Statera Biopharma (STAB) 10-Q 2022 Q3 Quarterly report

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, 2022

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 001-32954

STATERA BIOPHARMA, INC.

(Exact name of registrant as specified in its charter)

Delaware	20-0077155
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4333 Corbett Drive, Suite 1082, Fort Collins, Colorado	80525
(Address of principal executive offices)	(Zip Code)

(888) 613-8802

(Registrant’s telephone number, including area code) 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    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 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  ☒

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, par value $0.005	STAB	NASDAQ Capital Market

As of November 3, 2022, there were 54,661,890 shares outstanding of the registrant’s common stock, par value $0.005 per share.

TABLE OF CONTENTS

		PAGE
PART I – FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Loss	5
	Condensed Consolidated Statement of Stockholders’ Deficit	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	28
ITEM 4.	Controls and Procedures	28
PART II – OTHER INFORMATION
ITEM 1.	Legal Proceedings	29
ITEM 1A.	Risk Factors	30
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
ITEM 3.	Defaults Upon Senior Securities	30
ITEM 4.	Mine Safety Disclosures	30
ITEM 5.	Other Information	30
ITEM 6.	Exhibits	31
Signatures		32

STATERA BIOPHARMA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2022			December 31, 2021
		UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents	$	506,098		$	1,844,732
Short-term investments		—			134,603
Accounts receivable		183,383			216,183
Prepaid expenses		97,515			981,895
Contract asset		178,048			132,572
Other current assets		248,457			837,358
Total current assets		1,213,501			4,147,343
Non-current assets:
Operating lease right-of-use assets		914,226			964,331
Restricted cash		—			5,000,000
Goodwill		9,267,007			9,267,007
Intangible assets, net		1,239,853			1,580,980
Property and equipment, net		106,415			201,901
Total non-current assets		11,527,501			17,014,219
Assets of discontinued operation		8,123			8,123
Total assets	$	12,749,125		$	21,169,685
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	14,442,069		$	5,715,956
Current portion of operating lease liabilities		323,631			254,998
Deferred revenue		386,929			373,468
Stock issuances due		682,078			325,828
Notes payable		6,396,486			4,575,000
Total current liabilities		22,231,193			11,245,250
Operating lease liabilities, net of current portion		686,140			806,140
Long-term debt		-			10,625,000
Total long-term liabilities		686,140			11,431,140
Liabilities of discontinued operation		63			63
Total liabilities		22,917,396			22,676,453
Stockholders’ equity (deficit):
Preferred stock, $.005 par value; 1,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 0 shares issued and outstanding as of September 30, 2022 and December 31, 2021		—			—
Common stock, $.005 par value; 150,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 50,744,653 shares issued and outstanding as of September 30, 2022 and 35,484,106 shares issued and outstanding as of December 31, 2021		253,724			177,421
Additional paid-in capital		133,526,843			127,743,333
Accumulated other comprehensive income (loss)		53,695			(6,651	)
Accumulated deficit		(144,075,557	)		(129,482,141	)
Total Statera Biopharma, Inc. stockholders’ deficit		(10,241,295	)		(1,568,038	)
Noncontrolling interest in stockholders’ equity		73,024			61,270
Total stockholders’ deficit		(10,168,271	)		(1,506,768	)
Total liabilities and stockholders’ deficit	$	12,749,125		$	21,169,685

See Notes to Condensed Consolidated Financial Statements

3

STATERA BIOPHARMA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Revenues:
Grants and contracts	$	670,473		$	236,519		$	2,437,139		$	236,519
Cost of goods sold		169,354			115,927			723,961			115,927
Gross profit		501,119			120,592			1,713,178			120,592
Operating expenses:
Research and development		230,604			3,434,977			4,446,535			6,274,936
Sales and marketing expense		13,350			23,242			69,750			26,037
General and administrative		1,803,607			6,306,323			8,210,391			14,981,086
Total operating expenses		2,047,561			9,764,542			12,726,676			21,282,059
Loss from operations		(1,546,442	)		(9,643,950	)		(11,013,498	)		(21,161,467	)
Other expense:
Interest and other expense		(1,810,473	)		(3,089,301	)		(3,593,897	)		(3,463,572	)
Total other expense		(1,810,473	)		(3,089,301	)		(3,593,897	)		(3,463,572	)
Income from discontinued operations, net of income taxes		-			(1	)		-			(1	)
Net loss		(3,356,915	)		(12,733,250	)		(14,607,395	)		(24,625,038	)
Net loss attributable to noncontrolling interests		8,103			13,419			13,979			13,419
Net loss attributable to Statera Biopharma, Inc.	$	(3,348,812	)	$	(12,719,831	)	$	(14,593,416	)	$	(24,611,619	)
Net loss attributable to common stockholders per share of common stock, basic and diluted	$	(0.07	)	$	(0.47	)	$	(0.32	)	$	(0.86	)
Weighted average number of shares used in calculating net loss per share, basic and diluted		50,234,111			27,036,583			45,906,659			28,671,422

See Notes to Condensed Consolidated Financial Statements

4

STATERA BIOPHARMA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Net loss including noncontrolling interests	$	(3,356,915	)	$	(12,733,250	)	$	(14,607,395	)	$	(24,625,038	)
Other comprehensive income:
Foreign currency translation adjustment		42,217			—			86,079			—
Comprehensive loss including noncontrolling interests		(3,314,698	)		(12,733,250	)		(14,521,316	)		(24,625,038	)
Comprehensive income (loss) attributable to noncontrolling interests		(5,588	)		13,419			(11,754	)		13,419
Comprehensive loss attributable to Statera Biopharma, Inc.	$	(3,320,286	)	$	(12,719,831	)	$	(14,533,070	)	$	(24,611,619	)

See Notes to Condensed Consolidated Financial Statements

5

STATERA BIOPHARMA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(UNAUDITED)

							Additional
	Common Stock						Paid-In
	Shares			Amount			Capital
Balance at December 31, 2020		13,376,062		$	66,880		$	166,762,778
Exercise of warrants		92,883			466			(466	)
Issuance of common stock, net of offering costs		2,000,000			10,000			12,713,074
Net loss		—			—			—
Balance at March 31, 2021		15,468,945		$	77,346		$	179,475,386
Issuance of common stock, net of offering costs		—			—			214
Net loss		—			—			—
Balance at June 30, 2021		15,468,945		$	77,346		$	179,475,600
Statera merger and recapitalization		16,626,575			83,132			(58,925,110	)
Shares to be issued for services		—			—			464,703
Shares to be issued for stock based compensation		—			—			234,000
Issuance of restricted stock		—			—			4,957,707
Net loss		—			—			—
Balance at September 30, 2021		32,095,520		$	160,478		$	126,206,900
Balance at December 31, 2021		35,484,106		$	177,421		$	127,743,333
Issuance of common stock, net of offering costs		14,555,555			72,778			6,383,727
Common stock repurchase		(160,130	)		(801	)		(50,507	)
Shares issued for stock based compensation		100,000			500			(500	)
Stock based compensation		—			—			452,537
Foreign currency translation		—			—			—
Net loss		—			—			—
Balance at March 31, 2022		49,979,531		$	249,898		$	134,528,590
Common stock repurchase		(338,169	)		(1,690	)		1,690
Stock based compensation		—			—			(1,065,684	)
Foreign currency translation		—			—			—
Net loss		—			—			—
Balance at June 30, 2022		49,641,362		$	248,208		$	133,464,596
Common stock repurchase		(396,709	)		(1,984	)		1,984
Stock based compensation		—			—			(287,637	)
Common stock issuance for services		1,500,000			7,500			347,900
Foreign currency translation		—			—			—
Net loss		—			—			—
Balance at September 30, 2022		50,744,653		$	253,724		$	133,526,843

	Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interests			Total
Balance at December 31, 2020	$	(685,680	)	$	(27,631,321	)	$	4,973,465		$	143,486,122
Exercise of warrants		—			—			—			—
Issuance of common stock, net of offering costs		—			—			—			12,723,074
Net loss		—			(5,286,646	)		—			(5,286,646	)
Balance at March 31, 2021	$	(685,680	)	$	(32,917,967	)	$	4,973,465		$	150,922,550
Issuance of common stock, net of offering costs		—						—			214
Net loss		—			(6,591,723	)		—			(6,591,723	)
Balance at June 30, 2021	$	(685,680	)	$	(39,509,690	)	$	4,973,465		$	144,331,041
Statera merger and recapitalization		683,666			(2	)		(4,887,848	)		(63,046,162	)
Shares to be issued for services		—			—			—			464,703
Shares to be issued for stock based compensation		—			—			—			234,000
Restricted stock		—			—			—			4,957,707
Net loss		—			(12,719,831	)		(13,419	)		(12,733,250	)
Balance at September 30, 2021	$	(2,014	)	$	(52,229,523	)	$	72,198		$	74,208,039
Balance at December 31, 2021	$	(6,651	)	$	(129,482,141	)	$	61,270		$	(1,506,768	)
Issuance of common stock, net of offering costs		—			—			—			6,456,505
Common stock repurchase		—			—			—			(51,308	)
Shares issued for stock based compensation		—			—			—			—
Stock based compensation		—			—			—			452,537
Foreign currency translation		(17,601	)		—			(8,486	)		(26,087	)
Net loss		—			(7,757,210	)		(2,723	)		(7,759,933	)
Balance at March 31, 2022	$	(24,252	)	$	(137,239,351	)	$	50,061		$	(2,435,054	)
Common stock repurchase		—			—			—			—
Stock based compensation		—			—			—			(1,065,684	)
Foreign currency translation		49,421			—			20,528			69,949
Net loss		—			(3,487,394	)		(3,153	)		(3,490,547	)
Balance at June 30, 2022	$	25,169		$	(140,726,745	)	$	67,436		$	(6,921,336	)
Common stock repurchase		—			—			—			—
Stock based compensation		—			—			—			(287,637	)
Common stock issuance for services		—			—			—			355,400
Foreign currency translation		28,526			—			13,691			42,217
Net loss		—			(3,348,812	)		(8,103	)		(3,356,915	)
Balance at September 30, 2022	$	53,695		$	(144,075,557	)	$	73,024		$	(10,168,271	)

