OVERVIEW
We are a clinical-stage biopharmaceutical company developing multiple product
candidates to address unmet medical needs. Following the closing of the Merger,
we have been developing novel immunotherapies targeting autoimmune,
inflammatory, emerging viruses and cancers based on a proprietary, multi
receptor platform, or the AIMS platform, designed to restore the body's immune
system and restore homeostasis. These therapies are designed to elicit directly
within patients a robust and durable response of antigen-specific killer T-cells
and antibodies, thereby activating essential immune defenses against autoimmune,
inflammatory, infectious diseases and cancers. We believe that our technologies
can meaningfully leverage the human immune system for prophylactic and
therapeutic purposes by eliciting killer T-cell response levels not achieved by
other known immunotherapy approaches. Our immunomodulatory technology designed
to restore the balance between the cellular (Th1) and the humoral (Th2) immune
systems. Immune balance is regulated through T-helper cells that produce
cytokines. The Th1 lymphocytes help fight pathogens within cells like cancer and
viruses through interferon-gamma and macrophages. The Th2 lymphocytes target
external pathogens like cytotoxic parasites, allergens and toxins through the
activation of B-cells and antibody production to effect dendritic cells, which
are natural activators of killer T cells, also known as cytotoxic T -cells, or
CD8+ T cells. Furthermore, the Statera Biopharma technology antagonizes the
toll-like receptors (TLR4 and TLR9) to inhibit proinflammatory cytokines like
IL-6.
Our proprietary platform of Toll-like receptor drug candidates also have
applications in mitigation of radiation injury and neutropenia and anemia. Our
most advanced product candidate in this field is Entolimod, an
immune-stimulatory agent, which we are developing as a radiation countermeasure
and other indications in radiation oncology.
Prior to the closing of the Merger, we conducted business in the U.S. directly
and in Russia through two subsidiaries: one of which is wholly owned, BioLab 612
(which was dissolved in November 2020), and one of which is owned in
collaboration with a financial partner, Panacela. As of the closing of the
Merger, we also now conduct business through Old Cytocom and its subsidiaries,
ImQuest Life Sciences Inc, ImQuest BioSciences Inc., ImQuest Pharmaceuticals,
Inc., and Lubrinovation Inc. In addition, we conduct business with a former
subsidiary, Incuron, which will pay us a 2% royalty on future commercialization,
licensing, or sale of certain technology we sold to Incuron. We also partner in
a joint venture, GPI, with Everon.
The Company is developing therapies designed to directly elicit within patients
a robust and durable response of antigen-specific killer T-cells and antibodies,
thereby activating essential immune defenses against autoimmune, inflammatory,
infectious diseases, and cancers. Statera has clinical or preclinical programs
for Crohn's disease (STAT-201), hematology (STAT-601 (Entolimod)), pancreatic
cancer (STAT-401) and COVID-19 (STAT-205).
In the next 12 months, the Company expects to initiate several clinical trials,
including a pivotal Phase 3 trial for its lead drug candidate, STAT-201, in
pediatric Crohn's disease, as well as studies of STAT-205 in 'long haul'
COVID-19, STAT-401 in pancreatic cancer, and the TLR5 agonist entolimod as a
treatment for anemia and neutropenia in cancer patients.
Recent Developments
Default under Loan Agreement
On March 25, 2022, we received a letter (the "Default Letter") from Avenue
Venture Opportunities Fund, L.P. ("Avenue") regarding alleged events of default
with respect to the Loan and Security Agreement, dated as of April 26, 2021,
between the Company and Avenue (the "Avenue Facility"). In the Default Letter,
Avenue alleges that certain events of default under the Avenue Facility have
occurred and continue to exist. Specifically, Avenue alleges that the Company is
in violation of certain provisions of the Avenue Facility as a result of the
Company's failure to:
? timely deliver monthly financial statements for certain periods;
? obtain Avenue's consent to repurchase certain securities from stockholders;
? pay principal and interest when due, including on March 1, 2022; and
? maintain unrestricted cash and cash equivalents in one or more accounts
subject to control agreements in favor of Avenue in amount of at least $5
million.
In the Default Letter, Avenue purported to exercise its rights to suspend
further loans or advances to the Company under the Avenue Facility and to
accelerate the amount due under the Avenue Facility, which it asserts to be
approximately $11.2 million, inclusive of fees of penalties. Avenue further
states in the Default Letter that interest will continue to accrue on the
outstanding amounts at the default rate of 5.0%. In furtherance of the
allegations set forth in the Default Letter, Avenue foreclosed on approximately
$4.8 million of the Company's cash.
Nasdaq Noncompliance
On March 23, 2022, we received written notice from the Listing Qualifications
staff of the Nasdaq Stock Market LLC ("NASDAQ") indicating that because the
minimum bid price of the Company's common stock has closed below $1.00 per share
for the last 30 consecutive business days, the Company no longer meets the
requirements of Listing Rule 5550(a)(2), which requires the Company to maintain
a minimum bid price of $1.00 per share (the "Bid Price Rule"). The NASDAQ
Listing Rules provide the Company with a compliance period of 180 calendar days
in which to regain compliance with the Bid Price Rule. Accordingly, the Company
will regain compliance if at any time during this 180-day period the closing bid
price of the Company's common stock is at least $1.00 for a minimum of ten
consecutive business days.
On March 25, 2022, Randy Saluck and Lea Verny, each a member of the board of
directors of the Company, resigned from their positions as members of board,
effective immediately. At the time of their resignations, Mr. Saluck and Ms.
Verny each served on the audit, nominating and corporate governance and
compensation committees of the Board. As a result of these resignations, the
Company is no longer in compliance with NASDAQ governance rules requiring that
its board of directors be comprised of a majority of independent directors,
requiring that the audit committee of the board of directors be comprised of at
least three independent directors, and requiring that the compensation committee
of the board of directors be comprised of at least two independent directors. In
accordance with NASDAQ's rules, the Company is granted a cure period to regain
compliance with the rules pertaining to the composition of the board, the audit
committee of the board and the compensation committee of the board,
respectively, which cure period will expire upon the earlier of the Company's
next annual stockholders' meeting or March 24, 2023; provided, however, that if
the Company's next annual stockholders' meeting occurs no later than 180 days
following the date of the resignations, then the cure period will expire 180
days following the date of such resignations. The Company intends to appoint new
independent directors to fill the vacancies prior to the expiration of such cure
period in order to regain compliance with such Nasdaq Listing Rules.
On March 28, 2022, Taunia Markvicka resigned from the board of directors. She
continued to serve as the Company's Chief Operating Officer until her
termination in April 2022.
