Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K . Some of the information contained in this discussion and analysis are set forth elsewhere in this Annual Report on Form 10-K , including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” Our actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled “Risk Factors” and elsewhere in this Annual Report on Form 10-K .
Overview
We are a clinical-stage biotechnology company focused on the development of pathogen-specific bacteriophage therapeutics for the treatment of antibiotic-resistant and difficult-to-treat bacterial infections using our proprietary bacteriophage-based technology. We see bacteriophages as an alternative to antibiotics and an essential response to growing bacterial resistance to current classes of antibiotics. Bacteriophages or “phages” have a powerful and highly differentiated mechanism of action that enables binding to and killing of targeted bacteria while uniquely preserving the human microbiome. This is in direct contrast to traditional broad-spectrum antibiotics which can alter the human microbiome increasing susceptibility to opportunistic pathogens, such as C. difficile . We believe that phages represent a promising means to effectively treat bacterial infections as an alternative to broad- spectrum antibiotics, especially for patients with bacterial infections resistant to current standard of care therapies, including the multidrug-resistant or “superbug” strains of bacteria. We are a leading developer of phage therapeutics and are uniquely positioned to address the growing worldwide threat of antibiotic-resistant bacterial infections. We are completing two critical Phase 2 trials to ensure a pathway towards pivotal Phase 3 trials.
We are combining our proprietary approach and expertise in identifying, characterizing and developing both naturally occurring and engineered (synthetic) bacteriophages with our proprietary phage-specific host-engineered
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current good manufacturing practice (“cGMP”) manufacturing capabilities to advance a target pipeline of high-quality bacteriophage product candidates for advanced development. We are uniquely advancing two lead candidates to address both chronic and acute bacterial infections.
Our first lead candidate focused primarily on chronic bacterial infections is the clinical phage candidate for Pseudomonas aeruginosa (“P. aeruginosa”). On October 14, 2020, we received the approval to proceed from the U.S. Food and Drug Administration (the “FDA”) for our Investigational New Drug (“IND”) application for AP-PA02. In the first quarter of 2023, we announced positive topline results from the completed “SWARM- P.a. ” study – a Phase 1b/2a, multicenter, double-blind, randomized, placebo-controlled, single ascending dose (“SAD”) and multiple ascending dose (“MAD”) clinical trial to evaluate the safety and tolerability of inhaled AP-PA02 in subjects with cystic fibrosis (“CF”) and chronic pulmonary P. aeruginosa infection. Data indicate that AP-PA02 was well-tolerated with a treatment emergent adverse event profile similar to placebo. Pharmacokinetics (PK) findings confirm AP-PA02 can be effectively delivered to the lungs through nebulization with minimal systemic exposure, with single ascending doses and multiple ascending doses resulting in a proportional increase in exposure as measured in induced sputum and exposure achievement relatively consistent across patient subjects. Additionally, bacterial levels of P. aeruginosa in the sputum measured at several timepoints suggest improvement in bacterial load reduction for subjects treated with AP-PA02 at the end of treatment as compared to placebo after ten days of dosing. In addition, a correlation was seen between increasing phage dose and reduction in the bacterial load supporting the biologic plausibility of a bacterial specific mechanism of action and creating the opportunity for phage as a therapeutic alternative to inhaled antibiotics. This study is supported by the Cystic Fibrosis Foundation (“CFF”), which granted us a Therapeutics Development Award of $5.0 million. Following the promising Phase 1b/2a results of favorable safety and tolerability profile and plausible mechanism of action, an additional confirmatory Phase 2 trial was initiated in NCFB patients with similar chronic pulmonary infections due to Pseudomonas aeruginosa .
