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, 2019. Factors that may cause such differences include, but are not limited to, our need for additional financing to meet our business objectives; our history of operating losses; the substantial doubt expressed by our independent auditors about our ability to continue as a going concern; our ability to successfully develop, obtain regulatory approval for, and commercialize our products in a timely manner; our plans to research, develop and commercialize our product candidates; our ability to attract collaborators with development, regulatory and commercialization expertise; our plans and expectations with respect to future clinical trials and commercial scale-up activities; our reliance on third-party manufacturers of our product candidates; the size and growth potential of the markets for our product candidates, and our ability to serve those markets; the rate and degree of market acceptance of our product candidates; regulatory requirements and developments in the United States, the European Union and foreign countries; the performance of our third-party suppliers and manufacturers; the success of competing therapies that are or may become available; our ability to attract and retain key scientific or management personnel; our reliance on government funding for a significant portion of our operating costs and expenses; government contracting processes and requirements; the exercise of control over our company by our majority stockholder; our current noncompliance with the continued listing requirements of the NASDAQ Capital Market; 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, 2019.
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, 2019.
OVERVIEW
We are an innovative biopharmaceutical company developing novel approaches to activate the immune system and address serious medical needs. Our proprietary platform of Toll-like immune receptor 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 is entolimod, an immune-stimulatory agent, which we are developing as a radiation countermeasure and other indications in radiation oncology. We conduct business in the U.S. directly and in Russia through two subsidiaries, one of which is wholly owned, BioLab 612 (which the Company has decided to dissolve), and one of which is owned in collaboration with a financial partner, Panacela. In addition, we conduct business with a former subsidiary, Incuron, which will pay us a 2% royalty on future commercialization, licensing, or sale of certain technology we sold to Incuron. We also partner in a joint venture, GPI, with Everon Biosciences, Inc ("Everon").
Recent Developments
NASDAQ Compliance
On May 1, 2020, the Nasdaq Hearings Panel (the “Panel”) granted the Company a further extension to August 17, 2020 in which to regain compliance with Nasdaq Listing Rule 5550(b), which requires an issuer to maintain a minimum of $2,500,000 in stockholders’ equity (the “Rule”). If the Company does not regain compliance with the Rule by August 17, 2020, The Nasdaq Stock Market LLC (“Nasdaq”) will delist the Company’s common stock from The Nasdaq Capital Market. As previously disclosed, on February 18, 2020, the Company received written notification from the Listing Qualifications Staff of Nasdaq (the “Staff”) indicating that, based upon the Company’s continued non-compliance with the Rule, the Staff had determined to delist the Company’s securities from Nasdaq at the opening of business on February 27, 2020 unless the Company timely requested a hearing before the Panel. The Company appealed Nasdaq’s determination at a hearing before the Panel, which occurred on April 2, 2020. As noted above, the Panel’s decision was delivered May 1, 2020.
The Company is diligently working to evidence compliance with the Rule, however, there can be no assurance that the Company’s plans to regain compliance with the Rule will be successful or that the Company will otherwise be compliant with the other listing standards for the Nasdaq Capital Market.
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States, where a national emergency was declared, and several European and Asian countries. The continued spread of COVID-19 in the United States and worldwide, as well as the government-ordered shutdown and shelter-in-place orders imposed to counter the pandemic, have led to severe disruptions to the global economy. In this connection, on March 20, 2020, the Governor of New York announced that 100% of the workforce of all businesses, excluding essential services, must stay home. Accordingly, we have implemented a work-from-home policy for all employees based in our Buffalo, New York headquarters, and we may take further action that alter our operations as may be required by federal, state or local authorities, or which we determine are in the best interests of our employees. COVID-19 and the governmental responses to it may cause us to experience disruptions that could severely impact our business, operations, preclinical studies and clinical trials The global outbreak of COVID-19 continues to rapidly evolve and has begun to have indeterminable adverse effects on general commercial activity and the world economy. The extent to which COVID-19 may impact our business, research and development efforts, preclinical studies, clinical trials, prospects for regulatory approval of our drug candidates, and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, the extent and duration of travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business prospects and the value of our common stock. Furthermore, if we or any of the third parties with whom we engage were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on our business, financial condition and results of operations.
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 accounting principles generally accepted in the United States of America ("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.
