Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview
This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the headings “SPECIAL NOTE REGARDING Forward-Looking Statements” and “Risk Factors” of this report. The following discussion of our results of operations and financial condition should be read in conjunction with our financial statements and the related notes thereto included elsewhere in this report. These risks could cause our actual results to differ materially from any future performance suggested below.
Introduction
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Our Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows.
Overview
We are a clinical-stage biotechnology company focused on developing effective epigenetic-based cancer treatments for indications with high unmet medical need. Our lead epigenetic enzyme technology was licensed from the University of Utah Research Foundation in 2011. We also recent acquired DRX-164, subsequently named as SP-3164, which is a next-generation cereblon binding molecular glue and we believe it has a clear development path in hematological cancer and potential in solid tumors.
Epigenetics refers to the system that regulates gene expression through conformational changes to the chromatin rather than changes to the DNA sequence itself. Our lead compound, seclidemstat (“SP-2577”), is a small molecule that inhibits the epigenetic enzyme lysine specific demethylase 1 (“LSD1”). LSD1 is an enzyme that removes mono- and di-methyl marks on histones (core protein of chromatin) to alter gene expression. LSD1’s enzymatic activity can cause genes to turn on or off and thereby affect the cell’s gene expression and overall activity. In addition, LSD1 can act via its scaffolding properties, independently of its enzymatic function, to alter gene expression and modulate cell fate. In healthy cells, LSD1 is necessary for stem cell maintenance and cell development processes. However, in several cancers LSD1 is highly expressed and acts aberrantly to incorrectly silence or activate genes leading to disease progression. High levels of LSD1 expression are often associated with aggressive cancer phenotypes and poor patient prognosis. Hence, development of targeted LSD1 inhibitors is of interest for the treatment of various cancers. SP-2577 uses a novel, reversible mechanism to effectively inhibit LSD1’s enzymatic and scaffolding properties and thereby treat and prevent cancer progression.
Our first indication of interest for SP-2577 is a devastating bone and soft-tissue cancer called Ewing sarcoma. Ewing sarcoma mostly afflicts adolescents and young adults, with the median age of diagnosis being 15. The most commonly expressed fusion oncoprotein in Ewing sarcoma is the EWS-FLI fusion protein, which is present in approximately 85% of Ewing sarcoma cases. The LSD1 enzyme associates with EWS-FLI (and other E26 Transformation-Specific (“ETS”) fusion proteins) and is thought to promote tumorigenesis. We believe the SP-2577 molecule helps inhibit EWS-FLI activity by disrupting EWS-FLI from associating with coregulators (including LSD1) that are necessary for its cancer promoting activity. Therefore, we believe that SP-2577 can potentially reverse the aberrant gene expression and thereby possibly prevent Ewing sarcoma cell proliferation and even promote cell death. Preclinical studies of SP-2577 in certain Ewing sarcoma animal models show a significant tumor reduction as well as a significant survival benefit compared to untreated animals. Our ongoing Phase 1/2 clinical trial is designed as a single agent dose escalation followed by a dose expansion study. The trial can enroll up to 50 relapsed or refractory Ewing sarcoma patients. The primary objectives of the study are to assess the safety and tolerability of SP-2577. Secondary objectives include assessing preliminary efficacy of SP-2577.
As LSD1 can associate with over 60 regulatory proteins other than EWS-FLI, we believe that LSD1 may also play a critical role in progression of various other cancer types. These include both solid tumors and hematologic malignancies. In the second quarter of 2019, we initiated a second company-sponsored Phase 1 trial to study SP-2577 in Advanced Solid Tumors. The Advanced Solid Tumor (“AST”) trial is a single agent dose escalation, dose expansion study enrolling patients with advanced malignancies, excluding Ewing sarcoma or central nervous system tumors.
In addition, recent data from “LSD1 Ablation Stimulates Anti-tumor Immunity and Enables Checkpoint Blockade” by W. Sheng, et al. and “Inhibition of Histone Lysine-specific Demethylase 1 Elicits Breast Tumor Immunity and Enhances Antitumor Efficacy of Immune Checkpoint Blockade” by Y. Qin, et al. suggests that LSD1 plays a role in tumor immune activity and can sensitize tumors to checkpoint inhibitors. These recent works have sparked interest in combining LSD1 inhibitors with checkpoint inhibitors. We are conducting preclinical work with SP-2577 in this area.
Our plan is to develop SP-3164 in high unmet need hematological and solid tumor indications. SP-3164's development in hematological indications leverates the clinical safety and efficacy data demonstrated by avadomide in hematological malignancies (e.g., Diffuse Large B cell Lymphoma, Follicular Lymphoma) across several clinical trials. SP-3164 is the stabilized, active S-enantiomer of avadomide, which exists as a 1:1 ratio of the S and R enantiomers. However, only the S-enantiomer is the active, anti-cancer species. Therefore, because SP-3164 is the stabilized S-enantiomer, it has the potential to show improved therapy and safety over avadomide. This was demonstrated in early preclinical mouse models of multiple myeloma. In addition to having a clear development path
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in hematological cancers, we believe SP-3164 also has potential in solid tumors. We are conducting preclinical work to identify the most promising indications and combinations for SP-3164's development in solid tumors.
We have no products approved for commercial sale and have not generated any revenue from product sales. We have never been profitable and have incurred operating losses in each year since inception. We had an accumulated deficit of $32.2 million as of December 31, 2021. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years as we initiate and continue the clinical development of, and seek regulatory approval for, our product candidates, add personnel necessary to continue to operate as a public company, and work to develop an advanced clinical pipeline of product candidates. We expect that our operating losses will fluctuate significantly from quarter-to-quarter and year-to-year due to timing of clinical development programs and efforts to achieve regulatory approval.
