IMPACT BIOMEDICAL INC. 10-K

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain statements contained herein this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Reform Act”). Except for the historical information contained herein, this report contains forward-looking statements (identified by words such as “estimate,” “project”, “anticipate”, “plan”, “expect”, “intend”, “believe”, “hope”, “strategy” and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements. Overview Impact Biomedical Inc. (IBIO) discovers, confirms, and patents unique science and technologies which can be developed into new offerings in human healthcare and wellness in collaboration with external partners through licensing, co-development, joint ventures, and other relationships. By leveraging technology and new science with strategic partnerships, Impact Bio provides advances in drug discovery for the prevention, inhibition, and treatment of neurological, oncology and immuno-related diseases. Other exciting technologies include natural compositions for over-the-counter upper respiratory, anti-viral and other conditions, functional fragrance formulations for use in lotions, insect repellents, and other consumer products and a unique alternative sugar composition, with potential to impact calorie intake and glycemic index. The business model of Impact BioMedical includes licensing and potentially direct sales for commercialization and distribution. Potential licensors and development partners include pharmaceutical, food, consumer package goods companies and others in exchange for milestone, and royalty licensing payments. Below is a list of our principal subsidiaries: ● Impact BioLife Science, Inc.; ● Global Biomedical, Inc.; ● Global BioLife, Inc.; and ● Sweet Sense, Inc. Impact BioLife Science, Inc . We are the sole owner of the outstanding equity of Impact BioLife Science, Inc. Global Biomedical, Inc. We own 90.9% of Global Biomedical, Inc. outstanding equity. Global BioLife, Inc . Through our majority owned subsidiary Global Biomedical, Inc., we own 81.8% of the outstanding equity of Global BioLife, Inc. Sweet Sense, Inc . We are the owner of 95.5% of the outstanding equity of Sweet Sense. Through our majority-owned subsidiary Global BioLife, we own or have rights to a portfolio of biomedical intellectual property, including intellectual property assigned to Global BioLife by GRDG Sciences, LLC (“GRDG”). Global BioLife leverages its scientific know-how and intellectual property rights to develop various emerging technologies, including biopharmaceuticals, antivirals, antimicrobials, sugar alternatives, insect repellents, fragrances, bioplastics and natural preservatives. Impact BioMedical has several unique and proprietary technologies that are in continuing development. 20 Linebacker Linebacker is a platform of small molecule electrophilically enhanced polyphenol compounds with potential application in oncology (solid tumors), inflammatory disorders, and neurology. Polyphenols are substances found in many nuts, vegetables, and berries. Linebacker compounds are modified Myricetin, which is a common plant-derived flavonoid. Myricetin exhibits a wide rand of activities that include strong anti-oxidant, as well as potential anti-cancer, anti-inflammatory activities (source: NIH). Linebacker can potentially be developed as monotherapy or co-therapy to down-regulate PIM (proviral integration site for Moloney murine leukemia virus) kinase which plays a key role as an oncogene in various cancers (e.g. colon, lung, prostate, breast). Additional potential applications include inflammatory disorders and neurology. Lineebacker-1 and Linebacker-2 compounds have been licensed to ProPhase Laboratories for development and commercialization worldwide. Composition and method patents are issued for Linebacker in the U.S. and other countries. Two compounds from the Linebacker platform (LB-1, LB-2) are licensed to ProPhase Laboratories (PRPH: NASDAQ) for clinical development and commercialization for which Impact Biomedical could receive future milestone payments and royalties. Laetose Laetose technology is derived from a unique combination of sugar and inositol, which has the potential ability to inhibit the inflammatory and metabolic response of sugar alone. Use of Laetose in a daily diet, compared to sugar, could result in 30% lower sugar consumption and lower caloric and glycemic index/load. Patents/Intellectual Property Summary Laetose U.S. composition and method patent is filed, published, and awaiting issue. We are actively seeking potential partners for further development and commercialization of Laetose as a consumer packaged offering worldwide. Functional Fragrance Formulation (“3F”) 3F is a suite of “functional fragrances” containing specialized botanical ingredients(e.g., terpenes) with potential application as an antimicrobial, or as an additive in insect repellents, detergents, lotions, shampoo, fabrics and other substances to increase effectiveness. Composition patents have issued in the U.S. and are pending in other countries. We are actively seeking potential partners for further development and commercialization of 3F. Equivir Equivir/Equivir G technology is a novel blend of FDA Generally Recognized as Safe (GRAS) eligible polyphenols (e.g. Myricetin, Hesperetin, Piperine) which have demonstrated antiviral effects with additional potential application as health supplements or medication. Polyphenols are sourced from fruits, vegetables, and other natural substances. Myricetin is a member of the flavonoid class of polyphenolic compounds with antioxidant properties. Hesperitin is a flavanone and Piperine is an alkaloid, commonly found in black pepper. Method and composition patents are issued in the U.S. and other countries. Equivir/Equivir G is licensed to ProPhase Laboratories for development and commercialization worldwide. Emerging Technology IBIO continues to explore and discover potential new technologies in accordance with it’s business model. Areas of interest include bioplastics, preservatives, biopharmaceuticals and other categories which could result in differentiated and proprietary offerings in human healthcare. The information in the two paragraphs below does not assume or give effect to (1) a 1:55 reverse split of the Company’s outstanding common stock and (2) an exchange by a shareholder of common stock for Series A Convertible Preferred Stock. 