See Notes to Condensed Consolidated Financial Statements

6

STATERA BIOPHARMA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Nine Months Ended September 30,
	2022			2021
Cash flows from operating activities:
Net loss	$	(14,607,395	)	$	(24,625,038	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		101,940			8,309
Amortization expense		341,127			134,022
Noncash equity expense		—			235,538
Noncash interest expense		—			799,858
Stock based compensation		(900,784	)		4,957,707
Noncash lease expense		(1,263	)		21,472
Changes in operating assets and liabilities:
Other current assets		588,903			(380,615	)
Accounts receivable		32,800			63,279
Short term investments		134,603			(233,642	)
Prepaid expenses		884,380			(2,688,472	)
Contract asset		(45,476	)		374,626
Contract liability		13,462			(130,829	)
Accounts payable and accrued expenses		8,726,113			629,994
Net cash used in operating activities		(4,731,590	)		(20,833,791	)
Cash flows from investing activities:
Purchase of property and equipment		(6,454	)		(86,057	)
Cash acquired, ImQuest acquisition		—			529,499
Cash acquired, CBLI merger		—			13,116,459
Net cash provided by (used in) investing activities		(6,454	)		13,559,901
Cash flows from financing activities:
Proceeds from issuance of common		6,405,195			5,685,112
Proceeds from issuance of long-term debt		500,000			14,670,740
Proceeds from issuance of short-term debt		—			200,000
Payment of debt issuance costs		—			(329,260	)
Stock issuances due		711,650			769,529
Repayments on notes payable		(9,303,514	)		(97,737	)
Net cash provided by (used in) financing activities		(1,686,669	)		20,898,384
Effect of exchange rate change on cash and equivalents		86,079			(2,014	)
Increase (decrease) in cash and cash equivalents		(6,338,634	)		13,622,480
Cash, cash equivalents, and restricted cash, beginning of year		6,844,732			593,869
Cash, cash equivalents, and restricted cash, end of period	$	506,098		$	14,216,349
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	539,842		$	279,329
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Right of use asset exchanged for lease liability	$	—		$	210,872
Debt principal converted to equity		—			1,804,500

See Notes to Condensed Consolidated Financial Statements

7

STATERA BIOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Description of Business

On July 27, 2021, Statera Biopharma, Inc., formerly known as Cleveland BioLabs, Inc. (the "Company" or "Statera"), High Street Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the Company ("Merger Sub"), and Cytocom Inc., a Delaware corporation ("Old Cytocom"), completed their previously announced merger transaction. The merger transaction was completed pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of October 16, 2020, pursuant to which Merger Sub merged with and into Old Cytocom, with Old Cytocom continuing as a wholly owned subsidiary of the Company and the surviving corporation of the merger (the "Merger"). In connection with the closing of the Merger, Old Cytocom was renamed “Cytocom Subsidiary Inc.” and the Company was renamed “Cytocom, Inc.” Effective September 1, 2021, the Company changed its corporate name to "Statera Biopharma, Inc.", and the Company’s common stock began trading on The Nasdaq Capital Market with the symbol “STAB.”

The Company was incorporated in Delaware in June 2003 and is headquartered in Fort Collins, Colorado. Prior to the Merger, the Company conducted business in the United States ("U.S.") directly and in the Russian Federation ("Russia") through two subsidiaries: one wholly owned subsidiary, BioLab 612, LLC ("BioLab 612"), which began operations in 2012 and was dissolved in November 2020; and Panacela Labs, Inc. ("Panacela"), which was formed by us and Joint Stock Company "RUSNANO" ("RUSNANO"), our financial partner in the venture, in 2011. Unless otherwise noted, or the context otherwise requires, the terms "Statera Biopharma," the "Company," "we," "us," and "our" refer to Statera Biopharma, Inc., known as Cleveland BioLabs, Inc. prior to the Merger, BioLab 612, and Panacela.

On June 24, 2021, Old Cytocom completed the acquisition of ImQuest Life Sciences, Inc. and its subsidiaries ("ImQuest") in accordance with the Agreement and Plan of Merger by and among Old Cytocom and ImQuest dated as of July 17, 2020, and gained control of ImQuest. The purchase consideration due under this merger to the ex-shareholders of ImQuest consisted of 12,000,000 shares of preferred stock of Old Cytocom which were subsequently converted into 3,282,089 shares of common stock of Statera Biopharma.  ImQuest is now a wholly-owned subsidiary of the Company.

In addition, the Company has an investment in Genome Protection, Inc. ("GPI") that is recorded under the equity method of accounting. The Company has not recorded its 50% share of the losses of GPI through September 30, 2022 as the impact would have reduced the Company's equity method investment in GPI below zero, and there are no requirements to fund the Company's share of these losses or contribute additional capital as of the date of these statements.

Statera Biopharma is a clinical-stage biopharmaceutical company developing novel immunotherapies targeting autoimmune, neutropenia/anemia, emerging viruses and cancers based on a proprietary platform designed to rebalance the body’s immune system and restore homeostasis. Statera has one of the largest platforms of toll-like receptor ("TLR") agonists in the biopharmaceutical industry with TLR4 and TLR9 antagonists, and the TLR5 agonists, Entolimod and GP532. TLRs are a class of protein that play a key role in the innate immune system.

Statera Biopharma is developing therapies designed to directly elicit within patients a robust and durable response of antigen-specific killer T-cells and antibodies, thereby activating essential immune defenses against autoimmune, inflammatory, and infectious diseases and cancers. In the next 12 months, the Company expects to initiate clinical trials covering Crohn’s disease (STAT-201), hematology (Entolimod), pancreatic cancer (STAT-401) and COVID-19 (STAT-205).

Going Concern

At September 30, 2022, the Company had cash and cash equivalents of $0.5 million in the aggregate. The Company has incurred recurring losses from operations since inception, accumulating a deficit of approximately $144.1 million as of September 30, 2022. For the nine months ended September 30, 2022 and 2021, the Company incurred net losses of approximately $14.6 million and $24.6 million, respectively. The Company may incur additional losses and negative operating cash flows in the future. Failure to generate sufficient revenues, reduce spending or raise additional capital could adversely affect its ability to achieve its intended business objectives. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these condensed financial statements.

Management intends to fund future operations through additional private or public debt or equity offerings and may seek additional capital through arrangements with strategic partners or from other sources. Based on the Company’s operating plan, existing working capital as of September 30, 2022 was not sufficient to meet the cash requirements to fund planned operations for a period of one year after issuance of condensed financial statements without additional sources of cash. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.

8

 

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

These unaudited interim condensed consolidated financial statements reflect the historical results of Old Cytocom prior to the completion of the Merger, and do not include the historical results of the Company prior to the completion of the Merger. All share and per share disclosures have been adjusted to reflect the exchange of shares in the Merger. Under U.S. generally accepted accounting principles ("GAAP"), the Merger is treated as a “reverse merger” under the purchase method of accounting. For accounting purposes, Old Cytocom is considered to have acquired Cleveland BioLabs, Inc. See Note 3, Merger with Old Cytocom, for further details on the Merger and the U.S. GAAP accounting treatment.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America pursuant to the requirements of the Securities and Exchange Commission ("SEC") for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for the fair presentation of results for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard-setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Other Comprehensive Income (Loss)

The Company applies the Accounting Standards Codification ("ASC") on comprehensive income (loss) that requires disclosure of all components of comprehensive income (loss) on an annual and interim basis. Other comprehensive income (loss) is defined as the change in equity of a business enterprise during a period arising from transactions and other events and circumstances from non-owner sources. The following table presents the changes in accumulated other comprehensive loss for the nine months ended September 30, 2022.

	Gains and losses on foreign exchange translations
Beginning balance	$	(6,651	)
Other comprehensive income (loss) before reclassifications		60,346
Amounts reclassified from accumulated other comprehensive loss		—
Ending balance	$	53,695

9

 

Accounting for Stock-Based Compensation

The Statera BioPharma Equity Incentive Plan, previously known as the Cleveland Biolabs, Inc. Equity Incentive Plan, adopted in 2018 (the "Plan"), authorizes the Company to grant (i) options to purchase common stock, (ii) stock appreciation rights, (iii) awards of restricted or unrestricted stock, (iv) restricted stock units, and (v) performance awards, so long as the exercise or grant price of each are at least equal to the fair market value of the stock on the date of grant. As of September 30, 2022, an aggregate of 3,597,557 shares of common stock were authorized for issuance under the Plan, of which a total of 116,000 shares of common stock have been issued, 1,234,527 shares of common stock are reserved for outstanding stock options, 60,066 shares of common stock are reserved for restricted stock units, and 2,186,964 shares of common stock remained available for future awards. This includes the Company’s approved amendments to the Plan that increased the number of shares of common stock authorized to be issued by 3,000,000 shares, removed the limit on the maximum number of shares covered by an award that may be issued in any calendar year to any single recipient. Awards granted under the Plan have a contractual life of no more than 10 years. The terms and conditions of equity awards (such as price, vesting schedule, term, and number of shares) under the Plan are specified in an award document, and approved by the Company’s Board of Directors or its management delegates.

The 2013 Employee Stock Purchase Plan (the "ESPP") provides a means by which eligible employees of the Company and certain designated related corporations may be given an opportunity to purchase shares of common stock. As of September 30, 2022, there are 1,025,000 shares of common stock reserved for purchase under the ESPP. The number of shares reserved for purchase under the ESPP increases on January 1 of each calendar year by the lesser of: (i) 10% of the total number of shares of common stock outstanding on December 31st of the preceding year, or (ii) 100,000 shares of common stock. The ESPP allows employees to use up to 15% of their compensation to purchase shares of common stock at an amount equal to 85% of the fair market value of the Company’s common stock on the offering date or the purchase date, whichever is less.

The Company utilizes the Black-Scholes valuation model for estimating the fair value of all stock options granted where the vesting period is based on length of service or performance, while a Monte Carlo simulation model is used for estimating the fair value of stock options with market-based vesting conditions. A total of 1,216,149 options were granted during the nine months ended September 30, 2022 and no options were granted for the nine months ended September 30, 2021.  In addition, 60,066 restricted stock units were granted for the nine months ended September 30, 2022.

Income Taxes

No income tax expense was recorded for the three and nine months ended September 30, 2022 and 2021 as the Company does not expect to have taxable income for 2022 and did not have taxable income in 2021. A full valuation allowance has been recorded against the Company’s net deferred tax asset.

At September 30, 2022, the Company had U.S. federal net operating loss carryforwards of approximately $197.8 million, of which $140.6 million begins to expire if not utilized by 2023, and $57.2 million has no expiration, and approximately $4.3 million of tax credit carryforwards, which begin to expire if not utilized by 2024. The Company also has state net operating loss carryforwards of approximately $112.2 million, which begin to expire if not utilized by 2027, and state tax credit carryforwards of approximately $0.3 million, which begin to expire if not utilized by 2022. 