As of December 31, 2021, we had cash and cash equivalents of $29.2 million. We have received $14.5 million since inception of the grant. We believe that as of December 31, 2021, CPRIT fund matching requirements had been fully met. Additionally, during the twelve months ended December 31, 2021, we received $28.8 million cash from equity offering.
The lack of revenue from product sales to date and recurring losses from operations since our inception raise substantial doubt as to our ability to continue as a going concern. We will continue to require substantial additional capital to continue our clinical development activities and may need such additional capital sooner than 12 months. Accordingly, we will need to raise substantial additional capital to continue to fund our operations. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our development, regulatory approvals and authorizations, commercialization efforts and market conditions. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on our financial condition and our ability to develop and commercialize our product candidates.
We intend to obtain additional capital through the sale of equity securities in one or more offerings or through issuances of debt instruments. We may also consider new collaborations or selectively partnering our technology. However, we cannot provide any assurance that we will be successful in accomplishing any of our plans to obtain additional capital or be able to do so on terms acceptable to us.
Results of Operations
The following table sets forth the consolidated results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020.
Year ended December 31 Change
Grant Revenue
Grant revenue, which was derived solely from the CPRIT grant, was $1.8 million during the year ended December 31, 2021 compared to $5.2 million during the year ended December 31, 2020. During 2021, we reached the maximum amount of the eligible spending that can be reimbursed from CPRIT.
Research and Development Expenses
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Research and development expenses were $8.5 million during the year ended December 31, 2021 compared to $6.9 million during the year ended December 31, 2020. This increase of $1.6 million was principally due to higher headcount in 2021, increased clinical trial cost in 2021 directly tied to patients enrollment, more spending on lab material and nonclinical activities, partially offset by decreased manufacturing cost.
General and Administrative Expense
General and administrative expenses were $6.1 million for the year ended December 31, 2021 compared to $6.1 million for the year ended December 31, 2020, consistent with prior year.
Change in Fair Value of Warrant Liability
The change in fair value of warrant liability in current year was primarily due to the fluctuation of the price of our common stock which was $0.5 per share on December 31, 2021 compared to $0.9 per share on December 31, 2020 and our common stock price was $3.8 per share on December 31, 2019.
Liquidity and Capital Resources
Since inception, we have incurred operating losses and we anticipate that we will continue to incur losses for the foreseeable future. To date, we have generated revenue from the CPRIT grant, and have not generated any cash inflows from product sales.
We have known material contractual obligations which will require cash to meet their requirements. These applicable obligations include our lease agreement for our facilities, and our employment contracts. We also plan to deploy cash for other research and development and general and administrative operating expenses. Our ability to continue meeting these contractual obligations will be reliant upon our ability to secure significant additional capital funding.
We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate any revenue from product sales unless and until we obtain regulatory approval for and commercializes any of our product candidates, all of which are in early stages of development. At the same time, we expect our expenses to increase in connection with our ongoing development and manufacturing activities, particularly as we continue the research, development, manufacture and clinical trials of, and seek regulatory approval for our product candidates.
As of December 31, 2021, we had $28.1 million of working capital and our cash and cash equivalents totaled $29.2 million, which were held in bank accounts and money market account. Our cash and cash equivalents balance increased during the year ended December 31, 2021, primarily due to the capital received from financing activities partially offset by our net loss incurred.
Liquidity
Year Ended December 31
Net cash (used in) provided by:
Investing activities — (2,600)
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Year Ended December 31
Net cash provided by financing activities was $28.3 million and $17.7 million for the years ended December 31, 2021 and 2020. This increase of $10.6 million resulted primarily from higher proceeds from the sale of our common shares during the first and third quarters of 2021, partially offset by lower net proceeds from warrants exercised for cash. Principal payments on the insurance financing note were $0.5 million during the year ended December 31, 2021 compared to $1.0 million for the year ended December 31, 2020.
Capital Resources
We expect to continue to incur additional costs associated with our ongoing research and development activities and our continued operation as a public company. In addition, subject to obtaining regulatory approval of any of our product candidates, we anticipate we will need substantial additional funding in connection with our continuing operations.
We have no products approved for commercial sale, have not generated any revenue from product sales to date and have suffered recurring losses from operations since our inception. The lack of revenue from product sales to date and recurring losses from operations since our inception raise substantial doubt as to our ability to continue as a going concern. Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. Based on our expected cash requirements, we believe that there is substantial doubt that our existing cash and cash equivalents will be sufficient to fund our operation through one year from the date of this report.
We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we advance our product candidates in or towards clinical development.
Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to:
•the terms and timing of any strategic alliance, licensing and other arrangements that we may establish;
•the initiation and progress of our ongoing pre-clinical studies and clinical trials for our product candidates;
•the number of programs we pursue;
•the outcome, timing and cost of regulatory approvals;
•the cost and timing of hiring new employees to support our continued growth;
•the costs involved in patent filing, prosecution, and enforcement; and
•the costs and timing of having clinical supplies of our product candidates manufactured.
We expect to finance our future cash needs primarily through the issuance of additional equity and potentially through borrowing, strategic alliances with partner companies, and grants. To the extent that we raise additional capital through the issuance of additional equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant
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licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market itself.
Successful development of product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. We anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate and ongoing assessments as to each product candidate’s commercial potential. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the consolidated balance sheet and the reported amounts of expenses during the reporting period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in our consolidated financial statements prospectively from the date of the change in estimate.
