenth
of one share of the Company’s common stock upon the consummation of a Business Combination (“Right”), and one
redeemable warrant to purchase one-half of one share of the Company’s common stock (“Warrant”). Each Warrant
will entitle the holder to purchase one-half of one share of common stock at an exercise price of $5.75 per half share ($11.50
per whole share), subject to adjustment. No fractional shares will be issued upon exercise of the warrants. The Warrants will become
exercisable on the later of (i) 30 days after the completion of the initial Business Combination and (ii) 12 months from the closing
of the Initial Public Offering, and will expire five years after the completion of the initial Business Combination or earlier
upon redemption or liquidation.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
The Company may redeem
the Warrants, in whole and not in part, at a price of $0.01 per Warrant upon 30 days’ notice (“30-day redemption period”),
only in the event that the last sale price of the common stock equals or exceeds $18.00 per share for any 20 trading days within
a 30-trading day period ending on the third trading day prior to the date on which notice of redemption is given, provided there
is an effective registration statement with respect to the shares of common stock underlying such Warrants and a current prospectus
relating to those shares of common stock is available throughout the 30-day redemption period. If the Company calls the Warrants
for redemption as described above, the Company’s management will have the option to require all holders that wish to exercise
Warrants to do so on a “cashless basis.” In determining whether to require all holders to exercise their warrants on
a “cashless basis,” the management will consider, among other factors, the Company’s cash position, the number
of Warrants that are outstanding and the dilutive effect on the Company’s stockholders of issuing the maximum number of shares
of common stock issuable upon the exercise of the Warrants.
Each holder of a Right
will receive one-tenth (1/10) of one share of common stock upon consummation of a Business Combination. No fractional shares will
be issued upon exchange of the Rights. No additional consideration will be required to be paid by a holder of Rights in order to
receive its additional shares upon consummation of a Business Combination as the consideration related thereto has been included
in the Unit purchase price paid for by investors in the Initial Public Offering. If the Company enters into a definitive agreement
for a Business Combination in which the Company will not be the surviving entity, each holder of a right will be required to affirmatively
convert its rights in order to receive the 1/10 share of common stock underlying each right (without paying any additional consideration).
There will be no redemption
rights or liquidating distributions with respect to the Warrants and Rights, which will expire worthless if the Company fails to
complete its Business Combination within the Combination Period.
Private Placement
Concurrently with
the closing of the Initial Public Offering, the Sponsor and the underwriters purchased an aggregate of 450,000 Private Units at
$10.00 per Private Unit, generating gross proceeds of $4,500,000 in a Private Placement. In addition, on June 23, 2017, the Company
consummated the sale of an additional 52,500 Placement Units at a price of $10.00 per Unit, which were purchased by the Sponsor
and underwriters, generating gross proceeds of $525,000. Of these, 377,500 Private Units were purchased by the Sponsor and 125,000
Private Units were purchased by the underwriters. The proceeds from the Private Units were added to the net proceeds from the Initial
Public Offering held in the Trust Account. The Private Units (including their component securities) will not be transferable, assignable
or salable until 30 days after the completion of the initial Business Combination and the warrants included in the Private Units
(the “Private Placement Warrants”) will be non-redeemable so long as they are held by the Sponsor, the underwriters
or their permitted transferees. If the Private Placement Warrants are held by someone other than the Sponsor, the underwriters
or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders
on the same basis as the warrants included in the Units sold in the Initial Public Offering. In addition, for as long as the Private
Placement Warrants are held by the underwriters or its designees or affiliates, they may not be exercised after five years from
the effective date of the registration statement related to the Initial Public Offering. Otherwise, the Private Placement Warrants
have terms and provisions that are identical to those of the warrants being sold as part of the Units in the Initial Public Offering
and have no net cash settlement provisions.
If the Company does
not complete a Business Combination within the Combination Period, the proceeds of the Private Placement will be part of the liquidating
distribution to the public stockholders and the Private Units and their component securities issued to the Sponsor will expire
worthless.