10

 

Earnings (Loss) per Share

Basic net loss per share of common stock excludes dilution for potential common stock issuances and is computed by dividing net loss by the weighted average number of shares outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted net loss per share is identical to basic net loss per share as potentially dilutive securities have been excluded from the calculation of diluted net loss per common share because the inclusion of such securities would be antidilutive.

The Company has excluded the following securities from the calculation of diluted net loss per share because all such securities were antidilutive for the periods presented. Additionally, there were no dilutive securities outstanding as of September 30, 2022.

	As of
Common Equivalent Securities	September 30, 2022		December 31, 2021
Warrants		33,208,944		2,431,168
Restricted Stock Units		567,640		1,567,368
Options		1,234,527		45,468
Total		35,011,111		4,044,004

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business. The Company accrues for liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. 

Revenue Recognition

The Company has implemented the five steps to recognize revenue from contracts with customers under ASC 606, Revenue from Contracts with Customers ("ASC 606"), which are:

• Step 1: Identify the contract(s) with a customer

      • Step 2: Identify the performance obligations in the contract

      • Step 3: Determine the transaction price

      • Step 4: Allocate the transaction price to the performance obligations in the contract

      • Step 5: Recognize revenue when (or as) a performance obligation is satisfied

In the nine months ended September 30, 2022, the Company generated revenue from its Clinical Research Organization services ("CRO services") provided by ImQuest.

The Company provides preclinical CRO services to evaluate the potential of new and novel pharmaceutical products for the treatment and prevention of viruses, bacteria, cancer and inflammatory diseases. These preclinical research services include compound screening, efficacy analysis, drug target validations, mechanism of action research, and toxicity studies in multiple pharmaceutical areas.

The Company has concluded that each provision of its CRO services is a distinct and single performance obligation as the customer benefits from the services once they have the opportunity to question the findings and receive the final report which summarizes the research results. Management determined each promised good and service in the contract related to its CRO services should be bundled into a single performance obligation because even though the contract explicitly states individual promises such as consultation services combined with a range of tests that are carried out in order to conduct the preclinical research, the culmination of the individual promises is the CRO services which is a single performance obligation.

The amount the Company earns for its CRO services is typically a fixed fee per project. Revenue from the project is recognized at the point in time when the final report is delivered to the customer and thus the performance obligation is satisfied. At the time the final report is delivered: (a) the Company has the right to payment for the report, (b) the customer has legal title to the report, (c) physical transfer of the report has occurred and the customer has taken possession of the report, (d) the customer now has benefit and the risk of ownership of the report, and (e) the customer has accepted the report. Revenue collected in advance of delivery of the final report is classified as a contract liability in the consolidated balance sheet

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include bank demand deposits, marketable securities with maturities of three months or less at purchase, and money market funds that invest primarily in certificates of deposits, commercial paper and U.S. government and U.S. government agency obligations. Cash equivalents are reported at fair value. As of September 30, 2022 and December 31, 2021, there were no cash equivalents.  Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At September 30, 2022 and December 31, 2021, the Company had $0 and $331,385 in excess of the FDIC insured limit, respectively.

Restricted Cash

The Company considers all cash held for specific reasons and not available for immediate, normal business use as restricted cash. As of September 30, 2022 and December 31, 2021 the Company had $0 and $5,000,000, respectively, classified as restricted cash. In February 2022, the restricted cash was used to repay a portion of the debt to Avenue.

Accounts Receivable

Accounts receivable are recorded net of an allowance for credit losses, which is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expense in the consolidated statements of operations. The Company assesses collectability by reviewing accounts receivable on an individual basis when the Company identifies specific customers with known disputes or collectability issues.  The Company assesses past due amounts by reviewing the payment terms of the contracts with the Company’s customers. In determining the amount of the allowance for credit losses, the Company makes judgments about the creditworthiness of customers based on ongoing credit evaluations. The Company writes off uncollectable accounts receivable against the allowance based on facts and circumstances for specific customers when management determines that collectability is remote.  There is no allowance for doubtful account as of September 30, 2022 and December 31, 2021.

Goodwill

The Company tests goodwill for impairment in the fourth quarter each year, or more frequently if indicators of an impairment exist, to determine whether it is more likely than not that the fair value of the reporting unit with goodwill is less than its carrying value. For reporting units for which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is considered not impaired. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance, and other relevant events and factors affecting the fair value of the reporting unit. For reporting units for which this assessment concludes that it is more likely than not that the fair value is below the carrying value, goodwill is tested for impairment by determining the fair value of each reporting unit and comparing it to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired. If the carrying value of the reporting unit exceeds its fair value, we would record an impairment loss up to the difference between the carrying value and implied fair value.

Intangible Assets

The Company has two identified finite-lived intangible assets, its customer base and tradenames and trademarks. The customer base and tradenames have a useful life of 20 years and 3 years, respectively. The intangible assets are amortized on a straight-line basis over their useful lives.

The Company reviews all finite lived intangible assets for impairment when circumstances indicate that their carrying values may not be recoverable. If the carrying value of an asset group is not recoverable, the Company recognizes an impairment loss for the excess carrying value over the fair value in its consolidated statements of operations. No impairment losses have been recorded in the nine months ended September 30, 2022 and 2021.

12

 

3. Merger with Old Cytocom

On July 27, 2021, the Company, formerly known as Cleveland BioLabs, Inc., Merger Sub, and Old Cytocom completed their previously announced merger transaction. The merger transaction was completed pursuant to the Merger Agreement, pursuant to which Merger Sub merged with and into Old Cytocom, with Old Cytocom continuing as a wholly owned subsidiary of the Company and the surviving corporation of the Merger. Immediately upon completion of the Merger, the former stockholders of Old Cytocom stockholders held a majority of the voting interest of the combined company.

Under the terms of the Merger, at the effective time of the Merger, the Company issued shares of its common stock to Old Cytocom stockholders (but excluding those Old Cytocom stockholders who had been holders of stock of ImQuest prior to the merger between Old Cytocom and ImQuest in June 2021), at an exchange ratio of 0.3384 shares of common stock (the “Exchange Ratio”) for each share of Old Cytocom common stock outstanding immediately prior to the Merger. The Company also set aside a number of shares of its common stock for issuance to the Old Cytocom stockholders who had been holders of stock of ImQuest prior to merger between Old Cytocom and ImQuest in June 2021, which 3,282,089 shares were issued after the passage of 30 trading days following the Merger. Immediately following the closing of the Merger on July 27, 2021, the former Cleveland BioLabs, Inc. stockholders owned approximately 46% of the aggregate number of shares of common stock of the Company and the former Old Cytocom and former ImQuest stockholders owned approximately 54% of the shares of common stock of the Company.

At the effective time of the Merger, the Company also became party to a number of warrants that had been issued by Old Cytocom. At the time of the Company’s first draw under the Loan and Security Agreement, dated as of April 26, 2021, between Avenue Venture Opportunities Fund, L.P. (“Avenue”) and Old Cytocom, as supplemented by the Supplement to the Loan and Security Agreement, dated as of April 26, 2021, between Avenue and Old Cytocom (the “Avenue Facility”), which occurred July 30, 2021, the Company issued a warrant (the “Avenue Warrant”) to purchase an aggregate of 154,004 shares of the Company’s common stock at an exercise price of $0.01 per share. Avenue may exercise the Avenue Warrant at any time and from time to time until April 30, 2026. The terms of the Avenue Warrant provide that the exercise price of the Avenue Warrant, and the number of shares of common stock for which the Avenue Warrant may be exercised, are subject to adjustment to account for increases or decreases in the number of outstanding shares of common stock resulting from stock splits, reverse stock splits, consolidations, combinations and reclassifications.

In connection with the Company’s entry into the Amended and Restated Share Purchase Agreement, dated as of July 27, 2021, by and among GEM Global Yield LLC SCS, GEM Yield Bahamas Limited (such entities together, “GEM”) and the Company, as successor to Old Cytocom (the “GEM Agreement”), Old Cytocom issued a warrant (the “GEM Warrant”) to GEM. At the closing of the Merger, the GEM Warrant automatically became an obligation of the Company. The GEM Warrant is exercisable for an aggregate of 1,720,083 shares of Company common stock, or 4.99% of the Company’s outstanding stock as of immediately after the effective time of the Merger, at an exercise price of $5.01 per share. The exercise price increased to $5.51 on the one-year anniversary date of the effective time of the Merger. GEM may exercise the GEM Warrant at any time and from time to time until July 28, 2024. The terms of the GEM Warrant provide that the exercise price of the GEM Warrant, and the number of shares of common stock for which the GEM Warrant may be exercised, are subject to adjustment to account for increases or decreases in the number of outstanding shares of common stock resulting from stock splits, reverse stock splits, consolidations, combinations and reclassifications. Additionally, the GEM Warrant contains weighted average anti-dilution provisions that provide that if the Company issues shares of common stock, or securities convertible into or exercisable or exchange for, shares of common stock at a price per share that is less than the volume-weighted average price of the common stock prior to that issuance, then the exercise price of the GEM Warrant will be proportionally reduced by application of a formula provided for in the GEM Warrant that takes into account such new issuance price in light of the number of shares issued and to be issued.  

Immediately after the closing of the Merger, the Company issued warrants (the “2021 Warrants”) to the purchasers of Old Cytocom’s Series A-3 Preferred Stock and Series A-4 Preferred Stock, each of which were converted immediately prior to the closing of the Merger, exercisable for up to an aggregate of 952,000 shares of Company common stock. The 2021 Warrants were exercisable for an aggregate of 952,000 shares of Company common stock at an exercise price of $5.00 per share. The holders of the 2021 Warrants were able to exercise the 2021 Warrants at any time and from time to time until December 10, 2021. Upon exercise and payment of the applicable exercise price to the Company by a holder, the Company would issue to such holder (i) the underlying shares of common stock for which the exercise price is paid and (ii) a new warrant, in substantially the same form as the 2021 Warrants, that expires on December 10, 2022. The terms of the 2021 Warrants provide that the exercise price of the 2021 Warrants, and the number of shares of Common Stock for which the 2021 Warrants may be exercised, are subject to adjustment to account for increases or decreases in the number of outstanding shares of common stock resulting from stock splits, reverse stock splits, consolidations, combinations and reclassifications. As of September 30, 2022, an aggregate of 425,000 of the 2021 Warrants remain exercisable.