Our significant accounting policies are described in Note 2 to our audited consolidated financial statements for the year ended December 31, 2021 in this Annual Report on Form 10-K. We believe that our accounting policies relating to revenue recognition, research and development expenses, stock-based compensation and fair value of financial instruments are the most critical to understanding and evaluating our reported financial results. We have identified these policies as critical because they both are important to the presentation of our financial condition and results of operations and require us to make judgments and estimates on matters that are inherently uncertain and may change in future periods. For more information regarding these policies, you should refer to Note 2 of our audited consolidated financial statements included in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and does not have any holdings in variable interest entities.
Application of New Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The guidance eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. This guidance also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. The adoption of ASU 2019-12 in the first quarter of 2021 did not have a material impact on the Company’s consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of December 31, 2021, our cash was primarily held in money market account. Therefore, we have minimal market risk related to the fair market value of our portfolio.
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Item 8. Financial Statements and Supplementary Data
SALARIUS PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm PCAOB ID (42) 61
Consolidated Balance Sheets 63
Consolidated Statements of Operations 64
Consolidated Statements of Cash Flows 65
Consolidated Statement of Stockholders' Equity (Deficit) 66
Notes to Consolidated Financial Statements 67
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Salarius Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Salarius Pharmaceuticals, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a lack of revenue from product sales and has suffered recurring losses from operations since its inception and has stated that substantial doubt exists about the Company's ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
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Goodwill impairment evaluation
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2019.
Houston, Texas
March 25, 2022
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SALARIUS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
Assets
Current assets:
Grants receivable from CPRIT — 3,855,996
Grants receivable from CPRIT 1,610,490 —
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accrued expenses and other current liabilities 553,269 383,138
Commitments and contingencies (NOTE 5)
Stockholders' equity (deficit):
See accompanying notes to consolidated financial statements.
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SALARIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Months Ended December 31
Revenue:
Operating expenses:
Change in fair value of warrant liability 44,693 258,551
Government grants and other income — 175,540
Fair value increase related to warrant modification — (396,407)
Loss per common share — basic and diluted $ (0.31) $ (0.50)
Total net loss per share $ (0.31) $ (0.50)
See accompanying notes to consolidated financial statements.
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SALARIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended December 31
Operating activities
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation, amortization and impairment 19,183 18,058
Change in fair value of warrant liability (44,693) (258,551)
Changes in operating assets and liabilities:
Accrued expenses and other current liabilities 170,131 222,355
Investing activities
Purchase of property and equipment — (2,600)
Net cash used in investing activities — (2,600)
Financing activities
Net increase in cash, cash equivalents and restricted cash 18,095,766 7,379,714
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Change in accrued capital expenditures $ — $ 8,657
Accrued issuance costs for warrants exercised for cash $ — $ 56,915
Prepaid expense financed by note payable $ 949,131
See accompanying notes to consolidated financial statements.
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SALARIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Shares Amount Shares Amount
Modification of warrants exercise prices and terms — — — — 396,407 — 396,407
Increase in fair value for warrants modification — — — — (396,407) — (396,407)
Issuance of equity securities for services 6,188 — — — — — —
See accompanying notes to consolidated financial statements.
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SALARIUS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND OPERATIONS
Nature of Business
Salarius Pharmaceuticals, Inc. (“Salarius” or the “Company”), together with its subsidiaries, Salarius Pharmaceuticals, LLC, Flex Innovation Group LLC, and TK Pharma, Inc., is a clinical-stage biotechnology company focused on developing effective epigenetic-based cancer treatments for indications with high unmet medical need. Salarius’ lead epigenetic enzyme technology was licensed from the University of Utah Research Foundation in 2011. The Company is located in Houston, Texas. The Company merged with Flex Pharma, Inc. ("Flex Pharma") on July 19, 2019 through a reverse acquisition, Flex Pharma was renamed Salarius Pharmaceuticals, Inc. after the merger.
Going Concern
Salarius has no products approved for commercial sale, has not generated any revenue from product sales to date and has suffered recurring losses from operations since its inception. The lack of revenue from product sales to date and recurring losses from operations since its inception raise substantial doubt as to the Company's ability to continue as a going concern. The accompanying financial statements are prepared using accounting principles generally accepted in the United States applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities should the Company be unable to continue as a going concern. Salarius will require substantial additional capital to fund its research and development expenses related to its oncology drug. Based on Salarius’ expected cash requirements, Salarius believes that there is doubt that its existing cash and cash equivalents, will be sufficient to fund its operations through one year from the financial statements issuance date. The Company intends to obtain additional capital through the sale of equity securities in one or more offerings or through issuances of debt instruments, and may also consider new collaborations or selectively partnering its technology. However, the Company cannot provide any assurance that it will be successful in accomplishing any of its plans.
Risks Related to Covid-19 Pandemic
The COVID-19 pandemic is significantly affecting the United States, global economies, and businesses worldwide.While the potential magnitude and duration of the economic and social impact of the COVID-19 pandemic is difficult to assess or predict, the impact on the global financial markets may, in the future, reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity. At this time we are experiencing minimal disruption to our clinical trials. However, our ongoing Phase 1/2 Ewing sarcoma clinical trial and Phase 1/2 AST clinical trial may encounter delays in enrolling new patients due to concerns or healthcare resource constraints because of the COVID-19 pandemic.In addition, although at this time we have experienced no disruptions to manufacturing capabilities, certain aspects of our supply chain may be disrupted as certain of our third party suppliers and manufacturers have paused their operations in response to the COVID-19 pandemic or have otherwise encountered delays in providing supplies and services. The COVID-19 pandemic could also have a material and negative impact on our liquidity, capital resources (including our ability to secure additional financing if and when needed), our business and operations, and our workforce, as well as those of the third parties with which we do business or upon which we rely. While the situation is fluid and we do not yet know the full extent of potential delays or impacts on us or on healthcare systems or the global economy in general, we have worked to adapt to the unexpected and challenging circumstances resulting from the COVID-19 pandemic. However, we may experience disruptions in the future that have and could further adversely impact our business operations as well as our preclinical studies and clinical trials.
