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 our financial statements and notes thereto
appearing elsewhere in this Annual Report. In addition to historical financial information, the following discussion and analysis contains
forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results could differ materially from those anticipated
by these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these
differences below and elsewhere in this Form 10-K, including those set forth under “Risk Factors” and “Forward-Looking
Statements.”
Overview
We are a clinical-stage immunology
company focused on developing drugs that may reprogram the patient’s innate immune system to treat disease. We believe this may
be done by targeting cells of the innate immune system that cause acute and chronic inflammation and are involved in immune dysfunction
associated with chronic diseases such as cancer and neurodegenerative diseases. The Company’s drugs are in clinical trials and have
not been approved by a regulatory authority. The Company has two therapeutic platforms – a dominant-negative TNF platform (“DN-TNF”,
“XPro™”, “XPro1595™” or “ pegipanermin” ) and a Natural Killer (“NK”,
or “INKmune™”) platform. The DN-TNF platform neutralizes soluble TNF (“sTNF”) without affecting trans-membrane
TNF (“tmTNF”) or TNF receptors -TNFR1 and TNFR2. This unique biologic mechanism differentiates the DN-TNF drugs from currently
approved non-selective TNF inhibitors that inhibit both sTNF and tmTNF. Protecting the function of tmTNF and TNF receptors while neutralizing
the function of sTNF is a potent anti-inflammatory strategy that does not cause immunosuppression or demyelination which occur in the
currently approved non-selective TNF inhibitors. Currently approved non-selective TNF inhibitors treat autoimmune disease, but are contraindicated
in patients with infection, cancer and neurologic diseases because they increase the risk of infection, cancer and demyelinating neurologic
diseases, respectively; all the safety problems are due to off-target effects on inhibiting tmTNF. The NK platform targets the dysfunctional
natural killer cells in patients with cancer. NK cells are part of the normal immunologic response to cancer with important roles in immunosurveillance
to prevent cancer and in preventing relapse by eliminating residual disease. Residual disease is the cancer left behind after therapy
is finished. Residual disease can grow to cause relapse. The mechanism by which INKmune improves the ability of the patient’s NK
cells to kill their cancer is complex. The NK cells of cancer patients lose the ability to bind and kill cancer cells. A measure of NK
cell binding to cancer cells is avidity. The higher the avidity, the greater the bond between the NK cell to cancer cell and thus the
greater NK killing of cancer cells. INKmune increase NK avidity and further improves mitochondrial function and upregulates nutrient receptors.
These metabolic changes may help the INKmune primed NK cell to function in the hostile tumor microenvironment and persist much longer.
These mechanisms improve the ability of INKmune primed NK cells to overcome the immune evasion of the patient’s cancer cells. We
believe INKmune is best used to eliminate residual disease after the patient has completed other cancer therapies. Both the DN-TNF platform
and the INKmune platform can be used to treat multiple diseases. The DN-TNF platform will be used as an immunotherapy for the treatment
of cancer and neurodegenerative disease. INKmune is being developed to treat NK sensitive hematologic malignancies and solid tumors.
