November 20, 2023 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

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: 001-35994

NightHawk Biosciences, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)	26-2844103 (I.R.S. Employer Identification No.)

627 Davis Drive, Suite 300 Morrisville, NC (Address of principal executive offices)	27560 (Zip Code)

(919) 240-7133

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	NHWK	NYSE American LLC
Common Stock Purchase Rights		NYSE American LLC

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. Yes ☒ No ☐

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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 ☐ No ☒

As of November 20, 2023, there were 26,081,890 shares of Common Stock, $0.0002 par value per share, outstanding.

Table of Contents

NIGHTHAWK BIOSCIENCES, INC.

TABLE OF CONTENTS


		Page No.

	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	2

	Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022	2

	Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2023 and September 30, 2022	3

	Consolidated Statements of Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2023 and September 30, 2022	4

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2023 and September 30, 2022	6

	Notes to the Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	40

SIGNATURES		42

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Forward-looking statements are not guarantees of future performance and our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, our ability to raise additional capital to support our biodefense program, our manufacturing operations and other operations, our ability to develop products of commercial value and to identify, discover and obtain rights to additional potential product candidates, the outcome of research and development activities, our reliance on third-parties, the timing of completion of construction of the planned manufacturing facility in Kansas, our ability to successfully operate a manufacturing facility, competitive developments, the effect of current and future legislation and regulation and regulatory actions, as well as other risks described more fully in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (the “SEC”). Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere herein and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 31, 2023 (the “2022 Annual Report”). Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

As a result of these and other factors, we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

NOTE REGARDING COMPANY REFERENCES

Throughout this Quarterly Report on Form 10-Q, “NightHawk,” “NightHawk Biosciences,” “the Company,” “we” and “our” refer to NightHawk Biosciences, Inc.

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NIGHTHAWK BIOSCIENCES, INC.

Consolidated Balance Sheets


	September 30,		December 31,
	2023		2022
		(unaudited)
Current Assets
Cash and cash equivalents	$	2,042,741	$	3,191,714
Short-term investments		4,167,755		35,837,309
Accounts receivable		313,906		81,456
Grant receivable		—		1,524,522
Prepaid expenses and other current assets		1,261,228		1,491,123
Current assets held for sale		16,394,533		7,928,136
Total Current Assets		24,180,163		50,054,260

Property and Equipment, net		18,683,898		20,438,521

Operating lease right-of-use asset		5,346,910		5,866,261
Finance lease right-of-use asset		20,979,923		15,329,075
Other assets		453,135		260,011
Deposits		271,115		270,461
Non-current assets held for sale		—		12,178,323
Total Assets	$	69,915,144	$	104,396,912

Liabilities and Stockholders' Equity

Current Liabilities
Accounts payable	$	2,873,696	$	4,213,732
Deferred revenue, current portion		4,056,646		1,585,808
Operating lease liability, current portion		404,566		397,855
Finance lease liability, current portion		895,625		301,048
Accrued expenses and other liabilities		2,031,618		1,916,601
Current liabilities held for sale		14,225,696		9,622,279
Total Current Liabilities		24,487,847		18,037,323

Long Term Liabilities
Deferred revenue, net of current portion		32,500		32,500
Operating lease liability, net of current portion		2,825,536		3,079,887
Financing lease liability, net of current portion		9,122,617		5,520,034
Non-current liabilities held for sale		—		5,290,500
Total Liabilities		36,468,500		31,960,244

Commitments and Contingencies (Note 14 and Note 15)

Stockholders' Equity
Common stock, $0.0002 par value; 250,000,000 shares authorized, 26,081,890 and 25,661,488 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		5,217		5,126
Additional paid-in capital		285,090,202		283,019,456
Accumulated deficit		(248,962,791)		(209,153,659)
Accumulated other comprehensive income		159,929		51,924
Total Stockholders' Equity - NightHawk Biosciences, Inc.		36,292,557		73,922,847
Non-Controlling Interest		(2,845,913)		(1,486,179)
Total Stockholders' Equity		33,446,644		72,436,668

Total Liabilities and Stockholders' Equity	$	69,915,144	$	104,396,912

See Notes to Consolidated Financial Statements

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INIGHTHAWK BIOSCIENCES, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Revenue	$	723,126	$	58,861	$	2,146,804		290,259