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Underwritten Confidentially Marketed Public Offering
As previously disclosed, on March 24, 2022, the Company closed an underwritten
confidentially marketed public offering (the "CMPO") in accordance with a final
prospectus supplement and accompanying base prospectus relating to the
securities offered in the offering filed with the SEC on March 23, 2022. The
Company sold 12,555,555 units (the "Units"), at a price to the public of $0.45
per Unit for aggregate gross proceeds of approximately $5.7 million, prior to
deducting underwriting discounts, commissions, and other offering expenses. Each
Unit consisted of one share of Common Stock, one warrant with a one-year term
that expires on March 23, 2023 to purchase one share of Common Stock at an
exercise price of $0.45 per share (the "One-Year Warrants"), and one warrant
with a five-year term that expires on March 23, 2027 to purchase one share of
our Common Stock at an exercise price of $0.5625 per share (the "Five-Year
Warrants"). The shares of Common Stock, the One-Year Warrants, and the Five-Year
Warrants were immediately separable and were issued separately. In addition, the
Company granted the underwriters a 45-day option to purchase up to an additional
1,883,333 shares of Common Stock at the public offering price of $0.43 per share
less the underwriting discount per share, solely to cover over-allotments, if
any (the "Overallotment Option"). In connection with the offering, the
underwriters partially exercised the Overallotment Option to purchase an
additional 1,883,333 One-Year Warrants and 1,883,333 Five-Year Warrants at the
public offering price of $0.01 per One-Year Warrant and $0.01 per Five-Year
Warrant, less the underwriting discount per warrant.
The securities were offered and sold by the Company under a
prospectus supplement and accompanying prospectus filed with the SEC pursuant to
an effective shelf registration statement on Form S-3, which was filed with the
SEC on May 21, 2020 and subsequently declared effective on May 29, 2020 (File
No. 333-238578). The net proceeds received by the Company were $4.81 million,
all of which proceeds were foreclosed upon by Avenue in connection with Avenue's
assertion that the Company is in default under its obligations to Avenue.
EF Hutton, a division of Benchmark Investments, LLC ("EF Hutton"), acted as
underwriter and sole book-running manager in connection with the CMPO. In
connection with the CMPO, the Company entered into an underwriting agreement
with EF Hutton under which the Company paid EF Hutton an aggregate cash fee
equal to 9.0% of the aggregate gross proceeds of the CMPO, a non-accountable
expense reimbursement of 1.0% of the aggregate gross proceeds of the CMPO, and
$100,000 for the reimbursement of certain of EF Hutton's accountable expenses.
Registered Direct Offering
As previously disclosed, on February 6, 2022, the Company entered into a
Securities Purchase Agreement (the "EF Hutton Purchase Agreement") with a
certain institutional investor for the sale by the Company of 2,000,000 shares
(the "Registered Direct Shares") of the Company's common stock together with
warrants to purchase an aggregate of 2,000,000 shares of Common Stock (the
"Registered Direct Warrants"), at a combined price of $1.00 per Registered
Direct Share and accompanying warrant, in a registered direct offering. The
closing of the sale of the securities under the Purchase Agreement occurred on
February 9, 2022. The gross proceeds to the Company from the transaction were
approximately $2 million, before deducting the placement agent's fees and other
estimated offering expenses, and excluding proceeds to the Company, if any,
from the future exercise of the Registered Direct Warrants. The Shares were
offered and sold by the Company under a prospectus supplement and accompanying
prospectus filed with the SEC pursuant to an effective shelf registration
statement on Form S-3, which was filed with the SEC on May 21, 2020 and
subsequently declared effective on May 29, 2020 (File No. 333-238578). The net
proceeds received by the Company were $1.67 million.
Each Registered Direct Warrant sold in the offering is exercisable for one share
of Common Stock at an initial exercise price of $1.00 per share (the "Initial
Exercise Price"). The Registered Direct Warrants may be exercised at any time
until February 9, 2027. The Warrants are exercisable for cash, but they may be
exercised on a cashless exercise basis if, at the time of exercise, there is no
effective registration statement registering, or no current prospectus available
for, the issuance or resale of the shares of Common Stock issuable upon exercise
of the Registered Direct Warrants. The exercise of the Registered Direct
Warrants is subject to a beneficial ownership limitation, which will prohibit
the exercise thereof, if upon such exercise the holder of the Registered Direct
Warrants, its affiliates and any other persons or entities acting as a group
together with the holder or any of the holder's affiliates would hold 4.99% (or,
upon election of a purchaser prior to the issuance of any shares, 9.99%) of the
number of shares of the Common Stock outstanding immediately after giving effect
to the issuance of shares of Common Stock issuable upon exercise of the
Registered Direct Warrant held by the applicable holder, provided that the
holders may increase or decrease the beneficial ownership limitation (up to a
maximum of 9.99%) upon 60 days advance notice to the Company, which 60 day
period cannot be waived.
EF Hutton acted as placement agent on a "reasonable best efforts" basis, in
connection with the offering of the Registered Direct Shares and the Registered
Direct Warrants. In connection with such offering, the Company entered into a
Placement Agency Agreement, dated as of February 6, 2022, by and between
the Company and EF Hutton pursuant to which EF Hutton received aggregate cash
fee of 9.0% of the aggregate gross proceeds of the offering, a non-accountable
expense reimbursement of 1.0% of the aggregate gross proceeds in the
offering, and $75,000 for the reimbursement of certain of EF Hutton's
accountable expenses.
Forbearance Agreement
On March 25, 2022, the Company received the Letter from Avenue regarding alleged
events of default with respect to the Loan Agreement. In the Letter, Avenue
alleges that certain events of default under the Loan Agreement have occurred
and continue to exist. Specifically, Avenue alleged that the Company was in
violation of certain provisions of the Loan Agreement as a result of which,
Avenue purported to exercise its rights to suspend further loans or advances to
the Company under the Loan Agreement and to accelerate the amount due under the
Loan Agreement, which it asserts to be approximately $11.2 million, inclusive of
fees of penalties. Avenue further states in the letter that interest will
continue to accrue on the outstanding amounts at the default rate of 5.0%. In
furtherance of the allegations set forth in the Letter, Avenue foreclosed on
approximately $4.8 million of the Company's cash.