4. RELATED PARTY TRANSACTIONS
Founder Shares
In September 2016,
the Company issued 2,875,000 shares of the Company’s common stock to the Sponsor (the “Founder Shares”) in exchange
for a capital contribution of $25,000. The 2,875,000 Founder Shares included an aggregate of up to 375,000 shares subject to forfeiture
by the Sponsor to the extent that the underwriters’ over-allotment option was not exercised in full or in part. As a result
of the underwriters’ election to exercise their over-allotment option in full on June 23, 2017, 375,000 Founder Shares were
no longer subject to forfeiture.
In conjunction with
their investment in the Private Units, the underwriters or their designees also purchased membership interests in the Sponsor,
through which the underwriters or their designees collectively have a pecuniary interest in 230,000 Founder Shares, pursuant to
a separate private placement that closed simultaneously with the closing of the Initial Public Offering and the Private Placement.
The Sponsor beneficially owns the Founder Shares allocated to the underwriters or their designees and retains sole voting and dispositive
power over such securities until the closing of a Business Combination, at which time the Sponsor will distribute the Founder Shares
to the underwriters or their designees for no additional consideration. Upon receipt of the Founder Shares, the underwriters or
their designees will no longer retain their ownership interests in the Sponsor.
The Sponsor has agreed
not to transfer, assign or sell any of the Founder Shares (except to certain permitted transferees) until the earlier to occur
of (i) one year after the completion of a Business Combination, and (ii) the date following the completion of a Business Combination
on which the Company completes a liquidation, merger, share exchange or other similar transaction which results in all of the
Company’s stockholders having the right to exchange their shares of the Company’s common stock for cash, securities
or other property the (“Lock-Up Period”). Notwithstanding the foregoing, if the last sale price of the Company’s
common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations
and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after its initial Business
Combination, then the lock-up will terminate.
In connection with the
Business Combination Agreement, as fully described in Note 8, the Sponsor deposited in escrow with a third-party escrow agent 1,406,250
of its Founder Shares that it acquired prior to the Company's Initial Public Offering (the “Escrowed Shares”). See
Note 8.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
Related Party Advances
As of December 31,
2019, the Sponsor advanced an aggregate of $1,209,512 to fund working capital purposes and Business Combination expenses, of which
$840,482 was advanced during the year ended December 31, 2019. During the year ended December 31, 2019, the Company repaid an aggregate
amount of $100,000 of such advances and an aggregate amount of $314,509 was converted into loans under the March Promissory Note
described below. As of June 30, 2020 and December 31, 2019, advances of $795,003 were outstanding.
Administrative Service Fee
The Company agreed, commencing
on the effective date of the Initial Public Offering through the earlier of the Company’s consummation of a Business Combination
and its liquidation, to pay the Sponsor a monthly fee of $10,000 for office space, utilities and secretarial and administrative
support. For the each of the three months ended June 30, 2020 and 2019, the Company incurred $30,000 of administrative service
fees and for each of the six months ended June 30, 2020 and 2019, the Company incurred $60,000 of administrative service fees.
As of June 30, 2020 and December 31, 2019, an aggregate of $276,000 and $286,000, respectively, is payable. As of June 30,
2020 and December 31, 2019, $286,000 of the amounts due for such fees are included as loans under the March Promissory Note described
below and included in the convertible promissory note related party in the accompanying condensed consolidated balance sheets.
Convertible Promissory Note
On March 15, 2019,
the Company issued the Sponsor the March Promissory Note, pursuant to which outstanding advances in the aggregate amount of $314,509
were converted into loans under the March Promissory Note and including the $573,433 Initial Loan from the Sponsor. The March Promissory
Note is unsecured, non-interest bearing and due on the earlier of (i) the consummation of a Business Combination or (ii) the liquidation
of the Company. Up to $1,000,000 of the loans under the March Promissory Note may be converted, at the Sponsor’s discretion,
into units of the post-Business Combination entity at a price of $10.00 per unit. The units would be identical to the Private Units.
Through June 30, 2020, the Sponsor advanced the Company $371,696 under the Expense Reimbursement Agreement (as defined in Note
5), of which $33,877 was advanced during the six months ended June 30, 2020. Through June 30, 2020, the Company repaid $272,337
of the March Promissory Note, of which $62,922 was repaid during the six months ended June 30, 2020.
In connection with the
Term Sheet entered into on April 10, 2019, Tyche paid the Sponsor $650,000 to purchase such obligations owed to the Sponsor under
the March Promissory Note (see Note 8). In December 2019, the Tyche Note was transferred to 180.