On February 22, 2022, we announced that we had received from the FDA the approval to proceed for our IND application for AP-PA02, in a second indication, non-cystic fibrosis bronchiectasis (“NCFB”). We initiated a Phase 2 trial (“Tailwind”) in NCFB in 2022 and reported first patient dosing in the first quarter of 2023. The “Tailwind” study is a Phase 2, multicenter, double-blind, randomized, placebo-controlled study to evaluate the safety, phage kinetics, and efficacy of inhaled AP-PA02 phage therapeutic in subjects with NCFB and chronic pulmonary Pseudomonas aeruginosa infection. We are actively accelerating enrollment and increasing phage dosing with the goal of defining a safe and promising biologic correlation for a Phase 3 definitive trial in 2025 which will evaluate phage as an alternative to antibiotics in chronic pulmonary infections.
In parallel, we have an acute bacterial infection clinical development plan focused on Staphylococcus aureus bacteremia, a difficult-to-treat and often life-threatening human infections that can result in high morbidity and mortality and for which bacterial resistance to antibiotics is growing.
A key advantage of our phage manufacturing expertise is the purity profiles of our phage products, including AP-SA02, our phage product candidate for Staphylococcus aureus (“ S. aureus ”); this has enabled us to pursue treatment of complicated S. aureus bacteremia, where repetitive intravenous dosing is required. On June 15, 2020, we entered into an agreement (the “MTEC Agreement”) with the Medical Technology Enterprise Consortium (“MTEC”), pursuant to which we expect to receive a $15.0 million grant and entered into a three-year program administered by the U.S Department of Defense (the “DoD”) through MTEC with funding from the Defense Health Agency and Joint Warfighter Medical Research Program. On September 29, 2022, the MTEC Agreement was modified to increase the total award by $1.3 million to $16.3 million and extend the term into the second half of 2024. The grant is being used to partially fund a Phase 1/2, multi-center, randomized, double-blind, placebo- controlled dose escalation study that will assess the safety, tolerability, and efficacy of our phage-based candidate, AP-SA02, for the treatment of adults with S. aureus bacteremia. On November 17, 2021, we announced that we had received from the FDA the approval to proceed for our IND application for AP-SA02. We are focused on accelerating enrollment of the Phase 2a segment of the “diSArm” study, evaluating safety with higher intravenous doses, which is possible due to the high purity of our phage product candidates. We are committed to developing a definitive efficacy trial in 2025 focused on phage as an alternative to broad-spectrum antibiotics and/or antibiotic sparing to decrease the utilize of broad-spectrum antibiotics and their detrimental impact of the normal human microbiome.
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On August 1, 2022, we announced that we had received from the FDA the approval to proceed for our IND application for AP-SA02, in a second indication, prosthetic joint infections (“PJI”). We had planned to initiate a Phase 1b/2a trial in 2023, however in light of the growing concerns of both PJI and wound infection, we are revising the protocol to include both indications. Driven by data from the bacteremia study, and with sufficient funding, we may in the future initiate a Phase 1b/2a trial to assess the safety and tolerability of intravenous and intra-articular AP-SA02 as an adjunct to standard of care antibiotics in adults undergoing treatment of periprosthetic joint infections and/or wound infections caused by S. aureus .
We remain committed to conducting randomized controlled clinical trials required for FDA approval in order to move toward the commercialization of its phage products as alternatives to traditional antibiotics, providing a potential method of treating patients suffering from drug-resistant and difficult-to-treat bacterial infections.
The following chart summarizes the status of our phage product candidate development programs and partners.
We have incurred net losses since our inception and our operations to date have been primarily limited to research and development and raising capital. As of December 31, 2023, we had an accumulated deficit of $308.8 million. We currently expect to use our existing cash and cash equivalents for the focused research and development of our current product candidates and for working capital and other general corporate purposes. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development and seeking to obtain regulatory approval of our product candidates. We do not expect to generate product revenue unless and until we successfully complete development and obtain marketing approval for at least one of our product candidates. We may also use a portion of our existing cash and cash equivalents for the potential acquisition of, or investment in, product candidates, technologies, formulations or companies that complement our business, although we have no current understandings, commitments or agreements to do so.