In response to the Letter, on April 18, 2022, Avenue and the Company entered
into a Forbearance Agreement regarding the Loan Agreement. Pursuant to the
Forbearance Agreement, the parties agreed that from the effective date of the
Loan Agreement until May 31, 2022 (the "Forbearance Period"), it will refrain
and forbear from exercising certain remedies arising out of the events of
default or any other present or future event of default under the Loan Agreement
or supplement. Under the Forbearance Agreement, Avenue shall not seize, sweep,
or by any means take control of, directly or indirectly, any funds from any of
the Company's bank accounts; and (ii) during the Forbearance Period, the Loans
may be prepaid in whole or in part at any time, subject to the repayment and
prepayment terms of the Loan Agreement. In addition to the terms of the
Forbearance Agreement, certain terms of the Loan Agreement were amended,
including changing the Agreement Effective Date to April 18, 2022, and revisions
to certain definitions of Agreement terminology.
On March 25, 2022, Avenue exercised certain of its remedies under the Loan
Agreement with respect to the events of default, by sweeping cash from Company's
accounts, totaling $4,827,290.22, which Avenue applied to the then-outstanding
Obligations under the Loan Agreement. The principal balance outstanding under
the Loan Agreement, before giving effect to the Forbearance Agreement, is
$5,711,049.14, plus accrued and unpaid interest, fees and expenses.
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COVID-19 Pandemic
The COVID-19 pandemic has continued to affect most countries around the world,
including the United States, where a national emergency was declared in 2020.
The continued spread of COVID-19 in the United States and worldwide, as well as
the government-ordered shutdowns and shelter-in-place orders imposed to counter
the pandemic, led to severe disruptions to the global economy, especially in the
year ended December 31, 2020. In this connection, on March 20, 2020, the
Governor of the State of New York announced that 100% of the workforce of all
businesses, excluding essential services, must stay home. During the
effectiveness of this order, we implemented a work-from-home policy for all
employees based in our then Buffalo, New York headquarters. In the first quarter
of 2022, we gave notice to terminate our Buffalo lease, effective February 28,
2022. Our employees in Buffalo now work-from-home. None of our other offices,
including our new headquarters in Fort Collins, Colorado, had been required to
shut down due to COVID-19, and we generally experienced few effects from the
COVID-19 pandemic during 2021.
Nevertheless, we are continuing to monitor the situation and will take such
further action as may be required by federal, state or local authorities, or
that we determine are in the best interests of our employees. The extent to
which COVID-19 may impact our business, research and development efforts,
preclinical studies, clinical trials, prospects for regulatory approval of our
drug candidates, and operations will depend on future developments, which are
highly uncertain and cannot be predicted with confidence, such as the
effectiveness of vaccination efforts, ultimate geographic spread of the disease,
the duration of the outbreak, the impact of any new variants of the virus, the
extent and duration of travel restrictions and social distancing in the United
States and other countries, business closures or business disruptions and the
effectiveness of actions taken in the United States and other countries to
contain and treat the disease. Furthermore, if we or any of the third parties
with whom we engage were to experience renewed shutdowns or other business
disruptions, our ability to conduct our business in the manner and on the
timelines presently planned could be materially and negatively impacted, which
could have a material adverse effect on our business, financial condition and
results of operations.
Continuing Capital Needs
We are a clinical-stage company and we have generated insignificant revenue from
product sales to date. Our ability to generate revenue sufficient to achieve
profitability will depend heavily on the successful development and eventual
commercialization of one or more of our product candidates. Since inception, we
have incurred significant operating losses. For the years ended December 31,
2021 and 2020, we incurred net losses of $101.9 million and $12.1 million,
respectively. As of December 31, 2021, we had an accumulated deficit of
$129.5 million.
We expect to incur significant expenses and operating losses for the foreseeable
future as we advance our lead candidates through clinical trials, progress our
pipeline candidates from discovery through pre-clinical development, and seek
regulatory approval and pursue commercialization of our candidates. In addition,
if we obtain regulatory approval for any of our candidates, we expect to incur
significant commercialization expenses related to product manufacturing,
marketing, sales, and distribution. In addition, we may incur expenses in
connection with the in-license or acquisition of additional technology to
augment or enable development of future candidates. Furthermore, we expect to
incur additional costs associated with operating as a public company, including
significant legal, accounting, investor relations and other expenses that Old
Cytocom, our predecessor for accounting purposes, did not incur as a private
company prior to the Merger.
As a result, we will need additional financing to support our continuing
operations. Until such time as we can generate significant revenue from product
sales, if ever, we expect to finance our operations through a combination of
public or private equity and debt financings or other sources, which may include
collaborations with third parties. We do not expect that our existing cash and
cash equivalents will enable us to fund our operating expenses and capital
expenditure requirements beyond the second quarter of 2022.
Adequate additional financing may not be available to us on acceptable terms, or
at all. Our inability to raise capital as and when needed could have a negative
impact on our financial condition and our ability to pursue our business
strategy. We will need to generate significant revenue to achieve profitability,
and we may never do so. For these reasons, our financial statements contain
a paragraph in substantial doubt is expressed about our ability to continue as a
going concern within one year of the date of financial statements.
Financial Overview
Our discussion and analysis of our financial condition and results of operations
are based on our financial statements, which have been prepared in accordance
with GAAP. Such financial statements reflect the historical results of Old
Cytocom prior to the completion of the Merger, and do not include the historical
results of the Company prior to the completion of the Merger. All share and per
share disclosures have been adjusted to reflect the exchange of shares in the
Merger. Under GAAP, the Merger is treated as a "reverse merger" under the
purchase method of accounting. For accounting purposes, Old Cytocom is
considered to have acquired Cleveland BioLabs, Inc. See Note 3, Merger with Old
Cytocom to the financial statements included in Item 8 of this Annual Report on
Form 10-K, for further details on the Merger and its U.S. GAAP accounting
treatment.
The preparation of these financial statements requires us to make estimates and
judgments that affect our reported amounts of assets, liabilities, revenues, and
expenses. On an ongoing basis, we evaluate our estimates and judgments,
including those related to accrued expenses, income taxes, stock-based
compensation, investments, and in-process research and development. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
and the reported amounts of
revenues and expenses that are not readily apparent from other sources. Actual
results may differ from these estimates.
Our revenue, operating results, and profitability have varied, and we expect
that they will continue to vary on a quarterly basis, primarily due to the
timing of work completed under new and existing grants, development contracts,
and collaborative relationships. Additionally, we expect that as a result of the
Merger, our business, financial condition, results of operations and cash flows
will be materially different in future periods than in the past. Accordingly,
our past results are not likely to be indicative of our future performance
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Revenue
The Company generates revenue from (i) its Clinical Research Organization
services ("CRO services") provided by its ImQuest subsidiary, and (ii) grant
awards from the National Institutes of Health for multiple studies in research.