Revenue
Our revenue originates from grants and contracts from both United States ("U.S.") federal government sources and service contracts with Incuron. U.S. federal grants and contracts are provided to advance research and development of entolimod, our lead product candidate, which we believe is of interest for potential sale to the DoD, or the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services ("BARDA"). We provide various research, management, business development, and clinical advisory services to Incuron.
Research and Development Expenses
Research and development ("R&D") costs are expensed as incurred. Advance payments are deferred and expensed as performance occurs. R&D costs include the cost of our personnel (which consists of salaries and incentive and stock-based compensation), out-of-pocket pre-clinical and clinical trial costs usually associated with contract research organizations, drug product manufacturing and formulation, and a pro-rata share of facilities expense and other overhead items.
General and Administrative Expenses
General and administrative ("G&A") functions include executive management, finance and administration, government affairs and regulations, corporate development, human resources, and legal and compliance. The specific costs include the cost of our personnel consisting of salaries, incentive and stock-based compensation, out-of-pocket costs usually associated with attorneys (both corporate and intellectual property), bankers, accountants, and other advisors and a pro-rata share of facilities expense and other overhead items.
Other Income and Expenses
Other recurring income and expenses primarily consists of interest income on our investments, changes in the market value of our derivative financial instruments, and foreign currency transaction gains or losses.
Critical Accounting Policies and Significant Estimates
Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2019. Other than as set forth below, our critical accounting policies and significant estimates have not changed substantially from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Fair Value of Financial Instruments
We use the held-to-maturity accounting method to determine the fair value of certain cash equivalents and short-term investments in United States Treasury Notes or certificates of deposit. As of March 31, 2020, we held approximately $0.4 million in certificates of deposit which we classified as Level 2.
We use the Black-Scholes model to determine the fair value of certain common stock warrants on a recurring basis, and classify such warrants as Level 3 in the fair value hierarchy. The Black-Scholes model utilizes inputs consisting of: (i) the closing price of our common stock; (ii) the expected remaining life; (iii) the expected volatility using a weighted average of historical volatilities of CBLI common stock and a group of comparable companies; and (iv) the risk-free market rate.
As of March 31, 2020, we held approximately $0.04 million in accrued expenses related to warrants to purchase common stock, which we classified as Level 3.
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Revenue
Revenue decreased from approximately $0.20 million for the three months ended March 31, 2019 to approximately $0.16 million for the three months ended March 31, 2020, representing a decrease of approximately $0.04 million, or 20.0%. This decrease is primarily due to decreases in revenues from our service contract with Incuron, offset in part by an increase in revenues from our PRMRP and JWMRP contracts with the DoD for continued clinical and preclinical development of entolimod. The decrease in Incuron service contract revenue is due to delays in clinical trial activities being undertaken by Incuron. Differences in our revenue sources, by program, between the years are set forth in the following table.
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|
|
Three Months Ended March 31,
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|
|
|
|
|
Funding Source
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Program
|
|
2020
|
|
|
2019
|
|
|
Variance
|
|
DoD
|
JWMRP Contract (1)
|
|
$
|
69,011
|
|
|
$
|
62,836
|
|
|
$
|
6,175
|
|
DoD
|
PRMRP Contract (2)
|
|
|
46,021
|
|
|
|
1,017
|
|
|
|
45,004
|
|
Incuron
|
Service contract
|
|
|
41,010
|
|
|
|
134,066
|
|
|
|
(93,056
|
)
|
|
|
|
$
|
156,042
|
|
|
$
|
197,919
|
|
|
$
|
(41,877
|
)
|
(1)
|
The Congressionally Directed Medical Research Programs (CDMRP) Joint Warfighter Medical Research Program (JWMRP) contract was awarded on September 1, 2015.
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(2)
|
The CDMRP Peer Reviewed Medical Research Program (PRMRP) grant was awarded effective as of September 30, 2015.