The Company’s management has evaluated all the terms of the warrant agreements and determined that the warrants shall be accounted for as equity instruments as no conditions exist under ASC 480 to account for these as liabilities.

All Old Cytocom vested restricted stock units outstanding prior to the effective time of the Merger were exchanged for shares of the Company’s common stock in accordance with the Exchange Ratio. Each unvested Old Cytocom restricted stock unit was converted into a number of restricted stock units of the Company, as determined in accordance with the exchange ratio formula described above. The terms (including, without limitation, the vesting terms) of each such substitute restricted stock unit are substantially equivalent to those of the Old Cytocom restricted stock unit being replaced.

Cleveland BioLabs, Inc. equity awards issued and outstanding at the time of the Merger remained issued and outstanding and were not impacted by the Merger. As of July 27, 2021, Cleveland BioLabs, Inc. had outstanding stock options to purchase 45,706 shares of common stock, of which stock options to purchase 45,706 shares were vested and exercisable at a weighted average exercise price of $14.46 per share. As of September 30, 2022, an aggregate of 18,378 of these stock options remain exercisable.

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Allocation of Purchase Consideration

Pursuant to business combination accounting, the Company applied the acquisition method, which requires the assets acquired and liabilities assumed be recorded at fair value with limited exceptions.

The purchase price for Cleveland BioLabs, Inc. on July 27, 2021, the closing date of the Merger, was as follows:

	July 27, 2021
Number of shares of the combined company owned by Cleveland BioLabs, Inc. stockholders		15,478,945	(1)
Multiplied by the price per share of Cleveland BioLabs, Inc. common stock	$	4.99	(2)
Total purchase price	$	77,239,936

1.  Represents the number of shares of common stock of the combined company that Cleveland BioLabs, Inc. stockholders owned as of the closing of the Merger pursuant to the Merger Agreement.

2. The fair value of Cleveland BioLabs, Inc. common stock used in determining the purchase price was $4.99.

Under the acquisition method of accounting, the total purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed of Cleveland BioLabs, Inc. on the basis of their estimated fair values as of the transaction closing date on July 27, 2021.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed based on their fair values as of July 27, 2021:

	July 27, 2021
Tangible Assets Acquired
Cash and cash equivalents	$	13,116,460
Other receivables		25,142
Other current assets		44,507
Fixed assets - net		4,954
Panacela (67.57% ownership)		178,388
Total Tangible Assets		13,369,451
Assumed Liabilities
Accounts payable		(426,570	)
Accrued expenses		(41,755	)
Total Liabilities		(468,325	)
Net Tangible Assets/Liabilities		12,901,126
Intangible Assets Acquired
Goodwill		64,338,810
Total Net Assets Acquired	$	77,239,936

Goodwill

The excess of the purchase price over the assets acquired and liabilities assumed represents goodwill. The goodwill is primarily attributable to the synergies expected to arise after the acquisition and is not expected to be deductible for tax purposes.

Pro Forma Results in connection with the Merger

The unaudited financial information in the following table summarizes the combined results of operations of the Company and Cleveland BioLabs, Inc., on a pro forma basis, as if the Merger occurred at the beginning of the periods presented.

	Nine Months Ended September 30,
	2021			2022
Revenue	$	1,665,992		$	2,437,139
Net loss	$	(24,612,658	)	$	(14,607,395	)

The above unaudited pro forma information was determined based on historical GAAP results of Old Cytocom, ImQuest and Cleveland BioLabs, Inc. The unaudited pro forma combined results do not necessarily reflect what the Company’s combined results of operations would have been, if the acquisition was completed on January 1, 2021. The unaudited pro forma combined net loss includes pro forma adjustments primarily related to the non-recurring items directly attributable to the business combinations.

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4. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

	September 30, 2022		December 31, 2021
Accounts payable	$	8,131,585	$	3,964,962
Accrued payroll		2,886,575		195,470
Accrued interest and fees		613,056		51,195
Other accrued expenses		2,810,853		1,504,329
	$	14,442,069	$	5,715,956

5. Notes Payable

Notes payable consist of the following:

	September 30, 2022		December 31, 2021
Short-term portion of Avenue Ventures note payable	$	6,196,486	$	4,375,000
Short-term notes payable		200,000		200,000
	$	6,396,486	$	4,575,000

6. Long-term Debt

Long-term debt consists of the following:

	September 30, 2022		December 31, 2021
Long-term portion of Avenue Ventures note payable	$	-	$	10,625,000
	$	-	$	10,625,000

In February 2022, Avenue withdrew $5.0 million of the Company's restricted cash to repay a portion of the debt to Avenue. On March 31, 2022, the Company received a letter (the "Letter") from Avenue regarding alleged events of default with respect to the Loan and Security Agreement, dated as of April 26, 2021, between the Company and Avenue (the "Loan Agreement"). In the Letter, Avenue alleges that certain events of default under the Loan Agreement have occurred and continue to exist. Specifically, Avenue alleged that the Company was in violation of certain provisions of the Loan Agreement as a result of which, Avenue purported to exercise its rights to suspend further loans or advances to the Company under the Loan Agreement and to accelerate the amount due under the Loan Agreement. Avenue further states in the Letter that interest will continue to accrue on the outstanding amounts at the default rate of 5.0%. In furtherance of the allegations set forth in the Letter, Avenue foreclosed on approximately $4.8 million of the Company’s cash. In April 2022, Avenue returned $0.5 million of the amount foreclosed on. Approximately $3.8 million was applied to principal after application of prepayment fees, accrued interest, and miscellaneous expenses. Due to the accelerated payment schedule, the entire amount due on the Avenue note payable has been reclassed to short term notes payable.

15

 

7. Leases

The Company’s leases do not provide an implicit rate that can be readily determined. Therefore, the Company uses discount rates based on the incremental borrowing rate of its current external debt of 3% and 17%, depending on the entity and timing of the lease implementation.

The Company’s weighted-average remaining lease term relating to its operating leases is 4 years, with a weighted-average discount rate of 15.67%.

The Company incurred lease expense for its operating leases of $159,996 and $103,959, which was included in general and administrative expenses, and $187,795 and $0, which was included in research and development expenses in the condensed consolidated statements of operations for the periods ended September 30, 2022 and 2021, respectively. 

The following table presents information about the future maturity of the lease liability under the Company’s operating leases as of September 30, 2022:

Maturity of Lease Liability	Total
2022	$	119,284
2023		437,749
2024		264,955
2025		173,644
2026		182,326
Thereafter		223,605
Total undiscounted lease payments		1,401,563
Less: Imputed interest		391,792
Present value of lease liabilities	$	1,009,771

8. Intangible assets

Intangible assets consist of the following:

	September 30, 2022			December 31, 2021
Customer base	$	1,312,000		$	1,312,000
Trade-names/marks		502,100			502,100
Accumulated amortization		(574,247	)		(233,120	)
Net carrying value	$	1,239,853		$	1,580,980

During the nine months ended September 30, 2022 and 2021, the Company recorded total amortization expense of $341,127 and $134,022, respectively.

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9. Stockholders’ Deficit

The Company has granted options to employees and Board members to purchase shares of common stock. The following is a summary of option award activity during the nine months ended September 30, 2022:

	Total Stock Options Outstanding			Weighted Average Exercise Price per Share
December 31, 2021		45,468		$	14.28
Granted		1,216,149			0.24
Vested		—			—
Forfeited, Canceled		(27,090	)		14.89
September 30, 2022		1,234,527		$	0.44

The following is a summary of outstanding stock options as of September 30, 2022:

	As of September 30, 2022
	Stock Options Outstanding		Vested Stock Options
Quantity		1,234,527		1,234,527
Weighted Average Exercise Price	$	0.44	$	0.44
Weighted Average Remaining Contractual Term (in Years)		9.90		9.90
Intrinsic Value	$	—	$	—

As of September 30, 2022, there was no total compensation cost not yet recognized related to unvested stock options.

As of September 30, 2022, there are 567,640 restricted stock units outstanding to employees, 507,574 from the Old Cytocom plan and 60,066 included in the Plan.

10. Warrants

In connection with previous sales of the Company’s common stock and the issuance of debt instruments, warrants were issued which presently have exercise prices ranging from $0.01 to $5.51. The warrants expire between one and five years from the date of grant and are subject to the terms applicable in each agreement.  These terms include for certain warrants the right to receive cash settlement upon the occurrence of a fundamental transaction.  The Merger meets the definition of a fundamental transaction per the terms of these warrant agreements. The Company’s management has evaluated all the terms of the warrant agreements and determined that the warrants shall be accounted for as equity instruments as no conditions exist under ASC 480 to account for the warrants as liabilities.

The following table summarizes the outstanding warrant activity during the nine months ended September 30, 2022:

	Number of Warrants		Weighted Average Exercise Price
December 31, 2021		2,431,168	$	4.48
Granted		30,777,776		0.46
Exercised		—		—
Forfeited, Canceled		—		—
September 30, 2022		33,208,944	$	0.82

11. Commitments and Contingencies

On March 24, 2021, a complaint, captioned Bednar v. Cleveland BioLabs, Inc. et al., Case 1:21-cv-02546, was filed in the U.S. District Court for the Southern District of New York in connection with the Merger (the "Bednar Action").  The Bednar Action names as defendants Cleveland BioLabs and each director on the Cleveland BioLabs board of directors.  The complaint in the Bednar Action alleges that Cleveland BioLabs and the Cleveland BioLabs board of directors omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger in violation of their fiduciary duties and the Exchange Act and related SEC regulations. The Bednar Action seeks, among other things, an injunction preventing the closing of the Merger, rescission of the Merger if it is consummated, the dissemination by the Company of a revised registration statement on Form S-4 and an award of plaintiffs’ attorneys’ and experts’ fees. On October 13, 2021, Plaintiff Bednar filed a notice of dismissal.  On October 20, 2021, the Southern District entered an order dismissing the case.  On December 23, 2021, Plaintiff Bednar filed a new action in the Delaware Court of Chancery, asserting a cause of action for an equitable assessment of attorneys’ fees and expenses incurred in connection with the first lawsuit.  The new Delaware action names the same defendants as the first Bednar Action.  The Defendants in the new Delaware action have filed an answer to Plaintiff’s Delaware complaint.