We have no products approved for sale. Other than the sources of revenue
described above, we do not expect to receive any revenue from any candidates
that we develop until we obtain regulatory approval and commercializes such
products, or until we potentially enter into collaborative agreements with third
parties for the development and commercialization of such candidates.
At the inception of a contract for CRO services, once the contract is determined
to be within the scope of Accounting Standards Codification ("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.
There is no explicit guidance within ASC 606 to account for grant revenue, and
since the Company is a for-profit entity, it must look to other Financial
Accounting Standards Board guidance in order to account for funds received from
grants. The Company has determined it is appropriate to apply ASC 450 -
Contingencies.
Under ASC 450, the recognition of a gain contingency occurs at the earlier of
when the gain has been realized or the gain is realizable. The gain is realized
when the Company performs the research under the grant and submits the expense
reimbursements to the NIH and is approved under the terms of the grant the funds
are then received. The Company determined ASC 450 is appropriate because the
realization of the gain is contingent on whether the Company meets the
performance requirement. Once the Company performs the research, submits the
financial report for approval, and the cash disbursement occurs, the contingency
is thus resolved, and the recognition of grant revenue is realized.
Research and Development Expenses
Research and development ("R&D") costs are expensed as incurred. Advance
payments are deferred and expensed as performance occurs. R&D costs include the
cost of our personnel (which consists of salaries, benefits and incentive and
stock-based compensation), out-of-pocket pre-clinical and clinical trial costs
usually associated with contract research organizations, drug product
manufacturing and formulation, and a pro-rata share of facilities expense and
other overhead items.
Advertising and Marketing Costs
Advertising costs are expensed as incurred and included in operating expenses on
the statements of operations. The Company incurred advertising and marketing
expense for the years ended December 31, 2021 and 2020 of $79,439 and $2,406,
respectively.
General and Administrative Expenses
General and administrative ("G&A") functions include executive management,
finance and administration, government affairs and regulations, corporate
development, human resources, and legal and compliance. The specific costs
include the cost of our personnel consisting of salaries, incentive and
stock-based compensation, out-of-pocket costs usually associated with attorneys
(both corporate and intellectual property), bankers, accountants, and other
advisors and a pro-rata share of facilities expense and other overhead items.
Other Income and Expenses
Other recurring income and expenses primarily consists of interest income on our
investments, changes in the market value of our derivative financial
instruments, and foreign currency transaction gains or losses.
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Critical Accounting Estimates
The condensed consolidated financial statements include estimates made in
accordance with generally accepted accounting principles that involve a
significant level of estimation uncertainty and have had or are reasonably
likely to have a material impact on the financial condition or results of
operations. These significant accounting estimates include the inputs to level 3
valuation techniques for valuing the identified intangible assets in the ImQuest
acquisition, valuation allowances associated with deferred tax assets, and
revenue recognition in accordance with ASC 606.
Following is a discussion about the critical accounting estimates and
assumptions impacting our consolidated financial statements. For a description
of our significant accounting policies, see Note 2. Of these policies, the
following are considered critical to an understanding of our consolidated
financial statements as they require the application of the most subjective and
the most complex judgments: Acquisitions (Note 3); Fair Value (Note 13);
Revenues (Note 2); Asset Impairments (Note 12); and Tax Assets and Liabilities
and Income Tax Contingencies (Note 18).
Merger
We accounted for the Merger using the purchase method of accounting, which
requires, among other things, that most assets acquired and liabilities assumed
be recognized at their estimated fair value as of the acquisition date. For
further detail on purchase accounting, see Note 3. Intangible assets are often
the most significant fair values within business combinations. For further
information on our process to estimate the fair value of intangible assets, see
Asset Impairments below.
Revenues
Gross product revenues may be subject to a variety of deductions, which
generally are estimated and recorded in the same period that the revenues are
recognized. Such variable consideration may be represented by chargebacks,
rebates, sales allowances and sales returns. These deductions may represent
estimates of the related obligations and, as such, knowledge and judgment would
be required when estimating the impact of these revenue deductions on gross
sales for a reporting period. Historically, adjustments to these estimates to
reflect actual results or updated expectations, have not been material to our
overall business. Until such time as we sell products, product-specific rebates
will have no impact on product revenue growth trends. Accordingly, until that
time, our ratios, factors, assessments, experiences or judgments will be
indicative or accurate estimates of our future experience, and our results will
not be materially affected.
Asset Impairments
We review all of our long-lived assets for impairment indicators throughout the
year. We perform impairment testing for indefinite-lived intangible assets and
goodwill at least annually and for all other long-lived assets whenever
impairment indicators are present. When necessary, we record charges for
impairments of long-lived assets for the amount by which the fair value is less
than the carrying value of these assets. Our impairment review processes are
described in Note 12. Examples of events or circumstances that may be indicative
of impairment include:
? A significant adverse change in legal factors or in the business climate that
could affect the value of the asset. For example, a successful challenge of
our patent rights would likely result in generic competition earlier than
expected.
? A significant adverse change in the extent or manner in which an asset is used
such as a restriction imposed by the FDA or other regulatory authorities that
could affect our ability to manufacture or sell a product.
? An expectation of losses or reduced profits associated with an asset. This
could result, for example, from the introduction of a competitor's product
that impacts projected revenue growth, as well as the lack of acceptance of a
product by patients, physicians and payers. For In-Process R&D ("IPR&D")
projects, this could result from, among other things, a change in outlook
based on clinical trial data, a delay in the projected launch date or
additional expenditures to commercialize a product.
Identifiable Intangible Assets
We use an income approach, specifically the discounted cash flow method to
determine the fair value of intangible assets, other than goodwill. We start
with a forecast of all the expected net cash flows associated with the asset,
which incorporates the consideration of a terminal value for indefinite-lived
assets, and then we apply an asset-specific discount rate to arrive at a net
present value amount. Some of the more significant estimates and assumptions
that impact our fair value estimates include: the amount and timing of the
projected net cash flows, which includes the expected impact of competitive,
legal and/or regulatory forces on the projections and the impact of
technological advancements and risk associated with IPR&D assets, as well as the
selection of a long-term growth rate; the discount rate, which seeks to reflect
the various risks inherent in the projected cash flows; and the tax rate, which
seeks to incorporate the geographic origin of the projected cash flows. While
all intangible assets other than goodwill can face events and circumstances that
can lead to impairment, those that are most at risk of impairment include IPR&D
assets and newly acquired or recently impaired indefinite-lived brand assets.
