NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Nine-Months Period Ended September 30, 2021 and 2020
(Unaudited)
1. Basis
of Presentation and Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying condensed consolidated financial statements at September 30, 2021 and for the three-month and nine-month periods ended September
30, 2021 and 2020, respectively, are unaudited, but include all adjustments, consisting of normal recurring entries, that management
believes to be necessary for a fair presentation of the periods presented. Interim results are not necessarily indicative of results
for a full year. Balance sheet amounts as of December 31, 2020 have been derived from our audited financial statements as of that date.
The
consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to
such rules and regulations. The consolidated financial statements should be read in conjunction with our audited financial statements
contained in its Annual Report on Form 10-K for the year ended December 31, 2020 (as amended, the “2020 Annual Report”).
Liquidity
and Capital Resources
At
September 30, 2021, we had cash and cash equivalents and short-term investments of approximately $16.5
million. Management believes that our current
cash and cash equivalents and short-term investments will be sufficient to fund the Company’s operations for the foreseeable future.
This estimate is based, in part, upon our currently projected expenditures for the remainder of 2021 and the first ten months of 2022
of approximately $6.5
million (unaudited) to fund operating activities.
These projected expenditures exclude any payments related to liquidated damages or dividends to be paid on the Preferred Stock (as defined
herein). The Company will continue to accrue dividend and liquidated damages payments totaling $0.7
million on a quarterly basis until shareholders
approve an increase to the Company’s authorized shares of common stock (see Note 2). These projected expenditures and payments
are also based upon numerous other assumptions and subject to many uncertainties, and our actual expenditures may be significantly different
from these projections.
While
these projections represent the Company’s current expected expenditures, the Company has the ability to reduce the amounts as needed
to manage its liquidity needs while still advancing its corporate objectives. The Company will ultimately be required to obtain additional
funding in order to execute its long-term business plans, although it does not currently have commitments from any third parties to provide
the Company with long term debt, capital or non-dilutive up-front payments from a potential strategic partner. The Company cannot assure
that additional funding will be available on favorable terms, or at all. If the Company fails to obtain additional funding when needed,
it may not be able to execute its business plans and its business may suffer, which would have a material adverse effect on its financial
position, results of operations and cash flows.
Use
of Estimates
Preparation
of the Company’s consolidated financial statements in conformance with U.S. GAAP requires the Company’s management to make
estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities in the Company’s consolidated financial statements and accompanying notes. The significant estimates in
the Company’s consolidated financial statements relate to the valuation of equity awards, recoverability of deferred tax assets,
and estimated useful lives of fixed assets, The Company bases estimates and assumptions on historical experience, when available, and
on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on
an ongoing basis, and its actual results may differ from estimates made under different assumptions or conditions.
Stock
Compensation
The
Company accounts for share-based awards to employees and nonemployees directors and consultants in accordance with the provisions of
ASC 718, Compensation—Stock Compensation., and under the recently issued guidance following FASB’s pronouncement,
ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Under
ASC 718, and applicable updates adopted, share-based awards are valued at fair value on the date of grant and that fair value is recognized
over the requisite service, or vesting, period. The Company values its equity awards using the Black-Scholes option pricing model, and
accounts for forfeitures when they occur.
Foreign
Currency Remeasurement
The
U.S. dollar has been determined to be the functional currency for the net assets of our German operations. The transactions are recorded
in the local currencies and are remeasured at each reporting date using the historical rates for nonmonetary assets and liabilities and
current exchange rates for monetary assets and liabilities at the balance sheet date. Exchange gains and losses from the remeasurement
of monetary assets and liabilities are recognized in other income (loss). The Company recognized a (loss) of approximately $(7,400)
and ($9,500), respectively, for the three-month and nine-month periods ended September 30, 2021 and a gain of approximately $13,300 and
$100, respectively, for the three and nine-month periods ended September 30, 2020, respectively.
Basic
and Diluted Net Loss Per Common Share
Basic
and diluted net loss per common share is computed based on the weighted-average number of common shares outstanding. for the period.
