UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
CYTOCOM, INC.
(Exact name of registrant as specified in its charter)
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(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging Growth Company | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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As of August 9, 2021, there were
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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CYTOCOM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Equipment, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value; shares authorized as of June 30, 2021 and December 31, 2020; shares issued and outstanding as of June 30, 2021 and December 31, 2020 | ||||||||
| Common stock, $ par value; shares authorized as of June 30, 2021 and December 31, 2020; and shares issued and outstanding as of June 30, 2021 and December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Cytocom, Inc. stockholders’ equity (deficit) | ( | ) | ||||||
| Noncontrolling interest in stockholders’ equity | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See Notes to Consolidated Financial Statements
CYTOCOM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended |
For the Six Months Ended |
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| June 30, |
June 30, |
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| 2021 |
2020 |
2021 |
2020 |
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| Revenues: |
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| Grants and contracts |
$ | $ | $ | $ | |||||||||||
| Operating expenses: |
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| Research and development |
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| General and administrative |
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| Total operating expenses |
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| Loss from operations |
( |
) | ( |
) | ( |
) | ( |
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| Other income (expense): |
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| Interest and other income (expense) |
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| Foreign exchange gain (loss) |
( |
) | ( |
) | ( |
) | ( |
) | |||||||
| Change in value of warrant liability |
) | ( |
) | ||||||||||||
| Total other income (expense) |
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| Net loss |
( |
) | ( |
) | ( |
) | ( |
) | |||||||
| Net loss attributable to noncontrolling interests |
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| Net loss attributable to Cytocom, Inc. |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Net loss attributable to common stockholders per share of common stock, basic and diluted |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Weighted average number of shares used in calculating net loss per share, basic and diluted |
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See Notes to Consolidated Financial Statements
CYTOCOM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
| For the Three Months Ended |
For the Six Months Ended |
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| June 30, |
June 30, |
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| 2021 |
2020 |
2021 |
2020 |
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| Net loss including noncontrolling interests |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Other comprehensive income (loss): |
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| Foreign currency translation adjustment |
( |
) | |||||||||||||
| Comprehensive loss including noncontrolling interests |
( |
) | ( |
) | ( |
) | ( |
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| Comprehensive loss attributable to noncontrolling interests |
( |
) | |||||||||||||
| Comprehensive loss attributable to Cytocom, Inc. |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
See Notes to Consolidated Financial Statements
CYTOCOM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Additional |
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| Common Stock |
Treasury Stock |
Paid-In |
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| Shares |
Amount |
Shares |
Amount |
Capital |
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| Balance at December 31, 2019 |
$ | $ | $ | |||||||||||||||||
| Exercise of warrants |
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| Net loss |
— | — | ||||||||||||||||||
| Foreign currency translation |
— | — | ||||||||||||||||||
| Balance at March 31, 2020 |
$ | $ | $ | |||||||||||||||||
| Issuance of common stock, net of offering costs | ||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||
| Net loss |
— | — | ||||||||||||||||||
| Foreign currency translation |
— | — | ||||||||||||||||||
| Balance at June 30, 2020 |
$ | $ | $ | |||||||||||||||||
| Balance at December 31, 2020 |
$ | $ | $ | |||||||||||||||||
| Exercise of warrants |
( |
) | ||||||||||||||||||
| Net loss |
— | — | ||||||||||||||||||
| Foreign currency translation |
— | — | ||||||||||||||||||
| Issuance of common stock, net of offering costs |
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| Balance at March 31, 2021 |
$ | $ | $ | |||||||||||||||||
| Issuance of common stock, net of offering costs |
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| Net loss |
— | — | ||||||||||||||||||
| Foreign currency translation |
— | — | ||||||||||||||||||
| Balance at June 30, 2021 |
$ | $ | $ | |||||||||||||||||
| Accumulated Other Comprehensive Income (Loss) |
Accumulated Deficit |
Noncontrolling Interests |
Total |
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| Balance at December 31, 2019 |
$ | ( |
) | $ | ( |
) | $ | $ | ||||||||
| Exercise of warrants |
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| Net loss |
( |
) | ( |
) | ( |
) | ||||||||||
| Foreign currency translation |
( |
) | ( |
) | ( |
) | ||||||||||
| Balance at March 31, 2020 |
$ | ( |
) | $ | ( |
) | $ | $ | ||||||||
| Issuance of common stock, net of offering costs | ||||||||||||||||
| Exercise of warrants | ||||||||||||||||
| Net loss |
( |
) | ( |
) | ( |
) | ||||||||||
| Foreign currency translation |
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| Balance at June 30, 2020 |
$ | ( |
) | $ | ( |
) | $ | $ | ||||||||
| Balance at December 31, 2020 |
$ | ( |
) | $ | ( |
) | $ | $ | ||||||||
| Exercise of warrants |
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| Net loss |
( |
) | ( |
) | ( |
) | ||||||||||
| Foreign currency translation |
( |
) | ( |
) | ( |
) | ||||||||||
| Issuance of common stock, net of offering costs |
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| Balance at March 31, 2021 |
$ | ( |
) | $ | ( |
) | $ | $ | ||||||||
| Issuance of common stock, net of offering costs |
||||||||||||||||
| Net loss |
( |
) | ( |
) | ( |
) | ||||||||||
| Foreign currency translation |
||||||||||||||||
| Balance at June 30, 2021 |
$ | ( |
) | $ | ( |
) | $ | $ | ||||||||
See Notes to Consolidated Financial Statements
CYTOCOM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended June 30, | ||||||||
| 2021 |
2020 |
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| Cash flows from operating activities: |
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| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
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| Depreciation and amortization |
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| Accrued liability extinguishment |
( |
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| Change in value of warrant liability |
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| Changes in operating assets and liabilities: |
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| Accounts receivable and other current assets |
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| Other long-term assets |
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| Accounts payable and accrued expenses |
( |
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| Net cash used in operating activities |
( |
) | ( |
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| Cash flows from investing activities: |
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| Purchase of short-term investments |
( |
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| Sale of short-term investments |
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| Net cash provided by investing activities |
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| Cash flows from financing activities: |
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| Issuance of common stock, net of offering costs |
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| Exercise of warrants |
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| Net cash provided by financing activities |
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| Effect of exchange rate change on cash and equivalents |
( |
) | ||||||
| Increase in cash and cash equivalents |
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
See Notes to Consolidated Financial Statements
CYTOCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Description of Business
On July 27, 2021 Cytocom, Inc., formerly known as Cleveland BioLabs, Inc. (the "Company" or "Cytocom"), High Street Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the Company ("Merger Sub"), and Cytocom Inc., a Delaware corporation ("Old Cytocom"), completed their previously announced merger transaction. The merger transaction was completed pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of October 16, 2020, pursuant to which Merger Sub merged with and into Old Cytocom, with Old Cytocom continuing as a wholly owned subsidiary of the Company and the surviving corporation of the merger (the "Merger"). In connection with the closing of the Merger, Old Cytocom was renamed “Cytocom Subsidiary Inc.” and the Company was renamed “Cytocom, Inc.”
