Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis of our financial condition and plan of operations together with and our accompanying
consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical
information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our
actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include,
but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere
in this Annual Report on Form 10-K. All amounts in this report are in U.S. dollars, unless otherwise noted.
Overview
We
have the following two business units:
ImmixBio . ImmixBio is focused
on developing Tissue Specific Therapeutics targeting solid tumors and immune-dysregulated diseases. As of February 2023, 19 patients with
advanced solid tumors were treated with IMX-110, ImmixBio’s lead candidate.
Nexcella . Our majority-owned
subsidiary, Nexcella, Inc., is engaged in the discovery and development of novel
cell therapies for hematologic malignancies (blood cancers) and other indications. As of February 2023, 42 patients with relapsed/refractory
multiple myeloma (90% overall response rate at therapeutic dose) and 5 relapsed/refractory light chain (AL) amyloidosis patients (100%
organ response, 100% complete response rate) have been treated with next-generation CAR-T NXC-201.
Since
inception, we have devoted substantially all of our resources to developing product and technology rights, conducting research and development,
organizing and staffing our Company, business planning and raising capital. We operate as one business segment and have incurred recurring
losses, the majority of which are attributable to research and development activities and negative cash flows from operations. We have
funded our operations primarily through the sale of convertible debt and equity securities. Currently, our primary use of cash is to
fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative
expenditures. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance our product
candidates through all stages of development and clinical trials and, ultimately, seek regulatory approval. In addition, if we obtain
regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing,
marketing, sales and distribution. Furthermore, we incur costs associated with operating as a public company, including significant legal,
accounting, investor relations and other expenses. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year,
depending on the timing of our clinical trials and our expenses on other research and development activities.
AxioMx
Master Services Agreement
On
December 22, 2014, we entered into a Master Service Agreement (“MSA”) with AxioMx, Inc. (“AxioMx”) which is in
the business of developing and supplying custom affinity reagents. We entered into the MSA to serve as a master agreement governing multiple
sets of projects as may be agreed upon us and AxioMx from time to time. Pursuant to the MSA, we granted AxioMx a non-exclusive, royalty-free,
worldwide, non-transferable license to certain of our intellectual property to perform services pursuant to the MSA, and AxioMx granted
us an exclusive product assignment option (“Option”) which granted us an exclusive, royalty-bearing right, with the right
to sublicense, under the Deliverable (as defined in the MSA) to further research, develop, use, sell, offer for sale, import and export
one or more assigned products pursuant to the MSA. We exercised the Option in 2017. Pursuant to the MSA, AxioMx is entitled to royalties
on the sale of any Deliverable that is used for diagnostic, prognostic or therapeutic purposes, in humans or animals, or for microbiology
testing, including food safety testing or environmental monitoring. Specifically, we shall pay AxioMx a royalty of 3.5% of Net Sales
(as defined in the MSA) of assigned products for each Deliverable used in licensed products for therapeutic purposes. In addition, we
shall pay AxioMx a royalty of 1.5% of Net Sales of assigned products for each Deliverable used in licensed products for diagnostic or
prognostic purposes; provided, however, if three Deliverables are used in an assigned product for diagnostic or prognostic purposes,
the royalty shall be 4.5%. As of December 31, 2022, the MSA has expired and we do not intend to extend the MSA; however, the royalty
obligations described herein shall survive the termination of the MSA.
Research
and License Agreement with Hadasit and BIRAD
On December 8, 2022, Nexcella
entered into the Agreement with the Licensors pursuant to which the Licensors granted to Nexcella an exclusive, worldwide, royalty-bearing
license in the Territory to an invention entitled “Anti-BCMA CAR-T cells to target plasma cell” to develop, manufacture, have
manufactured, use, market, offer for sale, sell, have sold, export and import Licensed Product. Pursuant to the Agreement, Nexcella paid
the Licensors an upfront fee of $1,500,000 in December 2022. Additional quarterly payments totaling approximately $13.0 million are due
through September 2026 along with an annual license fee of $50,000. Nexcella has agreed to pay royalties to the Licensors equal to 5%
of Net Sales during the Royalty Period.
