Item 7. Management’s Discussion and Analysis
ITEM
7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion and analysis is related to our financial condition and results of operations for the two years ended December 31,
2021 This information should be read in conjunction with our consolidated financial statements and related notes thereto beginning on
F-1 of this Form 10-K. Please also see “Special Note Regarding Forward Looking Statements and Summary Risk Factors” in ITEM
1. Business.
Fair
Value
We
have issued warrants (the “Warrants”) in February 2017, June 2017, August 2017, April 2018, and March 2019 that are single
compound derivatives containing both an embedded right to obtain stock upon exercise (a “Call”) and a series of embedded
rights to settle the Warrants for cash upon the occurrence of certain events (each, a “Put”). Generally, the Put provisions
allow the Warrant Holders liquidity protection; the right to receive cash in certain situations where the Holders would not have a means
of readily selling the shares issuable upon exercise of the Warrants (e.g., where there would no longer be a significant public market
for our common stock). However, because the contractual formula used to determine the cash settlement value of the embedded Put requires
use of certain assumptions, the cash settlement value of the embedded Put can differ from the fair value of the unexercised embedded
Call option at the time the embedded Put option is exercised.
We
recompute the fair value of the Warrants at the end of each quarterly reporting period. Such value computation includes subjective input
assumptions that are consistently applied each period. If we were to alter our assumptions or the numbers input based on such assumptions,
the resulting fair value could be materially different.
RESULTS
OF OPERATIONS
Year
ended December 31, 2021 versus year ended December 31, 2020
Our
net loss was approximately $19,127,000 and $14,400,000 for the years ended December 31, 2021 and 2020, respectively, representing an
increase in net loss of approximately $4,727,000 when compared to the same period in 2020. This increase in net loss for
the year ended December 31, 2021, was primarily due to the following:
● an
increase in interest expense and finance costs/extinguishment of debt and notes payable of
$2,843,000 is largely due to a loss on extinguishment of debt of $2,701,000 and a decrease
in leaseback interest expense;
● an
increase in research and development expenses of $1,952,000;
● an
increase in gain from sale of Income tax operating losses of $1,395,000;
● an
increase in impairment losses of $1,644,000;
● an
increase of the quarterly revaluation of certain redeemable warrants of $268,000;
● an
increase in general and administrative expenses of $18,000; and
● an
increase in production costs of $44,000; offset by
● a
decrease in interest/other income of $420,000;
● a
decrease in interest expense and finance costs $605,000; and
● a
gain on sales of fixed assets of $216,000.
Net
loss per share was $ (0.40) and $(0.45) for the years ended December 31, 2021, and 2020, respectively. The weighted average number of
shares of our common stock outstanding as of December 31, 2021, was 47,339,975 as compared to 31,842,799 as of December 31, 2020.
Revenues
Revenues
from our Ampligen® Cost Recovery Program were $135,000 and $163,000 for the years ended December 31, 2021, and 2020, representing
a decrease of $28,000 which is primarily related not having sales for the European EAP program in 2021.
For
the years ended December 31, 2021 and 2020, we had no Alferon N Injection® Finished Good product to commercially sell and all revenue
was generated from the EAP and our FDA approved open-label treatment protocol, (“AMP 511”), that allows patient access to
Ampligen® for treatment in an open-label safety study.
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Production
Costs
Production
costs were approximately $850,000 and $806,000, respectively, for the years ended December 31, 2021, and 2020, representing an increase
of $44,000 in production costs in the current period.
Research
and Development Costs
Overall
Research and Development (“R&D”) costs for the year ended December 31, 2021, were approximately $7,672,000 as compared
to $5,720,000 for the same period a year ago, reflecting an increase of approximately $1,952,000. The primary reason for the increase
in research and development costs was due to increases in Company sponsored clinical trials expenses of $3,848,000, offset by decrease
of $1,940,000, caused by not producing two batches of Ampligen with third party CMO in 2021 compared to 2020.