Prior to the closing of the Merger and at all times during the period covered by this report, the Company was an innovative biopharmaceutical company developing novel approaches to activate the immune system and address serious medical needs. Our proprietary platform of Toll-like immune receptor ("TLR") activators has applications in radiation protection and 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, as of immediately prior to the closing of the Merger, is entolimod, an immune-stimulatory agent, which we are developing as a medical radiation countermeasure and other indications in radiation oncology.
The Company was incorporated in Delaware in June 2003 and is headquartered in Fort Collins, Colorado. The Company has conducted business in the United States ("U.S.") directly and in the Russian Federation ("Russia") through subsidiaries: wholly owned subsidiary, BioLab 612, LLC ("BioLab 612"), which began operations in 2012 and was dissolved in November 2020; and Panacela Labs, Inc. ("Panacela"), which was formed by us and Joint Stock Company "RUSNANO" ("RUSNANO"), our financial partner in the venture, in 2011. Unless otherwise noted, or the context otherwise requires, the terms "Cytocom," the "Company," "we," "us," and "our" refer to Cytocom, Inc., known as "Cleveland BioLabs, Inc." prior to the Merger, BioLab 612, Panacela and, prior to the closing of the Merger, Merger Sub, and after the Merger, Cytocom Subsidiary Inc.
In addition, the Company has an investment in Genome Protection, Inc. ("GPI") that is recorded under the equity method of accounting in the accompanying financial statements. The Company has not recorded its
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited consolidated condensed financial statements include the accounts of the Company, BioLab 612, Panacela and Merger Sub. All significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated condensed balance sheet as of December 31, 2020, which has been derived from audited financial statements, and the unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim consolidated financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC (the "2020 Form 10-K").
In the opinion of the Company’s management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature, and are necessary to fairly present the financial position of the Company as of June 30, 2021, along with its results of operations for the three and six month periods ended June 30, 2021 and 2020 and cash flows for the six-month periods ended June 30, 2021 and 2020. Interim results are not necessarily indicative of results that may be expected for any other interim period or for an entire year.
At June 30, 2021, we had cash and cash equivalents of $
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard-setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant Customers and Accounts Receivable
The following table presents our revenue by customer, on a proportional basis, for the three and six months ended June 30, 2021 and 2020.
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||
| Customer | 2021 | 2020 | Variance | 2021 | 2020 | Variance | ||||||||||||||||||
| Department of Defense | % | % | ( | )% | % | % | ( | )% | ||||||||||||||||
| Incuron | % | % | ( | )% | % | % | ( | )% | ||||||||||||||||
| Total | % | % | ( | )% | % | % | ( | )% | ||||||||||||||||
Other Comprehensive Income (Loss)
The Company applies the Accounting Standards Codification ("Codification") on comprehensive income (loss) that requires disclosure of all components of comprehensive income (loss) on an annual and interim basis. Other comprehensive income (loss) is defined as the change in equity of a business enterprise during a period arising from transactions and other events and circumstances from non-owner sources. The following table presents the changes in accumulated other comprehensive loss for the six months ended June 30, 2021.
| Gains and losses on foreign exchange translations | ||||
| Beginning balance | $ | ( | ) | |
| Other comprehensive income (loss) before reclassifications | ||||
| Amounts reclassified from accumulated other comprehensive loss | ||||
| Ending balance | $ | ( | ) | |
Accounting for Stock-Based Compensation
The Cleveland Biolabs, Inc. Equity Incentive Plan, adopted in 2018 (the "Plan"), authorizes the Company to grant (i) options to purchase common stock, (ii) restricted or unrestricted stock units, and (iii) stock appreciation rights, so long as the exercise or grant price of each are at least equal to the fair market value of the stock on the date of grant. As of June 30, 2021, an aggregate of
The 2013 Employee Stock Purchase Plan (the "ESPP") provides a means by which eligible employees of the Company and certain designated related corporations may be given an opportunity to purchase shares of common stock. As of June 30, 2021, there are
The Company utilizes the Black-Scholes valuation model for estimating the fair value of all stock options granted where the vesting period is based on length of service or performance, while a Monte Carlo simulation model is used for estimating the fair value of stock options with market-based vesting conditions.
Income Taxes
At June 30, 2021, the Company had U.S. federal net operating loss carryforwards of approximately $
Earnings (Loss) per Share
Basic net loss per share of common stock excludes dilution for potential common stock issuances and is computed by dividing net loss by the weighted average number of shares outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted net loss per share is identical to basic net loss per share as potentially dilutive securities have been excluded from the calculation of diluted net loss per common share because the inclusion of such securities would be antidilutive.
The Company has excluded the following securities from the calculation of diluted net loss per share because all such securities were antidilutive for the periods presented. Additionally, there were no dilutive securities outstanding as of June 30, 2021.
| As of June 30, | ||||||||
| Common Equivalent Securities | 2021 | 2020 | ||||||
| Warrants | ||||||||
| Options | ||||||||
| Total | ||||||||
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business. The Company accrues for liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
3. Fair Value of Financial Instruments
The Company has measured and recorded short-term investments and certain warrants as liabilities at fair value in the accompanying financial statements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, includes:
| • | Level 1 – Observable inputs for identical assets or liabilities such as quoted prices in active markets; |
| • | Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
| • | Level 3 – Unobservable inputs in which little or no market data exists, which are therefore developed by the Company using estimates and assumptions that reflect those that a market participant would use. |
Short-term investments primarily include certificates of deposit at commercial banking institutions, with maturities of three months or more at time of purchase. Certificates of deposit are carried at amortized cost, which approximates fair value and are included as a Level 2 measurement in the table below.
There were
| As of December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Short-term investments | $ | $ | $ | $ | ||||||||||||
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 fair value measurements for the periods indicated:
| Three Months Ended | ||||||
| June 30, 2020 | ||||||
| Accrued Warrant Liability | ||||||
| Beginning Balance | $ | |||||
| Total (gains) or losses, realized and unrealized, included in earnings (1) | ||||||
| Settlements | ( | ) | ||||
| Ending Balance | $ | |||||
| Six Months Ended | ||||||
| June 30, 2020 | ||||||
| Accrued Warrant Liability | ||||||
| Beginning Balance | $ | |||||
| Total (gains) or losses, realized and unrealized, included in earnings (1) | ||||||
| Settlements | ( | ) | ||||
| Ending Balance | $ | |||||
| (1) | Unrealized gains or losses related to the accrued warrant liability were included as change in value of accrued warrant liability. There were |
As of June 30, 2021 and December 31, 2020, the Company had
The carrying amounts of the Company’s short-term financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values due to their short maturities.