Operating expenses:
Cost of revenues		545,023		—		1,540,454		—
Research and development		5,155,359		5,379,780		16,600,186		13,334,021
Selling, general and administrative		6,082,539		4,838,169		19,603,075		13,299,474
In-process research and development impairment		—		3,500,000		—		3,500,000
Change in fair value of contingent consideration		—		(3,118,515)		—		(3,342,515)
Total operating expenses		11,782,921		10,599,434		37,743,715		26,790,980

Operating loss		(11,059,795)		(10,540,573)		(35,596,911)		(26,500,721)

Change in fair value of warrant liability		—		1,456		—		10,746
Other (expense) income, net		(110,352)		74,913		(329,103)		234,517
Unrealized (loss) gain on available-for-sale securities		(36,116)		(145,558)		99,437		(1,577,174)
Total non-operating loss		(146,468)		(69,189)		(229,666)		(1,331,911)

Net loss before income taxes from continuing operations		(11,206,263)		(10,609,762)		(35,826,577)		(27,832,632)
Income tax (expense) benefit		—		(37,063)		571,120		3,288,937
Net loss from continuing operations before income taxes		(11,206,263)		(10,646,825)		(35,255,457)		(24,543,695)
Net loss from discontinued operations before income taxes		(3,040,577)		(2,700,946)		(5,848,220)		(3,931,784)
Income tax expense from discontinued operations		(65,189)		—		(65,189)		—
Net Loss		(14,312,029)		(13,347,771)		(41,168,866)		(28,475,479)
Net loss - non-controlling interest		(1,179,559)		(89,421)		(1,359,734)		(265,256)
Net loss attributable to NightHawk Biosciences, Inc.		(13,132,470)		(13,258,350)		(39,809,132)		(28,210,223)

Net loss per share, basic and diluted - continuing operations	$	(0.38)	$	(0.41)	$	(1.30)	$	(0.95)
Net loss per share, basic and diluted - discontinued operations		(0.12)		(0.11)		(0.23)		(0.15)
Net loss per common share attributable to NightHawk Biosciences, Inc., basic and diluted	$	(0.50)	$	(0.52)	$	(1.53)	$	(1.10)

Weighted-average common shares outstanding, basic and diluted		26,050,562		25,613,316		26,022,244		25,603,481

Comprehensive loss from continuing operations:
Net loss	$	(14,312,029)	$	(13,347,771)	$	(41,168,866)	$	(28,475,479)
Unrealized gain on foreign currency translation		54,967		115,659		108,005		210,245
Total comprehensive loss		(14,257,062)		(13,232,112)		(41,060,861)		(28,265,234)
Comprehensive loss attributable to non-controlling interest		(1,179,559)		(89,421)		(1,359,734)		(265,256)
Comprehensive loss - NightHawk Biosciences, Inc.	$	(13,077,503)	$	(13,142,691)	$	(39,701,127)	$	(27,999,978)

See Notes to Consolidated Financial Statements

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NIGHTHAWK BIOSCIENCES, INC.

Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Three Months Ended September 30, 2023
							Accumulated
							Other				Total
	Common				Accumulated		Comprehensive		Non-Controlling		Stockholders'
	Stock		APIC		Deficit		Income		Interest		Equity
Balance at June 30, 2023	$	5,210	$	284,453,899	$	(235,830,321)	$	104,962	$	(1,666,354)	$	47,067,396
Issuance of common stock - ESPP		7		(7)		—		—		—		—
Stock-based compensation		—		636,310		—		—		—		636,310
Other comprehensive income		—		—		—		54,967		—		54,967
Net loss		—		—		(13,132,470)		—		(1,179,559)		(14,312,029)
Balance at September 30, 2023	$	5,217	$	285,090,202	$	(248,962,791)	$	159,929	$	(2,845,913)	$	33,446,644

	Nine Months Ended September 30, 2023
							Accumulated
							Other				Total
	Common				Accumulated		Comprehensive		Non-Controlling		Stockholders'
	Stock		APIC		Deficit		Income		Interest		Equity
Balance at December 31, 2022	$	5,126	$	283,019,456	$	(209,153,659)	$	51,924	$	(1,486,179)	$	72,436,668
Issuance of common stock from vesting of restricted stock awards		79		(79)		—		—		—		—
Issuance of common stock - ESPP		12		(12)		—		—		—		—
Stock-based compensation		—		2,070,837		—		—		—		2,070,837
Other comprehensive income		—		—		—		108,005		—		108,005
Net loss		—		—		(39,809,132)		—		(1,359,734)		(41,168,866)
Balance at September 30, 2023	$	5,217	$	285,090,202	$	(248,962,791)	$	159,929	$	(2,845,913)	$	33,446,644

See Notes to Consolidated Financial Statements

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NIGHTHAWK BIOSCIENCES, INC.

Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Three Months Ended September 30, 2022
							Accumulated
							Other				Total
	Common				Accumulated		Comprehensive		Non-Controlling		Stockholders'
	Stock		APIC		Deficit		(Loss) Income		Interest		Equity
Balance at June 30, 2022	$	5,120	$	280,603,302	$	(180,670,826)	$	26,645	$	(1,250,578)	$	98,713,663
Issuance of common stock - ESPP		2		(2)		—		—		—		—
Stock-based compensation		—		717,175		—		—		—		717,175
Other comprehensive income		—		—		—		115,659		—		115,659
Net loss		—		—		(13,258,350)		—		(89,421)		(13,347,771)
Balance at September 30, 2022	$	5,122	$	281,320,475	$	(193,929,176)	$	142,304	$	(1,339,999)	$	86,198,726

	Nine Months Ended September 30, 2022
							Accumulated
							Other				Total
	Common				Accumulated		Comprehensive		Non-Controlling		Stockholders'
	Stock		APIC		Deficit		Income		Interest		Equity
Balance at December 31, 2021	$	5,055	$	278,890,153	$	(165,718,953)	$	(67,941)	$	(1,074,743)	$	112,033,571
Issuance of common stock from vesting of restricted stock awards		65		(65)		—		—		—		—
Issuance of common stock - ESPP		2		(2)		—		—		—		—
Stock-based compensation		—		2,430,389		—		—		—		2,430,389
Other comprehensive income		—		—		—		210,245		—		210,245
Net loss		—		—		(28,210,223)		—		(265,256)		(28,475,479)
Balance at September 30, 2022	$	5,122	$	281,320,475	$	(193,929,176)	$	142,304	$	(1,339,999)	$	86,198,726

See Notes to Consolidated Financial Statements

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NIGHTHAWK BIOSCIENCES, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	For the Nine Months Ended
	September 30,
	2023		2022
Cash Flows from Operating Activities
Net loss	$	(41,168,866)	$	(28,475,479)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill impairment loss		3,873,079		—
Intangible asset impairment loss		2,277,921		3,500,000
Depreciation and amortization		4,668,589		988,715
Amortization of intangible asset		1,091,250		666,875
Noncash lease expense		318,073		127,681
Stock-based compensation		2,070,837		2,430,389
Change in fair value of common stock warrants		—		(10,746)
Change in fair value of contingent consideration		(177,354)		(3,342,515)
Unrealized (gain) loss on investments		(99,437)		1,577,174
Deferred tax liability		(571,120)		(3,073,000)
Payment of contingent consideration		(100,344)		—
Increase (decrease) in cash arising from changes in assets and liabilities, net of acquisitions:
Accounts receivable		(7,022,657)		(5,843,564)
Other assets		(193,124)		12,493,539
Prepaid expenses and other current assets		2,330,808		1,210,730
Grant receivable		1,524,522		(206,163)
Contract receivables		—		24,526,231
Inventory		—		5,844,000
Income tax receivable		600,877		443,968
Right-of-use assets		57,103		(9,974,366)
Deferred tax liability		—		(215,937)
Deposits		25,596		(33,064)
Accounts payable		(749,600)		2,354,279
Deferred revenue		2,470,838		718,850
Accrued expenses and other liabilities		(1,681,915)		(3,512,090)
Other long-term liabilities		—		(53,530)
Net Cash (Used In) Provided by Operating Activities		(30,454,924)		2,141,977

Cash Flows from Investing Activities
Purchase of short-term investments		(439,779)		(1,989,767)
Sale of short-term investments		32,208,771		44,947,779
Purchases of property and equipment		(1,852,665)		(19,271,087)
Disposal of property and equipment		220,802		—
Acquisition of Elusys Therapeutics, net of cash paid		—		2,719,898
Payment of contingent consideration		—		(22,784,571)
Net Cash Provided By Investing Activities		30,137,129		3,622,252