IPR&D assets are high-risk assets, given the uncertain nature of R&D. Newly
acquired and recently impaired indefinite-lived assets are more vulnerable to
impairment as the assets are recorded at fair value and are then subsequently
measured at the lower of fair value or carrying value at the end of each
reporting period. As such, immediately after acquisition or impairment, even
small declines in the outlook for these assets can negatively impact our ability
to recover the carrying value and can result in an impairment charge.
Goodwill
Our goodwill impairment review work as of December 31, 2021 concluded that none
of our goodwill was impaired and we do not believe the risk of impairment is
significant at this time. In our review, we first assess qualitative factors to
determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. Qualitative factors that we consider
include, for example, macroeconomic and industry conditions, overall financial
performance and other relevant entity-specific events. If we conclude that it is
more likely than not that the fair value of a reporting unit is less than its
carrying value, we then perform a quantitative fair value test. When we are
required to determine the fair value of a reporting unit, we typically use the
income approach. The income approach is a forward-looking approach to estimating
fair value and relies primarily on internal forecasts. Within the income
approach, we use the discounted cash flow method. We start with a forecast of
all the expected net cash flows for the reporting unit, which includes the
application of a terminal value, and then we apply a reporting unit-specific
discount rate to arrive at a net present value amount. Some of the more
significant estimates and assumptions inherent in this approach include: the
amount and timing of the projected net cash flows, which includes the expected
impact of technological risk and competitive, legal and/or regulatory forces on
the projections, as well as the selection of a long-term growth rate; the
discount rate, which seeks to reflect the various risks inherent in the
projected cash flows; and the tax rate, which seeks to incorporate the
geographic diversity of the projected cash flows. There are a number of future
events and factors that may impact future results and that could potentially
have an impact on the outcome of subsequent goodwill impairment testing. For a
list of these factors, see the sections of this Annual Report on Form 10-K
titled "Forward-Looking Statements" and "Item 1A. Risk Factors."
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YEAR ENDED DECEMBER 31, 2021 COMPARED TO YEAR ENDED DECEMBER 31, 2020
Revenue
Revenue increased from $0 for the year ended December 31, 2020 to $1,487,036 for
the year ended December 31, 2021. This increase is due entirely to the revenues
recorded after July 1, 2021 from sales of CRO services by ImQuest BioSciences.
There were no CRO services revenues in 2020, as the ImQuest Merger only took
place in June 2021. No revenues were generated from awards from the National
Institutes of Health for multiple studies in research in the years ended
December 31, 2021 or 2020.
Cost of Revenues
Cost of revenue increased from $0 for the year ended December 31, 2020 to
$488,314 for the year ended December 31, 2021. This increase is due entirely to
the cost of revenues recorded after July 1, 2021 from sales to CROs by ImQuest
BioSciences. There was no cost of revenue in the corresponding period of 2020,
as the ImQuest Merger only took place in June 2021.
Research and Development Expenses
R&D expenses increased from $5.26 million for the year ended December 31, 2020
to $11.83 million for the year ended December 31, 2021, representing an increase
of $6.57 million, or 124.7%. Variances are noted in the table below. The net
increase is primarily attributable to (i) an increase in payroll and benefits
costs
as we began scaling up our development efforts, which rose from $593,738 for the
year ended December 31, 2020 to $3,317,783 for the year ended December 31, 2021,
and (ii) the cost of contractors hired for clinical trials, which rose from
$470,881 to $6,378,080 for the years ended December 31, 2020 and 2021,
respectively, offset by a decrease of patent expenses related primarily to the
transfer of intellectual property to the Company by Immune Therapeutics, Inc.,
which fell from $3,948,533 for the year ended December 31, 2020 to $1,306,307
for the year ended December 31, 2021. The increase in payroll costs was
attributable to (i) an increase in R&D-related headcount, which grew from five
employees at December 31, 2020 to 12 at December 31, 2021, and (ii) the cost of
$704,234 for stock-based compensation incurred for the year ended December 31,
2021 (compared to $155,115 for the corresponding period in 2020).
We anticipate working to reduce our payroll and benefits costs in fiscal 2022.
Year ended December 31,
2021 2020 Variance
STAT-201: Crohn's disease $ 5,138,663 $ 216,989 $ 4,921,674
STAT-205: Acute and post-acute Covid-19 3,684,195 858,679 2,825,516
STAT-401: Pancreatic cancer
1,371,070 4,560 1,366,510
STAT-601: Entolimod for acute radiation 127,861 - 127,861
Other expenses 1,508,443 4,183,601 (2,675,158 )
Total research & development expenses $ 11,830,232 $ 5,263,829 $ 6,566,403
General and Administrative Expenses
G&A expenses increased from $5.76 million for the year ended December 31,
2020 to $19.83 million for the year ended December 31, 2021, representing an
increase of $13.88 million or 244%. Variances are noted in the table and
discussed below.
Year ended December 31,
2021 2020 Variance
Payroll (including benefits) $ 11,946,750 $ 4,112,826 $ 7,833,924
Stock listing and investor relations expenses 1,425,122 118,501 1,306,621
Professional fees 2,643,879 841,895 1,801,984
Consultants and contractors 1,862,943 594,274 1,268,669
Insurance 640,378 14,526 625,852
Travel 131,406 51,527 79,879
Other G&A expenses 1,181,515 27,884 1,153,631
Total general & administrative expenses $ 19,831,993 $ 5,761,433 $ 14,070,560
Payroll (including benefits) incudes salaries, health benefits, the cost of
stock-based compensation and related payroll costs. The increase in payroll
expense was primarily attributable to the increase in the number of employees
whose costs are accounted for as G&A expense, plus the cost of
$6,245,271 for stock-based compensation incurred in the year ended December 31,
2021 ($1,528,613 in 2020). Employee headcount for G&A purposes at December 31,
2020 and 2021 was 16 and 23, respectively. Growth in headcount for G&A purposes
between 2020 and 2021 reflects (i) the addition of four G&A employees in 2021 as
result of the Merger and the ImQuest Merger, and (ii) the addition of 3 other
G&A employees, several of whom were hired in senior executive roles to complete
the Company's leadership team plus the addition of staff in finance, human
resources, information technology and investor relations, offset by the transfer
of two employees to R&D. We anticipate working to reduce our payroll and
benefits costs in fiscal 2022.
Stock listing and investor relations expenses are made up of fees paid to
maintain the listing the Company's stock on The NASDAQ Stock Market ($199,118
and $3,905 for the years ended December 31, 2021 and 2020, respectively), the
costs of an investor relations program using outside consultants and databases
($431,430 and $99,546 for the years ended December 31, 2021 and 2020,
respectively), costs incurred with advisors to raise new debt and equity
required by the Company ($759,753 and $0 for the years ended December 31, 2021
and 2020, respectively), and the costs charged by stock transfer agents to
maintain the Company's share registers ($34,821 and $15,050 for the years ended
December 31, 2021 and 2020, respectively).