On August 16, 2022, certain former employees of the Company and certain third-party vendors of the Company (collectively, "Petitioning Creditors") filed an involuntary petition in the United States Bankruptcy Court for the District of Colorado (No. 22-13051-JGR) against the Company seeking relief under Chapter 11 of the United States Bankruptcy Code. The Company believes the involuntary petition is improper and wrongfully filed and is seeking dismissal of the petition. The outcome of this lawsuit is uncertain. The Company believes that the claims asserted are without merit.

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12. Subsequent Events

On October 6, 2022, the Company had a hearing before the Nasdaq Hearings Panel (the "Panel"), the Company presented its plan to evidence full compliance with NASDAQ'S filing requirement and all other applicable requirements for continued listing on NASDAQ and request an extension of time to do so. The Company is taking definitive steps to evidence compliance with the NASDAQ listing criteria as soon as possible; however, there can be no assurance that the Panel will grant the Company’s request for continued listing or that the Company will satisfy the NASDAQ listing criteria within any extension period that may be provided to the Company by the Panel. The Company plans to update the market promptly following receipt of the Panel’s determination after the hearing.

On October 11, 2022, the Company was notified by the Staff of NASDAQ that the Company’s common stock would be subject to delisting due to the Company’s non-compliance with the minimum Stockholders' Equity requirement set forth in Nasdaq Listing Rule 5550(b)(1) and non-compliance with Listing Rule 5250(e)(2)(D) regarding notifying Nasdaq of the Company's intention to issue additional shares. Each of these matters serve as an additional and separate basis for delisting the Company’s securities from NASDAQ. The Panel will consider these matters in their decision regarding the Company’s continued listing on NASDAQ. The Company presented its views with respect to these additional deficiencies to the Panel.

On October 18, 2022, the Company entered into the Assignment of Promissory Note with Avenue Venture Opportunities Fund, L.P. (" Avenue Venture ") and Silverback Capital Corporation (" Silverback "), pursuant to which, in consideration for a cash payment of $400,000 by Silverback to Avenue Venture, Avenue Venture assigned to Silverback a $400,000 portion (the " Apportioned Note ") of that certain Promissory Note, dated as of April 26, 2021, in the aggregate principal amount of $15 million (the " Partial Assignment " ) issued by the Company to Avenue Venture pursuant to the Loan and Security Agreement, dated as of the even date of the Original Note, by and between the Company and Avenue Venture, as supplemented and amended (the " Loan Agreement "). Pursuant to the Partial Assignment, the Company issued an Amended and Restated Convertible Note due May 1, 2024 (the " A&R Note ") in the principal amount of $400,000 to Silverback as of October 18, 

2022, 

in exchange for the Apportioned Note. The A&R Note bears interest at a variable rate of interest per annum equal to the sum of (i) the greater of (A) the Prime Rate (as defined in the Loan Agreement) and (B) 3.25% plus (ii) 7.74%. Payment of the aggregate principal amount of the A&R Note outstanding together with all accrued interest thereon is due on May 1, 2024 (the " Maturity Date "). Additionally, Silverback has the right to convert, at any time until the Maturity Date, all or any portion of the outstanding principal amount, accrued interest and fees due and payable thereon into shares of common stock of the Company at a conversion price equal to 75% of the lowest trading price of the Company’s common stock during the 

five-trading 

day period preceding the conversion date inclusive of the conversion date. The Company issued 2,551,000 shares of common stock to Silverback on October 21, 

2022, 

and 1,366,237 shares of common stock to Silverback on November 2, 2022, which represented conversion 

of the

 $400,000 A&R Note.

On October 26, 2022, the Company received a determination from the Panel granting the Company’s request for the continued listing of its common stock on Nasdaq, subject to the Company’s satisfaction of certain interim milestones and, ultimately, the Company’s compliance with all applicable criteria for continued listing on Nasdaq, including the $1.00 bid price and $2.5 million stockholders’ equity requirements as set forth in Nasdaq Listing Rules 5550(a)(1) and 5550(b)(2), respectively, by no later than January 31, 2023. The Company is taking definitive steps to timely evidence compliance with the terms of the Panel’s decision; however, there can be no assurance that it will be able to do so.

On November 1, 2022, the Company entered into a securities purchase agreement (the "Purchase Agreement") with a number of accredited investors to purchase from the Company, in a private placement (the "Private Placement"), (i) an aggregate of 10,200,000 shares (the "PIPE Shares") of the Company’s common stock, par value $0.005 per share (the "Common Stock") and (ii) warrants (the "Warrants") to purchase 20,400,000 shares of Common Stock (the "Warrant Shares") at an exercise price of $0.15, with a term of exercise of five years. Each share of Common Stock was offered with two accompanying Warrants for a combined purchase price of $0.075. The aggregate purchase price for the PIPE Shares and Warrants (collectively, the "Securities") to be sold in the Private Placement is approximately $0.8 million.

18

 

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

This management’s discussion and analysis of financial condition and results of operations and other portions of this quarterly report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. All statements other than statements of current or historical fact contained in this quarterly report, including statements regarding our future financial position, business strategy, new products, budgets, liquidity, cash flows, projected costs, regulatory approvals, or the impact of any laws or regulations applicable to us and plans and objectives of management for future operations are forward-looking statements. The words "anticipate," "believe," "continue," "should," "estimate," "expect," "intend," "may," "plan," "project," "will," and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations about future events. While we believe these expectations are reasonable, such forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Our actual future results may differ materially from those discussed here for various reasons. We discuss many of these risks in Item 1A under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021. Factors that may cause such differences include, but are not limited to, the substantial doubt expressed about our ability to continue as a going concern, the outcome of any legal proceedings that have been or may be instituted against the Company related to the merger agreement or the Merger; unexpected costs, charges or expenses resulting from the Merger; our need for additional financing to meet our business objectives; our history of operating losses; our ability to successfully develop, obtain regulatory approval for, and commercialize our products in a timely manner; our plans to research, develop and commercialize our product candidates; our ability to attract collaborators with development, regulatory and commercialization expertise; our plans and expectations with respect to future clinical trials and commercial scale-up activities; our reliance on third-party manufacturers of our product candidates; the size and growth potential of the markets for our product candidates, and our ability to serve those markets; the rate and degree of market acceptance of our product candidates; regulatory requirements and developments in the United States, the European Union and foreign countries; the performance of our third-party suppliers and manufacturers; the success of competing therapies that are or may become available; our ability to attract and retain key scientific or management personnel; our historical reliance on government funding for a significant portion of our operating costs and expenses; government contracting processes and requirements; the exercise of significant influence over our company by our largest individual stockholder; the impact of the novel coronavirus ("COVID-19") pandemic on our business, operations and clinical development; the geopolitical relationship between the United States and the Russian Federation as well as general business, legal, financial and other conditions within the Russian Federation; our ability to obtain and maintain intellectual property protection for our product candidates; our potential vulnerability to cybersecurity breaches; and other factors discussed below and in our other SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2021.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. The forward-looking statements included in this quarterly report are made only as of the date hereof. We do not undertake any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments. This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this filing and with our historical consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2021.

OVERVIEW

We are a clinical-stage biopharmaceutical company developing multiple product candidates to address unmet medical needs. Prior to the closing of the Merger, we focused exclusively on developing novel approaches to activate the immune system. Our proprietary platform of Toll-like immune receptor activators has applications in mitigation of radiation injury and radiation oncology. We combine our proven scientific expertise and our depth of knowledge about our products’ mechanisms of action into a passion for developing drugs to save lives. Our most advanced product candidate in this field is entolimod, an immune-stimulatory agent, which we are developing as a radiation countermeasure and other indications in radiation oncology. 

Following the closing of the Merger, as a result of the integration of Cytocom’s business, we are also now developing novel immunotherapies targeting autoimmune, inflammatory, infectious diseases and cancers based on a proprietary, multi receptor platform, or the AIMS platform, designed to rebalance the body’s immune system and restore homeostasis. These therapies are designed to elicit directly within patients a robust and durable response of antigen-specific killer T cells and antibodies, thereby activating essential immune defenses against autoimmune, inflammatory, infectious diseases, and cancers. We believe that our technologies can meaningfully leverage the human immune system for prophylactic and therapeutic purposes by eliciting killer T-cell response levels not achieved by other published immunotherapy approaches. Our immunomodulatory technology restores the balance between the cellular (Th1) and the humoral (Th2) immune systems. Immune balance is regulated through T-helper cells that produce cytokines. The Th1 lymphocytes help fight pathogens within cells like cancer and viruses through interferon-gamma and macrophages. The Th2 lymphocytes target external pathogens like cytotoxic parasites, allergens, toxins through the activation of B-cells and antibody production to effect to dendritic cells, which are natural activators of killer T cells, also known as cytotoxic T -cells, or CD8+ T cells. Furthermore, the Cytocom technology antagonizes the toll-like receptors to inhibit proinflammatory cytokines.

Prior to the closing of the Merger, we conducted business in the U.S. directly and in Russia through two subsidiaries, one of which is wholly owned, BioLab 612 (which was dissolved in November 2020), and one of which is owned in collaboration with a financial partner, Panacela. As of the closing of the Merger, we also now conduct business through Old Cytocom and its subsidiaries, ImQuest Life Sciences Inc, ImQuest BioSciences Inc., ImQuest Pharmaceuticals, Inc., and Lubrinovation Inc. In addition, we conduct business with a former subsidiary, Incuron, which will pay us a 2% royalty on future commercialization, licensing, or sale of certain technology we sold to Incuron. We also partner in a joint venture, GPI, with Everon Biosciences, Inc ("Everon").

The Company is developing therapies designed to directly elicit within patients a robust and durable response of antigen-specific killer T-cells and antibodies, thereby activating essential immune defenses against autoimmune, inflammatory, infectious diseases, and cancers. Statera has clinical or preclinical programs for Crohn’s disease (STAT-201), hematology (Entolimod), pancreatic cancer (STAT-401) and COVID-19 (STAT-205).

In the next 12 months, the Company expects to initiate several clinical trials, including a pivotal Phase 3 trial for its lead drug candidate, STAT-201, in pediatric Crohn’s disease, as well as studies of STAT-205 in ‘long haul’ COVID-19, STAT-401 in pancreatic cancer, and the TLR5 agonist entolimod as a treatment for anemia and neutropenia in cancer patients.