As of June 30, 2020
and December 31, 2019, there was $337,301 and $366,346, respectively, outstanding under the March Promissory Note and no amounts
outstanding under the Tyche Note.
Related Party Loans
In order to finance
transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s
officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”).
If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the proceeds of the Trust
Account released to the Company. Otherwise, the Working Capital Loans would be repaid only out of funds held outside the Trust
Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust
Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital
Loans. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements
exist with respect to such loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination,
without interest, or, at the lender’s discretion, up to $1,000,000 of such Working Capital Loans may be convertible into
units of the post-Business Combination entity at a price of $10.00 per unit. The units would be identical to the Private Units.
As of June 30, 2020 and December 31, 2019, the Company had $337,301 and $366,346, respectively, outstanding under the March Promissory
Note.
5. EXPENSE REIMBURSEMENT AGREEMENT
On March 15, 2019,
the Company entered into an expense reimbursement agreement (the “Expense Reimbursement Agreement”) with the Sponsor
and KBL Healthcare Management, LLC (“KBL Management”), an affiliate of the Sponsor and its Chief Executive Officer,
in recognition of the compensation expense incurred by KBL Management for services provided by one of their employees on behalf
of the Sponsor to the Company. The Expense Reimbursement Agreement is effective January 1, 2019 until the earlier of (i) the consummation
of a Business Combination or (ii) the Company’s liquidation. Under the Expense Reimbursement Agreement, the Company will
reimburse the Sponsor for the compensation expense incurred by KBL Management for its employee in the amount of $180,000 per year
plus health insurance costs of $1,139 per month. At the Company’s election, the Company may pay amounts due pursuant to a
non-interest bearing, unsecured promissory note. As of June 30, 2020 and December 31, 2019, amounts due under the Expense Reimbursement
Agreement totaled $337,301 and $337,819, respectively, and has been included in the March Promissory Note (see Note 4).
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
6. DOMINION CONVERTIBLE PROMISSORY NOTES
On June 12, 2020 (the
“Issue Date”), the Company entered into a $1,666,667 10% Secured Convertible Promissory Note and $138,889 10% Senior
Secured Convertible Extension Promissory Note (together the “Dominion Convertible Notes”) with Dominion Capital LLC
(the “Holder”), which was issued to the Holder in conjunction with 400,000 shares of common stock (the “Dominion
Commitment Shares”). In conjunction with the SPA, the Company entered into a series of Leak Out Agreements in which certain
parities agreed that they would not sell, dispose or otherwise transfer, in aggregate more than 5% of the composite daily trading
volume of the common stock of the Company. Pursuant to the Leak-Out Agreement between the Company and Caravel CAD Fund Ltd., the
Company issued 404,245 restricted shares of common stock (“Leak-Out Shares”).
The Company received $1,625,000
in cash from the Holder with the remainder retained by the Holder for the Original Issue Discount of $180,556. The Company incurred
$90,072 in third-party fees directly attributed to the issuance of the Dominion Convertible Notes, debt discount related to the
Dominion Commitment Shares and Leak-Out Shares pursuant to the transaction of $980,807 and a beneficial conversion feature of $358,899.
The beneficial conversion feature of $358,899 was recorded as a debt discount with an offsetting entry to additional
paid-in capital decreasing the Dominion Notes and increasing debt discount. The debt discount is being amortized to interest expense
over the term of the debt. The Company agreed to pay the principal amount, together with guaranteed interest at the annual rate
of 10% (unless the Company defaults, which increases the interest rate to 15%), with principal and accrued interest on the Dominion
Convertible Notes due and payable on February 11, 2021 (the “Maturity Date”), unless converted under terms and provisions
as set forth within the Dominion Convertible Notes. The Dominion Convertible Notes provide the Holder with the right to convert,
at any time, all or any part of the outstanding principal and accrued but unpaid interest into shares of the Company’s common
stock at a conversion price of $5.28 per share. The Dominion Convertible Notes require the Company to reserve at least 868,056
and 114,584 shares of common stock from its authorized and unissued common stock to provide for all issuances of common stock under
the 10% Secured Convertible Promissory Note and 10% Senior Secured Convertible Extension Promissory Note, respectively. However,
the Dominion Convertible Notes provide that the aggregate number shares of common stock issued to the Holder under the Dominion
Convertible Notes shall not exceed 4.99% of the total number of shares of common stock outstanding as of the closing date unless
the Company has obtained stockholder approval of the issuance (the “the Beneficial Ownership Limitation”). The Holder,
upon not less than sixty-one (61) days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation;
provided, that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the common stock outstanding
immediately after giving effect to the issuance of shares of common stock upon conversion of the Dominion Convertible Notes held
by the Holder.