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We believe our DN-TNF platform
can be used as a cancer therapy to reduce resistance in immunotherapy and as a CNS (“central nervous system”) therapy to target
glial activation to prevent progression of Alzheimer’s disease (“AD”), and to target neuroinflammation in treatment
resistant depression (“TRD”) and as a drug to prevent muscle degeneration, prevent fibrosis and promote muscle regeneration
in Duchene muscular dystrophy (DMD). The drug is named differently for the oncology and CNS indications; INB03™ or XPro™,
respectively, but it is the same drug product. For DMD, the company is exploring DN-TNF compounds that is optimized for the treatment
of DMD. This novel compound has the same mechanism of action but has novel IP protection. In each case, we believe neutralizing sTNF is
a cornerstone to the treatment of these diseases. As an immunotherapy for cancer, we are using INB03 to neutralize sTNF produced by HER2+
trastuzumab resistant breast cancers to reverse resistance to targeted therapy. sTNF produced by the tumor causes an up-regulation of
MUC4 express causing steric hindrance of trastuzumab binding to the HER receptor on HER2+ breast cancer cells. Without binding, trastuzumab
based therapies are not effective. Neutralizing sTNF reverses MUC4 expression converting a trastuzumab resistant breast cancer cell into
a trastuzumab sensitive breast cancer cell. In addition, INB03 changes the immunobiology of the tumor microenvironment by decreasing the
number of immunosuppressive myeloid cells, both myeloid derived suppressor cells and tumor active macrophages, and increasing the number
of cytotoxic lymphocytes and phagocytic macrophages in the TME. The Company has completed an open label dose escalation trial in cancer
patients with metastatic solid tumors that have failed multiple lines of therapy. The trial informs the design of the Phase II trial by
demonstrating that INB03 was safe and well tolerated, defined the dose of INB03 to carry into Phase II trials, and demonstrated a pharmacodynamic
end-point. A Phase II trial is planned in patients with advanced MUC4+ expressing cancer.
Likewise, we believe the DN-TNF
platform can be used to treat selected neurodegenerative diseases by modifying the brain microenvironment (“BME”). The Company
believes the core pathology of cognitive decline is a combination of neurodegeneration and synaptic dysfunction. Neurodegeneration is
nerve cell death that may include demyelination. Synaptic dysfunction means the connections between nerve cells stop working efficiently
and may decrease in number. The combination of neurodegeneration and synaptic dysfunction causes cognitive decline and behavioral changes
associated with Alzheimer’s disease (AD. XPro completed a Phase I trial treating patients with Alzheimer’s disease that was
partially funded by a Part-the-Clouds Award from the Alzheimer’s Association. We believe XPro targets activated microglia and astrocytes
of the brain that produce sTNF that promotes nerve cell loss and synaptic dysfunction, key elements in the development of dementia. In
animal models, elimination of sTNF prevents nerve cell dysfunction and reverses synaptic pruning. The Phase I trial in patients with biomarkers
of inflammation with AD has been completed. The open label, dose escalation trial was designed to demonstrate that XPro can safely decrease
neuroinflammation in patients with ADi. The endpoints of the trial are measures of neuroinflammation and neurodegeneration in blood and
cerebral spinal fluid by measuring changes in inflammatory cytokine levels in the CNS and using MRI-DTI to measure white matter free water.
White matter free water; a validated measure of neuroinflammation in the brain. XPro, at the 1mg/kg/week dose decreased inflammatory cytokines
in the CSF and decreased white matter free water in the brain demonstrating that XPro can decrease neuroinflammation in patients with
AD. We also studied downstream benefits of decreasing neuroinflammation by measuring changes in the CSF proteome and quantifying changes
in novel white matter MRI biomarkers. XPro significantly decreases biomarkers of neurodegeneration as measured by changes in the
CSF proteome including neurofilament light chain, phospho Tau 217 and VILIP-1; decreases of 84%, 46% and 91% respectively after 3 months
of therapy. Three months of XPro therapy improved measures of synaptic function, as measured in the CSF proteome including a 222% increase
in Contactin 2 and a 56% decrease neurogranin, changes that contribute to improved synaptic function.
The successful completion
of the Phase I trial in AD has informed the design of a blinded randomized, placebo controlled Phase II trials in patients with early
ADi. Early ADi includes patients with AD and MCI who have at least one biomarker of inflammation (ADi and MCI 2 respectively).