Diluted net income (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average
number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential
common shares had been issued using the treasury stock method. Potential common shares are excluded from the computation when their effect
is antidilutive. Common share equivalents that could potentially dilute net loss per share in the future, and which were excluded from
the computation of diluted loss per share, were as follows:
Schedule
of Shares Excluded from
Computation of Diluted Loss Per Share
|
|
2021
|
|
|
2020
|
|
|
|
As of September
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
Options to acquire common stock
|
|
|
2,862,700
|
|
|
|
3,162,700
|
|
Warrants to acquire common stock
|
|
|
4,167
|
|
|
|
193,196
|
|
Convertible preferred stock
|
|
|
9,336,637
|
|
|
|
—
|
|
Investment option
|
|
|
11,363,637
|
|
|
|
—
|
|
Shares excluded from computation of diluted loss per share
|
|
|
23,657,141
|
|
|
|
3,355,896
|
|
Fair
Value Measurements
Assets
and liabilities recorded at fair value on the balance sheets are categorized based upon the level of judgment associated with the inputs
used to measure the fair value. Level inputs are as follows:
Level
1 – quoted prices in active markets for identical assets or liabilities.
Level
2 – other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement
date.
Level
3 – significant unobservable inputs that reflect management’s best estimate of what market participants would use to price
the assets or liabilities at the measurement date.
We
consider carrying amounts of accounts receivable, accounts payable and accrued expenses to approximate fair value due to the short-term
nature of these financial instruments. Our non-financial assets are measured at fair value when there is an indicator of impairment and
recorded at fair value only when an impairment charge is recognized.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”).
The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables.
The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies
will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is
effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of ASU 2016-13 is not expected to
have a material impact on the Company’s financial position, results of operations, and cash flows.
Other
recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission (“SEC”) did not, or are not expected to, have a material impact on
the Company’s consolidated financial statements and related disclosures.
2.
Financing Under Security Purchase Agreement
On
July 13, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with a single institutional
investor (the “Investor”) for aggregate gross proceeds of $10
million and net proceeds of approximately $9.2
million. The transaction closed on July 16,
2021. Under the Purchase Agreement, the Company sold and issued (i) 2
million shares of its common stock at a purchase
price of $0.88
per share for total gross proceeds of approximately
$1.76
million in a registered direct offering (the
“Registered Direct Offering”) and (ii) 8,240
shares of Series C 10.00%
Convertible Preferred Stock (the “Preferred Stock”) at a purchase price of $1,000
per share, for aggregate gross proceeds of approximately
$8.24 million,
in a concurrent private placement (the “Private Placement” and, together with the Registered Direct Offering, the “July
2021 Offerings”). The shares of the Preferred Stock are convertible, upon shareholder approval as described below, into an
aggregate of up to 9,363,637
shares of common stock at a conversion price
of $0.88
per share. Holders of the Preferred Stock
shall be entitled to receive, and the Company shall pay, cumulative dividends at the rate per share (as a percentage of the stated value
per share) of 10.00% per annum, payable quarterly on January 1, April 1, July 1 and October 1, beginning on the first such date after
the date of issuance. The terms of the Preferred Stock include beneficial ownership limitations that preclude conversion that would
result in the Investor owning in excess of 9.99% of the Company’s outstanding shares of common stock. CytRx
also issued to the Investor an unregistered preferred investment option (the “Preferred Investment Option”) that allows
for the purchase of up to 11,363,637 shares of common stock for additional gross proceeds of approximately $10 million if the Preferred
Investment Option is exercised in full. The exercise price for the Preferred Investment Option is $0.88 per share.
The Preferred Investment Option has a term equal to
five and one-half years commencing upon the Company increasing its authorized common stock following shareholder approval. The Company
held a special meeting of stockholders on September 23, 2021 at which time the shareholders did not approve the proposal to increase
the Company’s authorized common stock. The Company is committed to holding another meeting in the first quarter of 2022 to obtain
approval for this increase in authorized common stock. In the meantime, the Company is liable for liquidated damages in the monthly amount
of $164,800,
with the first such payment having been made and expensed on September 29, 2021. On October 1, 2021, the Company paid a quarterly 10%
dividend to the Investor in the amount of $171,668.
The Company determined that the relative fair
value of (i) the 2,000,000
shares of the common stock issued was $859,218,
(ii) the relative fair value of the 8,240
shares of Preferred Stock was $4,022,700
, and (iii) the relative fair value of the Preferred Investment Option was $4,293,872
based upon a Black Scholes valuation model. As such, the Company recorded
as Additional Paid in Capital the fair value of the common stock and Preferred Investment Option of $5,153,090,
and the fair value of the Series C Preferred Stock was $4,022,700
which has been reflected as mezzanine equity due to certain clauses of the Securities Purchase Agreement.