On the 10th day following
the Company consummating any public or private offering of any securities or other financing or capital-raising transaction of
any kind (each a “Subsequent Offering”) on any date other than the Maturity Date, the Company shall, subject to the
Holder’s conversion rights set forth herein, pay to the Holder in cash an amount equal to the Mandatory Prepayment Amount
but in no event greater than fifty percent (50%) of the gross proceeds from the Subsequent Offering.
The Company shall
pay a late fee (the “Late Fees”) on any amount required to be paid under any transaction document and not paid when
due, at a rate equal to the lesser of an additional 10% percent of such amount or the maximum rate permitted by applicable law
which shall be due and owing daily from the date such amount is due hereunder through the date of actual payment in full of such
amount in cash.
Immediately on and
after the occurrence of any Event of Default, without need for notice or demand all of which are waived, interest on this Note
shall accrue and be owed daily at an increased interest rate equal to the lesser of two percent (2.0%) per month (twenty-four percent
(24.0%) per annum) or the maximum rate permitted under applicable law. In addition, in any Event of Default, the Company must pay
a mandatory default amount equal to one hundred thirty percent (130%) of the sum of the outstanding principal amount of the Dominion
Convertible Notes at such time and all accrued interest unpaid at such time (including any Minimum Interest Amount remaining outstanding
on such principal amount as of such time) and (b) all other amounts, costs, fees (including Late Fees), expenses, indemnification
and liquidated and other damages and other amounts due to the Holder or any other party in respect of the Dominion Convertible
Notes.
The Dominion Convertible
Notes also contain a provision whereby the Holder is due a minimum interest amount or make whole amount meaning on any date and
with respect to any principal amount owing under the Dominion Convertible Notes, the difference between (a) 10% of such principal
amount, representing a full year of interest payments hereunder and (b) any payment of interest made prior to such date with respect
to such principal amount. To be free from doubt, the minimum interest amount is only applicable for the initial 12 month period
from the Issue Date.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
The Company assessed
each of the above provisions in the Dominion Convertible Notes under ASC Topic 815-15. The derivative component of the obligation
is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts have been
amortized to interest expense over the respective term of the related note. The following are the key assumptions that were used
in connection with the valuation of the derivative identified during the period ending June 30, 2020:
Fair market value of stock
|
|
$
|
11.02
|
|
Exercise price
|
|
$
|
5.28
|
|
Volatility
|
|
|
255
|
%
|
Risk-free interest rate
|
|
|
0.18
|
%
|
Derivative life (years)
|
|
|
0.62
|
|
The total derivative liability
associated with these notes was $105,709 at June 30, 2020.
Principal of $1,805,556
remained outstanding as of June 30, 2020. Interest expense and amortization of debt discount, associated with the Dominion Convertible
Notes during the three and six months ended June 30, 2020 amounted to $135,497, respectively. The unamortized discount related
to the Dominion Convertible Notes was $1,096,458 at June 30, 2020.
7. KINGSBROOK CONVERTIBLE PROMISSORY
NOTES
On June 12, 2020 (the
“Issue Date”), the Company entered into a $1,657,522 10% Secured Convertible Promissory Note and $138,889 10% Senior
Secured Convertible Extension Promissory Note (together the “Kingsbrook Convertible Notes”) with Kingsbrook Opportunities
Master Fund LP (the “Holder”), which was issued to the Holder in conjunction with 250,000 shares of common stock (the
“Kingsbrook Commitment Shares”).