19

Recent Developments

Nasdaq Noncompliance

On October 6, 2022, the Company had a hearing before the Nasdaq Hearings Panel (the "Panel"), the Company presented its plan to evidence full compliance with NASDAQ'S filing requirement and all other applicable requirements for continued listing on NASDAQ and request an extension of time to do so. The Company is taking definitive steps to evidence compliance with the NASDAQ listing criteria as soon as possible; however, there can be no assurance that the Panel will grant the Company’s request for continued listing or that the Company will satisfy the NASDAQ listing criteria within any extension period that may be provided to the Company by the Panel.

On October 11, 2022, the Company was notified by the Staff of NASDAQ that the Company’s common stock would be subject to delisting due to the Company’s non-compliance with the minimum Stockholders' Equity requirement set forth in Nasdaq Listing Rule 5550(b)(1) and non-compliance with Listing Rule 5250(e)(2)(D) regarding notifying Nasdaq of the Company's intention to issue additional shares. Each of these matters serve as an additional and separate basis for delisting the Company’s securities from NASDAQ. The Panel will consider these matters in their decision regarding the Company’s continued listing on NASDAQ. 

On October 26, 2022, the Company received a determination from the Panel granting the Company’s request for the continued listing of its common stock on Nasdaq, subject to the Company’s satisfaction of certain interim milestones and, ultimately, the Company’s compliance with all applicable criteria for continued listing on Nasdaq, including the $1.00 bid price and $2.5 million stockholders’ equity requirements as set forth in Nasdaq Listing Rules 5550(a)(1) and 5550(b)(2), respectively, by no later than January 31, 2023. The Company is taking definitive steps to timely evidence compliance with the terms of the Panel’s decision; however, there can be no assurance that it will be able to do so.

Forbearance Agreement

On April 18, 2022, Avenue and the Company entered into a Forbearance Agreement regarding the Loan Agreement. Pursuant to the Forbearance Agreement, the parties agreed that from the effective date of the Loan Agreement until May 31, 2022 (the “Forbearance Period”), it will refrain and forbear from exercising certain remedies arising out of the events of default or any other present or future event of default under the Loan Agreement or supplement. Under the Forbearance Agreement, Avenue shall not seize, sweep, or by any means take control of, directly or indirectly, any funds from any of the Company’s bank accounts; and (ii) during the Forbearance Period, the Loans may be prepaid in whole or in part at any time, subject to the repayment and prepayment terms of the Loan Agreement. In addition to the terms of the Forbearance Agreement, certain terms of the Loan Agreement were amended, including changing the Agreement Effective Date to April 18, 2022, and revisions to certain definitions of Agreement terminology.

Bankruptcy Petition

On August 16, 2022, certain former employees of the Company and certain third-party vendors of the Company (collectively, "Petitioning Creditors") filed an involuntary petition in the United States Bankruptcy Court for the District of Colorado (No. 22-13051-JGR) against the Company seeking relief under Chapter 11 of the United States Bankruptcy Code. The Company believes the involuntary petition is improper and wrongfully filed and is seeking dismissal of the petition.

Lay Sciences

On September 2, 2022, the Company entered a Binding Letter of Intent ("LOI") with Lay Sciences, Inc. ("Lay"), pursuant to which the Company will manufacture and test IgY polyclonal antibody products created by Lay. The LOI provides for an exclusivity period of ninety (90) days (the "Exclusivity Period") for negotiating and finalizing a definitive agreement (the "Definitive Agreement"). During the Exclusivity Period, which begins from the date of the LOI, Lay will not engage in activities with any third party in relation to the acquisition of the Company. Pursuant to the LOI, (i) Lay shall complete technology transfer to the Company and (ii) the Company shall (A) assist Lay in testing its current and future products for activity and purity. In consideration of the manufacturing right granted to the Company by Lay, the Company shall (i) issue 500,000 shares of preferred stock of the Company to Lay and (ii) pay up to $500,000 to Lay within 30 days of the execution of the LOI.  As of the date of this filing, the Company hasn't issued any shares of preferred stock or paid any cash consideration.

Continuing Capital Needs

We are a clinical-stage company and we have generated insignificant revenue from product sales to date. Our ability to generate revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. Since inception, we have incurred significant operating losses. For the nine months ended September 30, 2022 and 2021, we incurred net losses of $14.6 million and $24.6 million, respectively. As of September 30, 2022, we had an accumulated deficit of $144.1 million.

We expect to incur significant expenses and operating losses for the foreseeable future as we advance our lead candidates through clinical trials, progress our pipeline candidates from discovery through pre-clinical development, and seek regulatory approval and pursue commercialization of our candidates. In addition, if we obtain regulatory approval for any of our candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales, and distribution. In addition, we may incur expenses in connection with the in-license or acquisition of additional technology to augment or enable development of future candidates. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that Old Cytocom, our predecessor for accounting purposes, did not incur as a private company prior to the Merger.

As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity and debt financings or other sources, which may include collaborations with third parties. We do not expect that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements beyond the fourth quarter of 2022.

Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so. For these reasons, our financial statements contain a paragraph in substantial doubt is expressed about our ability to continue as a going concern within one year of the date of financial statements.

20

Financial Overview

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues, and expenses.

On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, income taxes, stock-based compensation, investments, and in-process research and development. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates.

Our revenue, operating results, and profitability have varied, and we expect that they will continue to vary on a quarterly basis, primarily due to the timing of work completed under new and existing grants, development contracts, and collaborative relationships. Additionally, we expect that as a result of the Merger, our business, financial condition, results of operations and cash flows will be materially different in future periods than in the past. Accordingly, our past results are not likely to be indicative of our future performance.

Revenue

The Company generates revenue from its Clinical Research Organization services ("CRO services") provided by its ImQuest subsidiary.  We have no products approved for sale. Other than the sources of revenue described above, we do not expect to receive any revenue from any candidates that we develop until we obtain regulatory approval and commercializes such products, or until we potentially enter into collaborative agreements with third parties for the development and commercialization of such candidates.

At the inception of a contract for CRO services, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. 

Research and Development Expenses

Research and development ("R&D") costs are expensed as incurred. Advance payments are deferred and expensed as performance occurs. R&D costs include the cost of our personnel (which consists of salaries, benefits and incentive and stock-based compensation), out-of-pocket pre-clinical and clinical trial costs usually associated with contract research organizations, drug product manufacturing and formulation, and a pro-rata share of facilities expense and other overhead items.

Sales and Marketing Expenses

Sales and marketing costs are expensed as incurred and included in operating expenses on the statements of operations. The Company incurred sales and marketing expense for the nine months ended September 30, 2022 and 2021 of $69,750 and $26,037, respectively.

General and Administrative Expenses

General and administrative ("G&A") functions include executive management, finance and administration, government affairs and regulations, corporate development, human resources, and legal and compliance. The specific costs include the cost of our personnel consisting of salaries, incentive and stock-based compensation, out-of-pocket costs usually associated with attorneys (both corporate and intellectual property), bankers, accountants, and other advisors and a pro-rata share of facilities expense and other overhead items.

Interest and Other Expenses

Other recurring income and expenses primarily consists of interest expense and related financing expenses.

Critical Accounting Estimates

The condensed consolidated financial statements include estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations. These significant accounting estimates include the inputs to level 3 valuation techniques for valuing the identified intangible assets in the ImQuest acquisition, valuation allowances associated with deferred tax assets, and revenue recognition in accordance with ASC 606.

21

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Revenue

Revenue increased from $0.2 million for the three months ended September 30, 2021 to $0.7 million for the three months ended September 30, 2022. This increase is due entirely to increased revenues from sales of CRO services by ImQuest BioSciences for the three months ended September 30, 2022. 

Cost of Revenues

Cost of revenue increased from $0.1 million for the three months ended September 30, 2021 to $0.2 million for the three months ended September 30, 2022. This increase is due entirely to increased cost of revenues recorded from sales to CROs by ImQuest BioSciences for the three months ended September 30, 2022.

Research and Development Expenses

R&D expenses decreased from $3.4 million for the three months ended September 30, 2021 to $0.2 million for the three months ended September 30, 2022, representing a decrease of $3.2 million, or 93.2%. Variances are noted in the table below. The net decrease is primarily attributable to a decrease in other expenses for the three months ended September 30, 2022  to $0.2 million, compared to $0.9 million for the three months ended September 30, 2021 primarily due to a decrease in R&D employees, and decreased spending on specific R&D programs for the three months ended September 30, 2022 to $0.1 million, compared to $2.5 million for the three months ended September 30, 2021  primarily due to decreases in third-party spending on specific R&D programs.

	Three Months Ended September 30,
	2022		2021		Variance
STAT-201: Crohn's disease	$	—	$	1,642,041	$	(1,642,041	)
STAT-205: Acute and post-acute Covid-19		42,644		419,596		(376,952	)
STAT-401: Pancreatic cancer		—		384,025		(384,025	)
STAT-601: Entolimod for acute radiation		19,837		49,022		(29,185	)
Other expenses		168,123		940,293		(772,170	)
Total research and development expenses	$	230,604	$	3,434,977	$	(3,204,373	)

22

General and Administrative Expenses

G&A expenses decreased from $6.3 million for the three months ended September 30, 2021 to $1.8 million for the three months ended September 30, 2022, representing a decrease of $4.5 million or 71.4%.  Variances are noted in the table and discussed below.

	Three Months Ended September 30,
	2022		2021		Variance
Payroll (including benefits)	$	822,855	$	3,632,142	$	(2,809,287	)
Stock listing expenses		79,178		835,145		(755,967	)
Professional fees		163,910		554,159		(390,249	)
Consultants and contractors		62,200		427,551		(365,351	)
Insurance		375,964		149,267		226,697
Other G&A expenses		299,500		708,060		(408,560	)
Total general & administrative expenses	$	1,803,607	$	6,306,323	$	(4,502,716	)

Payroll (including benefits) incudes salaries, health benefits and related payroll costs.  The decrease in payroll expense was primarily attributable to a reduction of costs of $1.6 million for stock-based compensation incurred in the third quarter of 2022 over the comparative cost in the same period in 2021, and a reduction of costs of $1.2 million related to reduced employee headcount. 

Stock listing expenses are made up of fees paid to maintain the listing of the Company’s common stock on The NASDAQ, the costs of an investor relations program using outside consultants and databases, costs incurred with advisors to raise new debt and equity required by the Company, and the costs charged by stock transfer agents to maintain the Company’s share registers. The decreased costs in the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily reflect stock sale commissions incurred in 2021.

Professional fees comprise fees paid for services to lawyers (other than lawyers who are engaged for services related to R&D), accountants, and the Company’s firm of auditors.  Fees paid to lawyers in the three months ended September 30, 2022 and 2021 totaled $0.16 million and $0.5 million, respectively.  The decrease in fees arose primarily from increased services in the three months ended September 30, 2021 related to the Merger.