In addition,
Nexcella shall pay sales milestone payments of up to $20 million for Net Sales exceeding $700 million and Nexcella has committed to funding
NXC-201 clinical trials in Israel over 4 years for an estimated total cost of approximately $13 million, spread on a quarterly basis over
that period, which Nexcella believes will generate clinical trial data owned by Nexcella. The term of the Agreement commenced on December
8, 2022 and, unless earlier terminated pursuant to the terms thereof, shall continue in full force and effect until the later of the expiration
of the last Valid Claim under a Licensed Patent or a Joint Patent or Exclusivity Right covering a Licensed Product or the expiration of
a continuous period of 15 years during which there shall not have been a First Commercial Sale of any Licensed Product in any country
in the world. Licensors may terminate the Agreement immediately if Nexcella or its affiliates or sublicensees commences an action in which
it challenges the validity, enforceability or scope of any of the Licensed Patents or Joint Patents. In addition, either party may terminate
the Agreement if the other party materially breaches the Agreement and fails to cure such breach within 30 days. Additionally, Licensors
may terminate the Agreement if Nexcella becomes insolvent or files for bankruptcy.
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Recent
Developments
On January 12, 2023, Nexcella
entered into share purchase agreements with certain accredited investors for their purchase of an aggregate 100,152 shares of Nexcella’s
common stock at a purchase price of $6.49 per share, for gross proceeds of approximately $650,000. In addition, our Chief Executive Officer
and Chief Financial Officer collectively purchased 23,112 shares of Nexcella’s common stock for an aggregate purchase price of $150,000.
As a result of the foregoing offering, as of January 12, 2023, we owned 98% of Nexcella.
On March 22, 2023, we entered into the Sales Agreement with the Sales Agent
pursuant to which we may offer and sell, from time to time, through the Sales Agent, shares of our common stock having an aggregate offering
price of up to $5,000,000, subject to the terms and conditions set forth in the Sales Agreement. We will pay the Sales Agent a fixed commission
rate of 3.75% of the aggregate gross proceeds from the sale of the shares of our common stock pursuant to the Sales Agreement. We have
paid an expense deposit of $15,000 to the Sales Agent, which will be applied against the actual out-of-pocket accountable expenses. We
have agreed to reimburse the Sales Agent for all expenses related to the offering including, without limitation, the fees and expenses
of the Sales Agent’s legal counsel up to $50,000, and shall reimburse the Sales Agent, upon request, for such costs, fees and expenses
in an amount not to exceed $7,500 on a quarterly basis for the first three fiscal quarters of each year and $10,000 for the fiscal fourth
quarter of each year. The offering pursuant to the Sales Agreement will terminate upon the earlier of (i) the sale of all of the shares
of common stock subject to the Sales Agreement, and (ii) termination of the Sales Agreement as permitted therein. We may terminate
the Sales Agreement in our sole discretion at any time by giving ten days’ prior notice to the Sales Agent. The Sales Agent may
terminate the Sales Agreement under the circumstances specified in the Sales Agreement and in its sole discretion at any time by giving
ten days’ prior notice to us. In addition, the Sales Agreement may be terminated upon mutual agreement by us and the Sales Agent.
The
COVID-19 Pandemic and its Impacts on Our Business
In
March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. This pandemic could result in difficulty
securing clinical trial site locations, CROs, and/or trial monitors and other critical vendors and consultants supporting our trial.
These situations, or others associated with COVID-19, could cause delays in our clinical trial plans and could increase expected costs,
all of which could have a material adverse effect on our business and financial condition. At the current time, we are unable to quantify
the potential effects of this pandemic on our future consolidated financial statements.
Results
of Operations
Year
Ended December 31, 2022 compared to the Year Ended December 31, 2021
General
and Administrative Expenses
General
and administrative expenses were $4,023,170 for the year ended December 31, 2022 compared to $1,225,487 for the year ended December
31, 2021.
The
expenses incurred in both periods were related to salaries, patent maintenance costs and general accounting and other general consulting
expenses, which were higher for the year ended December 31, 2022 due to the Company becoming a fully reporting public company.