Our existing cash and cash equivalents together with the $35.0 million loan proceeds received in March 2024 will not be sufficient to enable us to complete all necessary development of any potential product candidates. Accordingly, we will be required to obtain further funding through one or more other public or private equity offerings, debt financings, collaboration, strategic financing, grants or government contract awards, licensing arrangements or other sources. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and potential disruptions to, and volatility in, financial markets in the United States and worldwide. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure, curtail or eliminate some or all of our development programs or other operations, dispose of assets, enter into arrangements that may require us to relinquish rights to certain of our product candidates, technologies or potential markets, file for bankruptcy or cease operations altogether. Any of these events could have a material adverse effect on our business, financial condition and results of operations and result in a loss of investment by our stockholders.
Recent Events
2024 Credit Agreement
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On March 4, 2024, we entered into a credit and security agreement (the “2024 Credit Agreement”) for a loan in an aggregate amount of $35.0 million with Innoviva Strategic Opportunities LLC (“Innoviva SO”), a wholly owned subsidiary of Innoviva, Inc. (NASDAQ: INVA) (collectively, “Innoviva”), our principal stockholder and a related party. The 2024 loan bears interest at an annual rate of 14% and matures on June 4, 2025. Principal and accrued interest are payable at maturity. Repayment of the Loan is guaranteed by our domestic subsidiaries, and the loan is secured by substantially all of our assets and our subsidiary guarantors . Concurrently with the execution of the 2024 loan, we amended certain provisions of the Convertible Loan and Credit Agreement to, among other things, conform certain terms relating to permitted indebtedness and permitted liens.
2023 Credit Agreement
On July 10, 2023, we entered into the Credit Agreement with Innoviva,. The Credit Agreement provides for a secured term loan facility in an aggregate amount of $25.0 million (the “Loan”) at an interest rate of 14.0% per annum and has a maturity date of January 10, 2025. Principal and accrued interest are payable at maturity. Repayment of the Loan is guaranteed by our domestic subsidiaries, and the Loan is secured by substantially all of our assets and our subsidiary guarantors.
The Credit Agreement contains customary affirmative and negative covenants and representations and warranties, including financial reporting obligations and certain limitations on indebtedness, liens, investments, distributions (including dividends), collateral, investments, mergers or acquisitions and fundamental corporate changes. The Credit Agreement also includes customary events of default, including payment defaults, breaches of provisions under the loan documents, certain losses or impairment of collateral and related security interests, the occurrence of certain events that could reasonably be expected to have a “material adverse effect” as set forth in the Credit Agreement, certain bankruptcy or insolvency events, and a material deviation from our operating budget.
The Loan was initially recognized at fair value of $21.2 million and subsequently accounted for at the amortized cost net of debt issuance costs and debt discount. We amortized $0.9 million of debt issuance costs and debt discount during the year ended December 31, 2023 using the effective interest method. The Loan’s annual effective interest rate was 27.3% as of December 31, 2023.
2023 Convertible Credit Agreement
On January 10, 2023, we entered into the Convertible Credit Agreement with Innoviva. The Convertible Credit Agreement provides for a secured term loan facility in an aggregate amount of $30.0 million (the “Convertible Loan”) which bears interest at a rate of 8.0% per annum, and was scheduled to mature on January 10, 2024. Concurrently with the execution of the Credit Agreement, we amended certain provisions of the Convertible Credit Agreement, to, among other changes, extend the maturity of the Convertible Loan to January 10, 2025.
Repayment of the Convertible Loan is guaranteed by our domestic subsidiaries and foreign material subsidiaries, and the Convertible Loan is secured by substantially all of our assets and the subsidiary guarantors.
The Convertible Credit Agreement provides that if there is a financing from new investors of at least $30.0 million (a “Qualified Financing”), the outstanding principal amount of, and all accrued and unpaid interest on, the Convertible Loan shall be converted into shares of our common stock at a price per share equal to a 15.0% discount to the lowest price per share for common stock paid by investors in a Qualified Financing (which price paid by investors in a Qualified Financing may not be less than a 15.0% discount to the closing price of common stock immediately prior to the consummation of a Qualified Financing event). The Convertible Credit Agreement also required us to file a registration statement (the “Registration Statement”) for the resale of all securities issued to the lender in connection with any conversion under the Convertible Credit Agreement, which we originally filed on February 13, 2023 and which was declared effective by the SEC on April 6, 2023. The Convertible Credit Agreement also confers upon the lender the option to convert any outstanding Convertible Loan amount, including all accrued and unpaid interest thereon, at the lender’s option, into shares of common stock at a price per share equal to the greater of book value or market value per share of common stock on the date immediately preceding the effective date of the Convertible Credit Agreement, which was $1.52 (as may be appropriately adjusted for any stock split, combination or similar act).