21 The Company was incorporated in the State of Nevada as a for-profit company on October 16, 2018, and established a fiscal year end of December 31st. The Company issued 9,000 shares to Global BioMedical Pte. Ltd., which was wholly–owned by Alset International Limited (formally Singapore eDevelopment Limited), a multinational public company, listed on the Singapore Exchange Securities Trading Limited (“SGXST”). On March 31, 2020, the Company issued 125,064,621 shares of common stock to its sole shareholder Global BioMedical Pte. Ltd. On July 24, 2020, the Board approved the Stock Split, pursuant to which each share of the Company’s common stock issued and outstanding was split into nine shares of the Company’s common stock. The numbers of authorized common stock and issued and outstanding common stock in the reporting periods were retrospectively adjusted for the stock split. On March 12, 2020 Alset International Limited (“Alset”), a related party, Global BioMedical Pte Ltd., a related party, DSS, Inc (“DSS”), a related party, and DSS BioHealth Security Inc. (“DSS BioHealth”), a related party, signed Term Sheets and subsequently on April 21, 2020, these four companies entered into Share Exchange Agreement (“Share Exchange”), based on which Global BioMedical Pte Ltd., agreed to sell all of the issued and outstanding shares of the Company to DSS BioHealth in exchange for the combination of common and preferred shares of DSS. Under the terms of the Share Exchange, DSS issued 483,334 shares of the DSS Common Stock nominally valued at $6.48 per share, and 46,868 newly issued shares of the DSS Series A Convertible Preferred Stock (“Series A Preferred Stock”), with a stated value of $46,868,000, or $1,000 per share, for a total consideration valued at $50 million. Due to several factors, including a discount for illiquidity, the value of the Series A Preferred Stock was discounted from $46,868,000 to $35,187,000, thus reducing the final consideration given to approximately $38,319,000. The Company’s Chairman, Heng Fai Ambrose Chan, a related party, who is also the largest shareholder of Alset, at the time of the signing of the Share Exchange Agreement was the beneficial owner of approximately 18.3% of the outstanding shares of DSS and is the Chairman of the Board of Directors of DSS. On August 21, 2020, the transaction was concluded, and the Company became a direct wholly owned subsidiary of DSS BioHealth. In connection with the acquisition, and the related accounting determination, DSS BioHealth has elected to apply push-down accounting and reflect in its financial statements of Impact BioMedical, the fair value of its assets and liabilities. Utilizing an income approach, the Company has completed its valuations of certain developed technology and pending patents assets acquired in the transaction as well the fair value of the non-controlling interests. More specifically, a Multi-Period Excess Earnings Method (“MPEEM”) estimates the value of an intangible asset by quantifying the amount of residual (or excess) estimated cash flows generated by the asset and discounting those cash flows to the present. These have been valued at approximately $22,260,000 and $3,910,000, respectively, and are included on the Consolidated Balance Sheet on December 31, 2020. Estimated useful life of these assets is twenty years, based on the remaining terms of the related patents, with annual amortization approximating $1,113,000. The Company has also completed its valuation of goodwill and deferred tax liabilities of Impact BioMedical, and has recorded goodwill of approximately $25,093,000, driven by other intangible assets that do not qualify for separate recognition, and a deferred tax liability of approximately $5,234,000. The goodwill is not deductible for tax purposes and has been allocated to Impact BioMedical in totality as a single reporting unit. The Company is committed to both funding research and developing intellectual property portfolio. Revenue Year ended December 31, 2023 Year ended December 31, 2022 % Change Revenue License revenue $ - $ 50,000 -100 % Total Revenue $ - $ 50,000 -100 % Revenue - The year ended December 31, 2022 revenue is associated with milestone payments on our licensing agreement with ProPhase. No such amounts were recorded for the year ended December 31, 2023. Costs and expenses December 31, 2023 December 31, 2022 % Change Sales, general and administrative compensation 315,000 325,000 -3 % Depreciation and amortization 1,120,000 1,113,000 1 % Professional services 1,262,000 722,000 75 % Research and development 1,147,000 1,226,000 -6 % Other operating expenses 184,000 68,000 171 % Total costs and expenses $ 4,028,000 $ 3,454,000 17 % 22 Selling, general and administrative compensation costs decreased 3% for the year-ended December 31, 2023, as compared to the year ended December 31, 2022 due to decreases in head count at the Company. Depreciation and amortization expense increased 1% for year-ended December 31, 2023 compared to year-ended December 31, 2022 and represents the amortization of the associated with the developed technology and patents acquired as part of the acquisition of Impact BioMedical by DSS. Amortization of these assets began on January 1, 2021, and will have a 20-year term. Professional fees increased 75% for the year-ended December 31, 2023, as compared to year-ended December 31, 2022 mostly due to increases in consulting and legal services associated with developing and implementing Impact Biomedical’s business plan, cost to patent newly developed technologies and other