Consultants and contractors are individuals and firms hired by the Company to provide certain investment banking and advisory services, to assist the Company with the implementation of a new enterprise resource planning ("ERP") system, to provide valuation reports required to complete the accounting for the Merger and to assist with other general matters.  Fees paid to consultants and contractors in the three months ended September 30, 2022 and 2021 totaled $0.1 million and $0.4 million, respectively.  The decrease in costs was attributable primarily to increased services in the three months ended September 30, 2021 to complete the Merger.

Insurance expenses comprise fees and premiums paid to insurance companies from which the Company purchased policies to protect against loss or damage to its assets and intellectual property, to protect itself against claims for damage caused to third parties by its clinical trials or products used in trials or sold to customers, coverage for workers’ compensation payable for injuries suffered by its employees, and losses incurred by its directors and officers in certain circumstances in the performance of their duties.  Insurance premiums and costs in the three months ended September 30, 2022 and 2021 totaled $0.4 million and $0.15 million, respectively.  The increase was attributable primarily to additional insurance added in 2021 to protect the Company against claims for damage caused to third parties by its clinical trials or products used in trials or sold to customers, and losses incurred by its directors and officers in certain circumstances in the performance of their duties.

Other G&A expenses comprise costs to operate and lease office space, non-capital expenditures incurred for office furniture and equipment, telecommunication and internet expenses, postage and courier costs, and bank charges. Other G&A expenses decreased year over year primarily as a result increased costs in 2021 as a result of the addition of new office locations and employees in 2021 in Colorado, California, Maryland, and New York. 

Other Income and Expenses

Interest and other expense of $1.8 million in the three months ended September 30, 2022 was made up of a $1.425 million commitment fee to GEM, interest expense of $0.33 million interest expense, and $0.05 million other expense related to a loss on disposal of assets.

Interest and other expense of $3.1 million in the three months ended September 30, 2021 was made up of an accrual for legal settlement costs of $2.1 million and interest and other share-related expenses of $1.0 million.

23

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Revenue

Revenue increased from $0.2 million for the nine months ended September 30, 2021 to $2.4 million for the nine months ended September 30, 2022. This increase is due entirely to the revenues from sales of CRO services by ImQuest BioSciences as a result of the ImQuest acquisition which took place in June 2021.

Cost of Revenues

Cost of revenue increased from $0.1 million for the nine months ended September 30, 2021 to $0.7 million for the nine months ended September 30, 2022. This increase is due entirely to the cost of revenues recorded from sales to CROs by ImQuest BioSciences as a result of the ImQuest acquisition which took place in June 2021.

Research and Development Expenses

R&D expenses decreased from $6.3 million for the nine months ended September 30, 2021 to $4.4 million for the nine months ended September 30, 2022, representing a decrease of $1.8 million, or 29.1%. Variances are noted in the table below. The net decrease is primarily attributable to decreased spending on specific R&D programs for the nine months ended September 30, 2022 of $1.6 million due to a reduction in services provided by third-party vendors.

	Nine Months Ended September 30,
	2022		2021		Variance
STAT-201: Crohn's disease	$	639,060	$	2,260,325	$	(1,621,265	)
STAT-205: Acute and post-acute Covid-19		599,459		2,041,271		(1,441,812	)
STAT-401: Pancreatic cancer		184,294		690,957		(506,663	)
STAT-601: Entolimod for acute radiation		192,489		49,022		143,467
Other expenses		2,831,234		1,233,361		1,579,873
Total research and development expenses	$	4,446,536	$	6,274,936	$	1,828,400

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General and Administrative Expenses

G&A expenses decreased from $15.0 million for the nine months ended September 30, 2021 to $8.2 million for the nine months ended September 30, 2022, representing a decrease of $6.8 million or 45.3%.  Variances are noted in the table and discussed below.

	Nine Months Ended September 30,
	2022		2021		Variance
Payroll (including benefits)	$	4,315,702	$	9,265,652	$	(4,949,950	)
Stock listing expenses		410,388		1,220,052		(809,664	)
Professional fees		1,015,093		2,036,307		(1,021,214	)
Consultants and contractors		552,515		1,238,114		(685,599	)
Insurance		816,551		409,637		406,914
Other G&A expenses		1,100,142		811,324		288,818
Total general and administrative expenses	$	8,210,391	$	14,981,086	$	(6,770,695	)

Payroll (including benefits) incudes salaries, health benefits and related payroll costs.  The decrease in payroll expense was primarily attributable to a reduction of costs of $5.7 million for stock-based compensation incurred in the nine months of 2022 over the comparative cost in the same period in 2021, partially offset by the increase in costs related to the increased employee headcount. Growth in headcount for G&A purposes between 2021 and 2022 reflects (i) the addition of four employees in 2021 as result of the Merger and the ImQuest Merger, and (ii) the addition of seven new employees in total, several of whom were hired in senior executive roles to complete the Company’s leadership team plus the addition of staff in finance, human resources, information technology and investor relations, offset by the transfer of two employees to R&D.

Stock listing expenses are made up of fees paid to maintain the listing of the Company’s common stock on The NASDAQ, the costs of an investor relations program using outside consultants and databases, costs incurred with advisors to raise new debt and equity required by the Company, and the costs charged by stock transfer agents to maintain the Company’s share registers. The decreased costs in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 reflect stock sale commissions incurred in 2021, partially offset by increased public company costs following the Merger in 2022.

Professional fees comprise fees paid for services to lawyers (other than lawyers who are engaged for services related to R&D), accountants, and the Company’s firm of auditors.  Fees paid to lawyers in the nine months ended September 30, 2022 and 2021 totaled $0.6 million and $1.7 million, respectively.  The decrease in fees arose primarily from increased services in the nine months ended September 30, 2021 related to the Merger and the ImQuest Merger. 

Fees paid to the audit firms engaged by the Company in the nine months ended September 30, 2022 and 2021 totaled $0.3 million and $0.2 million, respectively.  

Consultants and contractors are individuals and firms hired by the Company to provide certain investment banking and advisory services, to assist the Company with the implementation of a new enterprise resource planning (“ERP”) system, to provide valuation reports required to complete the accounting for the Merger and to assist with other general matters.  Fees paid to consultants and contractors in the nine months ended September 30, 2022 and 2021 totaled $0.6 million and $1.2 million, respectively.  The decrease in costs was attributable primarily to increased services in the nine months ended September 30, 2021 to complete the Merger.

Insurance expenses comprise fees and premiums paid to insurance companies from which the Company purchased policies to protect against loss or damage to its assets and intellectual property, to protect itself against claims for damage caused to third parties by its clinical trials or products used in trials or sold to customers, coverage for workers’ compensation payable for injuries suffered by its employees, and losses incurred by its directors and officers in certain circumstances in the performance of their duties.  Insurance premiums and costs in the nine months ended September 30, 2022 and 2021 totaled $0.8 million and $0.4 million, respectively.  The increase was attributable primarily to additional insurance added in 2021 to protect the Company against claims for damage caused to third parties by its clinical trials or products used in trials or sold to customers, and losses incurred by its directors and officers in certain circumstances in the performance of their duties.

Other G&A expenses comprise costs to operate and lease office space, non-capital expenditures incurred for office furniture and equipment, telecommunication and internet expenses, postage and courier costs, and bank charges. Other G&A expenses increased year over year primarily as a result of the addition of new office locations and employees in 2021 in Colorado, California, Maryland, and New York. 

Other Income and Expenses

Interest and other expense of $3.6 million in the nine months ended September 30, 2022 was made up of a $1.5 million of interest expense, $1.425 million commitment fee, $0.3 million of debt prepayment fees, $0.35 million for shares issued for services, and $0.05 million related to a loss on disposal of assets.

Interest and other expense of $3.5 million in the nine months ended September 30, 2021 relate to an accrual for legal settlement costs of $2.1 million, interest expense of $1.1 million, and other share-related expenses of $0.3 million. 

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Liquidity and Capital Resources

At September 30, 2022, we had cash and cash equivalents of $0.5 million, which represents a decrease of $6.3 million since the end of our last fiscal year. This decrease was caused by our capital raise in the first quarter of 2022, offset by our net cash used in operations of $4.0 million during the nine months ended September 30, 2022 and $8.8 million repayment of debt. As discussed above, we are a clinical-stage company, have generated only insignificant revenues to date, and have incurred cumulative net losses and expect to incur significant expenses and operating losses for the foreseeable future as we advance our lead candidates through clinical trials, progress our pipeline candidates from discovery through pre-clinical development, and seek regulatory approval and pursue commercialization of our candidates. We do not have commercial products other than CRO services, we have limited capital resources, meaning that we are currently generating limited revenues and cash from operations.  We do not expect our cash and cash equivalents will be sufficient to fund our projected operating requirements or allow us to fund our operating plan, in each case, beyond the fourth quarter of 2022.  As a result, we will need additional financing to support our continuing operations.  Historically, we have funded our operations through the sale of equity and debt securities, as well as the receipt of funded grants. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity and debt financings or other sources, which may include collaborations with third parties, the sale or license of drug candidates, the sale of certain of our tangible and/or intangible assets, the sale of interests in our subsidiaries or joint ventures, obtaining additional government research funding, or entering into other strategic transactions. However, we can provide no assurance that we will be able to raise cash in sufficient amounts, when needed or at acceptable terms. We do not expect that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements beyond the fourth quarter of 2022. If we are unable to raise adequate capital and/or achieve profitable operations, future operations might need to be scaled back or discontinued. The financial statements included elsewhere in this Quarterly Report on Form 10-Q do not include any adjustments relating to the recoverability of the carrying amount of recorded assets and liabilities that might result from the outcome of these uncertainties.