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We anticipate our revenue over the next year will continue to be derived primarily from government grants and contracts. We anticipate that DoD revenue will increase slightly in the next quarter as additional activities for continued clinical and preclinical development of entolimod commence. We anticipate Incuron revenue will decrease as the service contract is not expected to be extended. We also plan to submit proposals for government grants and contracts to various funding sources, but there can be no assurance that we will receive future funding awards. The following table sets forth information regarding our currently active grants and contracts:
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As of March 31, 2020
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Funding Source
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Program
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Total Award Value
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Funded Award Value
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Cumulative Revenue
|
|
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Funded Backlog
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|
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Unfunded Backlog
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DoD
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JWMRP Contract
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|
$
|
9,226,455
|
|
|
$
|
9,226,455
|
|
|
$
|
3,959,387
|
|
|
$
|
5,267,068
|
|
|
$
|
—
|
|
DoD
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PRMRP Contract
|
|
|
6,573,992
|
|
|
|
6,573,992
|
|
|
|
123,459
|
|
|
|
6,450,533
|
|
|
|
—
|
|
|
|
|
$
|
15,800,447
|
|
|
$
|
15,800,447
|
|
|
$
|
4,082,846
|
|
|
$
|
11,717,601
|
|
|
$
|
—
|
|
Research and Development Expenses
R&D expenses decreased from $0.51 million for the three months ended March 31, 2019 to $0.22 million for the three months ended March 31, 2020, representing a decrease of $0.29 million, or 57.5%. Variances in individual development programs are noted in the table below. The net decrease is primarily attributable to a $0.17 million decrease in R&D spending for biodefense applications of entolimod, and a $0.11 decrease in R&D spending on Curaxins. The decrease in spending for biodefense applications of entolimod is primarily due to comparison against the first quarter of 2019 during which certain studies that were completed in 2019 were still ongoing as well as a reduction in personnel costs. The remaining variances are not significant.
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Three Months Ended March 31,
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2020
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|
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2019
|
|
|
Variance
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|
Entolimod for Biodefense Applications
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|
$
|
200,955
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|
|
$
|
370,184
|
|
|
$
|
(169,229
|
)
|
CBLB612
|
|
|
-
|
|
|
|
6,601
|
|
|
|
(6,601
|
)
|
Entolimod for Oncology Indications
|
|
|
-
|
|
|
|
8,382
|
|
|
|
(8,382
|
)
|
|
|
|
200,955
|
|
|
|
385,167
|
|
|
|
(184,212
|
)
|
Curaxins
|
|
|
11,544
|
|
|
|
121,413
|
|
|
|
(109,869
|
)
|
Panacela product candidates
|
|
|
5,709
|
|
|
|
6,841
|
|
|
|
(1,132
|
)
|
Total research & development expenses
|
|
$
|
218,208
|
|
|
$
|
513,421
|
|
|
$
|
(295,213
|
)
|
General and Administrative Expenses
G&A expenses decreased from $0.47 million for the three months ended March 31, 2019 to $0.38 million for the three months ended March 31, 2020, representing a decrease of $0.09 million, or 19.5%. This decrease consisted primarily of a $0.13 million decrease in CBLI's personnel and professional fees, a $0.03 reduction in facilities costs, partially offset by a $0.1 million increase in CBLI's property taxes compared to the quarter ended March 31, 2019, when we received a property tax refund.
Other Income and Expenses
Other expense increased from $0.10 million of other expense for the three months ended March 31, 2019 to $0.16 million of other expense for the three months ended March 31, 2020, representing an increase of $0.06 million, or 52.6%. This increase was primarily related to an increase in the non-cash loss related to the change in valuation of our warrant liability as a result of stock price changes as well as warrant exercises.
Liquidity and Capital Resources
We have incurred net losses of approximately $167 million from our inception through March 31, 2020. Historically, we have not generated, and do not expect to generate in the immediate future, revenue from sales of product candidates. Since our founding in 2003, we have funded our operations through a variety of means:
• From inception through March 31, 2020, we have raised $144.7 million of net equity capital, including amounts received from the exercise of options and warrants. We have also received $7.3 million in net proceeds from the issuance of long-term debt instruments;
• DoD and BARDA have funded grants and contracts totaling $60.4 million for the development of entolimod for its biodefense indication;
• The government of the Russian Federation has funded a series of our contracts totaling $17.3 million, based on the exchange rates in effect on the date of funding. These contracts included a requirement for us to contribute matching funds, which we have satisfied;
• We have been awarded $4.0 million in grants and contracts not described above, all of which have been recognized at March 31, 2020;
• Incuron was formed to develop and commercialize the Curaxins product line, including its lead oncology drug candidate CBL0137. In 2015, we sold our ownership interest in Incuron for approximately $4.0 million and retain a 2% royalty interest in the CBL0137 technology;
• Panacela was formed to develop and commercialize preclinical compounds, which were transferred to Panacela through assignment and lease agreements. RUSNANO contributed $9.0 million to Panacela and CBLI contributed $3.0 million plus intellectual property to Panacela. As of the date of this filing, CBLI owns 67.57% of Panacela; and
• The Company formed its GPI joint venture with Everon. GPI, which is currently 50% owned by the Company and 50% owned by Everon, is undertaking a research and development program aimed at clinical testing of entolimod and GP532 (a variant of our entolimod drug candidate) and the development of medications with anti-aging and other indications associated with genome damage. GPI has been funded by an initial investment of $10.5 million from venture capital fund Norma Investments Limited.