4. Stockholders’ Equity
On February 19, 2021, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") for the sale of
The Company has granted options to purchase shares of common stock. The following is a summary of option award activity during the six months ended June 30, 2021:
| Total Stock Options Outstanding | Weighted Average Exercise Price per Share | |||||||
| December 31, 2020 | $ | |||||||
| Forfeited, Canceled | ( | ) | ||||||
| June 30, 2021 | $ | |||||||
The following is a summary of outstanding stock options as of June 30, 2021:
| As of June 30, 2021 | ||||||||
| Stock Options Outstanding | Vested Stock Options | |||||||
| Quantity | ||||||||
| Weighted Average Exercise Price | $ | $ | ||||||
| Weighted Average Remaining Contractual Term (in Years) | ||||||||
| Intrinsic Value | $ | $ | ||||||
For the six months ended June 30, 2021 and 2020, the Company granted
As of June 30, 2021, there was
5. Warrants
In connection with previous sales of the Company’s common stock and the issuance of debt instruments, warrants were issued which presently have exercise prices ranging from $
The following table summarizes the outstanding warrant activity during the six months ended June 30, 2021:
| Number of Warrants | Weighted Average Exercise Price | |||||||
| December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited, Canceled | ( | ) | ||||||
| June 30, 2021 | $ | |||||||
6. Significant Alliances and Related Parties
Roswell Park Cancer Institute
The Company has entered into several agreements with Roswell Park Cancer Institute ("RPCI"), including: various sponsored research agreements, an exclusive license agreement and clinical trial agreements for the conduct of the Phase 1 entolimod oncology study and the Phase 1 Curaxin CBL0137 ("Curaxin") intravenous administration study. Additionally, the Company’s Chief Scientific Officer, or CSO, Dr. Andrei Gudkov, is the Senior Vice President of Research Technology and Innovation at RPCI. The Company incurred $
The Cleveland Clinic
The Company has entered into an exclusive license agreement with The Cleveland Clinic pursuant to which the Company was granted an exclusive license to The Cleveland Clinic’s research base underlying entolimod's therapeutic platform and certain product candidates licensed to Panacela. The Company has the primary responsibility to fund all newly developed patents. However, The Cleveland Clinic retains ownership of those patents covered by the agreement. The Company also agreed to use commercially diligent efforts to bring one or more products to market as soon as practical, consistent with sound and reasonable business practices and judgments. On August 6, 2018, the Company sublicensed the intellectual property underlying entolimod's composition that the Company licenses from The Cleveland Clinic to GPI. There were no milestone or royalty payments paid to The Cleveland Clinic during the six months ended June 30, 2021 and 2020. The Company incurred
Buffalo BioLabs and Incuron
Our Global Head of Research and Development, Dr. Andrei Gudkov, has business relationships with Buffalo BioLabs, LLC ("BBL"), where Dr. Gudkov was a founder and currently serves as its uncompensated Principal Scientific Advisor. The Company recognized
Dr. Gudkov is also an uncompensated member of the board of directors for Incuron. Pursuant to master service and development agreements we have with Incuron, the Company performs various research, business development, clinical advisory, and management services for Incuron. The Company recognized revenue of $
Genome Protection
GPI incurred $
7. Subsequent Events
Closing of the Merger with Cytocom Inc.
On July 27, 2021, the Company, Merger Sub and Old Cytocom completed the Merger. The Merger was completed pursuant to the Merger Agreement, pursuant to which Merger Sub merged with and into Old Cytocom, with Old Cytocom continuing as a wholly owned subsidiary of the Company and the surviving corporation of the Merger. In connection with the closing of the Merger, Old Cytocom was renamed “Cytocom Subsidiary Inc.” and the Company was renamed “Cytocom, Inc.”
Merger Consideration. Upon completion of the Merger, each outstanding share of Old Cytocom common stock, each outstanding share of Old Cytocom preferred stock that was not, by its terms, converted into shares of Old Cytocom common stock immediately prior to the effective time of the Merger (the "Effective Time"), and each vested restricted stock unit of Old Cytocom (excluding, in each case, dissenting shares and shares held in treasury) automatically converted into the right to receive a number of shares of Company common stock determined by the application of an exchange ratio formula set forth in the Merger Agreement.
Exchange Ratio. The exchange ratio was calculated based on the total number of outstanding shares of Company common stock and Old Cytocom common stock, each on a fully diluted basis, and the respective valuations of the Company and Old Cytocom, as of immediately prior to the Effective Time. As of the effective date of the Merger Agreement, the valuation of the Company was assumed to be $
Accordingly, based on the foregoing exchange ratio, the parties determined that
Financing Arrangements
As a result of the Merger, the Company became party to the following material definitive agreements:
| • | Loan and Security Agreement, dated as of April 26, 2021, between Avenue Venture Opportunities Fund, L.P. ("Avenue") and Old Cytocom, as supplemented by the Supplement to the Loan and Security Agreement, dated as of April 26, 2021, between Avenue and Old Cytocom, under which the Company will (i) issue the warrant described in the next paragraph to Avenue and (ii) be obligated to issue shares of common stock upon conversion of up to $ |
| • | Warrant to Purchase Shares of Common Stock of Cytocom Inc, issued at the Effective Time, by the Company to Avenue, exercisable for up to |
| • | Share Purchase Agreement, dated as of May 21, 2021, by and among GEM Global Yield LLC SCS, GEM Yield Bahamas Limited (such entities together, "GEM") and the Company, as successor to Old Cytocom, under which the Company may sell, from time to time, up to $ |
| • | Warrant to Purchase Shares of Cytocom Inc., dated as of May 21, 2021, issued by Old Cytocom and assumed by the Company, exercisable for up to |
| • | The Registration Rights Agreement, dated as of May 21, 2021, between Old Cytocom, GEM Global Yield LLC SCS and GEM Yield Bahamas Limited ; and |
| • | Warrants, issued immediately after the Effective Time, by the Company to the purchasers of Old Cytocom’s Series A-3 Preferred Stock and Series A-4 Preferred Stock, each of which were converted immediately prior to the Effective Time, exercisable for up to an aggregate |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2020. Factors that may cause such differences include, but are not limited to, 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 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, 2020.
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, 2020.
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").
Recent Developments
Closing of the Merger
On July 27, 2021, the Company, Merger Sub, and Old Cytocom completed the Merger. The Merger was completed pursuant to the Merger Agreement, pursuant to which, Merger Sub merged with and into Old Cytocom, with Old Cytocom continuing as a wholly owned subsidiary of the Company and the surviving corporation of the Merger. In connection with the closing of the Merger. Old Cytocom was renamed "Cytocom Subsidiary Inc." and the Company was renamed "Cytocom, Inc."
Upon completion of the Merger, each outstanding share of Old Cytocom common stock, each outstanding share of Old Cytocom preferred stock that was not, by its terms, converted into shares of Old Cytocom common stock immediately prior to the Effective Time, and each vested restricted stock unit of Old Cytocom (excluding, in each case, dissenting shares and shares held in treasury) automatically converted into the right to receive a number of shares of Company common stock determined by the application of an exchange ratio formula set forth in the Merger Agreement.