related fees for the development of new technologies. Research and development costs represent costs consisting primarily of independent, third-party testing of the various properties of each technology the Company owns possesses as well as research on new technologies. Research and development decreased 6% for the year-ended December 31, 2023, as compared to year-ended December 31, 2022 due to several cost-cutting activities. Other operating expenses consist primarily of office supplies, IT support, sales and marketing costs, travel and insurance costs. These costs increased 171% for year-ended December 31, 2023, as compared to year-ended December 31, 2022, primarily due to increased IT support and travel costs. Other Income (Expense) Year Ended December 31, 2023 Year ended December 31, 2022 % Change Interest Income $ 13,000 $ 24,000 -46 % Interest Expense (444,000 ) (462,000 ) -4 % Impairment of investment - (4,100,000 ) -100 % Other expense 52,000 66,000 -21 % Total other income (expense) $ (379,000 ) $ (4,472,000 ) -92 % Interest income is recognized on the Company’s notes receivables. Interest income decreased 46% for year-ended December 31, 2023 as compared to the year-ended December 31, 2022 due to the assignment of a note receivable to a related party during 2022. Interest expense is recognized on the Company’s debt to DSS down year over year due to transfer of a note receivable, and the related note payable to a related party during 2022. Impairment of investment is the impairment of our Vivacitas investment in the amount of $4,100,000 which took place during the fourth quarter of 2022. Net Loss Year ended December 31, 2023 Year ended December 31, 2022 % Change Net loss $ (4,407,000 ) $ (7,255,000 ) 39 % For the year ended December 31, 2023, the Company recorded net losses of $4,407,000, as compared to net losses of $7,255,000 for the year ended December 31, 2022. The decrease in loses year over year is due primarily to the impairment of our Vivacitas investment during the fourth quarter of 2022. Liquidity and Capital Resources The Company has historically met its liquidity and capital requirements primarily through debt financing. As of December 31, 2023, the Company had cash of approximately $1,000. As of December 31, 2023, the Company believes that it has sufficient availability to cash via its revolving promissory note with DSS to meet its cash requirements for at least the next 12 months from the filing date of this Report. 23 Cash Flow from Operating Activities Net cash used by continuing operating activities was $2,851,000 for the year ended December 31, 2023 as compared to cash used for operating activities of $2,242,000 for the year ended December 31, 2022. This increase is driven by the increase in Operating loss of approximately $624,000 year over year offset by increase in accounts payable and the utilization of prepaid expenses. Cash Flow from Investing Activities Net cash used by investing activities was $15,000 for the year ended December 31, 2023 as compared to net cash used of $349,000 for the year ended December 31, 2022. This fluctuation is driven by the purchase of investments approximating $65,000 and purchase of property, plant and equipment of $276,000 during the year ended December 31, 2022 without similar activities during 2023. Cash Flow from Financing Activities Net cash provided by financing activities was $2,865,000 for the year ended December 31, 2023 and represents borrowings from DSS. During the year ended December 31, 2022, net cash provided by financing activities was driven by borrowings from DSS of $2,547,000. Continuing Operations and Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying financial statements the Company has incurred operating losses as well as negative cash flows from operating and investing activities over the past two years. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. To continue as a going concern, the Company has entered into an updated revolving promissory note which extended the maturity through September 30, 2030, and DSS, Inc. (“DSS”), the majority shareholder of the Company, intends to continue to fund the operations of the Company through a year from the date these financial statements were available to be issued. The Company’s management intends to take actions necessary to continue as a going concern. Management’s plans concerning these matters include, among other things, monetization of its intellectual properties, and tightly controlling operating costs. The Company has increased its efforts to raise additional capital through an initial public offering. The Company has engaged an underwriter and has been approved by the NYSE American for listing on its exchange. However, the Company cannot be certain that such capital (from its stockholders or third parties) will be available to the Company or whether such capital will be available on terms that are acceptable to the Company. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses. Inflation Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during 2023 or 2022 as we are generally able to pass the increase in our material and labor costs to our customers or absorb them as we improve the efficiency of our operations. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes. The financial statements as of December 31, 2023, describe the significant accounting policies and methods used in the preparation of the financial statements. There have been no material changes to such critical accounting policies as of the Annual Report on Form 10-K for the year ended December 31, 2023. 