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On July 10, 2023, in connection with the Credit Agreement with Innoviva, we amended the terms of the Convertible Loan, to, among other changes, extend the maturity of the Convertible Loan to January 10, 2025. We concluded that the amendment is an extinguishment for accounting purposes. We recognized a $1.8 million gain as the change in fair value of the convertible debt before the extinguishment date, July 10, 2023. We estimated fair value of the combined Loan and the Convertible Loan before and after modification and recognized an extinguishment loss of $3.9 million in the consolidated statements of operations for the year ended December 31, 2023. We recognized a $23.6 million loss as the change in fair value of the Convertible Loan from July 10, 2023 to December 31, 2023.
Results of Operations
Comparison of years ended December 31, 2023 and 2022
The following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (dollars in thousands):
Year Ended December 31,
Change
2023
2022
Amount
%
Grant revenue
$
4,529
$
5,508
$
(979)
(17.8%)
Operating expenses
Research and development
33,770
35,017
(1,247)
(3.6%)
General and administrative
11,649
7,437
4,212
56.6%
Total operating expenses
45,419
42,454
2,965
7.0%
Loss from operations
(40,890)
(36,946)
(3,944)
10.7%
Other income (expense)
Interest income
179
29
150
*
Interest expense
(2,626)
—
(2,626)
*
Change in fair value of convertible debt
(21,845)
—
(21,845)
*
Loss on convertible debt extinguishment
(3,863)
—
(3,863)
*
Total other (expense) income, net
(28,155)
29
(28,184)
*
Net loss
$
(69,045)
$
(36,917)
$
(32,128)
87.0%
*Not meaningful
Grant Revenue
We recognized $4.5 million and $5.5 million of grant revenue for the years ended December 31, 2023 and 2022, respectively, which represents MTEC’s share of the clinical development costs incurred for our AP-SA02 program for the treatment of Staphylococcus aureus bacteremia.
Research and Development
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The following table summarizes our research and development expenses for the years ended December 31, 2023 and 2022 (dollars in thousands):
Year Ended December 31,
Change
2023
2022
Amount
%
External costs:
Clinical trial expenses
$
9,982
$
10,795
$
(813)
(7.5%)
Other research and development costs, including consulting, laboratory supplies and other
4,665
3,963
702
17.7%
Total external costs
14,647
14,758
(111)
(0.8%)
Internal costs:
Personnel-related costs
9,665
11,638
(1,973)
(17.0%)
Facilities and overhead costs
9,458
8,621
837
9.7%
Total research and development expense:
$
33,770
$
35,017
$
(1,247)
(3.6%)
Research and development expenses decreased by $1.2 million, from $35.0 million for the year ended December 31, 2022 to $33.8 million for the year ended December 31, 2023.
Clinical trial costs decreased by $0.8 million, from $10.8 million for the year ended December 31, 2022, to $9.9 million for the year ended December 31, 2023. The decrease is primarily due to a decrease in clinical trial expenses for AP-PA02 Cystic Fibrosis study and AP-SA02 Prosthetic Joint Infection study, offset by an increase in clinical trial expenses for AP-PA02 Non-Cystic Fibrosis Bronchiectasis study and AP-SA02 Bacteremia study, based on the progress of our clinical trials.
Other external research and development costs increased by $0.7 million from $4.0 million for the year ended December 31, 2022 to $4.7 million for the year ended December 31, 2023. We recognized $0.3 million and $1.0 million credits to research and development expenses related to the CFF grant for the years ended December 31, 2023 and 2022, respectively. Our spending on laboratory supplies decreased by $1.4 million, which was partially offset by a $1.2 million increase in consulting expenses.