The Company received $125,000
in cash from the Holder with the remainder retained by the Holder for the Original Issue Discount of $13,889. The Company incurred
$6,929 in third-party fees directly attributed to the issuance of the Kingsbrook Convertible Notes, debt discount related to the
Kingsbrook Commitment Shares pursuant to the transaction of $25 and a beneficial conversion feature of $1,577,350. The beneficial
conversion feature of $1,577,350 was recorded as a debt discount with an offsetting entry to additional paid-in capital decreasing
the Kingsbrook Notes and increasing debt discount. The debt discount is being amortized to interest expense over the term of the
debt. The Company recognized a $1,657,522 loss in earnings pursuant to the transaction. This amount was calculated as the excess
of fair value of the liabilities recognized over the proceeds received of $1,657,522. The Company agreed to pay the principal amount,
together with guaranteed interest at the annual rate of 10% (unless the Company defaults, which increases the interest rate to
15%), with principal and accrued interest on the Kingsbrook Convertible Notes due and payable on February 11, 2021 (the “Maturity
Date”), unless converted under terms and provisions as set forth within the Kingsbrook Convertible Notes. The Kingsbrook
Convertible Notes provide the Holder with the right to convert, at any time, all or any part of the outstanding principal and accrued
but unpaid interest into shares of the Company’s common stock at a conversion price of $5.28 per share. The Kingsbrook Convertible
Notes require the Company to reserve at least 1,823,275 and 114,584 shares of common stock from its authorized and unissued common
stock to provide for all issuances of common stock under the 10% Secured Convertible Promissory Note and 10% Senior Secured Convertible
Extension Promissory Note, respectively. However, the Kingsbrook Convertible Notes provide that the aggregate number shares of
common stock issued to the Holder under the Kingsbrook Convertible Notes shall not exceed 4.99% of the total number of shares of
common stock outstanding as of the closing date unless the Company has obtained stockholder approval of the issuance (the “the
Beneficial Ownership Limitation”). The Holder, upon not less than sixty-one (61) days’ prior notice to the Company,
may increase or decrease the Beneficial Ownership Limitation; provided, that the Beneficial Ownership Limitation in no event exceeds
9.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common
stock upon conversion of the Kingsbrook Convertible Notes held by the Holder.
On the 10th day following
the Company consummating any public or private offering of any securities or other financing or capital-raising transaction of
any kind (each a “Subsequent Offering”) on any date other than the Maturity Date, the Company shall, subject to the
Holder’s conversion rights set forth herein, pay to the Holder in cash an amount equal to the Mandatory Prepayment Amount
but in no event greater than fifty percent (50%) of the gross proceeds from the Subsequent Offering.
Immediately on and
after the occurrence of any Event of Default, without need for notice or demand all of which are waived, interest on this Note
shall accrue and be owed daily at an increased interest rate equal to the lesser of two percent (2.0%) per month (twenty-four percent
(24.0%) per annum) or the maximum rate permitted under applicable law. In addition, in any Event of Default, the Company must pay
a mandatory default amount equal to one hundred thirty percent (130%) of the sum of the outstanding principal amount of the Kingsbrook
Convertible Notes at such time and all accrued interest unpaid at such time (including any Minimum Interest Amount remaining outstanding
on such principal amount as of such time) and (b) all other amounts, costs, fees (including Late Fees), expenses, indemnification
and liquidated and other damages and other amounts due to the Holder or any other party in respect of the Kingsbrook Convertible
Notes.
The Kingsbrook Convertible
Notes also contain a provision whereby the Holder is due a minimum interest amount or make whole amount meaning on any date and
with respect to any principal amount owing under the Kingsbrook Convertible Notes, the difference between (a) 10% of such principal
amount, representing a full year of interest payments hereunder and (b) any payment of interest made prior to such date with respect
to such principal amount. To be free from doubt, the minimum interest amount is only applicable for the initial 12 month period
from the Issue Date.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
The Company assessed
each of the above provisions in the Kingsbrook Convertible Notes under ASC Topic 815-15. The derivative component of the obligation
is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts have been
amortized to interest expense over the respective term of the related note. The following are the key assumptions that were used
in connection with the valuation of the derivative identified during the period ending June 30, 2020:
Fair market value of stock
|
|
$
|
11.02
|
|
Exercise price
|
|
$
|
5.28
|
|
Volatility
|
|
|
255
|
%
|
Risk-free interest rate
|
|
|
0.18
|
%
|
Derivative life (years)
|
|
|
0.62
|
|
The total derivative liability
associated with these notes was $108,479 at June 30, 2020.