Cash Flows

The following table provides information regarding our cash flows for the nine months ended September 30, 2022 and 2021:

	For the Nine Months Ended September 30,
	2022			2021			Variance
Cash flows used in operating activities	$	(4,731,590	)	$	(20,833,791	)	$	16,102,201
Cash flows provided by (used in) investing activities		(6,454	)		13,559,901			(13,566,355	)
Cash flows provided by (used in) financing activities		(1,686,669	)		20,898,384			(22,585,053	)
Effect of exchange rate on cash and cash equivalents		86,079			(2,014	)		88,093
Increase (decrease) in cash and cash equivalents		(6,338,634	)		13,622,480			(19,961,114	)
Cash, cash equivalents, and restricted cash at beginning of period		6,844,732			593,869			6,250,863
Cash, cash equivalents, and restricted cash at end of period	$	506,098		$	14,216,349		$	(13,710,251	)

Operating Activities

Net cash used in operating activities decreased by $16.1 million to $4.7 million for the nine months ended September 30, 2022 from $20.8 million for the nine months ended September 30, 2021. Net cash used in operating activities for the period ending September 30, 2022 consisted of a reported net loss of $14.6 million, which was decreased by $10.3 million of changes in operating assets and liabilities.  The $10.3 million of changes in operating assets and liabilities was due primarily to an increase in accounts payable and accrued expenses and decreases in prepaid expenses and other current assets.

Net cash used in operating activities for the nine months ended September 30, 2021 of $20.8 million consisted of a reported net loss of $24.6 million, which was decreased by $6.2 million of net non-cash operating activities and increased by $2.4 million of changes in operating assets and liabilities. The $6.2 million changes in net non-cash operating activities was primarily related to stock based compensation. The $2.4 million of changes in operating assets and liabilities was due primarily to changes in working capital items. 

Investing Activities

Net cash used in investing activities decreased to $0.006 million for the nine months ended September 30, 2022 from $13.6 million of net cash provided by investing activities for the nine months ended September 30, 2021, primarily due to the acquired net assets related to the ImQuest acquisition and the Merger with Cleveland BioLabs. 

Financing Activities

Net cash used in financing activities increased to $1.7 million for the nine months ended September 30, 2022 from $20.9 million of net cash provided by financing activities for the nine months ended September 30, 2021 due to the repayment of $8.8 million of long-term notes payable, partially offset by $7.1 million due to the issuance of common stock and common stock due during the nine months ended September 30, 2022. Net cash provided by financing activities of $20.9 million was primarily due to the issuance of long-term debt and the issuance of common stock and common stock due during the nine months ended September 30, 2021.

Impact of Exchange Rate Fluctuations

Our reported financial results are affected by changes in foreign currency exchange rates between the U.S. dollar and the Russian ruble. Translation gains or losses result primarily from the impact of exchange rate fluctuations on the reported U.S. dollar equivalent of ruble-denominated cash and cash equivalents, and short-term investments. Variances in the exchange rate for these items have not been realized; as such the resulting gain of $0.09 million for the nine months ended September 30, 2022 are recorded as other comprehensive income or loss in the equity section of the balance sheet.

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Sources of Liquidity

Avenue Facility

Avenue has the right to convert up to $3 million of outstanding principal into shares of Company common stock. The number of shares issuable upon conversion will be determined by dividing the amount of indebtedness being converted by 120% of the 5-day volume weighted average price (VWAP) of Company common stock prior to the date of the issuance of the Avenue Warrant. As of September 30, 2022, there was $6.2 million in outstanding principal and interest under the Avenue Facility, and no unused further borrowing capacity. We paid an aggregate of $9.6 million in interest, principal, and other fees to Avenue during the nine months ended September 30, 2022.

As discussed above under " – Recent Developments," on March 25, 2022, we received the Default Letter from Avenue regarding alleged events of default with respect to the Avenue Facility.  In the Default Letter, Avenue alleges that certain events of default under the Avenue Facility have occurred and continue to exist. Specifically, Avenue alleges that the Company is in violation of certain provisions of the Avenue Facility as a result of the Company’s failure to:

● timely deliver monthly financial statements for certain periods;

● obtain Avenue’s consent to repurchase certain securities from stockholders;

● pay principal and interest when due, including on March 1, 2022; and

● maintain unrestricted cash and cash equivalents in one or more accounts subject to control agreements in favor of Avenue in amount of at least $5 million.

In the Default Letter, Avenue purported to exercise its rights to suspend further loans or advances to the Company under the Avenue Facility and to declare accelerate the amount due under the Avenue Facility, which it asserts to be approximately $11.2 million, inclusive of fees of penalties. Avenue further states in the Default Letter that interest will continue to accrue on the outstanding amounts at the default rate of 5.0%. In furtherance of the allegations set forth in the Default Letter, Avenue foreclosed on approximately $4.8 million of the Company’s cash.

As mentioned above, the Company entered into a Forbearance Agreement on April 18, 2022 regarding the Avenue Facility with Avenue. Pursuant to the Forbearance Agreement, the parties agreed that they will refrain and forbear from exercising certain remedies arising out of the events of default or any other present or future event of default under the Loan Agreement or supplement during the Forbearance Period. Additionally, the parties agreed that Avenue shall not seize, sweep, or by any means take control of, directly or indirectly, any funds from any of the Company’s bank accounts; and (ii) during the Forbearance Period, the Loans may be prepaid in whole or in part at any time, subject to the repayment and prepayment terms of the Loan Agreement. In addition to the terms of the Forbearance Agreement, certain terms of the Loan Agreement were amended, including changing the Agreement Effective Date to April 18, 2022, and revisions to certain definitions of Agreement terminology.

GEM Agreement

Upon the Company’s issuance of shares in connection with any draw-down purchase made by GEM, the Company will be required to pay GEM, in cash or additional shares of stock, a commitment fee in an amount equal to 2% of the amount purchased in such drawdown.  This commitment fee amounted to $1.5 million and $1.425 million was recognized as other expenses in the three months ending September 30, 2022.

The GEM Agreement terminates on the earliest to occur of (i) three years from the effective time of the Merger, (ii) May 21, 2026 or (iii) the date on which GEM has purchased $75 million in the aggregate of Company stock. Upon payment of $1.5 million to GEM, the Company may terminate the GEM Agreement following the settlement in full of the issuance of the shares made for the first $15 million draw-down purchase.

As of September 30, 2022, the Company has issued 2.99 million shares of common stock to GEM of which 1.84 million shares of common stock were sold for total net proceeds of $3.7 million after commission and expenses of approximately $0.075 million, and 1.15 million shares remained available for sale under the GEM Agreement

Material Cash Requirements

The Company’s material cash requirements include the following contractual obligations:

As of September 30, 2022, the Company had $6.4 million of debt outstanding. This balance is composed of a $6.2 million short-term note payable to Avenue and $0.2 million in additional short-term debt. See Note 5, "Note Payable" & Note 6, "Note Payable, net of current portion" to the Condensed Consolidated Financial Statements for additional information. Avenue has declared us in default under the Avenue Facility and purported to accelerate the balance due under the facility.

As of September 30, 2022, the Company had $1.4 million of future lease commitments. See Note 7 "Leases" to the Condensed Consolidated Financial Statements for additional detail on future lease commitments.

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Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting company filers.

Item 4. Controls and Procedures

Effectiveness of Disclosure

Our management, with the participation of our Chief Executive Officer and Interim Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2022. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2022, our Chief Executive Officer and Interim Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Interim Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – Other Information

Item 1. Legal Proceedings

In the ordinary course of business, we may periodically become subject to legal proceedings and claims arising in connection with ongoing business activities. The results of litigation and claims cannot be predicted with certainty, and unfavorable resolutions are possible and could materially affect our results of operations, cash flows, or financial position. In addition, regardless of the outcome, litigation could have an adverse impact on us because of defense costs, diversion of management resources, and other factors.

While the outcome of these proceedings and claims cannot be predicted with certainty, there are no matters, other than those set forth below, as of September 30, 2022, that, in the opinion of management, might have a material adverse effect on our financial position, results of operations or cash flows, or that are required to be disclosed under the rules of the SEC.

On March 24, 2021, a complaint, captioned Bednar v. Cleveland BioLabs, Inc. et al., Case 1:21-cv-02546, was filed in the U.S. District Court for the Southern District of New York in connection with the Merger (the "Bednar Action"). The Bednar Action names as defendants Cleveland BioLabs and each director on the Cleveland BioLabs board of directors. The complaint in the Bednar Action alleges that Cleveland BioLabs and the Cleveland BioLabs board of directors omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger in violation of their fiduciary duties and the Exchange Act and related SEC regulations. The Bednar Action seeks, among other things, an injunction preventing the closing of the Merger, rescission of the Merger if it is consummated, the dissemination by the Company of a revised registration statement on Form S-4 and an award of plaintiffs’ attorneys’ and experts’ fees. On October 13, 2021, Plaintiff Bednar filed a notice of dismissal. On October 20, 2021, the Southern District entered an order dismissing the case. On December 23, 2021, Plaintiff Bednar filed a new action in the Delaware Court of Chancery, asserting a cause of action for an equitable assessment of attorneys’ fees and expenses incurred in connection with the first lawsuit. The new Delaware action names the same defendants as the first Bednar Action. The Defendants in the new Delaware action have filed an answer to Plaintiff’s Delaware complaint.

On August 16, 2022, certain former employees of the Company and certain third party vendors of the Company (collectively, "Petitioning Creditors") filed an involuntary petition in the United States Bankruptcy Court for the District of Colorado (No. 22-13051-JGR) against the Company seeking relief under Chapter 11 of the United States Bankruptcy Code. The Company believes the involuntary petition is improper and wrongfully filed and is seeking dismissal of the petition.

The Company cannot predict the outcome of these lawsuits.

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Item 1A. Risk Factors

As a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act), we are not required to provide the information called for by this Item 1A.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

(a) The following exhibits are included as part of this report:

Exhibit Number	Description of Document
3.1	Restated Certificate of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to Form 10-Q filed on November 15, 2021).
3.2	Second Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on December 5, 2007).
3.3	Amendment to Second Amended and Restated By-Laws of Cleveland BioLabs, Inc. (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on May 18, 2015).
10.1	Binding Letter of Intent, dated September 2, 2022, by and between Statera Biopharma, Inc. and Lay Sciences, Inc. (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on September 9, 2022).
31.1*	Rule 13a-14(a)/15d-14(a) Certification of Michael K. Handley.
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Christopher Zosh.
32.1*	Certification pursuant to 18 U.S.C. Section 1350.
101.1	The following information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021; (ii) Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021; (iii) Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2022 and 2021; (iv) Condensed Consolidated Statement of Stockholders’ Deficit for the Nine Months Ended September 30, 2022 and 2021; (v) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021; and (vi) Notes to Condensed Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*	Filed herewith.
†	Includes management contracts and compensation plans and arrangements.

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Signatures

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	STATERA BIOPHARMA, INC.
Dated: November 14, 2022	By:	/s/ Christopher Zosh
		Christopher Zosh
		Executive Vice President of Finance
		(Interim Principal Financial Officer)

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