Cash Flows from Financing Activities
Repayments of principal under finance lease		(2,751,037)		(145,672)
Net Cash Used In Financing Activities		(2,751,037)		(145,672)

Effect of exchange rate changes on cash and cash equivalents		(3,188)		(14,194)

Net (Decrease) Increase in Cash and Cash Equivalents		(3,072,020)		5,604,363

Cash and Cash Equivalents – Beginning of the Period		8,434,554		8,053,879

Cash and Cash Equivalents – End of the Period	$	5,362,534	$	13,658,242

Supplemental Disclosure for Cash Flow Information:
Right-of-use assets obtained upon operating lease commencements	$	—	$	351,098
Right-of-use assets obtained upon financing lease commencements	$	9,983,504	$	16,470,969
Right-of-use assets surrendered upon financing lease modifications	$	(3,092,408)	$	—
Right-of-use assets obtained upon operating lease modifications	$	87,839	$	—
Supplemental disclosure of non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable	$	—	$	1,233,232
Contingent and deferred cash consideration related to Elusys acquisition	$	—	$	42,853,685
Reconciliation of cash and cash equivalents at September 30, 2023 and 2022
Cash and cash equivalents included in current assets held for sale	$	3,319,793	$	5,242,840

See Notes to Consolidated Financial Statements

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1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

Effective May 3, 2022, Heat Biologics, Inc. changed its name to NightHawk Biosciences, Inc. (the “Company” or “NightHawk”) by filing a Certificate of Amendment (the “Certificate of Amendment”) to its Third Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting. Certain information or footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, these financial statements include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2023.

The consolidated financial statements as of and for the three and nine months ended September 30, 2023 and 2022 are unaudited. The balance sheet as of December 31, 2022 is derived from the audited consolidated financial statements as of that date. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 31, 2023 (the “2022 Annual Report”).

The accompanying unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2023 and 2022 include the accounts of NightHawk Biosciences, Inc., and its subsidiaries (“the Company”), Pelican Therapeutics, Inc. (“Pelican”), Heat Biologics I, Inc. (“Heat I”), Heat Biologics III, Inc. (“Heat III”), Heat Biologics IV, Inc. (“Heat IV”), Heat Biologics GmbH, Heat Biologics Australia Pty Ltd., Zolovax, Inc., Skunkworx Bio, Inc. (formerly known as Delphi Therapeutics, Inc.), Scorpius BioManufacturing, Inc. (“Scorpius”) (formerly Scorpion Biological Services, Inc), Blackhawk Bio, Inc., Abacus Biotech, Inc., and Elusys Therapeutics, Inc. (“Elusys”). The functional currency of the entities located outside the United States of America (the foreign entities) is the applicable local currency of the foreign entities. Assets and liabilities of the foreign entities are translated at period-end exchange rates. Statement of operations accounts are translated at the average exchange rate during the period. The effects of foreign currency translation adjustments are included in other comprehensive loss, which is a component of accumulated other comprehensive income in stockholders’ equity. All significant intercompany accounts and transactions have been eliminated in consolidation. At September 30, 2023 and December 31, 2022, NightHawk held an 85% controlling interest in Pelican and a 94% controlling interest in Scorpius. NightHawk accounts for its less than 100% interest in accordance with U.S. GAAP. Accordingly, the Company presents non-controlling interest as a component of stockholders’ equity on its consolidated balance sheets and reports non-controlling interest net loss under the heading “net loss – non-controlling interest” on its consolidated statements of operations and comprehensive loss.

In September 2023, the Company commenced the active marketing for the sale of Elusys Therapeutics, Inc. The divestiture has not been consummated as of September 30, 2023 however, the Company has reflected Elusys Therapeutics, Inc. as a discontinued operation in the consolidated financial statements for all periods presented. See Note 2 for further discussion.

Unless otherwise noted, amounts and disclosure throughout the Notes to the consolidated financial statements are related to the Company’s continuing operations.