Principal of $1,796,411
remained outstanding as of June 30, 2020. Interest expense and amortization of debt discount, associated with the Kingsbrook Convertible
Notes during the three and six months ended June 30, 2020 amounted to $134,760, respectively. The unamortized discount related
to the Kingsbrook Convertible Notes was $1,580,772 at June 30, 2020.
8. COMMITMENTS AND CONTINGENCIES
Risks and Uncertainties
Management continues
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, results of its operations and/or search for a target
company, the specific impact is not readily determinable as of the date of these condensed consolidated financial statements. The
condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Registration Rights
The holders of the
Founder Shares and Private Units and warrants that may be issued upon conversion of Working Capital Loans (and any shares of the
Company’s common stock issuable upon the exercise of the Private Units and warrants that may be issued upon conversion of
Working Capital Loans) are entitled to registration rights pursuant to a registration rights agreement signed on the effective
date of the Initial Public Offering. The holders of these securities are entitled to make up to three demands, excluding short
form demands, that the Company register such securities. In addition, the holders have certain “piggy-back” registration
rights with respect to registration statements filed subsequent to the consummation of a Business Combination. However, the registration
rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to become
effective until termination of the applicable Lock-Up Period. The Company will bear the expenses incurred in connection with the
filing of any such registration statements.
Underwriting Agreement
The Company granted
the underwriters a 45-day option to purchase up to 1,500,000 additional Units to cover over-allotments at the Initial Public Offering
price, less the underwriting discounts and commissions. On June 23, 2017, the underwriters elected to exercise their over-allotment
option to purchase 1,500,000 Units at a purchase price of $10.00 per Unit.
In connection with
the closing of the Initial Public Offering and the over-allotment option, the underwriters were paid a cash underwriting discount
of $2,875,000. In addition, the underwriters deferred their fee of up to $4,025,000 until the completion of the initial Business
Combination (the “Deferred Fee”). In June 2020, the underwriters waived their right to receive the $4,025,000 deferred
fee which had been held in the Trust Account. The Company recorded the waiver of the Deferred Fee as a credit to additional paid
in capital in the accompanying statement of stockholders’ equity.
Concurrently with
the closing of the Initial Public Offering, the underwriters purchased an aggregate of 125,000 Private Units at $10.00 per Private
Unit.
In conjunction with
their investment in the Private Units, the underwriters or their designees also purchased membership interests in the Sponsor,
through which the underwriters or their designees collectively have a pecuniary interest in 230,000 Founder Shares, pursuant to
a separate private placement that closed simultaneously with the closing of the Initial Public Offering and the Private Placement.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
Business Combination
On April 10, 2019,
the Company entered into a non-binding term sheet (the “Term Sheet”) for a Business Combination transaction (the “Transaction”)
with 180. In connection with the Term Sheet, 180, Katexco Pharmaceuticals Corp., a British Columbia corporation (“Katexco”),
CannBioRx Pharmaceuticals Corp., a British Columbia corporation (“CBR Pharma”), 180 Therapeutics L.P., a Delaware limited
partnership (“180 LP” and together with Katexco and CBR Pharma, the “180 Subsidiaries” and, together with
180, the “180 Parties”) agreed to loan $400,000 to the Company to be used to fund the Company’s operating expenses,
deal transaction expenses and any financing expenses for the Transaction (the “Operating Expenses”), and up to an additional
$300,000 to be used by the Company in connection with any future extensions of the deadline for the Company to consummate a Business
Combination (the “Extension Expenses”).
The loans are interest-free
and can be pre-paid at any time without penalty, but are required to be paid back (subject to a customary waiver against the Company’s
Trust Account) upon the earlier of (i) the closing of the Transaction, (ii) the consummation by the Company of a transaction with
a third party constituting the Company’s initial Business Combination, or (iii) the liquidation of the Company if it does
not consummate an initial Business Combination prior to its deadline to do so (a “Liquidation”). Promptly after signing
the Term Sheet, the Company received the loan of $400,000 to fund the Operating Expenses.
