Discontinued Operations

12 Months Ended

Dec. 31, 2023

Discontinued Operations

Discontinued Operations

2.        Discontinued Operations

On December 27, 2023, NightHawk Biosciences, Inc. completed the sale of all of its assets and equity interest in Elusys Therapeutics, Inc. (“Elusys”)  to Elusys Holdings, a company controlled by our Chairman, Chief Executive Officer, and President, Jeffrey Wolf for approximately $2.5 million before working capital, escrow adjustments and transaction expenses. Total consideration included $0.5 million of cash received at closing, $0.3 million related to consideration from a one-year convertible note, and fair value of $1.7 million in future payments from Elusys upon the achievement by Elusys of certain financial goals. The gain on the transaction was approximately $1.5 million.

The Company has separately reported the financial results of Elusys as discontinued operations in our consolidated statements of operations and comprehensive loss for the years ended December 31, 2023 and 2022, respectively. Assets and liabilities of discontinued operations in the consolidated balance sheet have a carrying value of $0 as of December 31, 2023.

Assets and liabilities classified as discontinued operations in the consolidated balance sheets as of December 31, 2022 consist of the following:

Assets of discontinued operations:		December 31, 2022
Current assets:
Cash and cash equivalents	$	5,242,840
Income tax refund receivable		600,877
Prepaid expenses and other current assets		2,084,419
Total Current Assets		7,928,136
Long term assets:
Property and equipment, net		41,854
Intangible assets, net		8,669,375
Goodwill		3,301,959
Operating lease right-of-use asset		138,885
Deposits		26,250
Total long term assets		12,178,323
Total assets of discontinued operations	$	20,106,459
Liabilities of discontinued operations
Current liabilities:
Accounts payable	$	210,321
Accrued expenses and other liabilities		2,385,320
Contingent consideration, current portion		6,934,114
Operating lease liability, current portion		92,524
Other liabilities		—
Total current liabilities	$	9,622,279
Long term liabilities:
Contingent consideration, net of current portion		5,290,500
Total long term liabilities		5,290,500
Total liabilities of discontinued operations	$	14,912,779

The results of operations from discontinued operations for the years ended December 31, 2023 and 2022 have been reflected in the consolidated statement of operations and consist of the following:

	For the Year Ended
	December 31,
	2023		2022
Revenue	$	6,699,200	$	6,012,993
Operating expenses:
Cost of revenues		2,163,723		6,319,723
Research and development		2,549,959		3,237,905
Selling, general and administrative		1,346,565		1,000,333
Amortization of intangible asset		1,091,250		1,030,625
Goodwill impairment loss		3,873,079		—
Intangible asset impairment loss		2,277,921		—
Change in fair value of contingent consideration		(107,355)		(109,500)
Total operating expenses		13,195,142		11,479,086
Loss from operations		(6,495,942)		(5,466,093)
Gain on sale of discontinued operations		(1,467,451)		—
Other expense, net		(22,973)		94,037
Total non-operating (loss) income		(1,490,424)		94,037
Net loss from discontinued operations before income taxes		(5,005,518)		(5,560,130)
Income tax benefit from discontinued operations		(65,189)		3,073,000
Net loss from discontinued operations	$	(5,070,707)	$	(2,487,130)

The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows. Total operating, investing and financing cash flows of discontinued operations for the year ended December 31, 2023 and 2022 are comprised of the following:

	2023		2022
Total net cash (used in) provided by operating activities from discontinued operations	$	(5,032,271)	$	30,042,512
Total net cash provided (used in) by investing activities from discontinued operations	$	41,854	$	(20,064,672)
Total net cash used by financing activities from discontinued operations	$	—	$	(4,735,000)

Derecognition and Gain from Disposal of Discontinued Operations

As a result of the Elusys Therapeutics, Inc. sale and pursuant to the terms and conditions of the divestiture agreement entered into with Elusys Holdings, the Company ceased to have a financial interest in Elusys Therapeutics, Inc. as of December 27, 2023. Because the Company was selling all of its equity interest in Elusys Therapeutics, a wholly owned subsidiary that met the definition of a business, the Company considered deconsolidation guidance under ASC 810-10-40 Consolidation – Derecognition. The derecognition of Elusys Therapeutics requires the recognition of a gain or loss measured as the difference of fair value of consideration received (NCI is not applicable for Elusys) less the Company’s carrying value of Elusys Therapeutics. The Company concluded that the divestiture agreement was to be accounted for under derecognition guidance and required the company to record a gain on sale for the excess of consideration received over carrying value of assets derecognized and liabilities recognized.