Going Concern Uncertainty

The Company has an accumulated deficit of approximately $249.0 million as of September 30, 2023 and a net loss before income taxes from continuing operations of approximately $35.3 million for the nine months ended September 30, 2023 and has not generated significant revenue or positive cash flows from operations. The Company expects to incur significant expenses and continued losses from operations for the foreseeable future. The Company expects its expenses to increase in connection with its ongoing activities, particularly as the Company ramps up operations in its in-house bioanalytic,

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process development and manufacturing facility in San Antonio, TX, which is now its main focus. In addition, any new business ventures that the Company may engage in are likely to require commitments of capital. Accordingly, the Company will need to obtain substantial additional funding in connection with its planned operations. Adequate additional financing may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce or eliminate its programs, any future commercialization efforts or the manufacturing services it plans to provide. To meet its capital needs, the Company intends to continue to consider multiple alternatives, including, but not limited to, additional equity financings such as sales of its common stock under at-the-market offerings, debt financings, partnerships, grants, funding collaborations and other funding transactions, if any are available. As of September 30, 2023, the Company had approximately $6.2 million in cash and cash equivalents and short-term investments, which it believes is sufficient to fund its operations into the first quarter of 2024. The Company will need to generate significant revenues to achieve profitability, and it may never do so. As a result of these circumstances, management has determined that there is substantial doubt about the Company's ability to continue as a going concern within one year after the consolidated interim financial statements are issued.

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of regulatory approval of the Company’s drug candidates or its manufacturing facility, the timing of completion of construction of the planned manufacturing facility in Kansas, uncertainty of market acceptance of the Company’s products or manufacturing capability or success of new business ventures, competition from substitute products and larger companies, government budget and spending on biological threat programs, securing and protecting proprietary technology, strategic relationships and dependence on key individuals and sole source suppliers. New risks and uncertainties may develop and it is not possible for us to predict all such risk factors, nor can we assess the effect of all such risk factors on our business.

The Company depends on third-party suppliers for key materials and services used in its manufacturing processes, and is subject to certain risks related to the loss of these third-party suppliers or their inability to supply adequate materials and services.

Cash and Cash Equivalents

The Company considers all cash and other highly liquid investments with initial maturities from the date of purchase of three months or less to be cash and cash equivalents.

Derivative Financial Instruments

The Company has issued common stock warrants in connection with the execution of certain equity financings. The fair value of the warrants, which were deemed to be derivative instruments, was recorded as a derivative liability under the provisions of Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC 815”), because they are not considered indexed to the Company’s own stock. Subsequently, the liability is adjusted to fair value as of the end of each reporting period and the changes in fair value of derivative liabilities are recorded in the consolidated statements of operations and comprehensive loss under the caption “Change in fair value of warrant liability.” See Note 4 for additional information.

The fair value of the warrants, including the warrants issued in connection with the January 2020 common stock offering and recorded as a liability, was determined using the Monte Carlo simulation model, which is deemed to be an appropriate model due to the terms of the warrants issued.

The fair value of warrants was affected by changes in inputs to the Monte Carlo simulation model including the Company’s stock price, expected stock price volatility, the remaining term, and the risk-free interest rate. This model uses Level 3 inputs, including stock price volatility, in the fair value hierarchy established by ASC 820 Fair Value Measurement. At September 30, 2023 the fair value of such warrants was $0.

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Short-term Investments

The Company’s short-term investments are equity securities and are carried at their fair value based on quoted market prices. Realized and unrealized gains and losses on equity securities are included in net earnings in the period earned or incurred.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, useful lives of fixed assets, contingent consideration, income taxes, revenue, and stock-based compensation. Actual results may differ from those estimates.

Segments

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed the operations and managed the business as one segment.

Business Combinations

The accounting for the Company’s business combinations consists of allocating the purchase price to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values, with the excess recorded as goodwill. The Company has up to one year from the acquisition date to use information as of each acquisition date to adjust the fair value of the acquired assets and liabilities, which may result in material changes to their recorded values with an offsetting adjustment to goodwill. Determining the fair value of assets acquired and liabilities assumed requires significant judgment, which includes, among other factors, analysis of historical performance and estimates of future performance. The Company has used discounted cash flow analyses, which were based on its best estimate of future revenue, earnings and cash flows as well as its discount rate, adjusted for risk, and estimated attrition rates.