The early ADi trial is a blinded randomized trial to test if treatment of early AD patients with neuroinflammation with XPro will affect
cognitive decline. The Phase II trial in early ADi has six important elements. Two hundred patients are being enrolled in a 2:1 ratio
(XPro vs placebo). The patients will receive 1mg/kg/week as a subcutaneous injection for six months. An enrichment strategy identical
to the successful strategy used in the Phase I trial will be used to ensure patients have neuroinflammation. Patients will need to have
one or more enrichment criteria: elevated blood level of at least one of C-reactive protein, hemoglobin A1c, erythrocyte sedimentation
and at least one allele of ApoE4. The primary end-point will be Early/mild Alzheimer’s Cognitive Composite (“EMACC”),
a validated cognitive measure that is more sensitive than traditional end-points used in many studies of patients with early AD. The
trial is open in Australia and Canada and will open in the US pending the lift of a clinical hold by the US FDA. All patients will be
offered to stay on therapy for at least 12 months in an extension trial. Clinical and biomarker data will be collected during the extension
trial.
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Effective therapy for TRD
is a large unmet need. Twenty percent of patients with a Major Depressive Disorder have TRD. Once third of TRD patients have peripheral
biomarkers to inflammation (elevated CRP). This is a large patient population. The role of TNF and anti-TNF therapeutics was explored
in a small open label clinical trial by Prof. Andrew Miller, MD of Emory University demonstrated the patients have elevated TNF levels
and treatment with infliximab treated their depression (Miller, 2011). The Company received a $2.9M USD award from the National Institute
of Mental Health (“NIMH”) to treat TRD with XPro. The blinded, randomized Phase II trial will use biomarkers of peripheral
inflammation to select patients with TRD for enrollment. Patients will be treated for 6 weeks. Primary end-points include both clinical
and neuroimaging measures. The final trial design is ongoing and discussions with the FDA are not complete. The Company anticipates receiving
authorization to initiate the clinical trial once the pending clinical hold is lifted.
We believe that INKmune improves
the ability of the patient’s own NK cells to attack their tumor. INKmune interacts with the patient’s NK cells to convert
them from inert resting NK cells into memory-like NK cells that kill the patient’s cancer cells. INKmune is a replication incompetent
proprietary cell line that is given to the patient after determining that i) the patient has adequate NK cells in their circulation and
ii) those NK cells are functional when exposed to INKmune in vitro. INKmune is designed to be given to patients after their immune system
has recovered after cytotoxic chemotherapy to target the residual disease the remains after treatment with cytotoxic therapy. We believe
INKmune can be used to treat numerous hematologic malignancies and solid tumors including leukemia, multiple myeloma, lymphoma, lung,
ovary, breast, renal and prostate cancer. The Company has initiated a Phase I trial using INKmune to treat patients with high risk MDS/AML,
a form of leukemia. One patient has been treated in the Phase I trial for MDS and three patients have been treated compassionately in
AML. In the four patients, INKmune therapy is safe, produces memory-like NK cells that kill cancer in vitro, promotes development of cancer
killing memory-like NK cells that can be found in the patient’s circulation of 4 months. The Company will continue to enroll patients
in the Phase I trial. The Company intends to initiate a separate Phase I/2 trial of INKmune in a solid tumor during 2023.
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We believe that INKmune improves
the ability of the patient’s own NK cells to attack their tumor. INKmune interacts with the patient’s NK cells to convert
them from inert resting NK cells into memory-like NK cells that kill the patient’s cancer cells. INKmune is a replication incompetent
proprietary cell line that is given to the patient after determining that i) the patient has adequate NK cells in their circulation and
ii) those NK cells are functional when exposed to INKmune in vitro. INKmune is designed to be given to patients after their immune system
has recovered after cytotoxic chemotherapy to target the residual disease the remains after treatment with cytotoxic therapy. We believe
INKmune can be used to treat numerous hematologic malignancies and solid tumors including leukemia, multiple myeloma, lymphoma, lung,
ovary, breast, renal and prostate cancer. The Company has initiated a Phase I trial using INKmune to treat patients with high risk MDS/AML,
a form of leukemia. One patient has been treated in the Phase I trial for MDS and three patients have been treated compassionately in
AML. In the four patients, INKmune therapy is safe, produces memory-like NK cells that kill cancer in vitro, promotes development of cancer
killing memory-like NK cells that can be found in the patient’s circulation of 4 months. The Company will continue to enroll patients
in the Phase I trial.