Our external research and development expenses by project for the years ended December 31, 2023 and 2022 were as follows (in thousands):
Year Ended December 31,
2023
2022
Product
Project name
AP-PA02
Non-Cystic Fibrosis Bronchiectasis
$
4,922
$
2,709
AP-PA02
Cystic Fibrosis
1,692
3,483
AP-SA02
Bacteremia
4,789
4,254
AP-SA02
Prosthetic Joint Infection
202
560
Expenses not allocated by projects*
3,042
3,752
Total external costs
$
14,647
$
14,758
● Expenses not allocated by projects include consultants, lab supplies and outsource service expenses
Personnel-related costs, including employee payroll and related expenses, decreased by $2.0 million, from $11.6 million for the year ended December 31, 2022 to $9.7 million for the year ended December 31, 2023, largely due to a decrease in payroll and related taxes of $0.9 million and recruiting expenses of $0.3 million, as well as employee stock-based compensation expenses decrease of $0.8 million, which was primarily due to the full vesting of awards issued in prior periods.
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Facilities and overheads increased by $0.8 million from $8.6 million for the year ended December 31, 2022 to $9.4 million for the year ended December 31, 2023, largely as a result of an increase in lease expense of $1.0 million, an increase of $0.2 million related to laboratory equipment maintenance costs, partially offset by a decrease of $0.4 million in expensed noncapitalizable lab equipment.
General and Administrative
General and administrative expenses were $11.6 million and $7.4 million for the years ended December 31, 2023 and 2022, respectively. The increase of $4.2 million is primarily related to an increase of $3.7 million in legal, accounting and other consulting expenses, a one-time expense of $0.5 million related to the prepaid financing costs , an increase of $0.3 million in other facilities and overhead expenses, an increase of $0.2 million in leases and recruiting expenses, and a net decrease in personnel-related costs of $0.6 million, including a stock-based compensation expense decrease of $1.3 million, related to the full vesting of awards issued in prior periods and a reversal of expense related to certain equity awards modifications, offset by a $0.7 million increase in severance costs payable to two former employees.
Interest Income
Interest income for the years ended December 31, 2023 and 2022 was $0.2 million and less than $0.1 million, respectively, which was related to interest income earned on our cash, cash equivalents and restricted cash balances.
Interest Expense
We recognized interest expense of $2.6 million for the year ended December 31, 2023, which relates to the interest and the amortization of debt discount and issuance costs for the Loan received from Innoviva in July 2023. Interest expense is accrued at each period end and is payable at the Loan maturity in January 2025.
Change in Fair Value of Convertible Debt
We recognized a fair value of the convertible debt loss for the year ended December 31, 2023 of $21.9 million. The Convertible Loan received is accounted at fair value using a weighted probability of various settlement scenarios of the Convertible Loan during its term discounted to each reporting date. Conversion option scenarios are valued using an option pricing model with significant assumptions and estimates such as volatility, expected term and risk-free interest rates. Refer to Note 7, “ Convertible Debt ”, in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.
Loss on Convertible Debt Extinguishment
We recognized a loss on convertible debt extinguishment for the year ended December 31, 2023 of $3.9 million which relates to the amendment to the Convertible Loan on July 10, 2023.The loss amount was estimated as a difference between the fair value of the Convertible Loan before and after modification. Refer to Note 7, “ Convertible Debt ”, in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.
Liquidity, Capital Resources and Financial Condition
We have incurred net losses since our inception and have negative operating cash flows. Our cash and cash equivalents of $13.5 million as of December 31, 2023, together with the loan proceeds of $35.0 million received in March 2024, will not be sufficient to fund our operations for the next 12 months from the date of this Annual Report. We plan to control our expenses and to raise additional capital through a combination of public and private equity, debt financings, strategic alliances, and grant arrangements. These circumstances raise substantial doubt about our ability to continue as a going concern. While management believes this plan to raise additional funds will alleviate the conditions that raise substantial doubt, these plans are not entirely within its control and cannot be assessed as being probable of occurring. We may not be able to secure additional financing in a timely manner or on favorable terms, if at all .