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP"). Any reference in these notes to applicable guidance is meant to
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refer to the authoritative GAAP as found in the Accounting Standard Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB").
The Company considered its going concern disclosure requirements in accordance with ASC 205-40-50.The Company has performed an analysis and concluded substantial doubt exists with respect to the Company being able to continue as a going concern through one year from the date of issuance of the consolidated financial statements for the year ended December 31, 2021.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America as defined by the FASB ASC requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Reclassification
Certain reclassifications of prior period presentations have been made to conform to the current period presentation.
Cash and Cash Equivalents
Salarius considers all highly-liquid investments with original maturities of three months or less to be cash equivalents.
The Company maintains several bank accounts including an interest-bearing account for funds received from Cancer Prevention and Research Institution of Texas ("CPRIT").
Intangibles
Intangible assets that have finite useful lives are amortized over their useful lives, and are reviewed for impairment when warranted by economic conditions. Intangible assets are included in other assets in the Company's Consolidated Balance Sheets.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no impairment charges related to long-lived assets during the twelve months ended December 31, 2021 and 2020.
Goodwill
Goodwill is not amortized, but is tested at least annually for impairment at the reporting unit level. The Company has determined that the reporting unit is the single operating segment disclosed in its current financial statements. Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired.
Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The Company utilizes the option to perform a qualitative assessment for its reporting unit and if the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company utilizes the two-step quantitative assessment. The Company’s qualitative assessment is sensitive to assumptions related to potential adverse events and circumstances, including current market trends in control premiums and involves judgement in determining comparable peer companies to include in the control premium evaluation. Many
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of the events and circumstances evaluated in determining whether it is more likely than not that goodwill is impaired are outside of the Company’s control and could change in future periods. There was no impairment of goodwill in 2021 or 2020.
Financial Instruments and Credit Risks
Financial instruments that potentially subject the Company to credit risk include cash and cash equivalents and restricted cash. Cash is deposited in demand accounts in federally insured domestic institutions to minimize risk. Insurance is provided through the Federal Deposit Insurance Corporation (“FDIC”). Although the balances in these accounts exceed the federally insured limit from time to time, the Company has not incurred losses related to these deposits.
Warrants
The Company determines whether warrants should be classified as a liability or equity. For warrants classified as liabilities, the Company estimates the fair value of the warrants at each reporting period using Level 3 inputs with changes in fair value recorded in the Consolidated Statement of Operations within change in fair value of warrant liability. The estimates in valuation models are based, in part, on subjective assumptions, including but not limited to stock price volatility, the expected life of the warrants, the risk-free interest rate and the fair value of the common stock underlying the warrants, and could differ materially in the future. The Company will continue to adjust the fair value of the warrant liability at the end of each reporting period for changes in fair value from the prior period until the earlier of the exercise or expiration of the applicable warrant. For warrants classified as equity contracts, the Company allocates the transaction proceeds to the warrants and any other free-standing instruments issued in the transaction based on an allowable allocation method.
Clinical Trial Accruals
The Company’s preclinical and clinical trials are performed by third party contract research organizations (CROs) and/or clinical investigators, and clinical supplies are manufactured by contract manufacturing organizations (CMOs). Invoicing from these third parties may be monthly based upon services performed or based upon milestones achieved. The Company accrues these expenses based upon its assessment of the status of each clinical trial and the work completed, and upon information obtained from the CROs and CMOs. The Company’s estimates are dependent upon the timeliness and accuracy of data provided by the CROs and CMOs regarding the status and cost of the studies, and may not match the actual services performed by the organizations. This could result in adjustments to the Company’s research and development expenses in future periods. To date the Company has had no significant adjustments.
Grants Receivable and Revenue Recognition
Salarius’ source of revenue has been from a grant received from CPRIT. Grant revenue is recognized when qualifying costs are incurred and there is reasonable assurance that conditions of the grant have been met. Cash received from grants in advance of incurring qualifying costs is recorded as deferred revenue and recognized as revenue when qualifying costs are incurred. The Company records revenue and a corresponding grants receivable when qualifying costs are incurred before the grants are received.
Research and Development Costs
Research and development costs consist of expenses incurred in performing research and development activities, including pre-clinical studies and clinical trials. Research and development costs include salaries and personnel-related costs, consulting fees, fees paid for contract research services, the costs of laboratory equipment and facilities, license fees and other external costs. Research and development costs are expensed when incurred.
Equity-Based Compensation
Salarius measures equity-based compensation based on the grant date fair value of the awards and recognizes the associated expense in the financial statements over the requisite service period of the award, which is generally the vesting period.
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The Company uses the Black-Scholes option valuation model to estimate the fair value of the stock-based compensation and incentive units. Assumptions utilized in these models include expected volatility calculated based on implied volatility from traded stocks of peer companies, dividend yield and risk-free interest rate. Additionally, forfeitures are accounted for in compensation cost as they occur.