Goodwill and Intangible Assets

The Company classifies intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. The Company determines the useful lives of definite-lived intangible assets after considering specific facts and circumstances related to each intangible asset. Factors the Company considers when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, and other economic facts; including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line basis, over their estimated useful lives. Intangible assets that are deemed to have indefinite lives, including goodwill, are reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test for indefinite-lived intangibles, other than goodwill, consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess. Indefinite-lived intangible assets, such as goodwill, are not amortized. The Company tests the carrying amounts of goodwill for recoverability on an annual basis or when events or changes in circumstances indicate a potential impairment exists, using a fair value-based test. The Company records a goodwill impairment charge if a reporting unit’s carrying value exceeds its fair value.

In-process research and development (“IPR&D”) assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development projects. IPR&D assets represent the fair value assigned to technologies that the Company acquires, which at the time of acquisition have not reached technological feasibility and have no alternative future use. During the period that the assets are considered indefinite-lived, they are tested for impairment on an annual basis, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the IPR&D assets are less than their carrying amounts. If and when development is complete, which generally occurs upon regulatory approval and the ability to commercialize products

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associated with the IPR&D assets, these assets are then deemed definite-lived and are amortized based on their estimated useful lives at that point in time. If development is terminated or abandoned, the Company may have a full or partial impairment charge related to the IPR&D assets, calculated as the excess of the carrying value of the IPR&D assets over fair value.

Contingent Consideration

Consideration paid in a business combination may include potential future payments that are contingent upon the acquired business achieving certain milestones in the future (“contingent consideration”). Contingent consideration liabilities are measured at their estimated fair value as of the date of acquisition, with subsequent changes in fair value recorded in the consolidated statements of operations. The Company estimates the fair value of the contingent consideration as of the acquisition date using the estimated future cash outflows based on the probability of meeting future milestones. The milestone payments will be made upon the achievement of clinical and commercialization milestones as well as single low digit royalty payments and payments upon receipt of sublicensing income. Subsequent to the date of acquisition, the Company reassesses the actual consideration earned and the probability-weighted future earn-out payments at each balance sheet date. Any adjustment to the contingent consideration liability will be recorded in the consolidated statements of operations and comprehensive loss, for the change that occurred during the fiscal year. Contingent consideration liabilities expected to be settled within 12 months after the balance sheet date are presented in current liabilities, with the non-current portion recorded under long term liabilities in the consolidated balance sheets. Contingent consideration is included in discontinued operations on the consolidated balance sheet.

Cost of revenues and selling, general and administrative expenses

Cost of revenues consists of production wages, material costs and overhead, and other costs related to the recognition of revenue. Selling, general and administrative expenses consist of salaries and related costs for administrators, public company costs, business development personnel as well as legal, patent-related expenses and consulting fees. Public company costs include compliance, auditing services, tax services, insurance and investor relations.

Research and Development

Research and development includes costs associated with developmental products not yet approved by the FDA as well as costs associated with bringing developmental products into advanced phase clinical trials as incurred. These costs consist primarily of pre-manufacturing and manufacturing drug costs, clinical trial execution, investigator payments, license fees, salaries, stock-based compensation and related personnel costs. Other costs include fees paid to consultants and outside service providers related to the development of the Company’s product candidates and other expenses relating to the design, development, testing and enhancement of its product candidates.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the most likely method based on historical experience as well as applicable information currently available.

Product Sales

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The Company recognizes revenue from product sales when its performance obligation with its customers has been satisfied. The performance obligation is satisfied at a point in time when the Company’s customers obtain control of the product, which is typically upon acceptance of the product at the delivery site. The Company invoices its customers after acceptance of the product and invoice payments are generally due within 30 days of the invoice date. The Company records product sales net of any variable consideration, including refund rights. The Company uses the most likely amount method when estimating its variable consideration, unless terms are specified within contracts. The Company recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. These estimates may differ from actual consideration received. The Company evaluates these estimates to reflect known changes.

Grant Revenue

The Company recognized revenue from a grant related to the Cancer Prevention and Research Institute of Texas (“CPRIT”) contract, which was accounted for under ASU No. 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, as a conditional non-exchange contribution.

The CPRIT grant covered the period from June 1, 2017 through May 31, 2023, for a total grant award of up to $15.2 million. CPRIT advanced grant funds upon request by the Company consistent with the agreed upon amounts and schedules as provided in the contract. The first tranche of funding of $1.8 million was received in May 2017, a second tranche of funding of $6.5 million was received in October 2017, and the third tranche of funding of $5.4 million was received in December 2019. The remaining $1.5 million was received in April 2023. Funds received were reflected in deferred revenue as a liability until revenue was earned. Grant revenue was recognized when qualifying costs are incurred. When grant funds were received after costs had been incurred, the Company recorded revenue and a corresponding grants receivable until grant funds were received. As of September 30, 2023, all $15.2 million has been recognized and received.