The exchange ratio was calculated based on the total number of outstanding shares of Company common stock and Old Cytocom common stock, each on a fully diluted basis, and the respective valuations of the Company and Old Cytocom, as of immediately prior to the Effective Time. As of the effective date of the Merger Agreement, the valuation of the Company was assumed to be $39 million and the valuation of Old Cytocom was assumed to be $61 million. For purposes of calculating the exchange ratio, the respective valuations of Old Cytocom and the Company at the Effective Time were increased or decreased, as applicable, based on the amount of each company’s net cash at closing, inclusive of certain short- and long-term liabilities. From these imputed valuation amounts, the number of shares to be issued as merger consideration to Old Cytocom securityholders will be equal to a percentage of the fully diluted common stock of the combined company determined by dividing the adjusted Old Cytocom valuation by the adjusted combined company valuation.
Accordingly, based on the foregoing exchange ratio, the parties determined that 18,492,452 shares of Company common stock will be issued in the Merger, resulting in the former Old Cytocom securityholders owning, or holding rights to acquire, approximately 54% of the common stock of the combined company, on a fully diluted basis, and legacy, pre-Merger Company securityholders owning, or holding rights to acquire, approximately 46% of the common stock of the combined company, on a fully diluted basis, in each case as of immediately following the Effective Time.
In addition, at the Effective Time, each unvested Old Cytocom restricted stock unit was converted into a number of restricted stock units of the Company, as determined in accordance with the exchange ratio formula described above. The terms (including, without limitation, the vesting terms) of each such substitute restricted stock unit are substantially equivalent to those of the Old Cytocom restricted stock unit being replaced.
Financing Arrangements
As a result of the Merger, the Company became party to the following material definitive agreements:
| • |
Loan and Security Agreement, dated as of April 26, 2021, between Avenue Venture Opportunities Fund, L.P. ("Avenue") and Old Cytocom, as supplemented by the Supplement to the Loan and Security Agreement, dated as of April 26, 2021, between Avenue and Old Cytocom, under which the Company will (i) issue the warrant described in the next paragraph to Avenue and (ii) be obligated to issue shares of common stock upon conversion of up to $3 million of principal outstanding under the Avenue facility; |
| • |
Warrant to Purchase Shares of Common Stock of Cytocom Inc, issued at the Effective Time, by the Company to Avenue, exercisable for up to 154,004 shares of Company common stock; |
| • |
Share Purchase Agreement, dated as of May 21, 2021, by and among GEM Global Yield LLC SCS, GEM Yield Bahamas Limited (such entities together, "GEM") and the Company, as successor to Old Cytocom, under which the Company may sell, from time to time, up to $75 million shares of its common stock at a price per share equal to 90% of the recent trading price of the Company’s common stock; |
| • |
Warrant to Purchase Shares of Cytocom Inc., dated as of May 21, 2021, issued by Old Cytocom and assumed by the Company, exercisable for up to 1,720,083 shares, or 4.99% of the outstanding shares of common stock as of immediately after the Effective Time; |
| • |
The Registration Rights Agreement, dated as of May 21, 2021, between Old Cytocom, GEM Global Yield LLC SCS and GEM Yield Bahamas Limited ; and |
| • |
Warrants, issued immediately after the Effective Time, by the Company to the purchasers of Old Cytocom’s Series A-3 Preferred Stock and Series A-4 Preferred Stock, each of which were converted immediately prior to the Effective Time, exercisable for up to an aggregate 952,000 shares of Company common stock. |
Certain of these arrangements are discussed in greater deal under the heading " – Liquidity and Capital Resources."
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. The continued spread of COVID-19 in the United States and worldwide, as well as the government-ordered shutdown and shelter-in-place orders imposed to counter the pandemic, led to severe disruptions to the global economy, especially for the year ended December 31, 2020. In this connection, on March 20, 2020, the Governor of New York announced that 100% of the workforce of all businesses, excluding essential services, must stay home. During the effectiveness of this order , we implemented a work-from-home policy for all employees based in our Buffalo, New York headquarters. Under new applicable state orders, our offices may be occupied at their normal capacity if other safety precautions are taken, however, generally very few of our employees have returned to the office. 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.
Registered Direct Offering
As previously disclosed, on February 19, 2021, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with several healthcare-focused and institutional investors for the sale by the Company of 2,000,000 shares (the "Shares") of the Company’s common stock at a purchase price of $7.00 per share in a registered direct offering. The closing of the sale of the Shares under the Purchase Agreement occurred on February 23, 2021. The gross proceeds to the Company from the transaction were $14 million, before deducting the placement agent’s fees and other estimated offering expenses. 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). Under the Company’s engagement letter (the "Engagement Letter") with H.C. Wainwright & Co., LLC ("Wainwright"), pursuant to which Wainwright agreed to serve as exclusive placement agent for the issuance and sale of the Shares, the Company agreed to pay Wainwright an aggregate fee equal to 7.25% of the gross proceeds received by the Company from the sale of the securities in the transaction as well as a management fee equal to 1.0% of the gross proceeds received by the Company from the sale of the securities in the transactions. Pursuant to the Engagement Letter, the Company also issued to designees of Wainwright warrants to purchase up to 7.5% of the aggregate number of shares of Common Stock sold in the transactions, or warrants to purchase up to 150,000 shares of Common Stock (the "Placement Agent Warrants"). Subject to certain ownership limitations, the Placement Agent Warrants are immediately exercisable at an exercise price of $8.75 per share of Common Stock, subject to customary adjustments as provided under the terms of the Placement Agent Warrants. The Warrants are exercisable for five years from the commencement of sales of the shares being offered.
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.
Revenue
Our revenue has historically originated from grants and contracts from both United States ("U.S.") federal government sources and service contracts with Incuron. U.S. federal grants and contracts have been provided to advance research and development of entolimod, our lead product candidate, prior to the Merger, which we believe is of interest for potential sale to the DoD, or the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services ("BARDA"). We also have provided various research, management, business development, and clinical advisory services to Incuron.
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 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.