Loss Per Share
Basic net loss per share is calculated by dividing the net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Since the Company was in a loss position for all periods presented, diluted net loss per share is the same as basic net loss per share for all periods, as the inclusion of all potential common shares outstanding is anti-dilutive.
The number of anti-dilutive shares, consisting of common shares underlying (i) common stock options, (ii) stock purchase warrants, (iii) unvested restricted stock and (iv) rights entitling holders to receive warrants to purchase the Company's common shares, which have been excluded from the computation of diluted loss per share, was 9,531,198 and 10,796,149 shares as of December 31, 2021 and 2020, respectively.
Income Taxes
Income taxes are recorded in accordance with FASB ASC Topic 740, Income Taxes ("ASC 740"), which provides for deferred taxes using an asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. The Company has evaluated available evidence and concluded that the Company may not realize the benefit of its deferred tax assets; therefore, a valuation allowance has been established for the full amount of the deferred tax assets.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2021 and 2020, the Company did not have any significant uncertain tax positions and no interest or penalties have been charged. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company is subject to routine audits by taxing jurisdictions.
Application of New Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The guidance eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. This guidance also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. The adoption of ASU 2019-12 in the first quarter of 2021 did not have a material impact on the Company’s consolidated financial statements.
Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU does not change the core principle of the guidance in ASU 2016-13, instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses guidance. The FASB also subsequently issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 842), which did not change the core
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principle of the guidance in ASU 2016-13 but clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed amounts previously written off and expected to be written off. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 for public business entities, excluding smaller reporting companies. Early adoption is permitted. As a smaller reporting company, the guidance will be effective for the Company during the first quarter of 2023. The Company is in the process of assessing the impact adoption will have on its consolidated financial statements.
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NOTE 3. GRANTS RECEIVABLE
Grants receivable represents qualifying costs incurred where there is reasonable assurance that conditions of the grant have been met but the corresponding funds have not been received as of the reporting date. Grants receivable balances are $1.6 million and $3.9 million as of December 31, 2021 and December 31, 2020, respectively. Grant receivables are classified as current or non-current receivables based on the Company’s best estimate of whether or not the amounts will be collected within one year of the balance sheet date.
NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 2021 and 2020 consisted of the following:
Prepaid clinical trial expenses $ 97,557 $ —
Total prepaid expenses and other current assets $ 949,215 $ 822,050
Prepaid insurance is comprised of prepaid directors' and officers' insurance. In July 2020, the Company financed their directors' and officers' insurance premium with a short term note, the principal amount of which was approximately $0.9 million, bearing interest at a rate of 2.49%. The note payable balance was $0.5 million as of December 31, 2020 and is included within Current Liabilities on the Consolidated Balance Sheet. In July 2021, the Company paid the directors' and officers' insurance policy in full.
NOTE 5. COMMITMENTS AND CONTINGENCIES
License Agreement with the University of Utah Research Foundation
In 2011, the Company entered into a license agreement with the University of Utah, under which, the Company acquired license to LSD 1. In exchange for the license, the Company issued 2% equity ownership in the Company based on a fully diluted basis at the effective date of the agreement and subject to certain adjustments specified in the agreement, granted revenue sharing rights on any resulting products or processes to commence on first commercial sale, and milestone payments based upon regulatory approval of any resulting product or process as well as on the second anniversary of first commercial sale.
Cancer Prevention and Research Institute of Texas
In June 2016, the Company entered into a Cancer Research Grant Contract with CPRIT. Pursuant to the contract, CPRIT awarded the Company a grant up to $18.7 million, further modified to $16.1 million to fund development of LSD 1 inhibitor. This is a 3-year grant award originally expired on May 31, 2019. The grant now expires on May 31, 2022.
The Company will retain ownership over any intellectual property developed under the contract ("Project Result"). With respect to non-commercial use of any Project Result, the Company agreed to grant to CPRIT a nonexclusive, irrevocable, royalty-free, perpetual, worldwide license with right to sublicense any necessary additional intellectual property rights to exploit all Project Results by CPRIT, other governmental entities and agencies of the State of Texas, and private or independent institutions of higher education located in Texas, for education, research and other non-commercial purposes.
The Company is obligated to make revenue-sharing payments to CPRIT with respect to net sales of any product covered by the contract, up to a maximum repayment of certain percentage of the aggregate amount paid to the Company by CPRIT under the CPRIT contract. The payments are determined as a percentage of net sales, which may be reduced if the Company is required to obtain a license from a third party to sell any such product. In addition, upon meeting the foregoing limitation on revenue-sharing payments, the Company agreed to make continued revenue-sharing payments to CPRIT of less than 1% of net sales.
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At December 31, 2021 and December 31, 2020, the Company had grants receivable of $1.6 million and $3.9 million, respectively, related to CPRIT contract.
Lease Agreement
The Company presently leases office space under operating lease agreements on a month to month basis.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, are used to measure fair value:
Level 1-Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2-Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3-Significant unobservable inputs including Salarius’ own assumptions in determining fair value.
The Company believes the recorded values of its financial instruments, including cash and cash equivalents, accounts payable and note payable approximate their fair values due to the short-term nature of these instruments.