24 Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include: ● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets. ● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and ● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. The carrying amounts reported in the balance sheet of cash and cash equivalents, prepaids, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of notes receivable approximates their carrying value as the stated or discounted rates of the notes do reflect recent market conditions. The Company’s investments are recorded at cost as the fair value of these investment in is not readily available. The fair value of notes payable approximates its carrying value as the stated interest rate reflects recent market conditions. Investments Investments in equity securities with a readily determinable fair value, not accounted for under the equity method, are recorded at fair value with unrealized gains and losses included in earnings. For equity securities without a readily determinable fair value, the investment is recorded at cost, less any impairment, plus or minus adjustments related to observable transactions for the same or similar securities, with unrealized gains and losses included in earnings. For equity method investments, the Company regularly reviews its investments to determine whether there is a decline in fair value below book value. If there is a decline that is other-than-temporary, the investment is written down to fair value. Goodwill Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is subject to impairment testing at least annually and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. FASB ASC Topic 350 provides an entity with the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Some of the qualitative factors considered in applying this test include consideration of macroeconomic conditions, industry and market conditions, cost factors affecting the business, and overall financial performance of the business. If, after completing the assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company will proceed to a quantitative test. If qualitative factors are not deemed sufficient to conclude that the fair value of the reporting unit more likely than not exceeds its carrying value, then a one-step approach is applied in making an evaluation. The evaluation utilizes multiple valuation methodologies, including a market approach (market price multiples of comparable companies) and an income approach (discounted cash flow analysis). The computations require management to make significant estimates and assumptions, including, among other things, selection of comparable publicly traded companies, the discount rate applied to future earnings reflecting a weighted average cost of capital, and earnings growth assumptions. The Company believes the estimates and assumptions used in our impairment assessments are reasonable and based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated. A discounted cash flow analysis requires management to make various assumptions about future sales, operating margins, capital expenditures, working capital, and growth rates. Cash flow projections are derived from one-year budgeted amounts plus an estimate of later period cash flows, all of which are determined by management. Subsequent period cash flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur. Impairment of goodwill is measured as the excess of the carrying amount of goodwill over the fair values of recognized and unrecognized assets and liabilities of the reporting unit. 25 Intangible Assets The estimated fair values of acquired intangibles are generally determined based upon future economic benefits such as earnings and cash flows. Acquired identifiable intangible assets are recorded at fair value and are amortized over their estimated useful lives. Acquired intangible assets with an indefinite life are not amortized but are reviewed for impairment at least annually as of December 31 st , or more frequently whenever events or changes in circumstances indicate that the carrying amounts of those assets are below their estimated fair values. Impairment is tested under ASC 350. No impairment was recognized as of December 31, 2023 or year ended December 31, 2022. Continuing Operations and Going Concern Due to incurred operating losses as well as negative cash flows from operating and investing activities over the past two years, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern. To continue as a going concern, the Company has entered into an updated revolving promissory note which extended the maturity through September 30, 2030, and DSS, Inc. (“DSS”), the majority shareholder of the Company, intends to continue to fund the operations of the Company through a year from the date these financial statements were available to be issued. The Company’s management intends to take actions necessary to continue as a going concern. Management’s plans concerning these matters include, among other things, monetization of its intellectual properties, and tightly controlling operating costs. The Company has increased its efforts to raise additional capital through an initial public offering. The Company has engaged an underwriter and has been approved by the NYSE American for listing on its exchange. However, the Company cannot be certain that such capital (from its stockholders or third parties) will be available to the Company or whether such capital will be available on terms that are acceptable to the Company. Revenue The Company has adopted ASC Topic 606 , Revenue from Contracts with Customers (“Topic 606”). The Company enters into licensing and development agreements with collaborators for the development of its technologies. The terms of these agreements contain multiple performance obligations which may include (i) licenses, or options to obtain licenses, to the Company’s technology, (ii) rights to future technological improvements, and/or (iii) research activities to be performed on behalf of the collaborative partner, Payments to the Company under these agreements may include upfront fees, option fees, exercise fees, payments based upon the achievement of certain milestones, and royalties on product sales. Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under the agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when or as the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 26