Terms of Series C Preferred Stock
Under the Certificate of the Designations, Powers,
Preferences and Rights of Series C 10.00% Convertible Preferred Stock (the “Certificate of Designations”),
each share of Series C Preferred Stock will be convertible, subject to the Beneficial Ownership Limitation (as defined below), at either
the holder’s option or at the Company’s option (a “Company Initiated Conversion”) at any time following
stockholder approval having been obtained to amend our restated certificate of incorporation to increase the number
of authorized shares of common stock above 41,666,666 (the “Stockholder Approval”), into common stock at a conversion rate equal to the quotient of (i) the Series C Stated Value of $1,000 (the
“Series C Stated Value”) plus, in the case of a Company Initiated Conversion, all accrued and accumulated and
unpaid dividends on such share of Series C Preferred Stock, divided by (ii) the initial conversion price of $0.88, subject to specified
adjustments for stock splits, stock dividends, reclassifications or other similar events as set forth in the Certificate of Designations.
The
Certificate of Designations contains limitations that prevent the holder thereof from acquiring shares of common stock upon conversion
that would result in the number of shares of common stock beneficially owned by such holder and its affiliates exceeding 9.99% of the
total number of shares of common stock outstanding immediately after giving effect to the conversion (the “Beneficial Ownership
Limitation”), except that upon notice from the holder to the Company, the holder may increase or decrease the amount of
ownership of outstanding shares of common stock after converting the holder’s shares of Series C Preferred Stock, provided that
the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of outstanding shares of the common stock outstanding immediately
after giving effect to the issuance of shares of common stock upon conversion of the shares of Series C Preferred Stock held by the holder
and provided that any increase in the Beneficial Ownership Limitation shall not be effective until 61 days following notice to the Company
Each holder of shares of Preferred
Stock is entitled to receive dividends, commencing from the date of issuance of the Preferred Stock. Such dividends may be paid
only when, as and if declared by the Board of Directors of the Company (the “Board”), out of assets legally
available therefore, quarterly in arrears on the first day of January, April, July and October in each year, commencing on the date of
issuance, at the dividend rate of 10.00% per year. Such dividends are cumulative and continue to accrue on a daily basis whether or not
declared and whether or not we have assets legally available therefore.
Under the Certificate of Designations, each
share of Series C Preferred Stock carries a liquidation preference equal to the Series C Stated Value plus accrued and unpaid and accumulated
dividends thereon.
The holders of the Series C Preferred Stock
may vote their shares of Preferred Stock on an as-converted basis, subject to the Beneficial Ownership Limitation (which Beneficial
Ownership Limitation shall be calculated on a basis which includes the number of shares of common stock which are issuable upon
conversion of the unconverted Series C Stated Value beneficially owned by a holder or any of its affiliates or attribution parties
on all matters submitted to the holders of common stock for approval). The Company may not take the following actions without the
prior consent of the holders of at least a majority of the Preferred Stock then outstanding: (a) alter or change adversely the
powers, preferences or rights given to the Preferred Stock or alter or amend the Certificate of Designations, (b) authorize or
create any class of stock ranking as to dividends, redemption or distribution of assets upon a Liquidation (as defined in the
Certificate of Designations) senior to, or otherwise pari passu with, the Preferred Stock, (c) amend
its Certificate of Incorporation or other charter documents in any manner that adversely affects any rights of the holders of the
Preferred Stock, (d) increase the number of authorized shares of Preferred Stock, or (e) enter into any agreement with respect to
any of the foregoing.
Terms of Preferred Investment Option
The Preferred Investment Option to purchase
up to 11,363,637
shares of common stock is exercisable at a price of $0.88
per share. The
Preferred Investment Option have a term of five and one-half years from the Authorized Share Increase Date. The holders of the Preferred
Investment Option may exercise the Preferred Investment Option on a cashless basis, solely to the extent there is no effective registration
statement registering, or the prospectus in such registration statement is not available for the resale of the shares of common stock
issuable at the time of exercise. The Company is prohibited from effecting an exercise of any Preferred Investment Option to the extent
that such exercise would result in the number of shares of common stock beneficially owned by such holder and its affiliates exceeding
9.99% of the total number of shares of common stock outstanding immediately after giving effect to the exercise of the Preferred Investment
Options by the holder (the “PIO Beneficial Ownership Limitation”), except that upon notice from the holder
to the Company, the holder may increase or decrease the amount of ownership of outstanding shares of Common Stock after exercising the
holder’s Preferred Investment Option, provided that the PIO Beneficial Ownership Limitation in no event exceeds 9.99% of the number
of outstanding shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of common stock upon
exercise of the Preferred Investment Option held by the holder and provided that any increase in the PIO Beneficial Ownership Limitation
shall not be effective until 61 days following notice to the Company. The Preferred Investment Option provides for a Black-Scholes
payout upon certain fundamental change transactions relating to the Company, as specified therein.