The following table sets forth a summary of changes in the fair value of Level 3 liabilities, the warrants associated with the Flex Pharma merger measured at fair value on a recurring basis for the twelve months ended December 31, 2021 and 2020:
7. STOCKHOLDERS' EQUITY
Preferred Stock and Common Stock
On February 11, 2020, the Company completed a public offering with total gross proceeds of approximately $11.0 million, which includes the full exercise of the underwriter's over-allotment option to purchase an additional 1,252,173 shares and warrants prior to deducting underwriting discounts and commissions and offering expenses payable by Salarius (the “February Offering”). The February Offering was comprised of 7,101,307 Class A units, priced at a public offering price of $1.15 per unit, with each unit consisting of one share of common stock and a five-year warrant to purchase one share of common stock at an exercise price of $1.15 per share, and 1,246,519 Class B units, priced at a public offering price of $1.15 per unit, with each unit consisting of one share of Series A convertible preferred stock and a five-year warrant to purchase one share of common stock with and exercise price of $1.15 per share. A total of 8,343,480 shares of common stock, 1,246,519 shares of Series A convertible preferred stock, and warrants to purchase up to 9,599,999 shares of common stock were issued in the offering, including the full exercise of the over-allotment option. The exercise price of the warrants are fixed and do not contain any variable pricing features or any price based anti-dilutive features. All Series A preferred stock was converted to common stock prior to December 31, 2020.
As discussed above, in connection with the February 2020 Offering, the Company issued five-year warrants to purchase one share of common stock at an exercise price of $1.15 per share (each a "warrant"). On December 11,
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2020, the Company entered into warrant exercise inducement offer letters (“Inducement Letters”) with certain holders of 3,964,065 Warrants (collectively, the “Exercising Holders”) pursuant to which such holders agreed to exercise on December 11, 2020 for cash, their Warrants to purchase 3,964,065 shares of Common Stock in exchange for the Company’s agreement to (i) lower the exercise price of the Warrants held by the Exercising Holders to $0.90 and (ii) issue new warrants (the “Inducement Warrants”) to purchase up to 3,964,065 shares of Common Stock. Each Inducement Warrant is exercisable at a price per share of $1.182 and expires on June 11, 2026. As of December 31, 2021, there was 3,964,065 inducement warrants and 3,783,522 warrants from February 2020 Offering were still outstanding, respectively.
On August 3, 2020, the Company completed a public offering of 5,130,390 shares of its common stock at a price of $1.20 per share. Total gross proceeds were approximately $6.2 million, prior to deducting underwriting discounts and commissions and offering expenses payable by the Company.
On February 5, 2021, the Company entered into an At the Market Offering Agreement ("ATM") with Ladenburg Thalmann & Co. Inc. Under this agreement the Company is able to issue and sell, from time to time, shares of its common stock. On February 5, 2021 and July 2, 2021, the Company filed prospectus supplements with the SEC to register the offering and sale of Common Stock having an aggregate offering price of up to $6.3 million and $25.0 million, respectively. During the twelve months ended December 31, 2021, the Company issued 3,247,834 shares under the ATM for gross proceeds of $6.8 million.
On March 8, 2021, the Company completed a public offering of 16,806,722 shares of its common stock at a price to the public of $1.3685 per share. Total gross proceeds from the offering were approximately $23.0 million prior to deducting underwriting discounts and commissions and offering expenses payable by the Company.
Warrants Exercised for Cash
During the twelve months ended December 31, 2021 and 2020, the Company issued 1,298,567 and 4,517,910 common shares as a result of warrant exercises, and received cash proceeds of approximately $1.5 million and $3.9 million, respectively.
Right to Warrants
On January 3, 2019, Flex Pharma, Private Salarius and Merger Sub entered into the Merger Agreement. Pursuant to the Merger Agreement, Flex Pharma distributed one right per share of common stock to stockholders of record as of the close of business on July 18, 2019. Each right entitles such stockholders to receive a warrant to purchase the Company's common shares on January 20, 2020. These warrants were issued on July 1, 2021 and are exercisable in the aggregate, into 142,711 shares of the Company's common stock with a 5-year term from January 20, 2020, at an exercise price of $15.17 per share. The warrants are subject to a cashless exercise, at the option of the Company, at the closing of an issuance and sale of the Company’s common stock in certain qualified financing, upon the closing of which the holders of warrants shall be entitled to receive a number of shares of common stock equal to the greater of two formulae defined by the Merger Agreement, which are based on the volume weighted average price of the Company's common stock during the 10 consecutive trading days ending on the trading day immediately preceding the date of exercise. As a result, the warrants have been classified as a liability.
The Company accounted for these warrants at fair value using Level 3 inputs. The Company determined the fair value of this warrant liability using a Black-Scholes valuation model. Using this method, unobservable inputs included the Company’s equity value, expected timing of possible outcomes, risk free interest rates and stock
price volatility.
Variables used in the Black-Scholes model are as follows:
Expected life (years) 3.06 years 4.06 years
Expected dividend — % — %
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Wedbush Warrant
On July 19, 2019, upon the closing of the merger, the Company elected to issue warrants to purchase 42,928 common shares to Wedbush Securities Inc. ("Wedbush") to satisfy $0.5 million of the $1.0 million success fee payable to Wedbush at the closing of the merger. The remaining $0.5 million success fee was paid in cash. These warrants have an exercise price of $18.90 and a 5-year term. As of December 31, 2021, all warrants issued to Wedbush were outstanding.
8. EQUITY-BASED COMPENSATION
Equity Incentive Plans
The Company has granted options to employees, directors, and consultants under the 2015 Equity Incentive Plan (the "2015 Plan"). The 2015 Plan provides for the grant of incentive stock options ("ISOs"), nonstatutory stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance-based stock awards and other stock-based awards. Additionally, the 2015 Plan provides for the grant of performance-based cash awards. ISOs may be granted only to the Company's employees. All other awards may be granted to the Company's employees, including officers, and to non-employee directors and consultants. As of December 31, 2021 and 2020, there were 1,026,690 and 108,348 shares, respectively, remaining available for the grant of stock option under the 2015 Plan.
