10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 20, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended | |
OR | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
(
(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 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.
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).
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 |
☐ |
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☒ |
Smaller reporting company |
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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
As of November 20, 2023, there were
NIGHTHAWK BIOSCIENCES, INC.
TABLE OF CONTENTS
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Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 |
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3 |
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4 |
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6 |
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7 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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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.
1
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NIGHTHAWK BIOSCIENCES, INC.
Consolidated Balance Sheets
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September 30, |
December 31, |
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2023 |
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2022 |
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(unaudited) |
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Current Assets |
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Cash and cash equivalents |
$ |
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$ |
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Short-term investments |
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Accounts receivable |
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Grant receivable |
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— |
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Prepaid expenses and other current assets |
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Current assets held for sale |
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Total Current Assets |
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Property and Equipment, net |
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Operating lease right-of-use asset |
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Finance lease right-of-use asset |
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Other assets |
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Deposits |
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Non-current assets held for sale |
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— |
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Total Assets |
$ |
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$ |
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Liabilities and Stockholders' Equity |
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Current Liabilities |
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Accounts payable |
$ |
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$ |
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Deferred revenue, current portion |
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Operating lease liability, current portion |
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Finance lease liability, current portion |
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Accrued expenses and other liabilities |
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Current liabilities held for sale |
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Total Current Liabilities |
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Long Term Liabilities |
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Deferred revenue, net of current portion |
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Operating lease liability, net of current portion |
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Financing lease liability, net of current portion |
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Non-current liabilities held for sale |
— |
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Total Liabilities |
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Commitments and Contingencies (Note 14 and Note 15) |
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Stockholders' Equity |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive income |
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Total Stockholders' Equity - NightHawk Biosciences, Inc. |
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Non-Controlling Interest |
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( |
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( |
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Total Stockholders' Equity |
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Total Liabilities and Stockholders' Equity |
$ |
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$ |
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See Notes to Consolidated Financial Statements
2
INIGHTHAWK BIOSCIENCES, INC.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
Three Months Ended |
Nine Months Ended |
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September 30, |
September 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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Revenue |
$ |
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$ |
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$ |
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Operating expenses: |
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Cost of revenues |
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— |
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— |
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Research and development |
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Selling, general and administrative |
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In-process research and development impairment |
— |
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— |
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Change in fair value of contingent consideration |
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— |
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( |
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— |
( |
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Total operating expenses |
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Operating loss |
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( |
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( |
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( |
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( |
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Change in fair value of warrant liability |
— |
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— |
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Other (expense) income, net |
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( |
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( |
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Unrealized (loss) gain on available-for-sale securities |
( |
( |
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( |
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Total non-operating loss |
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( |
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( |
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( |