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 Policies and Significant Estimates
Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2020. Our critical accounting policies and significant estimates have not changed substantially from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Revenue
Revenue decreased from approximately $0.06 million for the three months ended June 30, 2020 to $0.00 million for the three months ended June 30, 2021, representing a 100% decrease. This decrease is primarily due to the cessation of revenues from our JWMRP contract with the DoD for continued preclinical development of entolimod, decreases in revenue from our PRMRP contract with the DoD for continued clinical development of entolimod, and decreases in revenue from our service contract with Incuron. The cessation of revenue is due to the completion of the DoD contracts and grants in 2020 and the discontinuation of all revenue and service contracts with Incuron. Accordingly, unless we obtain new contract or grant awards, we may not generate significant revenue until we can commercialize one or more of our product candidates. Differences in our revenue sources, by program, between the years are set forth in the following table.
| Three Months Ended June 30, |
|||||||||||||
| Funding Source |
Program |
2021 |
2020 |
Variance |
|||||||||
| DoD |
JWMRP Contract (1) |
$ | - | $ | 44,544 | $ | (44,544 | ) | |||||
| DoD |
PRMRP Contract (2) |
- | 10,364 | (10,364 | ) | ||||||||
| Incuron |
Service contract |
- | 8,347 | (8,347 | ) | ||||||||
| $ | - | $ | 63,255 | $ | (63,255 | ) | |||||||
| (1) |
The Congressionally Directed Medical Research Programs (CDMRP) Joint Warfighter Medical Research Program (JWMRP) contract was awarded on September 1, 2015. |
| (2) |
The CDMRP Peer Reviewed Medical Research Program (PRMRP) grant was awarded effective as of September 30, 2015. |
Research and Development Expenses
R&D expenses decreased from $0.17 million for the three months ended June 30, 2020 to $0.05 million for the three months ended June 30, 2021, representing a decrease of $0.12 million, or 69.7%. Variances in individual development programs are noted in the table below. The net decrease is primarily attributable to a $0.11 million decrease in R&D spending for biodefense applications of entolimod primarily due to a reduction in personnel costs. The remaining variances are not significant.
| Three Months Ended June 30, |
||||||||||||
| 2021 |
2020 |
Variance |
||||||||||
| Entolimod for Biodefense Applications |
$ | 48,888 | $ | 163,505 | $ | (114,617 | ) | |||||
| Curaxins |
— | 1,146 | (1,146 | ) | ||||||||
| Panacela product candidates |
2,627 | 5,356 | (2,729 | ) | ||||||||
| Total research & development expenses |
$ | 51,515 | $ | 170,007 | $ | (118,492 | ) | |||||
General and Administrative Expenses
G&A expenses increased from $0.50 million for the three months ended June 30, 2020 to $0.60 million for the three months ended June 30, 2021, representing an increase of $0.10 million or 20.0%. This increase is primarily related to professional fees primarily relating to negotiation and completion of the Merger, as well as the defense against litigation incident thereto.
Other Income and Expenses
Other income decreased from $0.22 million for the three months ended June 30, 2020 to $0.002 million for the three months ended June 30, 2021, representing a decrease of $0.22 million or approximately 100%. This decrease primarily related to non-cash income during the three months ended June 30, 2020 resulting from a $0.5 million extinguishment of an accrued liability, offset by $0.3 million in expense related to the change in valuation of our warrant liability as a result of stock price changes.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Revenue
Revenue decreased from approximately $0.22 million for the six months ended June 30, 2020 to $0.00 million for the six months ended June 30, 2021, representing a 100% decrease. This decrease is primarily due to cessation in revenues from our JWMRP contract with the DoD for continued preclinical development of entolimod, cessation in revenue from our PRMRP contract with the DoD for continued clinical development of entolimod, and cessation in revenue from our service contract with Incuron. The decreases in revenues are due to the completion of the DoD contracts and grants in 2020 and the discontinuation of all revenue and service contracts with Incuron. Accordingly, unless we obtain new contract or grant awards, we may not generate significant revenue until we can commercialize one or more of our product candidates. Differences in our revenue sources, by program, between the years are set forth in the following table.
| Six Months Ended June 30, |
|||||||||||||
| Funding Source |
Program |
2021 |
2020 |
Variance |
|||||||||
| DoD |
JWMRP Contract (1) |
$ | - | $ | 113,555 | $ | (113,555 | ) | |||||
| DoD |
PRMRP Contract (2) |
- | 56,385 | (56,385 | ) | ||||||||
| Incuron |
Service contract |
- | 49,357 | (49,357 | ) | ||||||||
| $ | - | $ | 219,297 | $ | (219,297 | ) | |||||||
| (1) |
The Congressionally Directed Medical Research Programs (CDMRP) Joint Warfighter Medical Research Program (JWMRP) contract was awarded on September 1, 2015. |
| (2) |
The CDMRP Peer Reviewed Medical Research Program (PRMRP) grant was awarded effective as of September 30, 2015. |
Research and Development Expenses
R&D expenses decreased from $0.39 million for the six months ended June 30, 2020 to $0.17 million for the six months ended June 30, 2021, representing a decrease of $0.22 million, or 56.2%. Variances in individual development programs are noted in the table below. The net decrease is primarily attributable to a $0.20 million decrease in R&D spending for biodefense applications of entolimod due to a reduction in personnel costs. The remaining variances are not significant.
| Six Months Ended June 30, |
||||||||||||
| 2021 |
2020 |
Variance |
||||||||||
| Entolimod for Biodefense Applications |
$ | 164,441 | $ | 364,460 | $ | (200,019 | ) | |||||
| Curaxins |
— | 12,690 | (12,690 | ) | ||||||||
| Panacela product candidates |
5,332 | 11,065 | (5,733 | ) | ||||||||
| Total research & development expenses |
$ | 169,773 | $ | 388,215 | $ | (218,442 | ) | |||||
General and Administrative Expenses
G&A expenses increased from $0.87 million for the six months ended June 30, 2020 to $1.05 million for the six months ended June 30, 2021, representing an increase of $0.18 million, or 21.0%. This increase consisted primarily of an increase of $0.18 million in professional fees in part for activities related to the negotiation and completion of the Merger, as well as the defense against litigation incident thereto.
Other Income and Expenses
Other income decreased from $0.06 million for the six months ended June 30, 2020 to $0.006 million for the six months ended June 30, 2021, representing a decrease of $0.06 million or approximately 100%. This decrease primarily related to non-cash income during the three months ended June 30, 2020 resulting from a $0.5 million extinguishment of an accrued liability, offset by $0.45 million in expense related to the change in valuation of our warrant liability as a result of stock price changes.
Liquidity and Capital Resources
We have incurred net losses of approximately $170 million from our inception through June 30, 2021. Historically, we have not generated, and do not expect to generate in the immediate future, revenue from sales of product candidates. Since our founding in 2003, we have funded our operations through a variety of means:
• From inception through June 30, 2021, we have raised $160.6 million of net equity capital, including amounts received in connection with our February 2021 registered direct offering and from the exercise of options and warrants. We have also received $7.3 million in net proceeds from the issuance of long-term debt instruments;
• DoD and BARDA have funded grants and contracts totaling $49 million for the development of entolimod for its biodefense indication;
• The government of the Russian Federation has funded a series of our contracts totaling $17.3 million, based on the exchange rates in effect on the date of funding. These contracts included a requirement for us to contribute matching funds, which we have satisfied;
• We have been awarded $4.0 million in grants and contracts not described above, all of which have been recognized at June 30, 2021;
• Incuron was formed to develop and commercialize the Curaxins product line, including its lead oncology drug candidate CBL0137. In 2015, we sold our ownership interest in Incuron for approximately $4.0 million and retain a 2% royalty interest in the CBL0137 technology;
• Panacela was formed to develop and commercialize preclinical compounds, which were transferred to Panacela through assignment and lease agreements. RUSNANO contributed $9.0 million to Panacela and the Company contributed $3.0 million plus intellectual property to Panacela. As of the date of this filing, the Company owns 67.57% of Panacela; and
• The Company formed its GPI joint venture with Everon. GPI, which is currently 50% owned by the Company and 50% owned by Everon, is undertaking a research and development program aimed at clinical testing of entolimod and GP532 (a variant of our entolimod drug candidate) and the development of medications with anti-aging and other indications associated with genome damage. GPI has been funded by an initial investment of $10.5 million from venture capital fund Norma Investments Limited.