During the twelve months ended December 31, 2021 and 2020, the Company awarded 79,000 and 1,468,118, respectively, stock options to its employees and directors, pursuant to the plan described above. Stock options generally vest over one to four years and have a contractual term of ten years. Stock options are valued using the Black-Scholes option pricing model and compensation cost is recognized based on the resulting value over the service period. Expected volatilities utilized in the model are based on implied volatilities from traded stocks of peer companies. Similarly, the dividend yield is based on historical experience and the estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The expected term of the options is based on the average period the stock options are expected to remain outstanding.The fair value of the option grants of $92,191 and $1,196,469 respectively, has been estimated with the following assumptions for the year ended December 31, 2021 and 2020:
Expected life (years) 6 years 5-6 years
Expected dividend yield 0.00% 0.00%
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The following table summarizes stock option activity for employees and non-employees for the twelve months ended December 31, 2021 and 2020:
Exercised — —
Exercised —
Expired —
As of December 31, 2021 and 2020, there was approximately $0.9 million and $1.3 million of total unrecognized compensation cost, respectively, related to unvested stock options. Total unrecognized compensation cost will be adjusted for future changes in employee and non-employee forfeitures, if any. The Company expects to recognize that cost over a remaining weighted-average period of 2.22 years.
During the year ended December 31, 2020, the Company granted 1,468,118 stock options, in the aggregate, to certain employees, directors. These awards vest monthly over 5 months to 4 years as continuous services are provided, and expense is being recognized over this period. Total compensation cost related to stock options were $0.2 million for the year ended December 31, 2020.
During the year ended December 31, 2021, the Company granted 79,000 stock options, in the aggregate, to certain employees. These award vest over 4 years as continuous services are provided, and expense is being recognized over this period. Total compensation cost related to stock options were $0.5 million for the year ended December 31, 2021
During the year ended December 31, 2021, the Company granted 73,951 shares of common stock to its Employee Stock Purchase Plan ("ESPP") participants. Fair value of the grants are valued using the Black-Scholes option pricing model and compensation cost is recognized based on the resulting value over the derived service period.
9. INCOME TAX
The Company has no current or deferred tax expense due to its current year loss and its overall net operating loss position. A reconciliation of the federal statutory tax rate and the effective tax rates for the year ended December 31, 2021 and 2020 is as follows:
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December 31
Federal Tax at Statutory Rate 21.00% 21.00%
Change in Valuation Allowance (26.13)% (25.65)%
Other items —% (0.40)%
Effective Tax Rate —% —%
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets were as follows:
December 31
Net deferred tax assets (liabilities) $ — $ —
The valuation allowance recorded by the Company as of December 31, 2020 and December 31, 2021 resulted from the uncertainties of the future utilization of deferred tax assets caused by the lack of future taxable income. The deferred tax asset was reviewed for expected utilization using a “more likely than not” approach by assessing the available positive and negative evidence surrounding its recoverability. Accordingly, a full valuation allowance continues to be recorded against the Company’s deferred tax asset, as it was determined based upon past and projected future losses that it was “more likely than not” that the Company’s deferred tax assets would not be realized. In future years, if the deferred tax assets are determined by management to be “more likely than not” to be realized, the recognized tax benefits relating to the reversal of the valuation allowance will be recorded. The Company will continue to assess and evaluate strategies that will enable the deferred tax asset, or portion thereof, to be utilized, and will reduce the valuation allowance appropriately as such time when it is determined that the “more likely than not” criteria is satisfied.
The federal net operating loss carryforwards of $9.2 million have an indefinite life, but the R&D credits of $1.1 million begin to expire in 2039. Due to the change in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss carry forwards could be subject to annual limitations against taxable income in future periods, which could substantially limit the eventual utilization of such carry forwards. The Company has not analyzed the historical or potential impact of its equity financings on beneficial ownership and therefore no determination has been made whether the net operating loss carry forward is subject to any Internal Revenue Code Section 382 limitation. To the extent there is a limitation, there could be a reduction in the deferred tax asset with an offsetting reduction in the valuation allowance.
Tax positions taken or expected to be taken in the course of preparing the Company’s tax returns are required to be evaluated to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a more-likely-than-not threshold, as well as accrued interest and penalties, if any, would be recorded as an interest and penalties expense in the current year. There were no uncertain tax positions that require accrual or disclosure to the financial statements as of December 31, 2021.
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10. SUBSEQUENT EVENTS
On January 12, 2022, the Company, entered into an Acquisition and Strategic Collaboration Agreement (the “ASCA”), effective January 12, 2022 (the “Effective Date”), with DeuteRx, LLC, a Delaware limited liability company (the “Seller”), pursuant to which the Seller agreed to sell, and Company agreed to purchase and assume from Seller, all of Seller’s rights, title, and interest in and to certain assets of the Seller, including the development product currently referred to as DRX-164 (the “Product”), Seller’s intellectual property, information and data related to the Product, tangible materials or reagents related to the Product, goodwill, rights and claims, other than certain excluded assets (collectively, the “Purchased Assets”), all as more specifically set forth in the ASCA, and assume certain Assumed Liabilities (as defined in the ASCA), upon the terms and subject to the conditions set forth in the ASCA. Contemporaneous with the execution of the ASCA, the Seller and Company entered into a R&D Services Agreement (as defined in the ASCA), which sets forth the terms and conditions upon which Seller will provide services to Company, including the implementation and performance of a Non-Clinical and Clinical Development Scope of Work (collectively, the “Transaction”).