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( |
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Net loss before income taxes from continuing operations |
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( |
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( |
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( |
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( |
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Income tax (expense) benefit |
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— |
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( |
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Net loss from continuing operations before income taxes |
|
( |
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( |
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( |
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( |
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Net loss from discontinued operations before income taxes |
( |
( |
( |
( |
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Income tax expense from discontinued operations |
( |
— |
( |
— |
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Net Loss |
( |
( |
( |
( |
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Net loss - non-controlling interest |
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( |
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( |
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( |
( |
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Net loss attributable to NightHawk Biosciences, Inc. |
( |
( |
( |
( |
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Net loss per share, basic and diluted - continuing operations |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
|||||
Net loss per share, basic and diluted - discontinued operations |
( |
( |
( |
( |
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Net loss per common share attributable to NightHawk Biosciences, Inc., basic and diluted |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
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Weighted-average common shares outstanding, basic and diluted |
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Comprehensive loss from continuing operations: |
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Net loss |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
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Unrealized gain on foreign currency translation |
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Total comprehensive loss |
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( |
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( |
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( |
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( |
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Comprehensive loss attributable to non-controlling interest |
|
( |
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( |
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( |
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( |
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Comprehensive loss - NightHawk Biosciences, Inc. |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
See Notes to Consolidated Financial Statements
3
NIGHTHAWK BIOSCIENCES, INC.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
Three Months Ended September 30, 2023 |
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Accumulated |
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Other |
Total |
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Common |
Accumulated |
Comprehensive |
Non-Controlling |
Stockholders' |
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|
Stock |
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APIC |
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Deficit |
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Income |
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Interest |
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Equity |
|||||||
Balance at June 30, 2023 |
$ |
|
$ |
|
$ |
( |
$ |
|
$ |
( |
$ |
|
||||||
Issuance of common stock - ESPP |
|
( |
— |
— |
— |
— |
||||||||||||
Stock-based compensation |
— |
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— |
— |
— |
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||||||||||||
Other comprehensive income |
— |
— |
— |
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— |
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Net loss |
|
— |
— |
( |
— |
( |
|
( |
||||||||||
Balance at September 30, 2023 |
|
$ |
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|
$ |
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|
$ |
( |
|
$ |
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|
$ |
( |
|
$ |
|
Nine Months Ended September 30, 2023 |
||||||||||||||||||
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Accumulated |
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Other |
Total |
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Common |
Accumulated |
Comprehensive |
Non-Controlling |
Stockholders' |
||||||||||||||
|
Stock |
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APIC |
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Deficit |
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Income |
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Interest |
|
Equity |
|||||||
Balance at December 31, 2022 |
$ |
|
$ |
|
$ |
( |
$ |
|
$ |
( |
$ |
|
||||||
Issuance of common stock from vesting of restricted stock awards |
|
( |
— |
— |
— |
— |
||||||||||||
Issuance of common stock - ESPP |
|
( |
— |
— |
— |
— |
||||||||||||
Stock-based compensation |
— |
|
— |
— |
— |
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Other comprehensive income |
|
— |
— |
— |
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— |
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Net loss |
|
— |
— |
( |
— |
( |
|
( |
||||||||||
Balance at September 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
( |
|
$ |
|
|
$ |
( |
|
$ |
|
See Notes to Consolidated Financial Statements
4
NIGHTHAWK BIOSCIENCES, INC.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
Three Months Ended September 30, 2022 |
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Accumulated |
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Other |
Total |
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Common |
Accumulated |
Comprehensive |
Non-Controlling |
Stockholders' |
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|
Stock |
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APIC |
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Deficit |
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(Loss) Income |
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Interest |
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Equity |
|||||||
Balance at June 30, 2022 |
$ |
|
$ |
|
$ |
( |
$ |
|
$ |
( |
$ |
|
||||||
Issuance of common stock - ESPP |
|
( |
— |
— |
— |
— |
||||||||||||
Stock-based compensation |
|
— |
|
|
|
— |
|
— |
|
— |
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|
||||||
Other comprehensive income |
— |
— |
— |
|
— |
|
||||||||||||
Net loss |
|
— |
|
— |
|
( |
|
— |
|
( |
|
( |
||||||
Balance at September 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
( |
|
$ |
|
|
$ |
( |
|
$ |
|
Nine Months Ended September 30, 2022 |
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Accumulated |
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Other |
Total |
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Common |
Accumulated |
Comprehensive |
Non-Controlling |
Stockholders' |
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|
Stock |
