This management's discussion and analysis of financial condition and results of
operations and other portions of this quarterly report on Form 10-Q contain
forward-looking statements that involve risks and uncertainties. All statements
other than statements of current or historical fact contained in this quarterly
report, including statements regarding our future financial position, business
strategy, new products, budgets, liquidity, cash flows, projected costs,
regulatory approvals, or the impact of any laws or regulations applicable to us
and plans and objectives of management for future operations are forward-looking
statements. The words "anticipate," "believe," "continue," "should," "estimate,"
"expect," "intend," "may," "plan," "project," "will," and similar expressions,
as they relate to us, are intended to identify forward-looking statements. We
have based these forward-looking statements on our current expectations about
future events. While we believe these expectations are reasonable, such
forward-looking statements are inherently subject to risks and uncertainties,
many of which are beyond our control. Our actual future results may differ
materially from those discussed here for various reasons. We discuss many of
these risks in Item 1A under the heading "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2021. Factors that may cause such
differences include, but are not limited to, the substantial doubt expressed
about our ability to continue as a going concern, the outcome of any legal
proceedings that have been or may be instituted against the Company related to
the merger agreement or the Merger; unexpected costs, charges or expenses
resulting from the Merger; our need for additional financing to meet our
business objectives; our history of operating losses; our ability to
successfully develop, obtain regulatory approval for, and commercialize our
products in a timely manner; our plans to research, develop and commercialize
our product candidates; our ability to attract collaborators with development,
regulatory and commercialization expertise; our plans and expectations with
respect to future clinical trials and commercial scale-up activities; our
reliance on third-party manufacturers of our product candidates; the size and
growth potential of the markets for our product candidates, and our ability to
serve those markets; the rate and degree of market acceptance of our product
candidates; regulatory requirements and developments in the United States, the
European Union and foreign countries; the performance of our third-party
suppliers and manufacturers; the success of competing therapies that are or may
become available; our ability to attract and retain key scientific or management
personnel; our historical reliance on government funding for a significant
portion of our operating costs and expenses; government contracting processes
and requirements; the exercise of significant influence over our company by our
largest individual stockholder; the impact of the novel coronavirus ("COVID-19")
pandemic on our business, operations and clinical development; the geopolitical
relationship between the United States and the Russian Federation as well as
general business, legal, financial and other conditions within the Russian
Federation; our ability to obtain and maintain intellectual property protection
for our product candidates; our potential vulnerability to cybersecurity
breaches; and other factors discussed below and in our other SEC filings,
including our Annual Report on Form 10-K for the year ended December 31, 2021.
Given these uncertainties, you should not place undue reliance on these
forward-looking statements. The forward-looking statements included in this
quarterly report are made only as of the date hereof. We do not undertake any
obligation to update any such statements or to publicly announce the results of
any revisions to any of such statements to reflect future events or
developments. This management's discussion and analysis of financial condition
and results of operations should be read in conjunction with our financial
statements and the related notes included elsewhere in this filing and with our
historical consolidated financial statements and the related notes thereto in
our Annual Report on Form 10-K for the year ended December 31, 2021.
OVERVIEW
We are a clinical-stage biopharmaceutical company developing multiple product
candidates to address unmet medical needs. Prior to the closing of the Merger,
we focused exclusively on developing novel approaches to activate the immune
system. Our proprietary platform of Toll-like immune receptor activators has
applications in mitigation of radiation injury and radiation oncology. We
combine our proven scientific expertise and our depth of knowledge about our
products' mechanisms of action into a passion for developing drugs to save
lives. 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.
Following the closing of the Merger, as a result of the integration of Cytocom's
business, we are also now developing novel immunotherapies targeting autoimmune,
inflammatory, infectious diseases and cancers based on a proprietary, multi
receptor platform, or the AIMS platform, designed to rebalance 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 published immunotherapy approaches. Our immunomodulatory technology
restores 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, toxins through the
activation of B-cells and antibody production to effect to dendritic cells,
which are natural activators of killer T cells, also known as cytotoxic T
-cells, or CD8+ T cells. Furthermore, the Cytocom technology antagonizes the
toll-like receptors to inhibit proinflammatory cytokines.
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 Biosciences, Inc ("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 (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.
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Table of Contents
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.
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.
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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.
On June 13, 2022, the board of directors of the Company approved the engagement
of BF Borgers CPA, PC ("BF Borgers") as the Company's independent registered
public accounting firm effective as of June 13, 2022. During the Company's two
most recent fiscal years ended December 31, 2020 and 2021 and from January 1,
2022 through June 13, 2022, neither the Company nor anyone on its
behalf consulted BF Borgers regarding either (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's consolidated financial
statements, and no written report or oral advice was provided to the Company
that BF Borgers concluded was an important factor considered by the Company in
reaching a decision as to the accounting, auditing or financial reporting issue?
or (ii) any matter that was the subject of a disagreement or reportable event as
defined in Regulation S-K, Item 304(a)(1)(iv) and Item 304(a)(1)(v).
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. We generally
experienced few effects from the COVID-19 pandemic during 2021 and 2022.
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.
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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 three months ended March 31,
2022 and 2021, we incurred net losses of $7.8 million and $5.3 million,
respectively. As of March 31, 2022, we had an accumulated deficit of
$137.2 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.
Business After the Merger
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 three months ended March 31,
2022 and 2021, we incurred net losses of $7.8 million and $5.3 million,
respectively. As of March 31, 2022, we had an accumulated deficit of
$137.2 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.
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. 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.
23
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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 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 three months ended March 31, 2022 and 2021 of $37,036 and
$2,796, 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.