The Purchased Assets were purchased for an aggregate purchase price of $1,500,000 (the “Cash Payment”) and the delivery of one million (1,000,000) shares of the Company’s common stock (the “Shares” and together with the Cash Payment, the “Purchase Price”). In addition to the Purchase Price for the Purchased Assets, the Company agreed to pay to Seller (i) Milestone Payments (as defined in the ASCA) upon the occurrence of an applicable Milestone Event (as defined in the ASCA) and (ii) Royalty Payments (as defined in the ASCA). All cost related to the transaction will be immediately expensed in 2022 as acquired in-process research and development expenses since the Product has not yet achieved regulatory approval and, absent obtaining such approval, has no alternative future use. A member of the Company’s Board of Directors also serves as a consultant to the Seller and is employed by an affiliate of the Seller.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
As of December 31, 2020, our management, including our principal executive officer and principal financial officer, had evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) pursuant to Rule 13a-15(b) under the Exchange Act. Based upon and as of the date of the evaluation, our principal executive officer and principal financial officer concluded that information required to be disclosed is recorded, processed, summarized and reported within the specified periods and is accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow for timely decisions regarding required disclosure of material information required to be included in our periodic SEC reports. In connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2017 and 2018, we identified a material weakness in our internal control over financial reporting related to the failure to evaluate or identify the accounting implication of various transactions which was mainly due to the lack of accounting personnel with necessary knowledge and experience related to financial reporting. During the year ended December 31, 2019, we designed and implemented processes and internal controls to remediate this material weakness. We engaged consultants and added accounting personnel, including a Chief Financial Officer and Controller, with necessary knowledge and experience. With the oversight of senior management and our audit committee, we have taken steps to remediate the underlying causes of the material weakness. Based on the foregoing, our management determined that our disclosure controls and procedures were effective as of December 31, 2021.
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No change in our company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the framework in Internal Control—Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2021.
Item 9B. Other Information
None
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K and is incorporated herein by reference from our definitive proxy statement relating to our 2022 annual meeting of stockholders, pursuant to Regulation 14A of the Exchange Act of 1934, also referred to in this Annual Report on Form 10-K as our 2022 Proxy Statement, which we expect to file with the SEC no later than May 2, 2022.
Item 10. Directors, Executive Officers and Corporate Governance
Corporate Governance
We have adopted a written Code of Business Conduct that applies to all of our employees, officers and directors. This Code of Business Conduct is designed to ensure that our business is conducted with integrity and in compliance with SEC regulations and Nasdaq listing standards. The Code of Business Conduct covers adherence to laws and regulations as well as professional conduct, including employment policies, conflicts of interest and the protection of confidential information. The Code of Business Conduct is available under “Governance Overview” within the “Corporate Governance” section of our website at www.salariuspharma.com.
We intend to disclose any future amendments to, or waivers from, the Code of Business Conduct that affect our directors or senior financial and executive officers within four business days of the amendment or waiver by posting such information on the website address and location specified above.
Other Information
The other information required to be disclosed in Item 10 is hereby incorporated by reference to our 2022 Proxy Statement.
Item 11. Executive Compensation
The information required to be disclosed in Item 11 is hereby incorporated by reference to our 2022 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required to be disclosed in Item 12 is hereby incorporated by reference to our 2022 Proxy Statement.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required to be disclosed in Item 13 is hereby incorporated by reference to our 2022 Proxy Statement.
Item 14. Principle Accounting Fees and Services
The information required to be disclosed in Item 14 is hereby incorporated by reference to our 2022 Proxy Statement.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements.
The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements on page 63.
(a)(2) Financial Statement Schedules.
We have omitted these schedules because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits.
Exhibit Number Exhibit Title Filed with this Form 10-K Incorporated by Reference
Form File No. Date Filed
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23.1 Consent of Ernst & Young LLP X
24.1 Power of attorney (included on Signature Page) X
101.INS XBRL Instance Document X
101.SCH XBRL Schema Document X
101.CAL XBRL Calculation Linkbase Document X
101.DEF XBRL Definition Linkbase Document X
101.LAB XBRL Label Linkbase Document X
101.PRE XBRL Presentation Linkbase Document X
+ Management contract or compensatory plans or arrangements.
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
March 25, 2022 SALARIUS PHARMACEUTICALS, INC.
By: /s/ David J. Arthur
David J. Arthur
President & Chief Executive Officer
Each of the undersigned officers and directors of Salarius Pharmaceuticals, Inc., hereby constitutes and appoints David J. Arthur and Mark J. Rosenblum, their true and lawful attorney-in-fact and agent, for them and in their name, place and stead, in any and all capacities, to sign their name to any and all amendments to this Report on Form 10-K, and other related documents, and to cause the same to be filed with the Securities and Exchange Commission, granting unto said attorneys, full power and authority to do and perform any act and thing necessary and proper to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present, and the undersigned for himself hereby ratifies and confirms all that said attorney shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated
SIGNATURE TITLE DATE
/s/ William K. McVicar William K. McVicar Chairman of the Board March 25, 2022
/s/ Tess Burleson Tess Burleson Director March 25, 2022
/s/ Arnold HanishArnold Hanish Director March 25, 2022
/s/ Paul Lammers Paul Lammers Director March 25, 2022
/s/ Jon Lieber Jon Lieber Director March 25, 2022
/s/ Bruce McCreedy Bruce McCreedy Director March 25, 2022