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Professional fees comprise fees paid for services to lawyers (other than lawyers
who are engaged for services related to R&D), accountants, and the Company's
firm of auditors. Fees paid to lawyers in the years ended December 31, 2021 and
2020 totaled $2,175,492 and $727,881, respectively. The increase in fees 2021
arose primarily from costs to close the Merger and the ImQuest Merger, and legal
fees incurred in 2021 to defend lawsuits related to the Merger.
Fees paid to accountants in the years ended December 31, 2021 and 2020 totaled
$225,784 and $63,500, respectively. The increase in fees 2021 arose primarily
from the use of outside accounting consultants to assist with the compilation of
reports and filings required under securities laws to complete the Merger and
the ImQuest Merger, and to prepare the Company's income tax filings in 2021.
Fees paid to the audit firms engaged by the Company in the years ended December
31, 2021 and 2020 totaled $235,853 and $25,800, respectively. The audit
services were required filings required under securities laws to complete the
Merger and ImQuest Merger. Audit services only commenced in the fourth quarter
of 2020.
Consultants and contractors are individuals and firms hired by the Company to
provide certain investment banking and advisory services, to assist the Company
with the implementation of a new enterprise resource planning (ERP) system, to
provide valuation reports required to complete the accounting for the Merger and
to assist with other general matters. Fees paid to consultants and contractors
in the years ended December 31, 2021 and 2020 totaled $1,862,943 and $594,274,
respectively. The increase was attributable primarily to services required to
complete the Merger in 2021.
Insurance expenses comprise fees and premiums paid to insurance companies from
which the Company purchased policies to protect against loss or damage to its
assets and intellectual property, to protect itself against claims for damage
caused to third parties by its clinical trials or products used in trials or
sold to customers, coverage for workers' compensation payable for injuries
suffered by its employees, and losses incurred by its directors and officers in
certain circumstances in the performance of their duties. Insurance premiums
and costs in the years ended December 31, 2021 and 2020 totaled $640,378 and
$14,526, respectively. The increase was attributable primarily to additional
insurance added in 2021 to protect the Company against claims for damage caused
to third parties by its clinical trials or products used in trials or sold to
customers, and losses incurred by its directors and officers in certain
circumstances in the performance of their duties.
Travel. The Company maintains offices in a number of locations in the United
States. As a result of the Merger, new offices were added in 2021 in Colorado,
California, Maryland and New York, requiring an increase in travel between
locations. Travel expenses increased accordingly between the years ended
December 31, 2020 and 2021 from $51,527 to $131,406, respectively.
Other G&A expenses comprise costs to operate and lease office space, non-capital
expenditures incurred for office furniture and equipment, telecommunication and
internet expenses, postage and courier costs, and bank charges. Other G&A
expenses increased year over year primarily as a result of the addition of new
office locations and employees in 2021 in Colorado, California, Maryland and New
York.
Impairment Loss
Impairment Loss expenses increased from $0 million for the year ended December
31, 2020 to $67.6 million for the year ended December 31, 2021, representing an
increase of $67.6 million
Other Income and Expenses
Other expense of ($3,531,363) in the year ended December 31, 2021 was made up
of interest and other expense of ($4,560,147), offset by a gain on
extinguishment of debt of $1,028,784. Interest and other expense in 2021
comprised interest expense ($1,286,885), the cost of stock issued for services
($1,294,986), and accruals for legal settlements arising out of the Merger
($2,127,835), offset by miscellaneous income of $149,650. The gain on
extinguishment of debt resulted from an agreement by a lender to accept stock in
the Company in lieu of payment of interest that had been accrued.
Other expense of ($1,592,193) in the year ended December 31, 2020 was made up of
interest expense ($130,693), loan origination fees ($1,000,000), and a loss on
settlement of debt of $(461,500).
The year-over-year increase in interest expense was caused by a $15 million
increase in notes payable in April 2021 and interest expense on a note payable
acquired through the ImQuest merger.
Liquidity and Capital Resources
At December 31, 2021, we had cash and cash equivalents, including restricted
cash, of $6.84 million, which represents an increase of $6.3 million over the
prior year end. This increase was caused primarily by the capital we raised in
2021 from sales of stock ($7.3 million), the issuance of debt ($14.7 million)
and cash acquired from the Merger and the ImQuest Merger ($13.6 million), offset
in part by cash used in operations ($28.2 million). As discussed above, we are
a clinical-stage company, we have generated only insignificant revenues to date,
we have incurred cumulative net losses and we expect to incur significant
expenses and operating losses for the foreseeable future as we advance our lead
candidates through clinical trials, progress our pipeline candidates from
discovery through pre-clinical development, and seek regulatory approval and
pursue commercialization of our candidates. We do not have commercial products
other than CRO services, we have limited capital resources, and our contracts
and grants with the Department of Defense were completed in 2020, meaning that
we are currently generating limited revenues and cash from operations. We do
not expect our cash and cash equivalents will be sufficient to fund our
projected operating requirements or allow us to fund our operating plan, in each
case, beyond the second quarter of 2022. We will need to raise between $2
million and $4 million in order to satisfy our working capital and debt service
needs in the next several months. If we are not able to raise these funds we may
be unable to meet our payroll costs. Historically, we have funded our operations
through the sale of equity and debt securities, as well as the receipt of funded
grants. Until such time as we can generate significant revenue from product
sales, if ever, we expect to finance our operations through a combination of
public or private equity and debt financings or other sources, which may include
collaborations with third parties, the sale or license of drug candidates, the
sale of certain of our tangible and/or intangible assets, the sale of interests
in our subsidiaries or joint ventures, obtaining additional government research
funding, or entering into other strategic transactions. However, we can provide
no assurance that we will be able to raise cash in sufficient amounts, when
needed or at acceptable terms.
If we are unable to raise adequate capital and/or achieve profitable operations,
future operations might need to be scaled back or discontinued. The matters
discussed above raise substantial doubt as to our ability to continue as a going
concern within one year after the date that these consolidated financial
statements are issued. The financial statements included elsewhere in this
Annual Report on Form 10-K do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets and liabilities that
might result from the outcome of these uncertainties.
Since the end of the fiscal year, as previously disclosed, in February 2022 and
March 2022 we sold securities in a registered direct offering and a
confidentially marketed public offering to institutional investors, resulting in
net proceeds to us of $6.45 million. We are also party to an equity
line-of-credit arrangement with GEM Global Yield LLC SCS under which we have a
limited ability to sell additional shares of our common stock for cash (see " -
Sources of Liquidity").