General
and Administrative Expenses
General
and Administrative (“G&A”) expenses for the years ended December 31, 2021, and 2020, were approximately $8,672,000 and
$8,654,000, respectively, reflecting an increase of approximately $18,000. The increase in G&A expenses during the current period
was mainly due to increases in stock compensation of $532,000, insurance of $182,000, offset by decreases in taxes and licenses of $64,000,
scientific advisory board of $156,000, travel of $21,000, warrant expense of $46,000, software IT expense of $17,000, consulting fees
of $119,000, accounting, professional and legal fees of $63,000 and salaries and benefits of $247,000.
Gain (loss) on Investments
Gain (loss) on investments
for the years ended December 31, 2021, and 2020 represents a net decrease of approximately $420,000, driven by a loss primarily from
the reclassification out of other comprehensive income of debt securities sold of $376,000, offset by the increase in interest income
from investments.
Impairment
of plant property and equipment and other assets
During
the year ended December 31, 2021, there was a loss of $1,779,000 related to the impairment of plant property and equipment (see Note
2 Summary of Significant Accounting Policies).
During
the year ended December 31, 2020, there was a loss of $135,000 related to the impairment of other assets consisting of the loss of a
deposit to a supplier for use of technology which we are no longer utilizing and was written off.
Interest
Expense and Finance Costs
Interest expense and finance
costs for the year ended December 31, 2021, was $67,000 compared to $672,000 in the prior year, a decrease of $605,000. The decrease
is mainly attributed to the interest and amortization of costs of the Chicago Ventures and Atlas notes which were extinguished in the
second quarter of 2020.
Extinguishment
of Financing Obligation and Note Payable
During
the year ended December 31, 2021, there was a loss on the extinguishment of debt of $2,701,000 related to the repurchase of the manufacturing
facility (see Note 17 Financing Obligating Arising from Sales Leaseback Transaction.)
During
the year ended December 31, 2020, there was a gain of $142,000 related to the prepayment of note payable.
Redeemable
Warrants
The
quarterly revaluation of certain redeemable warrants resulted in a non-cash adjustment to the redeemable warrants liability amounted
to a gain of $145,000 for the year ended December 31, 2021, compared to a loss of approximately $123,000 in December 31, 2020 (see “Financial
Statements: Note 16: Fair Value” for the various factors considered in the valuation of redeemable warrants).
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Gain
from sale of income tax operating losses
In
December 2021, the Company effectively sold $19,500,000 New Jersey state operating losses for approximately $1,640,000, offset
by 2020 deferred tax asset of $632,000. Additionally, we recorded a deferred tax asset in the amount of $1,305,000 for the current
year operating losses to be sold in 2022. In December 2020, the Company effectively sold $11,000,000 New Jersey state net operating
loss for approximately $1,090,000. (see Note 12 Income Taxes (FASB ASC 740 Income Taxes)
Liquidity
and Capital Resources
During
the first quarter of 2020 an aggregate of 8,746,990 shares were issued upon exercise of the Warrants for gross proceeds of approximately
$8,658,000 and an aggregate of 1,870,000 shares were issued upon exercise of the Prefunded Warrants. In addition, on March 25, 2020,
the Representative’s Warrant was amended to permit exercise of such warrant to commence on March 30, 2020. During the first quarter
of 2020, the amended warrants were exercised and an aggregate of 266,665 shares are being issued upon exercise of the warrant for gross
proceeds of approximately of $264,000.
