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,
2022 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, 2022 versus year ended December 31, 2021
Our
net loss was approximately $19,445,000 and $19,127,000 for the years ended December 31, 2022 and 2021, respectively, representing an
increase in net loss of approximately $318,000 when compared to the same period in 2021. This increase in net loss for the year ended
December 31, 2022, was primarily due to the following:
● an
increase in general and administrative expenses of $4,402,000;
● an
increase in loss on investments of $1,478,000; offset by
● an
increase in interest/other income of $629,000;
● a
decrease in interest expense and finance costs $2,768,000; and
● a
decrease in impairment losses of $1,779,000;
● a
decrease in research and development expenses of $682,000;
● a
decrease in production costs of $850,000;
● a
decrease in gain from sale of Income tax operating losses of $829,000;
● a
decrease in gain of sale of fixed assets of $213,000
● a
decrease of the quarterly revaluation of certain redeemable warrants of $110,000;
Net
loss per share was $ (0.40) and $(0.40) for the years ended December 31, 2022, and 2021, respectively. The weighted average number of
shares of our common stock outstanding as of December 31, 2022, was 48,047,288 as compared to 47,339,975 as of December 31, 2021.
Revenues
Revenues
from our Ampligen® Cost Recovery Program were $141,000 and $135,000 for the years ended December 31, 2022, and 2021, representing
an increase of $6,000 which is primarily related to the timing of orders.
For
the years ended December 31, 2022 and 2021, 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 $0 and $850,000, respectively, for the years ended December 31, 2022, and 2021, representing a decrease of $850,000
in production costs in the current period. The decrease was due primarily to the sale of the facility and no production for 2022 compared
to 2021.
Research
and Development Costs
Overall
Research and Development (“R&D”) costs for the year ended December 31, 2022, were approximately $6,990,000 as compared
to $7,672,000 for the same period a year ago, reflecting a decrease of approximately $682,000. The primary reason for the decrease in
research and development costs was due to decreases in Company sponsored clinical trials expenses of $1,728,000, offset by increases
in salaries and outside consultant costs of $607,00, $66,000 in rent and $304,000 in patents & trademarks.
General
and Administrative Expenses
General
and Administrative (“G&A”) expenses for the years ended December 31, 2022, and 2021, were approximately $13,074,000 and
$8,672,000, respectively, reflecting an increase of approximately $4,402,000. The increase in G&A expenses during the current period
was mainly due to increases in legal fees of $4,582,000, public relations expenses of $348,000, insurance expenses of $439,000 and general
expense of $51,000 net of decreases in stock compensation of $613,000, salary expenses of $243,000 and depreciation of $12,000.
Gain
(loss) on Investments
Gain
(loss) on investments for the years ended December 31, 2022, and 2021 were approximately ($1,679,000) and ($201,000), respectively, reflecting an increase in the loss on investments of approximately ($1,478,000). The loss was due to the
change in the fair value of equity investments.
Impairment
of plant property and equipment and other assets
During
the year ended December 31, 2022, there was a loss of $0 related to the impairment of plant property and equipment (see Note 2 Summary
of Significant Accounting Policies).
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).
Interest
expense and finance costs for the year ended December 31, 2022, was $0 compared to $2,768,000 in the prior year, a decrease of $2,768,000
primarily due to the extinguishment of debt of $2,768,000 in 2021.
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 $35,000 for the year ended December 31, 2022, compared to a gain of approximately $145,000 in December 31, 2021 (see “Financial
Statements: Note 15: Fair Value” for the various factors considered in the valuation of redeemable warrants).
Gain
from sale of income tax operating losses
We
effectively sold $20,500,000 New Jersey state operating losses from 2021 for approximately $1,676,000. Additionally, we recorded a deferred
tax asset in the amount of $1,118,000 for the current year 2022 operating losses to be sold in 2023. (see Note 12 Income Taxes (FASB
ASC 740 Income Taxes).
Liquidity
and Capital Resources
Cash
used in operating activities for the year ended December 31, 2022, was approximately $16,108,000 compared to approximately $13,965,000
for the same period in 2021, an increase of $2,143,000. The primary reasons for this increase in cash used in operations in 2022 was
related to the loss on marketable securities of $1,679,000, as well as in increase in the prepaid expenses of $151,000 and an increase
in accounts payable of $179,000.
Cash
provided by investing activities for the year ended December 31, 2022, was approximately $10,988,000 compared to cash used in 2021
was approximately $631,000, representing a change of $11,619,000. The primary reason for the change
during the current period is the net purchase and sale of marketable securities activity of $7,359,000 compared to the $243,000 for
the same period in 2021, and by the proceeds from the sale of the asset held for sale of $3,900,000 in 2022.
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Cash
provided by financing activities for the year ended December 31, 2022, was approximately $80,000 compared to approximately $8,188,000
for the same period in 2021, a decrease of $8,108,000. The primary reason for this decrease was our receipt of $13,042,000 in net proceeds
from the sale of shares in 2021compared to $80,000 from the proceeds from sale of stock, net of issuance costs in 2022. As of December
31, 2022, we had approximately $34,190,000 in cash, cash equivalents and marketable securities, inclusive of approximately $7,137,000
in Marketable Securities, representing a decrease of approximately $14,078,000 from December 31, 2021.
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.
Today, some two years after COVID-19 first appeared, the world has a number of vaccines and some promising therapeutics.
Our quest to prove the antiviral activities of Ampligen continues. If Ampligen has the broad-spectrum antiviral properties that
we believe that it has, it could be a very valuable tool in treating variants of existing viral diseases, including COVID-19,
or novel ones that arise in the future. Unlike most developing therapeutics which attack the virus, Ampligen works differently. We believe
that it activates antiviral immune system pathways that fight not just a particular virus or viral variant, but other similar viruses
as well.
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
sixteen months. In February 2022, the SEC declared our universal shelf registration statement on Form S-3 effective. Pursuant to that
registration statement, we can sell up to $100 million of our securities and raise additional capital as needed in the future. No assurance
can be given as to the amount of funds that could be raised pursuant to this registration statement or the potential dilution to current
stockholders.
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 ”.
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 Estimates
Our significant accounting estimates are described in the Notes to Consolidated Financial Statements. The significant accounting
estimates 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.
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We
measure the impairment by comparing the difference between the asset grouping’s carrying value and its fair value. We measure our
long-lived assets, in accordance to ASC 360 impairment (patents, trademarks, intangibles, fixed assets) 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. At the end of fiscal year December 31, 2022, we engaged an outside third party to provide a valuation for the impairment of our
patents and trademarks. The determination was, from a qualitative standpoint, it would appear highly unlikely that there would be any
impairment to the patnets. (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.
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.
ITEM
9. Changes
in and Disagreements with Accountants on Accounting and Financial Disclosures.
None.
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