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Cash Flows
The following table provides information regarding our cash flows for the years
ended December 31, 2021 and 2020:
For the Year ended December 31,
2021 2020 Variance
Cash flows used in operating activities $ (28,193,283 ) $ (5,082,144 ) $ (23,111,139 )
Cash flows provided by (used in) investing
activities
13,462,989 (9,637 ) 13,472,626
Cash flows provided by financing activities 20,987,808 5,684,000 15,303,808
Increase in cash and cash equivalents
6,250,863 592,219 5,658,644
Cash and cash equivalents at beginning of
period 593,869 1,650 592,219
Cash, restricted cash and cash equivalents
at end of period $ 6,844,732 $ 593,869 $ 6,250,863
Operating Activities
Net cash used in operating activities increased by $23.1 million to
$28.2 million for the year ended December 31, 2021 from $5.1 million for the
year ended December 31, 2020. Net cash used in operating activities for the year
ending December 31, 2021 consisted of a reported net loss of $101.9 million,
which was further increased by $1.1 million of changes in operating assets and
liabilities, partially decreased by $72.6 million of net non-cash operating
activities. The $1.1 million of changes in operating assets and liabilities was
due primarily to decreases in Accounts receivable, Short term investments,
Prepaid expenses, Contract asset, Contract liability and Liabilities of
discontinued operations, offset by increases in Other current assets, Due from
subsidiary, Deferred revenue, Stock issuances due, and Investment in subsidiary.
Net cash used in operating activities for the year ended December 31, 2020 of
$5.1 million consisted of a reported net loss of $12.1 million, which was offset
by $7.1 million of net non-cash operating activities and $0.14 million
of changes in operating assets and liabilities. The $0.4 million of changes in
operating assets and liabilities was due primarily to a decrease in other
current assets.
Investing Activities
Net cash provided by investing activities increased to $13.5 million for the
year ended December 31, 2021 from $(0.01) million for the year ended December
31, 2020, reflecting the $13.6 million acquisition of net assets primarily
through the Merger and the ImQuest Merger, offset by the purchase of $0.1
million of property and equipment.
Financing Activities
Net cash provided by financing activities increased to $21.0 million for the
year ended December 31, 2021 from $5.7 million for the year ended December 31,
2020 due to the issuance of $14.7 million of long-term notes payable and
$7.3 million from the issuance of common and preferred stock, offset by note
repayments and payment of deferred debt issuance costs totaling $1.2 million
during the year ended December 31, 2021.
Impact of Exchange Rate Fluctuations
Our reported financial results are affected by changes in foreign currency
exchange rates between the U.S. dollar and the Russian ruble. Between the
closing date of the Merger on July 27, 2021 and December 31, 2021, this rate
fluctuated by 0.26%. For calendar year 2020, our results were not affected by
any such fluctuations. Translation gains or losses result primarily from the
impact of exchange rate fluctuations on the reported U.S. dollar equivalent of
ruble-denominated cash and cash equivalents, and short-term investments.
Variances in the exchange rate for these items have not been realized; as such
the resulting gains or losses (a loss of $0.01 million for the year ended
December 31, 2021) are recorded as other comprehensive income or loss in the
equity section of the balance sheet.
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Sources of Liquidity
Avenue Facility
At the effective time of the Merger, the Company became party to the Avenue
Facility.
Under the terms of the Avenue Facility, Avenue agreed to make a term loan to Old
Cytocom in the aggregate principal amount of $15,000,000. The loan bears
interest at a variable rate of interest equal to the sum of (i) the greater
of (A) the Prime Rate and (B) 3.25% plus (ii) 7.74%. Repayment of the loan owed
under the Avenue Facility is secured by a security interest in substantially all
of Old Cytocom's assets, including equipment, fixtures, inventory, deposit
accounts and personal property, as well as the securities it holds in its wholly
owned subsidiaries.
The $15 million aggregate loan amount was deposited by Avenue into a controlled
account in May 2021. Old Cytocom transferred $10 million into its general
operating account, which was assigned to the Company at the time of the closing
of the Merger, and accordingly, the Company's assets are subject to a security
interest in favor of Avenue. According to the terms of the Avenue Facility, the
Company had the right to transfer the $5 million in the controlled account into
its general operating account upon the Company raising at least $20 million in
additional capital in the form of subordinated indebtedness or equity from a
follow-on transaction entered into after the Merger. As of December 31, 2021,
the Company had used all $10.0 million of the Avenue Facility. As the Company
had not succeeded in raising the $20 million in additional capital in the form
of subordinated indebtedness or equity from a follow-on transaction as of
January 31, 2022, Avenue withdrew the $5 million in the controlled account as a
partial repayment of the Avenue Facility. The Company is required to make only
monthly interest payments, calculated as described above, until April 2022.
Thereafter, the Company will be required to make monthly payments of principal
in equal installments until the maturity date of May 1, 2024.
The Avenue Facility documents contain customary representations and warranties
of Old Cytocom, as well as various affirmative and negative covenants. Among
such covenants are requirements that the Company:
? provide notice of certain events;
? deliver monthly financial statements to Avenue, until the Company has a
market capitalization of at least $250 million and maintains at least a
minimum of $4 million in unrestricted cash, after which it will only need to
provide quarterly statements;
? execute regular compliance certificates;
? provide copies of all board of directors materials and minutes of meetings to
Avenue;
? maintain its existence and comply with all applicable laws;
? may not become indebted for borrowed money, the deferred purchase price for
property or enter into any leases that would be capitalized in accordance
with GAAP, subject to certain exceptions, including indebtedness for the
acquisition of supplies, subordinated indebtedness and certain other items;
? maintain a minimum of $5 million in unrestricted cash and cash equivalents in
accounts subject to control agreements with Avenue;
? may not create, incur or assume any liens on its property;
? may not undergo any fundamental or change-in-control transactions or sell all
its assets;
? may not make any loans or investments, subject to certain exceptions;
? may not enter into any transactions with related parties;
? may not prepay any other indebtedness; or
? may not create, acquire or sell any subsidiaries.
The Avenue Facility documents also grant certain additional rights to Avenue.
Under the Avenue Facility, Avenue has a preemptive right to purchase up to $1
million of Company equity securities on the same terms, conditions and prices
offered by the Company to any investor in connection with any equity or debt
financing until October 16, 2022. Additionally, Avenue has the right to convert
up to $3 million of outstanding principal into shares of Company common stock.