Until the Authorized Share Increase Date, the
Company may not issue any shares of common stock upon exercise of the Preferred Investment Option.
Registration Rights Agreement
In connection with the
July 2021 Offerings, the Company entered into a registration rights agreement, dated as of July 13, 2021 (the “Registration
Rights Agreement”), with the investor named therein, pursuant to which the Company will undertake to file, within five
calendar days of the date of the filing of the proxy statement seeking the Stockholder Approval, a resale registration statement to
register the shares of common stock issuable upon: (i) the conversion of the Preferred Stock sold in the Private Placement and (ii)
the exercise of the Preferred Investment Option (the “Registrable Securities”); and to cause such
registration statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in
any event no later than 75 days following the pricing date of this offering, or no later than 105 days following such date in the
event of a “full review” by the SEC, and shall use its reasonable best efforts to keep such registration statement
continuously effective under the Securities Act until the date that all Registrable Securities covered by such registration
statement have been sold or are otherwise able to be sold pursuant to Rule 144. The Registration Rights Agreement provides for
liquidated damages to the extent that the Company does not file or maintain a registration statement in accordance with the terms
thereof. The registration rights agreement entered into between us and the Investor on July 13, 2021, contains a triggering event
which would require us to pay to any holder of the Preferred Stock an amount in cash, as partial liquidated damages and not as a
penalty, on a monthly basis equal to the product of 2.0% multipled by the aggregate subscription amount paid by such holder for
shares of Preferred Stock pursuant to the Purchase Agreement; provided, however, that such partial liquidated damages shall
not exceed 24% of the aggregate subscription amounts paid by such holders pursuant to the Purchase Agreement, or $1,977,600. If we
fail to pay any partial liquidated damages within seven days after the date payable, we will be required to pay interest on any such
amounts at a rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law.
3. Leases
We
lease office space and office copiers related primarily to the administrative activities. The Company accounts for leases under ASC 842,
Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases.
In
January 2020, the Company signed a new four-year lease which covers approximately 2,771 square feet of office and storage space. This
lease is effective March 1, 2020 and extends through February 29, 2024, with a right to extend the term for an additional five-year period,
subject to the terms and conditions set forth in the lease agreement. The monthly rent is $13,855, subject to annual increases of 3.5
percent. In February 2020, the Company renewed its additional storage space lease, which requires us to make monthly payments of $1,370,
subject to a 2.5 percent annual increase. The Company recorded a right of use asset and lease liability obligation of $715,310 upon inception
of these leases. The Company also reclassified a previously existing right-of-use asset of $66,271 from other assets to right-of-use
asset.
As
of September 30, 2021, the balance of right-of-use assets was approximately $444,000, and the balance of total lease liabilities was
approximately $461,000.
Future
minimum lease payments under non-cancelable operating leases under ASC 842 as of September 30, 2021 are as follows:
Schedule
of Future Minimum Lease Payments
|
|
Operating
Lease Payments
|
|
|
|
October 2021 – September 2022
|
|
$
|
198,385
|
October 2022 – September 2023
|
|
|
199,263
|
October 2023 – March 2024
|
|
|
84,261
|
Total future minimum lease payments
|
|
|
481,909
|
|
|
|
|
Less: present value adjustment
|
|
|
20,555
|
Operating lease liabilities at September 30, 2021
|
|
|
461,354
|
Less: current portion of operating lease liabilities
|
|
|
184,761
|
Operating lease liabilities, net of current portion
|
|
$
|
276,593
|
The
components of rent expense and supplemental cash flow information related to leases for the period are as follows:
Schedule
of Rent Expense and Supplemental Cash Flow Information Related to Leases
|
|
Period Ended
September 30, 2021
|
Lease Cost
|
|
|
|
|
|
|
|
Operating lease cost (included in General and administrative expenses in the Company’s condensed Consolidated Statements of Operations)
|
|
$
|
149,197
|
|
|
|
|
Other information
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the period ended September 30, 2021
|
|
$
|
141,900
|
|
|
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
2.4
|
|
|
|
|
Average discount rate
|
|
|
3.6%
|
4. Stock
Based Compensation
The
Company has a 2008 Stock Incentive Plan under which 5 million shares of common stock are reserved for issuance. As of September 30, 2021,
there were approximately 2.3 million shares subject to outstanding stock options and approximately 0.8 million shares outstanding related
to restricted stock grants issued from the 2008 Plan. This plan expired on November 20, 2018 and thus no further shares are available
for future grant under this plan.