Research
and Development Expenses
Research
and development expenses were $4,195,778 for the year ended December 31, 2022 compared to $126,527 for the year ended December
31, 2021.
The
increased research and development expenses during the year ended December 31, 2022, as compared to the year ended December 30, 2021,
were related to our ongoing Phase 1b/2a clinical trial, including, but not limited to, contract research organization (“CRO”)
and related costs for maintaining and treating patients in the clinical trial. We were able to increase spending on research and development
as a result of closing the IPO in December 2021, and we expect to incur increased research and development costs in the future as our
product development activities expand. In addition, the Company paid $1,500,000 for an upfront license fee in connection with the Agreement.
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Change
in Fair Value of Derivative Liability
The change in fair
value of derivative liability was $0 for the year ended December 31, 2022 compared to $22,759,829 for the year ended December 31, 2021.
The derivative liability related to the probability of a “Qualified Financing” (as defined in our convertible notes), was
reclassified to equity in connection with the automatic conversion of the convertible notes to shares of our common stock in connection
with our initial public offering (“IPO”) in December 2021.
Loss on Debt Extinguishment
In December 2021, in connection with our IPO, our convertible notes along
with the corresponding accrued interest, were automatically converted into an aggregate of 5,633,689 shares of our common stock. As a
result of the conversion, we recorded a loss on debt extinguishment of $86,170.
Interest
Expense
Interest
expense was $497 for the year ended December 31, 2022 compared to $179,853 for the year ended December 31, 2021. Interest expense in
the prior period was related to interest accrued on our convertible notes payable bearing interest at rates from the applicable federal
rate to 6% per annum, all of which were converted to shares of our common stock in connection with our IPO in December 2021.
Provision
for Income Taxes
Provision
for income taxes for the year ended December 31, 2022 was $10,268 compared to $6,013 for the year ended December 31, 2021, due to withholding
taxes relating to our Australian subsidiary.
Funding
Requirements
Our
primary use of cash is to fund operating expenses, which consist of research and development expenditures and various general and administrative
expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in
our outstanding accounts payable, accrued expenses and prepaid expenses.
Because
of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are
unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors,
including, but not limited to:
●
the
scope, timing, progress and results of discovery, pre-clinical development, laboratory testing and clinical trials for our product
candidates;
●
the
costs of manufacturing our product candidates for clinical trials and in preparation for regulatory approval and commercialization;
●
the
extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our
product candidates;
●
the
costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims;
●
the
costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies;
●
expenses
needed to attract and retain skilled personnel;
●
the
costs associated with being a public company;
●
the
costs required to scale up our clinical, regulatory and manufacturing capabilities;
●
the
costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing and distribution capabilities,
for any of our product candidates for which we receive regulatory approval; and
●
revenue,
if any, received from commercial sales of our product candidates, should any of our product candidates receive regulatory approval.
We
will need additional funds to meet our operational needs and capital requirements for clinical trials, other research and development
expenditures, and general and administrative expenses. We currently have no credit facility or committed sources of capital.
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Until
such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity
offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements, other
collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity
or convertible debt securities, your ownership interest may be diluted, and the terms of these securities may include liquidation or
other preferences that adversely affect your rights as a common stockholder. If we raise additional funds through collaborations, strategic
alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies,
future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are
unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit,
reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market product
candidates that we would otherwise prefer to develop and market ourselves.
Cash
used in operating activities
Net
cash used in operating activities was $7,408,303 for the year ended December 31, 2022 and $1,589,307 for the year ended December 31,
2021 and primarily included CRO, clinical site costs and related logistics.
Cash
used in investing activities
Net
cash used by investing activities was $0 for the year ended December 31, 2022 and $802 for the year ended December 31, 2021. We purchased
equipment during the year ended December 31, 2021.