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In March 2024, we received a $35.0 million loan from Innoviva, which matures in June 2025 and bears interest at a rate of 14% per year. Principal and accrued interest are payable at maturity and may be prepaid at the Company’s option.
During the year ended December 31, 2023, we received from Innoviva the Convertible Loan in the aggregate amount of $30.0 million and the Loan in the aggregate amount of $25.0 million from Innoviva. The Convertible Loan and the Loan mature in January 2025, and principal and accrued interest are payable at maturity. The Convertible Loan provides for various conversion and repayment options, including the conversion of principal and accrued interest into shares of our common stock upon a Qualified Financing and our option to repay the Convertible loan prior to maturity.
Future Capital Requirements
We will need to raise additional capital in the future to continue to fund our operations. Our future funding requirements will depend on many factors, including:
● the costs and timing of our research and development activities;
● the progress and cost of our clinical trials and other research and development activities;
● manufacturing costs associated with our targeted phage therapies strategy and other research and development activities;
● the costs of completing the construction and improvements of our leased premises to be used as our new headquarters. We expect to incur $5.4 million of additional expenses by mid-2024, which may increase or decrease as we complete the construction by mid 2024;
● the costs and timing of seeking regulatory approvals;
● the costs of filing, prosecuting and enforcing any patent applications, claims, patents and other intellectual property rights; and
● the costs of potential lawsuits involving us or our product candidates.
We may seek to raise capital through a variety of sources, including:
● the public equity market;
● private equity or debt financings;
● collaborative arrangements,
● government grants; or
● strategic financings.
Any additional fundraising efforts may divert our management team from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. Our ability to raise additional funds will depend, in part, on the success of our product development activities, including our targeted phage therapies strategy and any clinical trials we initiate, regulatory events, our ability to identify and enter into in-licensing or other strategic arrangements, and other events or conditions that may affect our value or prospects, as well as factors related to financial, economic and market conditions, many of which are beyond our control. We cannot be certain that sufficient funds will be available to us when required or on acceptable terms. If we are unable to secure additional funds on a timely basis or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure, curtail or eliminate some or all of our development programs or other operations, dispose of technology or assets, pursue an acquisition of our company by a third party at a price that may result in a loss on investment for our stockholders, enter into arrangements that may require us to relinquish rights to
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certain of our product candidates, technologies or potential markets, file for bankruptcy or cease operations altogether. Any of these events could have a material adverse effect on our business, financial condition and results of operations, increase a risk of insolvency and loss of investment by our stockholders. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to our existing stockholders. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide.
Cash Flows
The following table summarizes our sources and uses of cash for the periods presented (in thousands):
Year Ended December 31,
2023
2022
Net cash used in operating activities
$
(47,423)
$
(32,481)
Net cash used in investing activities
(8,134)
(2,211)
Net cash provided by financing activities
53,988
44,016
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(1,569)
$
9,324
Cash Flows Used in Operating Activities
Net cash used in operating activities was $47.4 million and $32.5 million for the years ended December 31, 2023 and 2022, respectively.
Cash used in operating activities in the year ended December 31, 2023 was primarily due to our net loss for the period of $69.0 million, adjusted by non-cash net expenses of $31.3 million and a net change of $9.7 million in our net operating assets and liabilities. The non-cash items consist of $21.8 million related to a loss from change in fair value of convertible debt, $3.9 million related to the Convertible Loan extinguishment loss, $2.6 million of non-cash interest expense on the Loan, $1.0 million related to depreciation and amortization expense, $1.0 million related to change in right-of-use asset, $0.9 million related to stock-based compensation expense. The changes in our net operating assets and liabilities were primarily due to a decrease of $13.5 million in operating lease liability, mainly related to payments for our new leased facility construction, which we expect to complete by mid-2024, and rent payments, a decrease of $1.1 million in accrued compensation, partially offset by a decrease of $4.8 million in prepaid expenses and other assets.