In
November 2019, the Company adopted a 2019 Stock Incentive Plan under which 5.4 million shares of common stock are reserved for issuance.
As of September 30, 2021, there were 0.6 million shares subject to outstanding stock options. This Plan expires on November 14, 2029.
The
following table sets forth the total stock-based compensation expense resulting from stock options, restricted stock and warrants included
in our Condensed Consolidated Statements of Operations:
Schedule
of Stock-based Compensation Expense
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
General and administrative — employee
|
|
|
—
|
|
|
$
|
87,277
|
|
|
|
—
|
|
|
$
|
260,598
|
|
Total employee stock-based compensation
|
|
$
|
—
|
|
|
$
|
87,277
|
|
|
$
|
—
|
|
|
$
|
260,598
|
|
Stock
Options
There
were no options granted in either of the periods ended September 30, 2021 and September 30, 2020.
Presented
below is our stock option activity:
Schedule of Stock Options Activity
|
|
Nine Months Ended September 30, 2021
|
|
|
|
Number of Options
(Employees)
|
|
|
Number of Options
(Non-Employees)
|
|
|
Total
Number of Options
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding at January 1, 2021
|
|
|
2,801,270
|
|
|
|
365,000
|
|
|
|
3,166,270
|
|
|
$
|
7.43
|
|
Exercised
|
|
|
(300,000
|
)
|
|
|
—
|
|
|
|
(300,000
|
)
|
|
$
|
0.26
|
|
Forfeited or expired
|
|
|
(3,570
|
)
|
|
|
—
|
|
|
|
(3,570
|
)
|
|
$
|
30.24
|
|
Outstanding at September 30, 2021
|
|
|
2,497,700
|
|
|
|
365,000
|
|
|
|
2,862,700
|
|
|
$
|
8.15
|
|
Exercisable at September 30, 2021
|
|
|
2,497,700
|
|
|
|
365,000
|
|
|
|
2,862,700
|
|
|
$
|
8.15
|
|
The
following table summarizes significant ranges of outstanding stock options under our plans at September 30, 2021:
Schedule
of Ranges of Stock Options
Range
of Exercise Prices
|
|
|
Number
of Options
|
|
|
Weighted-
Average Remaining Contractual Life (years)
|
|
|
Weighted-Average
Exercise Price
|
|
|
Number
of Options Exercisable
|
|
|
Weighted-
Average Remaining Contractual Life (years)
|
|
|
Weighted-Average
Exercise Price
|
|
$0.26 - $1.00
|
|
|
|
550,000
|
|
|
|
8.21
|
|
|
$
|
0.26
|
|
|
|
550,000
|
|
|
|
8.21
|
|
|
$
|
0.26
|
|
$1.01 – $3.00
|
|
|
|
1,050,673
|
|
|
|
5.86
|
|
|
$
|
2.04
|
|
|
|
1,050,673
|
|
|
|
5.86
|
|
|
$
|
2.04
|
|
$3.01 – $15.00
|
|
|
|
852,360
|
|
|
|
3.22
|
|
|
$
|
12.56
|
|
|
|
852,360
|
|
|
|
3.22
|
|
|
$
|
12.56
|
|
$15.01 –$42.42
|
|
|
|
409,667
|
|
|
|
2.37
|
|
|
$
|
25.24
|
|
|
|
409,667
|
|
|
|
2.37
|
|
|
$
|
25.24
|
|
|
|
|
|
2,862,700
|
|
|
|
5.02
|
|
|
$
|
3.32
|
|
|
|
2,862,700
|
|
|
|
5.02
|
|
|
$
|
3.32
|
|
During
the three and nine-month periods ended September 30, 2021, the Company recorded no stock compensation costs as all options had previously
vested, as compared to $30,392 and $91,179, respectively, for the three and nine-month periods ended September 30, 2020. As of September
30, 2021, there was no unrecognized compensation expense related to unvested stock options.
During
the nine months ended September 30, 2021, options to acquire 300,000 shares of common stock were exercised resulting in net proceeds
of $78,000.