Since the end of the fiscal quarter ended June 30, 2021, as a result of the Merger, we have become party to several new financing arrangements, including a credit facility and equity line-of-credit agreement, that have provided us with additional cash in the aggregate amount of approximately $10 million. We have the capacity to make further borrowings and drawings under these facilities, which can provide us with additional working capital. See “ – Avenue Facility” and “ – GEM Equity Line Agreement” below.
We have incurred cumulative net losses and expect to incur additional losses related to our R&D activities. We do not have commercial products and have limited capital resources and our contracts and grants with the DoD were completed in 2020, meaning that we are currently not generating any revenues or cash from operations. At June 30, 2021, we had cash and cash equivalents of $13.8 million, which represents a increase of $11.5 million since the end of our last fiscal year. This increase was caused by our capital raise, offset by our net cash used in operations of $1.2 million during the six months ended June 30, 2021. We expect our cash and cash equivalents to fund our projected operating requirements and allow us to fund our operating plan, in each case, into August 2022. However, until we are able to commercialize our product candidates at a level that covers our cash expenses, we will need to raise substantial additional capital, which we may be unable to raise in sufficient amounts, when needed and at acceptable terms. Our plans with regard to these matters may include seeking additional capital through debt or equity financing, 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. There can be no assurance that we will be able to obtain future financing on acceptable terms, obtain additional government financing for our operations, or enter into other strategic transactions. In addition, the recent outbreak of the novel coronavirus known as COVID-19 has significantly disrupted world financial markets, negatively impacted U.S. market conditions and may reduce opportunities for us to seek out additional funding. 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 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.
Cash Flows
The following table provides information regarding our cash flows for the six months ended June 30, 2021 and 2020:
| For the Six Months Ended June 30, | ||||||||||||
| 2021 |
2020 |
Variance |
||||||||||
| Cash flows used in operating activities |
$ | (1,223,547 | ) | $ | (902,004 | ) | $ | (321,543 | ) | |||
| Cash flows provided by investing activities |
323,111 | 43,245 | 279,866 | |||||||||
| Cash flows provided by financing activities |
12,723,288 | 3,165,640 | 9,557,648 | |||||||||
| Effect of exchange rate change on cash and equivalents |
7,685 | (23,695 | ) | 31,380 | ||||||||
| Increase in cash and cash equivalents |
11,830,537 | 2,283,186 | 9,547,351 | |||||||||
| Cash and cash equivalents at beginning of period |
1,946,418 | 1,126,124 | 820,294 | |||||||||
| Cash and cash equivalents at end of period |
$ | 13,776,955 | $ | 3,409,310 | $ | 10,367,645 | ||||||
Operating Activities
Net cash used in operating activities increased by $0.3 million to $1.2 million for the six months ended June 30, 2021 from $0.90 million for the six months ended June 30, 2020. Net cash used in operating activities for the period ending June 30, 2021 consisted of a reported net loss of $1.2 million.
Net cash used in operating activities for the six months ended June 30, 2020 of $0.90 million consisted of a reported net loss of $0.98 million, which was further increased by $0.05 million of net non-cash operating activities, and offset by $0.13 million of changes in operating assets and liabilities. The $0.05 million of net non-cash operating activities was due to a $0.5 million gain on extinguishment of an accrued liability, offset by $0.45 million in expense related to the change in valuation of our warrant liability as a result of stock price changes. The $0.13 million of changes in operating assets and liabilities was due primarily to a decrease in accounts receivable and other current assets.
Investing Activities
Net cash provided by investing activities increased to $0.3 million for the six months ended June 30, 2021 from $0.04 million for the six months ended June 30, 2020 due to the sale of short-term investments during the six months ended June 30, 2021.
Financing Activities
Net cash provided by financing activities increased to $12.7 million for the six months ended June 30, 2021 from $3.2 million for the six months ended June 30, 2020 due to an issuance of common stock net of offering costs during the six months ended June 30, 2021.
Impact of Exchange Rate Fluctuations
Our reported financial results are affected by changes in foreign currency exchange rates between the U.S. dollar and the Russian ruble. Between January 1, 2021 and June 30, 2021, this rate fluctuated by 1.1%. For calendar year 2020, this rate fluctuated by 18.9%. Translation gains or losses result primarily from the impact of exchange rate fluctuations on the reported U.S. dollar equivalent of ruble-denominated cash and cash equivalents, and short-term investments. Variances in the exchange rate for these items have not been realized; as such the resulting gains or losses are recorded as other comprehensive income or loss in the equity section of the balance sheet.
Avenue Facility
Under the terms of the Avenue Facility, Avenue agreed to make term loans to Old Cytocom from time to time in the aggregate principal amount of up to $15,000,000. Each loan made by Avenue under the Avenue Facility will be evidenced by a separate promissory note payable to Avenue. The loans will bear interest at a variable rate of interest equal to the sum of (i) the greater of (A) the Prime Rate and (B) 3.25% plus (ii) 7.74%. Repayment of the loans owed under the Avenue Facility are secured by a security interest in substantially all of Old Cytocom’s assets, including equipment, fixtures, inventory, deposit accounts and personal property, as well as the securities it holds in its wholly owned subsidiaries. The making of each loan requested by Old Cytocom is subject to certain customary conditions, including the provision of a legal opinion, certified copies of resolutions and organizational documents, the company’s good standing and other matters.
The aggregate loan amounts were deposited by Avenue into a controlled account. Old Cytocom transferred $10 million into its general operating account during July 2021, which was assigned to the Company, and accordingly, the Company’s assets are subject to a security interest in favor of Avenue. The Company will be able to transfer an additional $5 million into its general operating account, which will be subject to a control agreement with Avenue, upon the Company raising at least $20 million in additional capital in the form of subordinated indebtedness or equity from a follow-on transaction entered into after the Effective Time. The loans may then be drawn down from the controlled account and will be evidenced by a promissory note. The note will provide that the Company will be required to make only monthly interest payments, calculated as described above, until April 2022 (which may be extended to April 2023 upon the Company’s raising of an additional $20 million in capital). Thereafter, the Company will also be required to make monthly payments of principal in equal installments until the maturity date of May 1, 2024.