In
July 2019, the Company entered into a new Equity Distribution Agreement (the “2019 EDA”) with the Maxim Group LLC (“Maxim”),
pursuant to which we could sell from time to time, shares of our Common Stock through Maxim, as agent (the “Offering”). The
2019 EDA replaced prior EDA with Maxim. During the year ended December 31, 2020, we sold 20,444,807 shares under the 2019 EDA for total
gross proceeds of $53,936,615, which included a 3.5% fee to Maxim of $1,888,727. During 2021, we sold 5,655,731 shares under the 2019
EDA for total gross proceeds of $13,301,526, which includes a 3.5% fee to Maxim of $465,553. The 2019 EDA was terminated in early February
2021. In February 2022, the Company filed a universal shelf registration statement with the SEC on Form S-3 registering future sales
of up to $100 million of the Company’s securities. This registration statement will allow the Company to raise additional capital
as needed in the future.
Cash
used in operating activities for the year ended December 31, 2021, was approximately $13,965,000 compared to approximately $10,368,000
for the same period in 2020, an increase of $3,597,000. The primary reasons for this increase in cash used in operations in 2021 was
related to the loss on the extinguishment of financing obligation with the repurchase of the building of $2,701,000, tax benefit from
the gain on the sale of $646,000 offset by the increase in stock compensation of $532,000.
Cash
used in investing activities for the year ended December 31, 2021 was approximately $631,000 compared to $9,164,000 for the same period
in 2020, representing a change of $8,525,000. The primary reason for the change during the current period is the net purchase
and sale of marketable securities activity of $243,000 compared to the $8,569,000 for the same period in 2020, and by the
proceeds from the sale of property and equipment of $245,000.
Cash
provided by financing activities for the year ended December 31, 2021, was approximately $8,188,0000 compared to approximately
$56,563,000 for the same period in 2020, a decrease of $48,375,000. The primary reason for this decrease was our receipt of $13,042,000
in net proceeds from the sale of shares compared to $61,248,000 from the sale of shares in 2020.
As
of December 31, 2021, we had approximately $48,268,000 in cash, cash equivalents and marketable securities, inclusive of approximately
$16,175,000 in Marketable Securities, representing a decrease of approximately $6,110,000 from December 31, 2020.
We
are committed to a focused business plan oriented toward finding senior co-development partners with the capital and expertise needed
to commercialize the many potential therapeutic aspects of our experimental drugs and our FDA approved drug Alferon N Injection.
The
development of our products requires the commitment of substantial resources to conduct the time-consuming research, preclinical development,
and clinical trials that are necessary to bring pharmaceutical products to market. We believe, based on our current financial condition,
that we have adequate funds to meet our anticipated operational cash needs and fund current clinical trials over approximately the next
twenty-four months. At present we do not generate any material revenues from operations and we do not anticipate doing so in the near
future. We may need to obtain additional funding in the future for new studies and/or if current studies do not yield positive results,
require unanticipated changes and/or additional studies. If we are unable to commercialize and sell Ampligen and/or recommence material
sales of Alferon N Injection, our operations, financial position and liquidity may be adversely impacted, and additional financing may
be required. There can be no assurances that, if needed, we will be able to raise adequate funds or enter into licensing, partnering
or other arrangements to advance our business goals. We may seek to access the public equity market whenever conditions are favorable,
even if we do not have an immediate need for additional capital at that time. We are unable to estimate the amount, timing or nature
of future sales of outstanding common stock or instruments convertible into or exercisable for our common stock. Any additional funding
may result in significant dilution and could involve the issuance of securities with rights, which are senior to those of existing stockholders.
See Part I, Item 1A - “Risk Factors; We may require additional financing which may not be available ”.
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Certain
Relationships and Related Transactions
Refer
to PART III, ITEM 13 - “Certain Relationships and Related Transactions, and Director Independence.”
New
Accounting Pronouncements
Refer
to “Note 2(h) – Recent Accounting Standards and Pronouncements” under Notes to Consolidated Financial Statements.
Critical
Accounting Policies
Financial
Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation
of financial statements. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. The significant
accounting policies that we believe are most critical to aid in fully understanding our reported financial results are the following:
Long-Lived
Assets
We
assess long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of the assets or the
asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant
under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant
changes or planned changes in the use of the assets. We measure the recoverability of assets that we will continue to use
in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted
net cash flows. If an asset grouping’s carrying value is not recoverable through the related undiscounted cash flows, the asset
grouping is considered to be impaired.