The
aggregate intrinsic value of the outstanding options and options vested as of September 30, 2021 was $0.2 million.
Stock
Warrants
At
December 31, 2020, the Company had 193,196 warrants outstanding at a weighted average price of $8.60. During 2021, 189,029 warrants expired,
and as such, there were 4,167 remaining warrants outstanding as of September 30, 2021 at a weighted average exercise price of $10.44.
At September 30, 2021, the 4,167 warrants outstanding had no intrinsic value.
Restricted
Stock
In
December 2017, the Company granted to Steven Kriegsman, Chief Executive Officer, 387,597
shares of restricted common stock, pursuant to
the 2008 Plan. This restricted stock vests in equal annual instalments over three
years. The fair value of the restricted stock
is based on the market price of the Company’s shares on the grant date less the par value received as consideration. The fair value
of the restricted stock on the grant date was $679,000.
In December 2016, the Company granted to Steven Kriegsman, Chief Executive Officer, 387,597
shares of restricted common stock, pursuant to
the 2008 Plan. This restricted stock vests in equal annual instalments over three
years. The fair value of the restricted stock
is based on the market price of the Company’s shares on the grant date less the par value received as consideration. The fair value
of the restricted stock on the grant date was $1,000,000.
The Company recorded an employee stock-based compensation expense for restricted stock of $56,885
and $169,419
respectively, for the three and nine-month
periods ended September 30, 2020. All shares had fully vested as of December 31, 2020. No
restricted stock was granted in 2021 nor 2020.
5. Stockholder
Protection Rights Plan
On
December 13, 2019, the Board of Directors of the Company, authorized and declared a dividend of one right (a “Right”) for
each of the Company’s issued and outstanding shares of common stock, par value $0.001 per share . The dividend was paid to the
stockholders of record at the close of business on December 23, 2019. Each Right entitled the registered holder, subject to the terms
of the Original Rights Agreement (as defined below), to purchase from the Company one one-thousandth of a share of the Company’s
Series B Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”), at a price of $5.00 (the
“Purchase Price”), subject to certain adjustments. The description and terms of the Rights were set forth in the Rights Agreement,
dated as of December 13, 2019 (the “Original Rights Agreement”), by and between the Company and American Stock Transfer &
Trust Company, LLC, as Rights Agent (the “Rights Agent”).
On
November 12, 2020, the Board approved an amendment and restatement of the Original Rights Agreement (as amended and restated, the “Amended
and Restated Rights Agreement”) to effect certain changes to the Original Rights Agreement, including (i) reducing the duration
to a term of three years, subject to certain earlier expiration as described in more detail below, and (ii) lowering the beneficial ownership
threshold at which a person or group of persons becomes an Acquiring Person (as defined below) to 4.95% or more of the Company’s
outstanding shares of Common Stock, subject to certain exceptions. The Amended and Restated Rights Agreement is designed to discourage
(i) any person or group of persons from acquiring beneficial ownership of more than 4.95% of the Company’s shares of Common Stock
and (ii) any existing stockholder currently beneficially holding 4.95% or more of the Company’s shares of Common Stock from acquiring
additional shares of the Company’s Common Stock.
The
purpose of the Amended and Restated Rights Agreement is to protect value by preserving the Company’s ability to utilize its net
operating losses and certain other tax attributes (collectively, the “Tax Benefits”) to offset potential future income tax
obligations. The Company’s ability to use its Tax Benefits would be substantially limited if it experiences an “ownership
change,” as such term is defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Tax Code”).
A corporation generally will experience an ownership change if the percentage of the corporation’s stock owned by its “5-percent
shareholders,” as defined in Section 382 of the Tax Code, increases by more than 50 percentage points over their lowest ownership
percentage within a rolling three-year period. The Amended and Restated Rights Agreement is intended to reduce the likelihood the Company
would experience an ownership change under Section 382 of the Tax Code.
The
Rights will not be exercisable until the earlier to occur of (i) the close of business on the tenth business day after a public announcement
or filing that a person or group of affiliated or associated persons has become an “Acquiring Person,” which is defined as
a person or group of affiliated or associated persons that, at any time after the date of the Amended and Restated Rights Agreement,
has acquired, or obtained the right to acquire, beneficial ownership of 4.95% or more of the Company’s outstanding shares of Common
Stock, subject to certain exceptions or (ii) the close of business on the tenth business day after the commencement of, or announcement
of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person becoming an Acquiring
Person (the earlier of such dates being called the “Distribution Date”) (provided, however, that if such tender
or exchange offer is terminated prior to the occurrence of the Distribution Date, then no Distribution Date shall occur as a result of
such tender or exchange offer).