The Avenue Facility documents contain customary representations and warranties of Old Cytocom, as well as various affirmative and negative covenants. Among such covenants are requirements that the Company:
• provide notice of certain events;
• deliver monthly financial statements to Avenue, until the Company has a market capitalization of at least $250 million and maintains at least a minimum of $4 million in unrestricted cash, after which it will only need to provide quarterly statements;
• execute regular compliance certificates;
• provide copies of all board of directors materials and minutes of meetings to Avenue;
• maintain its existence and comply with all applicable laws;
• may not become indebted for borrowed money, the deferred purchase price for property or enter into any leases that would be capitalized in accordance with GAAP, subject to certain exceptions, including indebtedness for the acquisition of supplies, subordinated indebtedness and certain other items;
• maintain a minimum of $5 million in unrestricted cash and cash equivalents in accounts subject to control agreements with Avenue;
• may not create, incur or assume any liens on its property;
• may not undergo any fundamental or change-in-control transactions or sell all its assets;
• may not make any loans or investments, subject to certain exceptions;
• may not enter into any transactions with related parties;
• may not prepay any other indebtedness; or
• may not create, acquire or sell any subsidiaries.
The Avenue Facility documents also grant certain additional rights to Avenue. Under the Avenue Facility, Avenue has a preemptive right to purchase up to $1 million of Company equity securities on the same terms, conditions and prices offered by the Company to any investor in connection with any equity or debt financing until October 16, 2022. Additionally, Avenue has the right to convert up to $3 million of outstanding principal into shares of Company common stock. The number of shares issuable upon conversion will be determined by dividing the amount of indebtedness being converted by 120% of the 5-day volume weighted average price (VWAP) of Company common stock prior to the date of the issuance of the Avenue Warrant.
GEM Equity Line Agreement
Under the terms of the GEM Equity Line Agreement, the agreement became immediately binding upon the Company at the Effective Time. Under the GEM Equity Line Agreement, the Company may elect to issue and sell to GEM up to $75 million of its common stock. Upon the election of the Company to make such a sale, it will deliver a draw-down notice to GEM, and, if all applicable conditions are satisfied, GEM will purchase newly issued shares for the amount specified in the draw-down notice. The purchase price of the shares to be sold is set at 90% of the recent average daily closing price of the Company’s common stock on the Nasdaq Capital Market or other market on which the stock may be listed. The Company is not permitted to make a draw-down request in an amount that exceeds 400% of the average daily trading volume of the Company’s stock for the 30 trading days preceding the draw-down date. Each draw down is subject to certain closing conditions, including (i) the continued accuracy of the representations and warranties made in the GEM Equity Line Agreement, (ii) a registration statement registering the resale of the shares sold under the GEM Equity Line Agreement having been declared effective by the Securities and Exchange Commission ("SEC"), (ii) the absence of any law, order, ruling or injunction prohibiting the consummation of the transactions contemplated by the GEM Equity Line Agreement, (iii) the Company’s common stock not being suspended from trading by the Nasdaq Capital Market or other market on which the shares are then listed, (iv) the absence of any litigation commenced, or governmental investigation commenced or threated, against the Company in connection with the GEM Equity Line Agreement transactions and (v) with respect to the first draw down only, the delivery by the Company’s counsel of a negative assurance letter and delivery by the Company’s independent auditors of a comfort letter. However, the Company will be permitted to make a draw-down request for the sale of up to $15 million of shares in the period immediately following the Effective Time without having to have an effective resale registration statement in effect. The resale of the shares sold pursuant to this initial drawdown request will not be required to be registered immediately. Upon the Company’s issuance of shares in connection with any draw-down purchase made by GEM, the Company will be required to pay GEM, in cash or additional shares of stock, a commitment fee in an amount equal to 2% of the amount purchased in such drawdown.
The GEM Equity Line Agreement terminates on the earliest to occur of (i) three years from the Effective Time, (ii) May 21, 2026 or (iii) the date on which GEM has purchased $75 million in the aggregate of Company stock. Upon payment of $1.5 million to GEM, the Company may terminate the GEM Equity Line Agreement following the settlement in full of the issuance of the shares made for the first $15 million draw-down purchase.
The GEM Equity Line Agreement contains customary representations and warranties of the Company, as well as various affirmative and negative covenants. Among such covenants are requirements that the Company:
• comply with applicable laws, including the securities laws;
• file a registration statement with the SEC to register the resale of the shares sold under the GEM Equity Line Agreement and undertake best efforts to maintain the effectiveness of the registration statement;
• not enter into any other agreement that would restrict or impair the Company’s ability to perform under the GEM Equity Line Agreement, including any other equity line arrangement; and
• keep reserved an adequate number of shares for issuance under the GEM Equity Line Agreement.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting company filers.
Item 4. Controls and Procedures
Effectiveness of Disclosure
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of June 30, 2021. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
In the ordinary course of business, we may periodically become subject to legal proceedings and claims arising in connection with ongoing business activities. The results of litigation and claims cannot be predicted with certainty, and unfavorable resolutions are possible and could materially affect our results of operations, cash flows, or financial position. In addition, regardless of the outcome, litigation could have an adverse impact on us because of defense costs, diversion of management resources, and other factors.
While the outcome of these proceedings and claims cannot be predicted with certainty, there are no matters, other than those set forth below, as of June 30, 2021, that, in the opinion of management, might have a material adverse effect on our financial position, results of operations or cash flows, or that are required to be disclosed under the rules of the SEC.
On March 12, 2021, a complaint, captioned Teo v. Cleveland BioLabs, Inc. et al., Case 1:21-cv-02187, was filed in the U.S. District Court for the Southern District of New York in connection with the Merger (the "Teo Action"). The Teo Action names as defendants Cleveland BioLabs, each director on the Cleveland BioLabs board of directors, Merger Sub and Cytocom. The complaint in the Teo Action alleges that (i) the Cleveland BioLabs board of directors breached its fiduciary duties to the plaintiff stockholder in entering into the Merger Agreement and (ii) Cleveland BioLabs and the Cleveland BioLabs board of directors omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger, of which this proxy statement/prospectus forms a part, in violation of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and related SEC regulations. On July 14, 2021, Plaintiff Teo filed a notice of dismissal. On July 16, 2021, the Southern District entered an order dismissing the case.
On March 17, 2021, a complaint, captioned Steudte v. Cleveland BioLabs, Inc. et al., Case 1:21-cv-02314, was filed in the U.S. District Court for the Southern District of New York in connection with the Merger (the "Steudte Action"). The Steudte Action names as defendants Cleveland BioLabs and each director on the Cleveland BioLabs board of directors. The complaint in the Steudte Action alleges that Cleveland BioLabs and the Cleveland BioLabs board of directors omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger, of which this proxy statement/prospectus forms a part, in violation of their fiduciary duties and the Exchange Act and related SEC regulations. The Steudte Action seeks, among other things, an injunction preventing the closing of the merger, rescission of the merger if it is consummated, the dissemination by the Company of a revised registration statement on Form S-4 and an award of plaintiffs’ attorneys’ and experts’ fees. Defendants have filed a letter seeking permission to file a motion to dismiss. The parties have until August 15, 2021 to inform the Southern District whether the case has or will be dismissed and whether the issue of attorneys’ fees has been resolved.