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.
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Table of Contents
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Revenue
Revenue increased from $0 for the three months ended March 31, 2021 to $1.0
million for the three months ended March 31, 2022. This increase is due entirely
to the revenues from sales of CRO services by ImQuest BioSciences. There were no
CRO services revenues in the corresponding period of 2021, as the merger with
ImQuest took place in June 2021.
Cost of Revenues
Cost of revenue increased from $0 for the three months ended March 31, 2021 to
$0.35 million for the three months ended March 31, 2022. This increase is due
entirely to the cost of revenues recorded from sales to CROs by ImQuest
BioSciences. There were no cost of revenues in the corresponding period of
2021, as the ImQuest Merger took place in June 2021.
Research and Development Expenses
R&D expenses increased from $1.0 million for the three months ended March 31,
2021 to $3.2 million for the three months ended March 31, 2022, representing an
increase of $2.2 million, or 217.6%. Variances are noted in the table below. The
net increase is primarily attributable to increased spending on specific R&D
programs for the three months ended March 31, 2022 of $1.3 million, compared to
$0.3 million for the three months ended March 31, 2021 as well as increased
other expenses for the three months ended March 31, 2022 of $1.9 million,
compared to $0.7 million for the three months ended March 31, 2021 primarily due
to increases in R&D employees.
Three Months Ended March 31,
2022 2021 Variance
STAT-201: Crohn's disease $ 639,060 $ 58,624 $ 580,436
STAT-205: Acute and post-acute Covid-19 396,833 191,882 204,951
STAT-401: Pancreatic cancer 134,932 - 134,932
STAT-601: Entolimod for acute radiation 109,013 - 109,013
Other expenses 1,895,930 773,838 1,122,092
Total research & development expenses $ 3,242,328 $ 1,024,344 $ 2,151,424
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General and Administrative Expenses
G&A expenses decreased from $4.2 million for the three months ended March 31,
2021 to $4.0 million for the three months ended March 31, 2022, representing
a decrease of $0.2 million or 4.8%. Variances are noted in the table and
discussed below.
Three Months Ended March 31,
2022 2021 Variance
Payroll (including benefits) $ 2,246,573 $ 2,635,189 $ (388,616 )
Stock listing expenses 218,136 91,576 126,560
Professional fees 543,867 718,925 (175,059 )
Consultants and contractors 294,832 471,289 (176,457 )
Insurance 220,199 117,238 102,961
Travel 36,232 16,264 19,968
Other G&A expenses 418,510 116,408 302,102
Total general & administrative expenses $ 3,978,349 $ 4,166,889 $ (188,540 )
Payroll (including benefits) incudes salaries, health benefits and related
payroll costs. The decrease in payroll expense was primarily attributable to a
reduction of costs of $1.4 million for stock-based compensation incurred in the
first quarter of 2022 over the comparative cost in the same period in 2021,
partially offset by the increase in costs related to the increased employee
headcount. Growth in headcount for G&A purposes between 2021 and 2022 reflects
(i) the addition of four employees in 2021 as result of the Merger and the
ImQuest Merger, and (ii) the addition of seven new employees in total, 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.
Stock listing expenses are made up of fees paid to maintain the listing of the
Company's common stock on The NASDAQ, the costs of an investor relations program
using outside consultants and databases, costs incurred with advisors to raise
new debt and equity required by the Company, and the costs charged by stock
transfer agents to maintain the Company's share registers. The increased costs
in the three months ended March 31, 2022 compared to the three months ended
March 31, 2021 reflect increased public company costs following the Merger.
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 three months ended March 31,
2022 and 2021 totaled $0.4 million and $0.6 million, respectively. The decrease
in fees arose primarily from increased services in the three months ended March
31, 2021 related to the Merger and the ImQuest Merger.
Fees paid to accountants in the three months ended March 31, 2022 and
2021 totaled $0.1 million and $0.04 million, respectively. The higher in fees
2022 arose primarily from the use of outside accounting consultants to assist
with the compilation of reports and filings required under securities laws.
Fees paid to the audit firms engaged by the Company in the three months ended
March 31, 2022 and 2021 totaled $0.1 million and $0.1 million, respectively.
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 three months ended March 31, 2022 and 2021 totaled $0.3 million and $0.5
million, respectively. The decrease in costs was attributable primarily to
increased services in the three months ended March 31, 2021 to complete the
Merger.
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 three months ended March 31, 2022 and 2021 totaled $0.2
million and $0.1 million, 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 three months
ended March 31, 2021 and 2022 from $0.02 million to $0.04 million, 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.
Other Income and Expenses
Interest and other expense of $1.15 million in the three months ended March 31,
2022 was made up of a $0.9 million of interest expense and $0.25 of prepayment
fees.
Interest and other expense of $0.1 million in the three months ended March 31,
2021 relate to interest expense.
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Liquidity and Capital Resources
At March 31, 2022, we had cash and cash equivalents of $0.15 million, which
represents a decrease of $1.7 million since the end of our last fiscal year.
This decrease was caused by our capital raise in the first quarter of 2022,
offset by our net cash used in operations of $3.8 million during the three
months ended March 31, 2022 and repayment of debt. As discussed above, we are a
clinical-stage company, have generated only insignificant revenues to date, and
have incurred cumulative net losses and 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, 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. As a result, we will need additional
financing to support our continuing operations. 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. 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.
If we are unable to raise adequate capital and/or achieve profitable operations,
future operations might need to be scaled back or discontinued. The financial
statements included elsewhere in this Quarterly Report on Form 10-Q 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.
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STATERA BIOPHARMA, INC. 