The
Rights, which are not exercisable until the Distribution Date, will expire at or prior to the earliest of (i) the close of business on
November 16, 2023; (ii) the time at which the Rights are redeemed pursuant to the Amended and Restated Rights Agreement; (iii) the time
at which the Rights are exchanged pursuant to the Amended and Restated Rights Agreement; (iv) the time at which the Rights are terminated
upon the occurrence of certain mergers or other transactions approved in advance by the Board; and (v) the close of business on the date
set by the Board following a determination by the Board that (x) the Amended and Restated Rights Agreement is no longer necessary or
desirable for the preservation of the Tax Benefits or (y) no Tax Benefits are available to be carried forward or are otherwise available
(the earliest of (i), (ii), (iii), (iv) and (v) is referred to as the “Expiration Date”).
Each
share of Preferred Stock will be entitled, when, as and if declared, to a preferential per share quarterly dividend payment equal to
the greater of (i) $1.00 per share or (ii) an amount equal to 1,000 times the dividend declared per share of Common Stock. Each share
of Preferred Stock will entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Company.
In the event of any merger, consolidation or other transaction in which shares of Common Stock are converted or exchanged, each share
of Preferred Stock will be entitled to receive 1,000 times the amount received per one share of Common Stock.
The
Purchase Price payable, and the number of shares of Preferred Stock or other securities or property issuable, upon exercise of the Rights
are each subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination
or reclassification of the Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights or warrants to subscribe
for or purchase Preferred Stock or convertible securities at less than the then-current market price of the Preferred Stock or (iii)
upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends
or dividends payable in Preferred Stock) or of subscription rights or warrants (other than those referred to above). The number of outstanding
Rights and the number of one one-thousandths of a share of Preferred Stock issuable upon exercise of each Right are also subject to adjustment
in the event of a stock split, reverse stock split, stock dividends and other similar transactions involving the Common Stock.
In
the event that any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right, other than
the Rights beneficially owned by the Acquiring Person, affiliates and associates of the Acquiring Person and certain transferees thereof
(which will thereupon become null and void), will thereafter have the right to receive upon exercise of a Right that number of shares
of Common Stock having a market value of two times the Purchase Price.
In
the event that, after a person or a group of affiliated or associated persons has become an Acquiring Person, the Company is acquired
in a merger or other business combination transaction, or 50% or more of the Company’s assets or earning power are sold, proper
provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then-current
purchase price of the Right, that number of shares of common stock of the acquiring company having a market value at the time of that
transaction equal to two times the Purchase Price.
With
certain exceptions, no adjustment in the Purchase Price will be required unless such adjustment would require an increase or decrease
of at least one percent (1%) in the Purchase Price. No fractional shares of Preferred Stock will be issued (other than fractions which
are integral multiples of one one-thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by
depositary receipts) and, in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Stock on the
trading day immediately prior to the date of exercise.
At
any time after any person or group of affiliated or associated persons becomes an Acquiring Person and prior to the acquisition of beneficial
ownership by such Acquiring Person of 50% or more of the outstanding shares of Common Stock, the Board, at its option, may exchange each
Right (other than Rights owned by such person or group of affiliated or associated persons which will have become void), in whole or
in part, at an exchange ratio of one share of Common Stock per outstanding Right (subject to adjustment).
In
connection with any exercise or exchange of the Rights, no holder of a Right will be entitled to receive shares of Common Stock if receipt
of such shares would result in such holder, together with such holder’s affiliates and associates, beneficially owning more than
4.95% of the then-outstanding Common Stock (such shares, the “Excess Shares”) and the Board determines that such holder’s
receipt of Excess Shares would jeopardize or endanger the value or availability of the Tax Benefits or the Board otherwise determines
that such holder’s receipt of Excess Shares is not in the best interests of the Company. In lieu of such Excess Shares, such holder
will only be entitled to receive cash or a note or other evidence of indebtedness with a principal amount equal to the then-current market
price of the Common Stock multiplied by the number of Excess Shares that would otherwise have been issuable.
At
any time before the Distribution Date, the Board may redeem the Rights in whole, but not in part, at a price of $0.001 per Right (subject
to certain adjustments) (the “Redemption Price”). The redemption of the Rights may be made effective at such time, on such
basis and with such conditions as the Board in its sole discretion may establish.