Pursuant to the Agreement, Elusys Holdings was obligated to pay us $500,000 on December 11, 2023, which payment was timely completed. Elusys Holdings  is further obligated to pay to us on an annual basis a royalty fee equal to 3% of

gross revenue received by Elusys Holdings or any of its affiliates or their respective successors or licensees from all sales of the anthrax antitoxin known as ANTHIM® during the period commencing on January 1, 2024 and ending on June 30, 2031; provided that, if as of December 31, 2028, we have not received an aggregate of $5,000,000 in such royalty fees, Elusys Holdings  will be obligated to pay to us  no later than March 1, 2029 a cash payment equal to the difference between the aggregate amount of such royalty fees received by us  and $5,000,000.

Pursuant to the Agreement, at the December 27, 2023 closing of the Divestiture Transaction (the “Divestiture Closing”), Elusys Holdings assumed certain specified liabilities and manufacturing commitments relating to Elusys Therapeutics’ business, which at the time of the Divestiture were estimated at $51.4 million. The assumed liabilities and manufacturing commitments include all amounts owed to the former owners of Elusys Therapeutics under that certain Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) by and among us, Heat Acquisition Sub 1, Inc., Elusys Therapeutics and Fortis Advisors LLC, in its capacity as “Stockholders’ Representative,” which provides that we will remain liable if Elusys Holdings fails to satisfy its obligations to pay merger consideration under the Merger Agreement. In addition, from and after the Divestiture Closing, Elusys Holdings asumed all operating costs of Elusys Therapeutics, including the costs incurred after the closing related to Elusys Therapeutics employees, consultants, and regulatory and research costs. Mr. Wolf and William Ostrander, our Chief Financial Officer, will continue to serve in their current positions with us and also continue to serve as the Chief Executive Officer and Chief Financial Officer, respectively, of Elusys Holdings.

Also in connection with the transaction, we entered into a Shared Services Agreement with the Buyer setting forth the terms on which we will provide to Buyer, on a transitional basis, certain services or functions that it has historically provided to Elusys. Shared services will include various administrative, accounting, billing, cash management and banking and budgeting services and other support services. In consideration for such services, the Buyer will pay fees to us for the services provided, and those fees will generally be in amounts intended to allow us to recover all of its direct and indirect costs incurred in providing those services. We will charge the Buyer a fee for services performed by (i) our employees which shall be a percentage of each employee’s base salary based upon an allocation of their business time spent providing such services and (ii) third parties, the fees charged by such third parties. Buyer will also pay us for general and administrative expenses incurred by us attributable to both the operation of the Buyer and us (other than the provision of the services performed by us employees) and the provision of the shared services. As of December 31, 2023, no such services were provided.

The fair value of consideration received is shown in the following table:

	2023
Upfront cash consideration	$	500,000
Estimated fair value of 3% ANTHIM earnout	$	1,720,000
Estimated fair value of contingent consideration receivable, related party	$	268,000
Total fair value of contingent consideration receivable, related party	$	1,988,000
Total fair value of consideration received	$	2,488,000

Refer to “The Divestiture of Elusys Therapeutics, Inc.” for additional information on fair value assumptions of each contingent consideration. The book value of the assets and liabilities derecognized on December 27, 2023 in connection with the sale were as follows:

	2023
Cash	$	252,423
Prepaid expenses and deposits		30,228
Intangibles and other long-term assets		6,728,109
Accounts payable		(197,082)
Accrued expenses and other liabilities		(1,183,129)
Contingent royalty earnout liability		(4,610,000)
Net book value of assets and liabilities sold	$	1,020,549

After recording the fair value of consideration and derecognition of assets and liabilities, the Company recorded a gain from disposal of discontinued operations in the amount of $1,467,451 as follows:

	2023
Total fair value of consideration received and receivable	$	2,488,000
Less: net book value of assets and liabilities sold		(1,020,549)
Gain from disposal of discontinued operations	$	1,467,451