Cash
provided by financing activities
Net
cash provided by financing activities was $3,232,063 for the year ended December 31, 2022 and $18,848,934 for the year ended December
31, 2021. Net cash provided by financing activities in 2022 was primarily related to $2,913,750 in net proceeds from the issuance of
shares of our common stock pursuant to the exercise of the underwriter’s overallotment option to purchase additional shares of
our common stock in connection with our IPO completed in December 2021 and funds of $475,000 received by our subsidiary, Nexcella,
in connection with a private placement offering. We received $18,648,934 in net proceeds from the issuance of our shares of common stock
pursuant to our initial public offering during the year ended December 31, 2021, along with $200,000 in proceeds from convertible notes
payable.
The continuation of the Company as a going concern is dependent upon its
ability to obtain continued financial support from its stockholders, necessary equity financing to continue operations and the attainment
of profitable operations. As of December 31, 2022, we have incurred an accumulated deficit of $37,985,247 and have not yet generated any
revenue from operations. Additionally, management anticipates that its cash on hand will be sufficient to fund its planned operations
for at least 12 months from the filing date of this Annual Report on Form 10-K.
We
will have additional capital requirements going forward and may need to seek additional financing, which may not be available to us on
acceptable terms, if at all.
Critical
Accounting Policies
This
management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation
of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we
evaluate our estimates and judgments, including those related to prepaid/accrued research and development expenses, stock-based compensation,
value of deferred tax assets and related valuation allowances, and fair value of the embedded derivative financial instrument related
to our convertible promissory notes. We base our estimates on historical experience, known trends and events, and various other factors
that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
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While
our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are the most critical to the judgments and
estimates used in the preparation of our consolidated financial statements.
Derivative
Instruments - We evaluated our convertible notes to determine if those contracts or embedded components of those contracts qualified
as derivatives to be separately accounted for in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives
and Hedging . The result of this accounting treatment is that the fair value of the embedded derivative is marked to market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded
in the statements of operations and comprehensive loss as other income or expense. Upon conversion or exercise of a derivative instrument,
the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other
embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments
are accounted for as a single, compound derivative instrument.
We
determined that the convertible notes contain embedded features that provide the noteholders with multiple settlement alternatives. Certain
of these settlement features provide the noteholders the right to receive cash or a variable number of shares upon the completion of
a capital raising transaction, change of control or default by us, which are referred to as “redemption features.”
Stock-Based
Compensation - We measure all stock-based awards granted based on their estimated fair value on the date of the grant and recognize
the corresponding compensation expense for those awarded to employees and directors over the requisite service period, which is generally
the vesting period of the respective award, and for those awarded to nonemployees over the period during which services are rendered
by nonemployees until completed. We have typically issued stock options with service-based vesting conditions and we record the expense
for these awards using the straight-line method.
We
estimate the fair value of each stock option grant using the Black-Scholes option-pricing model, which uses as inputs the fair value
of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free
interest rate for a period that approximates the expected term of our stock options and our expected dividend yield.
The
following table reflects the weighted average assumptions used to estimate the fair value of stock options granted during the years ended
December 31, 2022 and 2021:
2022
2021
Volatility
117-124 %
117-128 %
Expected life (years)
5.27-10.0
10.0
Risk-free interest rate
1.70-3.06 %
1.37-1.74 %
Dividend rate
— %
— %
Before
establishing a public market for the trading of our common stock and due to a lack of company-specific historical and implied volatility
data, we based the estimate of expected stock price volatility on the historical volatility of a representative group of publicly traded
companies for which historical information was available. The historical volatility was generally calculated based on a period of time
commensurate with the expected term assumption. We used the simplified method to calculate the expected term for options granted to employees
and directors. We did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected
term and used the contractual term since the stock options were not issued at-the-money. For options granted to non-employees, we utilized
the contractual term. The risk-free interest rate was based on a U.S. treasury instrument whose term is consistent with the expected
term of the stock options. The expected dividend yield was assumed to be zero, as we had never paid dividends and do not have current
plans to pay any dividends on our common stock.
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Fair
Value of Common Stock
Prior
to establishing a public market for our common stock, the estimated fair value of our common stock had been determined by our board of
directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations
of common stock, and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant
and which may have changed from the date of the most recent valuation through the date of the grant.
Third-party
valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting
and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . Our common stock valuations
were prepared using a hybrid method that incorporated elements of both a probability-weighted expected return method (“PWERM”)
and an option pricing method (“OPM”).