License revenue

The Company has licensed certain provisional patent applications and know-how related to fusion proteins to treat cancer and other diseases that were not being developed by the Company. Shattuck Labs, Inc. (“Shattuck”) paid the Company an initial license fee of $50,000 in June 2016 and is obligated to pay the Company fees upon its receipt of sublicensing income, achievement of certain milestones, and royalties upon sales of commercial products. In March 2023, the Company received a milestone payment of $100,000 from Shattuck due to completion of a Phase 1A monotherapy dose escalation clinical trial of SL-172154. However, the technology that the Company out-licensed remains in the early stages of development since there is a low likelihood of success for any technology at such stage, there can be no assurance that any products will be developed by Shattuck or that the Company will derive any additional future revenue from Shattuck.

Process development revenue

Process development revenue generally represents revenue from services associated with the custom development of a manufacturing process and analytical methods for a customer’s product. Process development revenue is recognized over time utilizing an input method by tracking the progress toward completion by measuring inputs to date relative to total estimated inputs needed to satisfy the performance obligation. Under a process development contract, the customer owns the product details and process, which has no alternative use. These process development projects are customized to each customer to meet its specifications and typically include only one performance obligation. Each process represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of its product as the product is being created or enhanced by our services and can make changes to its process or specifications upon request. Under these agreements, the Company is entitled to consideration for progress to date that includes an element of profit margin.

The transaction price for services provided under the Company’s contracts reflects its best estimate of the amount of consideration to which it is entitled in exchange for providing goods and services to our customers. For contracts with multiple performance obligations, the Company allocates transaction price to each performance obligation identified in a contract on a relative standalone selling price basis. If observable standalone selling prices are not available, the Company

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estimates the applicable standalone selling price based on the pricing of other comparable services or on a price that the Company believes the market is willing to pay for the applicable service.

In determining the transaction price, the Company also considered the different sources of variable consideration including, but not limited to, discounts, credits, refunds, price concessions or other similar items. The Company has included in the transaction price some or all of an amount of variable consideration, utilizing the most likely method, only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The actual amount of consideration ultimately received may differ.

Deferred Revenue

Deferred revenue is comprised of an exclusive license agreement with Shattuck and process development customer deposits received in advance of our fulfillment of performance obligations.

License Agreements

The Company has licensed certain provisional patent applications and know-how related to fusion proteins to treat cancer and other diseases that were not being developed by the Company. Shattuck paid the Company an initial license fee of $50,000 in June 2016 and is obligated to pay the Company fees upon its receipt of sublicensing income, achievement of certain milestones, and royalties upon sales of commercial products. In-as-much as the technology that the Company out-licensed remains in the early stages of development since there is a low likelihood of success for any technology at such stage, there can be no assurance that any products will be developed by Shattuck or that the Company will derive any additional future revenue from Shattuck.

Process Development

Process development deferred revenue generally represents customer payments received in advance of the Company’s fulfillment of performance obligations associated with the custom development of a manufacturing process and analytical methods for a customer’s product. As of September 30, 2023, there was $4.1 million of deferred revenue related to process development.

Accounts Receivable

Accounts receivable are primarily comprised of amounts owed to us for services and sales provided under our customer contracts and are recorded at the invoiced amount net of an allowance for doubtful accounts, if necessary. The Company applies judgment in assessing the ultimate realization of our receivables and we estimate an allowance for doubtful accounts based on various factors, such as the aging of our receivables, historical experience, and the financial condition of our customers.

Prepaid Expenses and Other Current Assets

The Company’s prepaid expenses and other current assets consist primarily of amounts paid in advance for manufacturing activities, clinical trial support, contract assets and insurance. Contract assets consist of unbilled receivables.

Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that utilization is not presently more likely than not.

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Other Assets

The balance consists of $0.5 million of land option agreements for the Kansas facility.