On March 19, 2021, a putative class action complaint, captioned Litwin v. Cleveland BioLabs, Inc. et al., Case 2021-0242, was filed in the Delaware Court of Chancery in connection with the Merger (the “Litwin Action”). The Litwin Action names as defendants Cleveland BioLabs, each director on the Cleveland BioLabs board of directors, and the Vice President of Finance of Cleveland BioLabs. The complaint in the Litwin Action alleges that Defendants omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger, of which this proxy statement/prospectus forms a part, in breach of their fiduciary duties. The Litwin Action seeks, among other things, an injunction preventing the closing of the Merger, rescission of the merger if it is consummated, the dissemination by Cleveland BioLabs of a revised registration statement on Form S-4 and an award of plaintiffs’ attorneys’ and experts’ fees. Plaintiff in the Litwin Action has filed a motion for expedited proceedings, which Defendants have opposed. Plaintiff’s motion for expedited proceedings was granted in part and denied in part by the court on April 30, 2021. Defendants have also filed a motion to dismiss the Litwin Action. On July 7, 2021, Plaintiff filed a stipulation and proposed order voluntarily dismissing the case, but reserving the right to seek attorneys’ fees. On July 8, 2021, the Delaware Court of Chancery entered an order dismissing the case, but reserving jurisdiction to determine whether to award Plaintiff’s counsel any fees, should Plaintiff’s counsel file a motion for such.
On March 18, 2021, a complaint, captioned Wang v. Cleveland BioLabs, Inc. et al., Case 1:21-cv-02395, was filed in the U.S. District Court for the Southern District of New York in connection with the Merger (the "Wang Action"). The Wang Action names as defendants the Company, each director on the Company’s board of directors, Merger Sub and Cytocom. The complaint in the Wang Action alleges that the Company and the Company’s board of directors omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger, of which this proxy statement/prospectus forms a part, in violation of the Exchange Act and related SEC regulations. The Wang Action seeks, among other things, an injunction preventing the closing of the Merger, rescission of the Merger if it is consummated, the dissemination by the Company of a revised registration statement on Form S-4 and an award of plaintiffs’ attorneys’ and experts’ fees. On July 29, 2021, Plaintiff Wang filed a notice of dismissal. On August 2, 2021, the Southern District entered an order dismissing the case.
On March 23, 2021, a complaint, captioned Morgan v. Cleveland BioLabs, Inc. et al., Case 1:21-cv-00418, was filed in the U.S. District Court for the District of Delaware in connection with the Merger (the "Morgan Action"). The Morgan Action names as defendants Cleveland BioLabs and each director on the Cleveland BioLabs board of directors. The complaint in the Morgan Action alleges that Cleveland BioLabs and the Cleveland BioLabs board of directors omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger, of which this proxy statement/prospectus forms a part, in violation of the Exchange Act and related SEC regulations. The Morgan Action seeks, among other things, an injunction preventing the closing of the Merger, rescission of the Merger if it is consummated, the dissemination by Cleveland BioLabs of a revised registration statement on Form S-4 and an award of plaintiffs’ attorneys’ and experts’ fees.
On March 24, 2021, a complaint, captioned Bednar v. Cleveland BioLabs, Inc. et al., Case 1:21-cv-02546, was filed in the U.S. District Court for the Southern District of New York in connection with the Merger (the "Bednar Action"). The Bednar Action names as defendants Cleveland BioLabs and each director on the Cleveland BioLabs board of directors. The complaint in the Bednar Action alleges that Cleveland BioLabs and the Cleveland BioLabs board of directors omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger, of which this proxy statement/prospectus forms a part, in violation of their fiduciary duties and the Exchange Act and related SEC regulations. The Bednar Action seeks, among other things, an injunction preventing the closing of the Merger, rescission of the Merger if it is consummated, the dissemination by the Company of a revised registration statement on Form S-4 and an award of plaintiffs’ attorneys’ and experts’ fees. The parties have until August 15, 2021 to inform the Southern District whether the case has or will be dismissed and whether the issue of attorneys’ fees has been resolved.
On April 1, 2021, a complaint, captioned Hoenecke v. Cleveland BioLabs, Inc., et al., Case 1:21-cv-1789, was filed in the U.S. District Court for the Eastern District of New York in connection with the Merger (the “Hoenecke Action”). The Hoenecke Action names as defendants Cleveland BioLabs and each director on the Cleveland BioLabs board of directors. The complaint in the Hoenecke Action alleges that Cleveland BioLabs and the Cleveland BioLabs board of directors omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger, of which this proxy statement/prospectus forms a part, in violation of the Exchange Act and related SEC regulations. The Hoenecke Action seeks, among other things, an injunction preventing the closing of the Merger, rescission of the Merger if it is consummated, the dissemination by the Company of a revised registration statement on Form S-4 and an award of plaintiffs’ attorneys’ and experts’ fees. On June 29, 2021, Plaintiff filed a notice of dismissal. That same day, the Southern District entered an order dismissing the case.
On March 23, 2021, a complaint captioned Stickel v. Cleveland Biolabs, Inc., et al., Case 1:21-cv-02489, was filed in the U.S. District Court for the Southern District of New York in connection with the Merger (the “Stickel Action”). The Stickel Action names as defendants Cleveland BioLabs and each director on the Cleveland BioLabs board of directors. The complaint alleges that Cleveland BioLabs and the Cleveland BioLabs board of director omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger, in violation of the Exchange Act and SEC regulations. Stickel seeks to enjoin the company from consummating the Merger, to force the Company to amend the registration statement, and to collect damages and attorneys’ fees. On July 15, 2021, Plaintiff filed a notice of dismissal. On July 16, 2021, the Southern District entered an order dismissing the case.
The Company cannot predict the outcome of these lawsuits.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
| (a) |
The following exhibits are included as part of this report: |
| Exhibit Number |
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Description of Document |
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| 3.1* |
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Restated Certificate of Incorporation, as amended. |
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| 3.2 |
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| 3.3 |
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| 31.1* |
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Rule 13a-14(a)/15d-14(a) Certification of Michael K. Handley. |
| 31.2* | Rule 13a-14(a)/15d-14(a) Certification of Peter Aronstam. | |
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| 32.1* |
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| 101.1 |
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The following information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline Extensible Business Reporting Language (XBRL): (i) Consolidated Condensed Balance Sheets as of June 30, 2021 and December 31, 2020; (ii) Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020; (iii) Consolidated Condensed Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2021 and 2020; (iv) Consolidated Condensed Statement of Stockholders’ Equity for the Six Months Ended June 30, 2021 and 2020; (v) Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020; and (vi) Notes to Consolidated Condensed Financial Statements. |
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| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
| * |
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Filed herewith. |
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CYTOCOM, INC. |
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| Dated: August 16, 2021 |
By: |
/s/ Peter Aronstam |
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Peter Aronstam |
| Chief Financial Officer | ||
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(Principal Financial Officer) |
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