We have incurred cumulative net losses and expect to incur additional losses related to our R&D activities. We do not have commercial products and have limited capital resources. At March 31, 2020, we had cash, cash equivalents and short-term investments of $1.4 million, which represents a decrease of $0.16 million or 10.0% since the end of our last fiscal year. This decrease was caused primarily by our net loss of $0.6 million, during the three months ended March 31, 2020, partially offset by warrants exercised. We expect our cash, cash equivalents, and short-term investments, along with the active government contracts described above, to fund our projected operating requirements and allow us to fund our operating plan, in each case, into August. However, until we are able to commercialize our product candidates at a level that covers our cash expenses, we will need to raise substantial additional capital, which we may be unable to raise in sufficient amounts, when needed and at acceptable terms. Our plans with regard to these matters may include seeking additional capital through debt or equity financing, the sale or license of drug candidates, the sale of certain of our tangible and/or intangible assets, the sale of interests in our subsidiaries or joint ventures, obtaining additional government research funding, or entering into other strategic transactions. There can be no assurance that we will be able to obtain future financing on acceptable terms, obtain additional government financing for our operations, or enter into other strategic transactions. In addition, the recent outbreak of the novel coronavirus known as COVID-19 has significantly disrupted world financial markets, negatively impacted U.S. market conditions and may reduce opportunities for us to seek out additional funding. If we are unable to raise adequate capital and/or achieve profitable operations, future operations might need to be scaled back or discontinued. The financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets and liabilities that might result from the outcome of these uncertainties.
Item 4. Controls and Procedures
Effectiveness of Disclosure
Our management, with the participation of our Vice President of Finance (performing the functions of the Company's principal executive officer and 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 March 31, 2020. 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 March 31, 2020, our Vice President of Finance (performing the functions of the Company's principal executive officer and principal financial officer) concluded that, as of such date, our disclosure controls and procedures were not 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 Vice President of Finance (performing the functions of the Company's principal executive officer and principal financial officer), as appropriate to allow timely decisions regarding required disclosure due to the material weakness described below.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, we identified material weaknesses in our accounting for revenue transactions. Specifically, the Company does not have adequate controls in place to monitor revenue recognition with respect to specific elements of contracts. In addition, controls to prevent or detect material misstatements on a timely basis related to contract compliance and proper revenue recognition are not operating effectively.
Remediation of Previously Reported Material Weakness
Management has been implementing changes to strengthen our internal controls over the monitoring of revenue recognition and the prevention or detection of material misstatements on a timely basis related to contract compliance and proper revenue recognition. These changes are intended to address the identified material weaknesses and to enhance our overall control environment and include the ongoing activities described below.
Management has performed a comprehensive review of all contracts to which the Company is party, including a review of underlying schedules, to ensure a more complete understanding of these agreements to ensure compliance and proper application of revenue recognition principles. Upon completion of this review, management implemented certain system controls to ensure compliance and prevent the recognition of revenue in excess of specific elements of the contract agreements. In addition, new processes have been implemented related to periodic invoicing and revenue recognition analysis designed to detect any potential issues and correct as applicable.
We believe the measures described above will facilitate the remediation of the control deficiencies we have identified and strengthen our internal control over financial reporting. However, these material weaknesses will not be considered remediated until the applicable remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify, or, in appropriate circumstances, not complete, certain of the remediation measures described above.
Changes in Internal Control over Financial Reporting
Other than the mitigating controls referenced above, 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 March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.