Other Liabilities

In conjunction with the acquisition of Elusys, the Company recorded an uncertain tax position reserve for the research and development credits utilized on the Elusys pre-acquisition short period 2022 return. The Company is not able to assert that the credit amounts utilized are more likely than not to be sustained by the IRS upon audit and thus a liability of $1.0 million was recorded and is included in discontinued operations on the consolidated balance sheet.

Discontinued Operations

In accordance with ASC Subtopic 205-20, Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity (“disposal group”) is required to be reported as discontinued operations if the disposal group represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the disposal group meets held for sale criteria. Assets and liabilities of disposal group meeting discontinued operations treatment is presented separately as held-for-sale. At the same time, the results of all discontinued operations, less applicable income taxes, are reported as components of net loss separate from the net loss of continuing operations.

Assets classified as held for sale that are not sold after the initial one-year period are assessed to determine if they meet the exception to the one-year requirement to continue being classified as held for sale. The disposal group that is held for sale is the Elusys Therapeutics, Inc. subsidiary.

Significant Accounting Policies

The significant accounting policies used in preparation of these interim financial statements are disclosed in the audited consolidated financial statements and related notes included in the Company’s 2022 Annual Report.

Impact of Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. For trade receivables and other instruments, entities will be required to use a new forward-looking expected loss model that generally will result in the earlier recognition of allowances for losses. The Company adopted ASU 2016-13 as of January 1, 2023.

The cumulative effect of applying the new credit loss standard was not material and, therefore, did not result in an adjustment to retained earnings. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related financial statement disclosures.

2. Discontinued Operations

The Company considers assets to be held for sale when management approves and commits to a plan to actively market the assets for sale at a reasonable price in relation to its fair value, the assets are available for immediate sale in their present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the assets is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company ceases to record depreciation and amortization expenses and measures the assets at the lower of their carrying value or estimated fair value less costs to sell. Assets held for sale are included in the Company’s consolidated balance sheets. Gains and losses are not recognized until the date of sale and will be recognized in income (loss) from operating activities.

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As of September 30, 2023, the Company’s activities with regard to the divesture of the Elusys Therapeutics business met the criteria to report within discontinued operations. The Company has reclassified its previously issued financial statements to segregate the discontinued operations as of the earliest period presented.

The Company evaluated its intangible asset and goodwill for impairment under ASC 360-10, Impairment or disposal of long-lived assets and ASC 350, Intangibles—Goodwill and Other. As a result, goodwill was fully impaired by $3.9 million and intangible assets were partially impaired by $2.3 million. These impairments resulted in the carrying value of the held for sale asset being less than the fair value and therefore no loss has been recognized upon reclassification of the disposal group to held for sale treatment.

Assets and liabilities classified as held for sale in the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 relate to the planned divestiture of the Elusys Therapeutics business and consist of the following:


Assets of discontinued operations:		September 30, 2023		December 31, 2022
Current assets:
Cash and cash equivalents	$	3,319,793	$	5,242,840
Accounts receivable		6,699,200		—
Income tax refund receivable		—		600,877
Prepaid expenses and other current assets		72,432		2,084,419
Intangible assets, net		5,300,204		—
Other assets		1,002,904		—
Total Current Assets		16,394,533		7,928,136
Long term assets:
Property and equipment, net		—		41,853
Intangible assets, net		—		8,669,375
Goodwill		—		3,301,959
Operating lease right-of-use asset		—		138,885
Deposits		—		26,251
Total long term assets		—		12,178,323
Total assets held for sale	$	16,394,533		20,106,459

Liabilities held for sale:
Current liabilities:
Accounts payable	$	800,258	$	210,321
Accrued expenses and other liabilities		475,618		2,385,319
Contingent consideration, current portion		11,946,916		6,934,115
Operating lease liability, current portion		—		92,524
Other liabilities		1,002,904		—
Total current liabilities	$	14,225,696	$	9,622,279
Long term liabilities:
Contingent consideration, net of current portion		—		5,290,500
Total long term liabilities		—		5,290,500
Total liabilities held for sale	$	14,225,696	$	14,912,779

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The Company determined that the disposal group represents a strategic shift that will have a major effect on the Company's operations and financial results, and has therefore reflected the Elusys Therapeutics business as a discontinued operation for all periods presented. Details of the loss from discontinued operations included in our consolidated statement of operations are as follows:

Three Months Ended

Nine Months Ended,

September 30,

2023

2022

2023

Form: 10-Q

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