The number of shares issuable upon conversion will be determined by dividing the
amount of indebtedness being converted by 120% of the 5-day volume weighted
average price (VWAP) of Company common stock prior to the date of the issuance
of the Avenue Warrant.
As of December 31, 2021, there was $17,295,116 in outstanding principal and
interest under the Avenue Facility, and no unused further borrowing capacity. We
paid an aggregate of $1,144,792 in interest to Avenue during the fiscal year
ended December 31, 2021.
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As discussed above under " - Recent Developments," on March 25, 2022, we
received the Default Letter from Avenue regarding alleged events of default with
respect to the Avenue Facility. In the Default Letter, Avenue alleges that
certain events of default under the Avenue Facility have occurred and continue
to exist. Specifically, Avenue alleges that the Company is in violation of
certain provisions of the Avenue Facility as a result of the Company's failure
to:
? timely deliver monthly financial statements for certain periods;
? obtain Avenue's consent to repurchase certain securities from stockholders;
? pay principal and interest when due, including on March 1, 2022; and
? maintain unrestricted cash and cash equivalents in one or more accounts
subject to control agreements in favor of Avenue in amount of at least $5
million.
In the Default Letter, Avenue purported to exercise its rights to suspend
further loans or advances to the Company under the Avenue Facility and to
declare accelerate the amount due under the Avenue Facility, which it asserts to
be approximately $11.2 million, inclusive of fees of penalties. Avenue further
states in the Default Letter that interest will continue to accrue on the
outstanding amounts at the default rate of 5.0%. In furtherance of the
allegations set forth in the Default Letter, Avenue foreclosed on approximately
$4.8 million of the Company's cash.
As mentioned above, the Company entered into a Forbearance Agreement on April
18, 2022 regarding the Avenue Facility with Avenue. Pursuant to the Forbearance
Agreement, the parties agreed that they will refrain and forbear from exercising
certain remedies arising out of the events of default or any other present or
future event of default under the Loan Agreement or supplement during the
Forbearance Period. Additionally, the parties agreed that Avenue shall not
seize, sweep, or by any means take control of, directly or indirectly, any funds
from any of the Company's bank accounts; and (ii) during the Forbearance Period,
the Loans may be prepaid in whole or in part at any time, subject to the
repayment and prepayment terms of the Loan Agreement. In addition to the terms
of the Forbearance Agreement, certain terms of the Loan Agreement were amended,
including changing the Agreement Effective Date to April 18, 2022, and revisions
to certain definitions of Agreement terminology.
GEM Agreement
At the effective time of the Merger, the Company also became party to that
certain Amended and Restated Share Purchase Agreement, dated as of July 27,
2021, by and among GEM Global Yield LLC SCS, GEM Yield Bahamas Limited (such
entities together, "GEM") and the Company, as successor to Old Cytocom (the "GEM
Agreement").
Under the GEM Agreement, the Company may elect to issue and sell to GEM up to
$75 million of its common stock (up to a maximum of approximately 2.98 million
shares if the Company does not obtain the approval of its stockholders for the
issuance of additional shares). Upon the election of the Company to make such a
sale, it will deliver a draw-down notice to GEM, and, if all applicable
conditions are satisfied, GEM will purchase newly issued shares for the amount
specified in the draw-down notice. The purchase price of the shares to be sold
is set at 90% of the recent average daily closing price of the Company's common
stock on the Nasdaq Capital Market or other market on which the stock may be
listed. The Company is not permitted to make a draw-down request in an amount
that exceeds 400% of the average daily trading volume of the Company's stock for
the 30 trading days preceding the draw-down date. Each draw down is subject to
certain closing conditions, including (i) the continued accuracy of
the representations and warranties made in the GEM Agreement, (ii) a
registration statement registering the resale of the shares sold under the GEM
Agreement having been declared effective by the SEC, (ii) the absence of any
law, order, ruling or injunction prohibiting the consummation of the
transactions contemplated by the GEM Agreement, (iii) the Company's common stock
not being suspended from trading by the Nasdaq Capital Market or other market on
which the shares are then listed, (iv) the absence of any litigation commenced,
or governmental investigation commenced or threated, against the Company in
connection with the GEM Agreement transactions and (v) with respect to the first
draw down only, the delivery by the Company's counsel of a negative assurance
letter and delivery by the Company's independent auditors of a comfort letter.
However, the Company will be permitted to make a draw-down request for the sale
of up to $15 million of shares in the period immediately following the effective
time of the Merger without having to have an effective resale registration
statement in effect. The resale of the shares sold pursuant to this initial
drawdown request will not be required to be registered immediately. Upon the
Company's issuance of shares in connection with any draw-down purchase made by
GEM, the Company will be required to pay GEM, in cash or additional shares of
stock, a commitment fee in an amount equal to 2% of the amount purchased in such
drawdown.
The GEM Agreement terminates on the earliest to occur of (i) three years from
the effective time of the Merger, (ii) May 21, 2026 or (iii) the date on which
GEM has purchased $75 million in the aggregate of Company stock. Upon payment of
$1.5 million to GEM, the Company may terminate the GEM Agreement following the
settlement in full of the issuance of the shares made for the first $15 million
draw-down purchase.
The GEM Agreement contains customary representations and warranties of the
Company, as well as various affirmative and negative covenants. Among such
covenants are requirements that the Company:
? comply with applicable laws, including the securities laws;
? file a registration statement with the SEC to register the resale of the
shares sold under the GEM Agreement and undertake best efforts to maintain
the effectiveness of the registration statement;
? keep reserved an adequate number of shares for issuance under the GEM
Agreement; and
? not enter into any other agreement that would restrict or impair the
Company's ability to perform under the GEM Agreement, including any other
equity line arrangement.
On November 1, 2021, in accordance with the GEM Agreement the Company sold and
issued to GEM 1.84 million shares of its common stock at a price of $2.04 per
share, for which it received payment of $3,750,000. As of December 31, 2021,
1.15 million shares remained available for sale under the GEM Agreement.
Material Cash Requirements
The Company's material cash requirements include the following contractual
obligations:
As of December 31, 2021, the Company had $15.2 million of debt outstanding. This
balance is composed of a $15.0 million note payable to Avenue Venture of which
$4.4 million is short-term and $10.6 is long-term note payable and $0.2 million
is another short-term note payable. See Note 7, "Note Payable" & Note 8, "Note
Payable, net of current portion" to the Consolidated Financial Statements for
additional information. Avenue has since declared us in default under the Avenue
Facility and purported to accelerate the balance due under the facility.
As of December 31, 2021, the Company had $1.5 million of future lease
commitments. See Note 9 "Leases" to the Consolidated Financial Statements for
additional detail on future lease commitments.
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