In connection with
the Term Sheet, Tyche Capital LLC (the “Tyche”) paid $650,000 to the Sponsor to purchase $650,000 of the obligations
owed to the Sponsor under the March Promissory Note (the “Tyche Note”), but Tyche waived any rights under the assigned
portion of the March Promissory Note to convert the obligations under the assigned portion of the March Promissory Note into units
of the post-Business Combination entity. Pursuant to the Term Sheet, Tyche also agreed to provide equity financing for the Transaction
to ensure that the Company has sufficient cash at the closing of the Transaction to meet its $5,000,001 net tangible assets test.
In December 2019, the $650,000 Tyche Note was transferred to 180.
On July 25, 2019,
the Company entered into a Business Combination Agreement (the “Business Combination Agreement”) with 180, the 180
Subsidiaries, Merger Sub, and Lawrence Pemble, in his capacity as representative of the stockholders of 180 and the stockholders
of the 180 Subsidiaries (the “Stockholder Representative”), pursuant to which, among other matters, and subject to
the satisfaction or waiver of the conditions set forth in the Business Combination Agreement, Merger Sub will merge with and into
180, with 180 continuing as the Company’s wholly owned subsidiary at the closing (the “Closing”).
Subject to the terms
and conditions of the Business Combination Agreement, at the Closing, (a) each outstanding share of 180 common stock will
be converted into the right to receive a number of shares of the Company’s common stock (the “KBL Common Stock”)
equal to the exchange ratio described below; (b) each outstanding share of 180 preferred stock will be converted into the
right to receive a number of shares of the Company’s preferred stock on a one-for-one basis; and (c) each outstanding exchangeable
share of 180 or any of the 180 Subsidiaries, as the case may be, will be converted into the right to receive a number of exchangeable
shares equal to the exchange ratio described below. Each exchangeable share will be an exchangeable share in a Canadian subsidiary
of the Company that will be exchangeable for KBL Common Stock.
Subject to the terms
and conditions of the Business Combination Agreement, at the Closing, the Company will acquire 100% of the outstanding equity and
equity equivalents of 180 (including options, warrants or other securities that have the right to acquire or convert into equity
securities of the Company) in exchange for shares of KBL Common Stock (the “Transaction Shares”) valued at $175 million,
subject to adjustment. Each Transaction Share will have a value equal to $10.00. The $175 million of consideration will be reduced
by the amount of any liabilities of 180 in excess of $5 million at the Closing.
The 180 Business Combination
will be consummated subject to the deliverables and provisions as further described in the Business Combination Agreement, as an
exhibit to a Current Report on Form 8-K filed with the SEC on July 26, 2019 and in the Registration Statement on Form S-4 filed
by us with the SEC on November 12, 2019 and amended on February 10, 2020.
During the year ended
December 31, 2019, the Company received additional advances in the aggregate amount of $1,049,825 from the 180 Parties to fund
Operating Expenses and Extension Expenses. During the six months ended June 30, 2020, the Company received additional advances
in the aggregate amount of $9,990 and repaid advacnes in the amount of $330,000. As of June 30, 2020 and December 31, 2019, a total
of $1,379,815 and $1,699,825, respectively, is due under the advances from the 180 Parties.
Founder Shares Escrow
In connection with
the Business Combination Agreement, the Sponsor deposited in escrow with a third-party escrow agent 1,406,250 of its Founder Shares
that it acquired prior to the Company’s Initial Public Offering (the “Escrowed Shares”). The Escrowed Shares
will be transferred to Tyche, less any portion used for financing for the Transaction, upon the earlier of (i) the closing of the
Transaction or (ii) a Liquidation; provided, that if the Company consummates its initial Business Combination with a third party
other than 180 or its affiliates, upon the consummation of such Business Combination, in addition to paying the loans described
above, the Sponsor will transfer to Tyche a number of Escrowed Shares equal in value to three times the amount of the loans, with
each Escrowed Share valued at the price paid to each public stockholder that redeems its shares in connection with such initial
Business Combination.
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
Additional information
on the Business Combination is available in the Company’s Form S-4 filed by us with the SEC on November 12, 2019 and amended
on February 10, 2020.
7. STOCKHOLDERS’ EQUITY
Preferred Stock
— The Company is authorized to issue 1,000,000 preferred shares with a par value of $0.0001 per share. At June 30, 2020 and
December 31, 2019, there are no preferred shares issued or outstanding.