The
OPM is based on the Black-Scholes option pricing model, which allows for the identification of a range of possible future outcomes. The
OPM treats common stock and convertible instruments as call options on the total equity value of a company, with exercise prices based
on the value thresholds at which the allocation among the various holders of a company’s securities changes. A discount for lack
of marketability of the common stock is applied to arrive at an indication of value for the common stock.
PWERM
involves a forward-looking analysis of the possible future outcomes of the enterprise. This method is particularly useful when discrete
future outcomes can be predicted at a relatively high confidence level with a probability distribution. Discrete future outcomes considered
under the PWERM include an initial public offering, as well as non-initial public offering market-based outcomes. Determining the fair
value of the enterprise using the PWERM requires the Company to develop assumptions and estimates for both the probability of an initial
public offering liquidity event and stay private outcomes, as well as the values the Company expects those outcomes could yield.
Prior
to establishing a public trading market of our capital stock, our board of directors exercised reasonable judgment and considered a number
of objective and subjective factors to determine its estimate of the fair value of our common stock, including changes in the following
factors between the date of the March 31, 2021 valuation and the grant date:
●
our
business, financial condition and results of operations, including related industry trends affecting our operations;
●
the
likelihood of achieving a liquidity event, such as an initial public offering or sale of our company, given prevailing market conditions;
●
the
lack of marketability of our common stock;
●
the
market performance of comparable publicly traded companies; and
●
U.S.
and global economic and capital market conditions and outlook.
The
assumptions underlying our board of directors’ valuations represented our board’s best estimates, which involved inherent
uncertainties and the application of our board’s judgment. As a result, if factors or expected outcomes had changed or our board
of directors had used significantly different assumptions or estimates, our equity-based compensation expense could have been materially
different.
Research and Development Costs
Research and
development costs are expensed as incurred. Research and development costs consist primarily of clinical research fees paid to
consultants and outside service providers, other expenses relating to design, development and testing of our
therapy candidates, and for license and milestone costs related to in-licensed products and technology. Costs incurred in obtaining
technology licenses are charged to research and development expense if the technology licensed has not reached commercial
feasibility and has no alternative future use. Such licenses purchased by us require substantial completion of research
and development, regulatory and marketing approval efforts in order to reach commercial feasibility and has no alternative future
use.
Clinical trial
costs are a component of research and development expenses. The Company estimates expenses incurred for clinical trials that are in
process based on services performed under contractual agreements with clinical research organizations and actual clinical
investigators. Included in the estimates are (1) the fee per patient enrolled as specified in the clinical trial contract with each
institution participating in the clinical trial and (2) progressive data on patient enrollments obtained from participating clinical
trial sites and the actual services performed. Changes in clinical trial assumptions, such as the length of time estimated to enroll
all patients, rate of screening failures, patient drop-out rates, number and nature of adverse event reports, and the total number
of patients enrolled can impact the average and expected cost per patient and the overall cost of the clinical trial. We
monitor the progress of the trials and their related activities and adjust expense accruals, when applicable. Adjustments to
accruals are charged to expense in the period in which the facts give rise to the adjustments become known.
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Recent
Accounting Pronouncements
See
Note 2 to our audited consolidated financial statements found elsewhere in this Annual Report on Form 10-K for a description of recent
accounting pronouncements applicable to our consolidated financial statements.
JOBS
Act
On
April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take
advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting
standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those
standards would otherwise apply to private companies.
We
have chosen to take advantage of the extended transition periods available to emerging growth companies under the JOBS Act for complying
with new or revised accounting standards until those standards would otherwise apply to private companies provided under the JOBS Act.
As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates for
complying with new or revised accounting standards.
Subject
to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions,
including, without limitation, (i) providing an auditor’s attestation report on our internal controls over financial reporting
pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with the requirement adopted by the Public Company Accounting
Oversight Board (“PCAOB”) regarding the communication of critical audit matters in the auditor’s report on financial
statements. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which
we have total annual gross revenues of $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of
the date of the completion of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible
debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the
SEC.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
a smaller reporting company, we are not required to provide the information required by this item.
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