Cash used in operating activities in the year ended December 31, 2022 was primarily due to our net loss for the period of $36.9 million, adjusted by non-cash net expenses of $4.0 million and a net change of $0.4 million in our net operating assets and liabilities. The non-cash amounts consisted of $3.1 million related to stock-based compensation expense and $0.9 million related to depreciation and amortization expense. The changes in our net operating assets and liabilities were primarily due to an increase of $3.6 million in operating lease liability, an increase of $0.8 million in accrued compensation, an increase of $3.7 million in accounts payable and accrued liabilities, partially offset by an increase of $7.7 million in prepaid expenses and other current assets.
Cash Flows Used in Investing Activities
Net cash used in investing activities was $8.1 million and $2.2 million for the years ended December 31, 2023 and 2022, respectively, which is mostly attributable to purchases of laboratory and manufacturing equipment acquired for our new manufacturing facility. We expect our spending for property and equipment to decrease as our manufacturing facility will be ready by mid-2024.
Cash Flows from Financing Activities
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Cash provided by financing activities for the year ended December 31, 2023 was $54.0 million, which consisted primarily of net proceeds from issuance of convertible debt of $29.1 million and net proceeds from issuance of long-term debt of $24.9 million.
Cash provided by financing activities for the year ended December 31, 2022 was $44.0 million, which consisted primarily of proceeds from the sale of common stock, net of offering costs of $44.4 million, proceeds from the exercise of stock options of $0.1 million, offset by payment of deferred offering costs of $0.5 million.
Off-Balance Sheet Arrangements
As of December 31, 2023, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements as of December 31, 2023 and December 31, 2022, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates and assumptions could occur in the future. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.
Although our significant accounting policies are described in more detail in Note 3, “ Significant Accounting Policies” , to our consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Accrued Research and Development
All research and development costs are expensed as incurred. Research and development costs consist primarily of salaries, employee benefits, costs associated with preclinical studies and clinical trials (including amounts paid to clinical research organizations and other professional services) and in process research and development expenses. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.
We record accruals for estimated research and development costs, comprising payments for work performed by third-party contractors, laboratories, participating clinical trial sites, and others. Some of these contractors bill monthly based on actual services performed, while others bill periodically based upon achieving certain contractual milestones. For the latter, we accrue the expenses as goods or services are used or rendered. Clinical trial site costs related to patient enrollment are accrued as patients enter and progress through the trial. Judgments and estimates are made in determining the accrued balances at the end of the reporting period.
Fair Value Estimate of the Convertible Loan
In January 2023, we entered into the Convertible Credit Agreement with Innoviva, which was amended in July 2023. The Convertible Loan includes various conversion and repayment options, including the conversion of principal and accrued interest into shares of our common stock upon a Qualified Financing and our option to repay the Convertible Loan prior to maturity. Refer to Note 7, “ Convertible Debt ”, in the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.
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We account for the Convertible Loan at fair value and changes in fair value are included in other income (expense) in the consolidated statements of operations in each reporting period. We estimate the fair value using a weighted probability of various settlement scenarios during the Convertible Loan term discounted to each reporting date. To estimate the fair value of the conversion option scenarios, we use an option pricing model with assumptions, such as volatility, expected term and risk-free interest rates. Changes in the fair value of our common stock and probabilities of scenarios significantly impact the fair value of the Convertible Loan. We expect to continue making these estimates until the Convertible Loan conversion or its maturity in January 2025.
As of December 31, 2023, we estimated the fair value of the Convertible Loan to be $58.6 million. For the year ended December 31, 2023, we recognized a change in fair value loss of $21.8 million in the consolidated statements of operations and comprehensive loss.
Recent Accounting Pronouncements
Refer to Note 3, “ Significant Accounting Policies ”, of the notes to the consolidated financial statements contained elsewhere in this Annual Report on Form 10-K.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not required to provide the information required under this item.