Common Stock
— The Company is authorized to issue 35,000,000 shares of the Company’s common stock with a par value of $0.0001 per
share. Holders of the Company’s shares of the Company’s common stock are entitled to one vote for each share. At June
30, 2020 and December 31, 2019, there were 5,077,321 and 4,458,149 shares of common stock issued and outstanding, respectively,
excluding 396,781 and 33,618 shares of common stock subject to possible redemption, respectively.
8. TRUST ACCOUNT AND FAIR VALUE MEASUREMENTS
The Trust Account
can be invested in U.S. government securities, within the meaning set forth in the Investment Company Act, having a maturity of
180 days or less or in any open-ended investment company that holds itself out as a money market fund selected by the Company meeting
the conditions of Rule 2a-7 of the Investment Company Act.
The Company’s
amended and restated certificate of incorporation provide that, other than the withdrawal of interest to pay income taxes and up
to $50,000 of interest to pay dissolution expenses if any, none of the funds held in the Trust Account will be released until the
earlier of: (i) the completion of the Business Combination; (ii) the redemption of Public Shares properly tendered in connection
with a stockholder vote to amend the Company’s amended and restated certificate of incorporation to modify the substance
or timing of the Company’s obligation to redeem 100% of the Public Shares if the Company does not complete the Business Combination
within the Combination Period or (iii) the redemption of 100% of the Public Shares if the Company is unable to complete a Business
Combination within the Combination Period.
The Company classifies
its U. S. Treasury and equivalent securities as held-to-maturity in accordance with ASC 320 “Investments - Debt and Equity
Securities.” Held-to-maturity securities are those securities which the Company has the ability and intent to hold until
maturity. Held-to-maturity treasury securities are recorded at amortized cost on the accompanying condensed consolidated balance
sheets and adjusted for the amortization or accretion of premiums or discounts.
The following table
presents information about the Company’s assets that are measured at fair value on a recurring basis at June 30, 2020 and
December 31, 2019 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
Description
|
|
Level
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Assets:
|
|
|
|
|
|
|
|
|
Marketable securities held in Trust Account – U.S. Treasury Securities Money Market Fund
|
|
1
|
|
$
|
11,276,350
|
|
|
$
|
11,877,654
|
|
Derivative liability
|
|
3
|
|
$
|
214,188
|
|
|
$
|
—
|
|
The Company follows the guidance in ASC
820 for its financial assets and liabilities that are re-measured at fair value at each reporting period, and non-financial assets
and liabilities that are re-measured and reported at fair value at least annually.
The fair value of
the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have
received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction
between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities,
the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the
use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following
fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in
order to value the assets and liabilities:
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
|
KBL MERGER CORP. IV
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(unaudited)
|
Level 2:
|
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
|
|
|
|
|
Level 3:
|
Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.
|
Level 3 liabilities are
valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the
derivative liability. Level 3 financial liabilities consisted of the derivative liability for which the determination of fair value
required significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy
are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
At June 30, 2020 and December
31, 2019 there were no transfers in or out between the levels in the fair value hierarchy.
The following table provides
a reconciliation of the beginning and ending balances for the derivative liability measured using significant unobservable inputs
(Level 3):
|
|
(in millions)
|
|
Balance – January 1, 2020
|
|
$
|
-
|
|
Initial classification of derivative liability
|
|
|
214,188
|
|
Balance – June 30, 2020
|
|
$
|
214,188
|
|
|
|
|
|
|
9. SUBSEQUENT EVENTS
The Company evaluates
subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued.
Other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure
in the condensed consolidated financial statements.
On July 9, 2020, the
Company’s stockholders approved to further extend the period of time for which the Company is required to consummate a Business
Combination (the “Fifth Extension Amendment”) from July 9, 2020 to November 9, 2020 or such earlier date as determined
by the Board (the “Combination Period”). The number of shares of common stock presented for redemption in connection
with the Fifth Extension Amendment was 106,186. The Company paid cash in the aggregate amount of $1,160,695, or approximately $10.93
per share, to redeeming stockholders. As a result of the payment on the shares of common stock presented for redemption in connection
with the Fifth Extension Amendment, cash and marketable securities held in the Trust Account decreased to $10,279,476 at July 9,
2020.