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,
2023 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, 2023 versus year ended December 31, 2022
Our
net loss was approximately $28,962,000 and $19,445,000 for the years ended December 31, 2023 and 2022, respectively, representing an
increase in net loss of approximately $9,517,000 or (49%) when compared to the same period in 2022. This increase in net loss for the
year ended December 31, 2023, was primarily due to the following:
●
an
increase in general and administrative expenses of $8,063,000;
●
an
increase in research and development expenses of $3,949,000;
●
an
increase in production costs of $42,000; offset by
●
an
increase in revenue of $61,000;
●
an
increase on income from investments of $1,879,000;
●
an
increase in interest/other income of $440,000;
●
an
increase in gain from sale of Income tax operating losses of $177,000;
●
an
increase on the gain from sale of fixed assets of $15,000;
●
a
decrease of the quarterly revaluation of certain redeemable warrants of $35,000.
Net
loss per share was $ (0.60) and $(0.40) for the years ended December 31, 2023 and 2022, respectively. The weighted average number of
shares of our common stock outstanding as of December 31, 2023, was 48,585,404 as compared to 48,047,288 as of December 31, 2022.
Revenues
Revenues
from our Ampligen® Cost Recovery Program were $202,000 and $141,000 for the years ended December 31, 2023 and 2022, representing
an increase of $61,000 which is primarily related to the fluctuation of patient participation.
For
the years ended December 31, 2023 and 2022, 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 $42,000 and $0, respectively, for the years ended December 31, 2023 and 2022, representing an increase of $42,000
in production costs in the current period. The increase was due to the cost incurred for production of Ampligen that occurred in the
last quarter of 2023.
Research
and Development Costs
Overall
Research and Development (“R&D”) costs for the year ended December 31, 2023, were approximately $10,939,000 as compared
to $6,990,000 a year ago, reflecting an increase of approximately $3,949,000. The primary reason for the increase in research and development
costs was due to the increases in Company sponsored clinical trials expenses of approximately $2,162,000 and an increase in outside consultant
costs of approximately $1,787,000.
General
and Administrative Expenses
General
and Administrative (“G&A”) expenses for the years ended December 31, 2023 and 2022, were approximately $21,137,000 and
$13,074,000, respectively, reflecting an increase of approximately $8,063,000. The increase in G&A expenses during the current period
was largely due to increases in legal fees of approximately $6,500,000 primarily related to responding to an attempt by a group of shareholders
to bypass our bylaws and nominating procedures, and financial consultant fees of $2,407,000 offset by a decrease in stock compensation
of $711,000. We are in the process of submitting an insurance claim and hopes to recover a portion of the legal expenses related to the
shareholder action, but recovery, if any, at this time cannot be determined.
Gain
(loss) on Investments
Gain
(loss) on investments for the years ended December 31, 2023 and 2022 was approximately $200,000 and ($1,679,000), respectively, reflecting
an increased gain on investments of approximately $1,879,000. The gain was due to the change in the fair value of equity investments.
Redeemable
Warrants
The
revaluation of certain redeemable warrants resulted in a non-cash adjustment to the redeemable warrants liability. There was no change
for the twelve months ended December 31, 2023, compared with a gain of $35,000 for the twelve months ended December 31, 2022 (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
In
December 2023, we effectively sold $14,156,000 of our New Jersey state net operating loss carryforward and $38,600 in R&D credits
for the year 2022 for approximately $1,313,000. Additionally, we recorded a deferred tax asset in the amount of approximately $1,604,000
for the current year 2023 operating losses to be sold in 2024. (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, 2023, was approximately $21,267,000 compared to approximately $16,108,000
for the same period in 2022, an increase of $5,159,000. The primary reasons for this increase in cash used in operations in 2023 was
an increased net loss during the year of $9,517,000 and a gain on investments of $1,879,000, a decrease in stock compensation of $711,000 which was partially offset by an increase in accounts payable of
$5,887,000 an increase in accrued expenses of $812,000.
Cash
used in investing activities for the year ended December 31, 2023, was approximately ($832,000) compared to cash provided by investing
activities in 2022 of approximately $10,988,000, representing a change of $11,820,000. The primary reason for the change during the
current period is the net purchase and sale of marketable investments activity of ($294,000) compared to the $7,359,000 for
the same period in 2022, and by the proceeds from the sale of property and equipment of $47,000 in 2023, compared with $3,900,000 in
2022.
Cash
provided by financing activities for the year ended December 31, 2023, was approximately $485,000 compared to approximately $80,000 for
the same period in 2022, an increase of $405,000. The primary reason for this increase was the receipt of $485,000 in net proceeds from
the sale of shares in 2023 compared to $80,000 from the proceeds from sale of stock, net of issuance costs in 2022. As discussed below,
in April 2023 we entered into an Equity Distribution Agreement, which was the primary source of additional equity proceeds in 2023 compared
with 2022.
39
As
of December 31, 2023, we had approximately $13,070,000 in cash, cash equivalents and marketable investments, inclusive of approximately
$7,631,000 in marketable investments, representing a decrease of approximately $21,120,000 from December 31, 2022.
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 three 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 twenty-four months. In this regard, in April, 2023, we entered into an Equity Distribution Agreement
(the “EDA”), with Maxim Group LLC (“Maxim”), pursuant to which we may sell from time to time, shares of our
common stock having an aggregate offering price of up to $8.5 million through Maxim, as agent. During the year ended December 31,
2023, we sold 598,114 shares under the EDA for total gross proceeds of approximately $344,000, which includes a 3.0% fee to Maxim of
$10,326. 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.
Subsequent to the end of 2023, we raised $2,500,000 in net proceeds from the sale of an unsecured Note and entered into an equity
line of credit (see exhibits 10.104 and 10.105). No assurance can be given as to the amount of funds that could be raised 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(g) – 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:
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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 the Company considers in deciding when to perform an impairment review include significant
decreases in the market price of a long-lived asset or group, a significant adverse change in the extent or manner in which a long-lived
asset (asset group) is being used or its physical condition, a significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset (asset group, including an adverse action or assessment by a regulator, an accumulation
of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group),
a current period operating or cash flow loss combined with a history of operating or cash flow losses or projection or forecast that
demonstrates continuing losses associated with the use of a long-lived asset (asset group) or a current expectation that, more likely
than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated
useful life.
When
assessing for impairment, we measure the recoverability of assets that it will continue to use in its 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.
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. The Company makes subjective judgments in determining
the independent cash flows that can be related to specific asset groupings. In addition, as the Company reviews its manufacturing process
and other manufacturing planning decisions, if the useful lives of assets are shorter than the Company had originally estimated, it accelerates
the rate of depreciation over the assets’ new, shorter useful lives.
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.
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ITEM
9.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.
None.