Immediately
upon the action of the Board electing to redeem or exchange the Rights, the Company shall make a public announcement thereof, and upon
such election, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption
Price.
Until
a Right is exercised or exchanged, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends.
The
Board may amend or supplement the Amended and Restated Rights Agreement without the approval of any holders of Rights, including, without
limitation, in order to (a) cure any ambiguity, (b) correct inconsistent provisions, (c) alter time period provisions, including the
Expiration Date, or (d) make additional changes to the Amended and Restated Rights Agreement that the Board deems necessary or desirable.
However, from and after the date any person or group of affiliated or associated persons becomes an Acquiring Person, the Amended and
Restated Rights Agreement may not be supplemented or amended in any manner that would adversely affect the interests of the holders of
Rights.
6.
Income Taxes
At
December 31, 2020, we had federal and state net operating loss carryforwards of $327.6 million and $252.6 million, respectively, available
to offset against future taxable income. Of this amount, $310.3 million of federal NOLs expire in 2024 through 2037. The federal operating
losses from 2018, 2019 and 2020 totaling $17.0 million carry forward indefinitely but are only able to offset 80% of taxable income in
future years. The California NOLs expire in 2029 through 2039. Management currently believes that $258.3 million in federal net operating
loss carryforwards and $252.6 million in state net operating loss carryforwards are unrestricted.
7. Commitments
and Contingencies
Commitments
Aldoxorubicin
We
have an agreement with Vergell Medical (formerly with KTB) (“Vergell”) for the exclusive license of patent rights held by
Vergell for the worldwide development and commercialization of aldoxorubicin. Under the agreement, we must make payments to Vergell in
the aggregate of $7.5 million upon meeting clinical and regulatory milestones up to and including the product’s second final marketing
approval. We also have agreed to pay:
|
●
|
commercially
reasonable royalties based on a percentage of net sales (as defined in the agreement);
|
|
●
|
a
percentage of non-royalty sub-licensing income (as defined in the agreement); and
|
|
●
|
milestones
of $1 million for each additional final marketing approval that we obtain.
|
In
the event that we must pay a third party in order to exercise our rights to the intellectual property under the agreement, we are entitled
to deduct a percentage of those payments from the royalties due Vergell, up to an agreed upon cap.
Arimoclomol
The
agreement relating to our worldwide rights to arimoclomol provides for our payment of up to an aggregate of $3.65 million upon receipt
of milestone payments from Orphayzme A/S.
Innovive
Under
the merger agreement by which we acquired Innovive, we agreed to pay the former Innovive stockholders a total of up to approximately
$18.3 million of future earnout merger consideration, subject to our achievement of specified net sales under the Innovive license agreements.
The earnout merger consideration, if any, will be payable in shares of our common stock, subject to specified conditions, or, at our
election, in cash or by a combination of shares of our common stock and cash. Our common stock will be valued for purposes of any future
earnout merger consideration based upon the trading price of our common stock at the time the earnout merger consideration is paid.
As
of September 30, 2021 and December 31, 2020, no amounts were due under the above agreements.
Contingencies
We
apply the disclosure provisions of ASC 460, Guarantees (“ASC 460”) to its agreements that contain guarantees or indemnities
by the Company. We provide (i) indemnifications of varying scope and size to certain investors and other parties for certain losses suffered
or incurred by the indemnified party in connection with various types of third-party claims; and (ii) indemnifications of varying scope
and size to officers and directors against third party claims arising from the services they provide to the Company.
The
Company evaluates developments in legal proceedings and other matters on a quarterly basis. The Company records accruals for loss contingencies
to the extent that the Company concludes that it is probable that a liability has been incurred and the amount of the related loss can
be reasonably estimated.
In
December 2019, a novel strain of coronavirus, COVID-19, was first identified in China and has surfaced in several regions across the
world. In March 2020, the disease was declared a pandemic by the World Health Organization. As the situation with Covid-19 continues
to evolve, the companies which are working to further develop and commercialize our products, ImmunityBio and Orphazyme, could be materially
and adversely affected by the risks, or the public perception of the risks, related to this pandemic. Among other things, the active
and planned clinical trials by ImmunityBio and Orphazyme and their regulatory approvals, if any, may be delayed or interrupted, which
could delay or adversely affect the Company’s potential receipt of milestone and royalty payments within the disclosed time periods
and increase expected costs. As of the date of this filing, senior management and administrative staff are working primarily remotely
and will return to their offices at a yet to be determined date.