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APIC |
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Deficit |
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Income |
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Interest |
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Equity |
|||||||
Balance at December 31, 2021 |
$ |
|
$ |
|
$ |
( |
$ |
( |
$ |
( |
$ |
|
||||||
Issuance of common stock from vesting of restricted stock awards |
|
|
|
( |
|
— |
|
— |
|
— |
|
— |
||||||
Issuance of common stock - ESPP |
|
|
|
( |
|
— |
|
— |
|
— |
|
— |
||||||
Stock-based compensation |
|
— |
|
|
|
— |
|
— |
|
— |
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Other comprehensive income |
|
— |
|
— |
|
— |
|
|
|
— |
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|
||||||
Net loss |
|
— |
|
— |
|
( |
|
— |
|
( |
|
( |
||||||
Balance at September 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
( |
|
$ |
|
|
$ |
( |
|
$ |
|
See Notes to Consolidated Financial Statements
5
NIGHTHAWK BIOSCIENCES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended |
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September 30, |
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2023 |
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2022 |
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Cash Flows from Operating Activities |
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Net loss |
$ |
( |
$ |
( |
||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Goodwill impairment loss |
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— |
||||
Intangible asset impairment loss |
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Depreciation and amortization |
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Amortization of intangible asset |
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Noncash lease expense |
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Stock-based compensation |
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Change in fair value of common stock warrants |
— |
( |
||||
Change in fair value of contingent consideration |
|
( |
|
( |
||
Unrealized (gain) loss on investments |
|
( |
|
|
||
Deferred tax liability |
( |
( |
||||
Payment of contingent consideration |
( |
— |
||||
Increase (decrease) in cash arising from changes in assets and liabilities, net of acquisitions: |
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|
||||
Accounts receivable |
|
( |
|
( |
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Other assets |
|
( |
|
|
||
Prepaid expenses and other current assets |
|
|
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||
Grant receivable |
|
( |
||||
Contract receivables |
— |
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||||
Inventory |
— |
|
||||
Income tax receivable |
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|
||||
Right-of-use assets |
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|
|
( |
||
Deferred tax liability |
— |
( |
||||
Deposits |
|
( |
||||
Accounts payable |
|
( |
|
|
||
Deferred revenue |
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|
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||
Accrued expenses and other liabilities |
|
( |
|
( |
||
Other long-term liabilities |
|
— |
|
( |
||
Net Cash (Used In) Provided by Operating Activities |
|
( |
|
|
||
Cash Flows from Investing Activities |
|
|
|
|
||
Purchase of short-term investments |
|
( |
|
( |
||
Sale of short-term investments |
|
|
||||
Purchases of property and equipment |
( |
( |
||||
Disposal of property and equipment |
|
— |
||||
Acquisition of Elusys Therapeutics, net of cash paid |
— |
|
||||
Payment of contingent consideration |
— |
( |
||||
Net Cash Provided By Investing Activities |
|
|
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||
Cash Flows from Financing Activities |
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|
|
|
||
Repayments of principal under finance lease |
( |
( |
||||
Net Cash Used In Financing Activities |
|
( |
|
( |
||
Effect of exchange rate changes on cash and cash equivalents |
|
( |
|
( |
||
Net (Decrease) Increase in Cash and Cash Equivalents |
|
( |
|
|
||
Cash and Cash Equivalents – Beginning of the Period |
|
|
|
|
||
Cash and Cash Equivalents – End of the Period |
$ |
|
$ |
|
||
Supplemental Disclosure for Cash Flow Information: |
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||
Right-of-use assets obtained upon operating lease commencements |
$ |
— |
$ |
|
||
Right-of-use assets obtained upon financing lease commencements |
$ |
|
$ |
|
||
Right-of-use assets surrendered upon financing lease modifications |
$ |
( |
$ |
— |
||
Right-of-use assets obtained upon operating lease modifications |
$ |
|
$ |
— |
||
Supplemental disclosure of non-cash investing and financing activities: |
||||||
Purchases of property and equipment included in accounts payable |
$ |
— |
$ |
|
||
Contingent and deferred cash consideration related to Elusys acquisition |
$ |
— |
$ |
|
||
Reconciliation of cash and cash equivalents at September 30, 2023 and 2022 |
||||||
Cash and cash equivalents included in current assets held for sale |
$ |
|
$ |
|
See Notes to Consolidated Financial Statements
6
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
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 $
7
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 $
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 $
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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
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
9
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 $
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 $
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 $
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 $
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 $
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 $
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
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 $
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: |
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September 30, 2023 |
|
December 31, 2022 |
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Current assets: |
||||||
Cash and cash equivalents |
$ |
|
$ |
|
||
Accounts receivable |
|
— |
||||
Income tax refund receivable |
— |
|
||||
Prepaid expenses and other current assets |
|
|
||||
Intangible assets, net |
|
— |
||||
Other assets |
|
— |
||||
Total Current Assets |
|
|
||||
Long term assets: |
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Property and equipment, net |
— |
|
||||
Intangible assets, net |
— |
|
||||
Goodwill |
— |
|
||||
Operating lease right-of-use asset |
— |
|
||||
Deposits |
— |
|
||||
Total long term assets |
— |
|
||||
Total assets held for sale |
$ |
|
|
|||
Liabilities held for sale: |
|
|
||||
Current liabilities: |
||||||
Accounts payable |
$ |
|
$ |
|
||
Accrued expenses and other liabilities |
|
|
||||
Contingent consideration, current portion |
|
|
||||
Operating lease liability, current portion |
— |
|
||||
Other liabilities |
|
— |
||||
Total current liabilities |
$ |
|
$ |
|
||
Long term liabilities: |
||||||
Contingent consideration, net of current portion |
— |
|
||||
Total long term liabilities |
— |
|
||||
Total liabilities held for sale |
$ |
|
$ |
|
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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, |
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September 30, |
September 30, |
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2023 |
|
2022 |
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2023 |
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