Since
our inception in 2015, we have devoted substantially all of our resources to the discovery and development of our product candidates,
including clinical trials and preclinical studies as well as general and administrative support for these operations. To date, we have
generated no significant revenue. We have incurred net losses in each year since our inception and, as of December 31, 2022, we had an
accumulated deficit of approximately $91.0 million. Our net losses were $27,299,000 and $30,340,000 for the years ended December 31,
2022 and 2021, respectively. Substantially all of our net losses resulted from costs incurred in connection with our research and development
programs and from general and administrative costs associated with our operations, including stock-based compensation.
The
Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic
on the Company’s business is highly uncertain and difficult to predict. Also, economies worldwide have also been negatively impacted
by the COVID-19 pandemic, however policymakers around the globe have responded with fiscal policy actions to support the healthcare industry
and economy as a whole. The magnitude and overall effectiveness of these actions remain uncertain.
In addition, the Company’s clinical trials have been affected
by and may continue to be affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment have and may continue to
be delayed due to prioritization of hospital resources toward the COVID-19 pandemic. Some patients have not, and others may not be able
to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Similarly, the ability
to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to
COVID-19, may adversely impact the Company’s clinical trial operations.
The
severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not
limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s service providers,
suppliers, contract research organizations (“CROs”) and the Company’s clinical trials, all of which are uncertain and
cannot be predicted. As of the date of issuance of Company’s financial statements, the extent to which the COVID-19 pandemic may
materially impact the Company’s financial condition, liquidity or results of operations is uncertain.
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As a company with less than $1.07 billion in revenue
during our last fiscal year, we qualify as an “emerging growth company” under the JOBS Act. As an emerging growth company,
we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies.
These provisions include:
● only
two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
● reduced
disclosure about our executive compensation arrangements;
● no
non-binding advisory votes on executive compensation or golden parachute arrangements;
● exemption
from the auditor attestation requirement in the assessment of our internal control over financial reporting; and
● delaying
the adoption of new or revised accounting standards that have different effective dates for public and private companies until those
standards apply to private companies.
We have elected to take advantage of the above-referenced
exemptions and we may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth
company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenues, we have more than $700
million in market value of our stock held by non-affiliates, or we issue more than $1 billion of non-convertible debt over a three-year
period. We may choose to take advantage of some but not all of these reduced burdens.
Components of Operating Results
Operating Expenses
Research and Development
Research and development expense consists of expenses
incurred while performing research and development activities to discover and develop our product candidates. This includes conducting
preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for product candidates.
We recognize research and development expenses as they are incurred. Our research and development expense primarily consist of:
●
clinical trial and regulatory-related costs;
●
expenses incurred under agreements with investigative sites and consultants that conduct our clinical trials;
●
manufacturing and testing costs and related supplies and materials; and
●
employee-related expenses, including salaries, benefits, travel and stock-based compensation
We typically use our employee, consultant and
infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program,
but we do not allocate personnel costs, other internal costs or external consultant costs to specific product candidates or development
programs.
We participate, through our wholly-owned subsidiary
in Australia, in the Australian research and development tax incentive program, such that a percentage of our qualifying research and
development expenditures are reimbursed by the Australian government, and such incentives are reflected as a reduction of research and
development expense. The Australian research and development tax incentive is recognized when there is reasonable assurance that the incentive
will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured.
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We participate, through our wholly-owned subsidiary in the United Kingdom,
in the research and development program provided by the United Kingdom tax relief program, such that a percentage of our qualifying research
and development expenditures are reimbursed by the United Kingdom government, and such incentives are reflected as a reduction of research
and development expense. The United Kingdom has recently enacted certain changes to the research and development program which will limit
the research and development tax incentive available to the Company. The United Kingdom research and development tax incentive is recognized
when there is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred and the amount of the
consideration can be reliably measured.