In the event if the carrying
value exceeds the future undiscounted net cash flows, we would estimate the fair values using a combination of market and income approaches.
Under the market approach, fair values would be estimated using published market multiples for comparable companies. Under the income
approach, a discounted cash flow methodology would be used, considering: (i) management estimates, such as projections of revenue, operating
costs and cash flows, taking into consideration historical and anticipated financial results; (ii) general economic and market conditions;
and (iii) the impact of planned business and operational strategies
We
measure the impairment by comparing the difference between the asset grouping’s carrying value and its fair value. Long-lived assets
are considered a non-financial asset and are recorded at fair value only if an impairment charge is recognized. Impairments are determined
for groups of assets related to the lowest level of identifiable independent cash flows. We make subjective judgments in determining
the independent cash flows that can be related to specific asset groupings. In addition, as we review our manufacturing process and other
manufacturing planning decisions, we must make subjective judgments regarding the remaining useful lives of assets. When we determine
that the useful lives of assets are shorter than originally estimated, we accelerate the rate of depreciation over the assets’
new, shorter useful lives. (see Note 2 Summary of Significant Accounting Policies)
Redeemable
Warrants
We
utilize the guidance contained in ASC 480 Distinguishing Liabilities from Equity in the determination of whether to record warrants
and options as Equity and/or Liability. If the guidance of ASC 480 is deemed inconclusive, we continue our analysis utilizing ASC 815
Derivatives and Hedging.
Our
method of recording the related value is consistent with the standards as defined by the Financial Accounting Standards Board utilizing
the concept of “Fair Value” from ASC 820-10-55-1 that states that any fair value measurement requires that the reporting
entity, to determine the valuation technique(s) appropriate for the measurement, consider the availability of data with which to develop
inputs that represent the assumptions that market participants would use in pricing the asset or liability and the level in the fair
value hierarchy within which the inputs fall.
We
recomputed the value of the redeemable warrants at the end of each quarterly period. We use the Monte Carlo Simulation approach which
includes subjective input assumptions that are consistently applied each quarter. If we were to alter our assumptions or the numbers
input based on such assumptions, the resulting fair value could be materially different. As discussed in greater detail in “Fair
Value” at the beginning of this ITEM 7, the significant assumptions using this model are: (i) Risk-Free Interest Rate; (ii) Expected
Holding Period; (iii) Expected Volatility; (iv) Expected Dividend Yield; (v) Expected Probability of a Fundamental Transaction; (vi)
Expected Timing of Announcement of a Fundamental Transaction; (vii) Expected 100 Day Volatility at Announcement of a Fundamental Transaction;
(viii) Expected Risk-Free Interest Rate at Announcement of a Fundamental Transaction; and (ix) Expected Time Between Announcement and
Consummation of a Fundamental Transaction. The derivative is values using Level 3 inputs which are highly subjective and require a
high degree of judgment.
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Concentration
of Credit Risk
Our
policy is to limit the amount of credit exposure to any one financial institution and place investments with financial institutions evaluated
as being credit worthy, or in short-term money markets, which are exposed to minimal interest rate and credit risks. We have bank
deposits and overnight repurchase agreements that exceed federally insured limits.
Concentration
of credit risk, with respect to receivables, is limited through our credit evaluation process. We do not require collateral on our receivables.
Our receivables historically consisted principally of amounts due from wholesale drug companies.
ITEM
7A. Quantitative
and Qualitative Disclosures About Market Risk.
Not
Applicable.
ITEM 8.
Financial Statements and Supplementary Data.
Please
see the “Index to Financial Statements and Financial Statement Schedule” on page F-1.
37
ITEM
9. Changes
in and Disagreements with Accountants on Accounting and Financial Disclosures.
Not
Applicable.