Substantially all of our research and development
expenses to date have been incurred in connection with our current and future product candidates. We expect our research and development
expenses to increase significantly for the foreseeable future as we advance an increased number of our product candidates through clinical
development, including the conduct of our planned clinical trials and manufacturing drug to be used in those clinical trials. The process
of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. The successful development of product
candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining
development of any product candidates. This is due to the numerous risks and uncertainties associated with the development of product
candidates.
The costs of clinical trials may vary significantly
over the life of a project owing to, but not limited to, the following:
●
per patient trial costs;
●
the number of sites included in the clinical trials;
●
the countries in which the clinical trials are conducted;
●
the length of time required to enroll eligible patients;
●
the number of patients that participate in the clinical trials;
●
the number of doses that patients receive;
●
the cost of comparative agents used in clinical trials;
●
the drop-out or discontinuation rates of patients;
●
potential additional safety monitoring or other studies requested by regulatory agencies;
●
the duration of patient follow-up;
●
the efficacy and safety profile of the product candidate; and
●
the cost of manufacturing, finishing, labeling and storage drug used in the clinical trial
We do not expect any of our product candidates
to be commercially available for at least the next several years, if ever. We expect to continue to incur significant expenses and increasing
operating losses for the foreseeable future, which may fluctuate significantly from quarter-to-quarter and year-to-year. We anticipate
that our expenses will increase substantially as we:
●
continue research and development, including preclinical and clinical development of our existing product candidates;
●
potentially seek regulatory approval for our product candidates;
65
●
seek to discover and develop additional product candidates;
●
establish a commercialization infrastructure and scale up our manufacturing and distribution capabilities to commercialize any of our product candidates for which we may obtain regulatory approval;
●
seek to comply with regulatory standards and laws;
●
maintain, leverage and expand our intellectual property portfolio;
●
hire clinical, manufacturing, scientific and other personnel to support
our product candidate’s development and future commercialization efforts;
●
add operational, financial and management information systems and personnel; and
●
incur additional legal, accounting and other expenses in operating as a public company.
General and Administrative Expenses
General and administrative expenses consist principally
of payroll and personnel expenses, including stock-based compensation; professional fees for legal, consulting, accounting and tax services;
insurance, overhead, including rent and utilities; and other general operating expenses not otherwise classified as research and development
expenses.
Other income, net
Other expense consists primarily of interest expense incurred on debt,
partially offset by interest income from a money market investment.
Critical Accounting Policies and Significant
Judgments and Estimates
This management’s discussion and analysis
of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with accounting
principles generally accepted in the United States. The preparation of our 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 our
financial statements, as well as the reported revenues and expenses during the reported periods. We evaluate these estimates and judgments
on an ongoing basis. We base our estimates on 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. Actual results may differ from these estimates under different assumptions or conditions.
In-Process Research and Development
The Company evaluates the carrying value of indefinite-lived
intangible assets, which consists of in-process research and development (“IPR&D”), on an annual basis or more frequently
when indicators of impairment exist. An impairment of indefinite-lived intangible assets would occur if the fair value of the intangible
asset is less than the carrying value. Intangible assets with finite lives are tested for impairment when events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. If these facts and circumstances exist, the Company assesses
for recovery by comparing the carrying values of the assets with their future undiscounted net cash flows. Significant management judgment
is required in the forecast of future operating results that are used in the preparation of expected undiscounted cash flows.
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IPR&D assets are considered to be indefinite-lived
until the completion or abandonment of the associated research and development projects. During the period the assets are considered indefinite-lived,
they are tested for impairment. If the related project is terminated or abandoned, the Company may have a full or partial impairment related
to the IPR&D assets, calculated as the excess of their carrying value over fair value. The valuation process is very complex and requires
significant input and judgment using internal and external sources with respect to the Company’s future revenue and expense growth
rates, changes in working capital use, the selection of an appropriate discount rate, and other assumptions and estimates.
Research and Development (“R&D”)
R&D expenses consist primarily of costs related
to clinical studies and outside services, personnel expenses, and other R&D expenses. Clinical studies and outside services costs
relate primarily to services performed by clinical research organizations and related clinical or development manufacturing costs, materials
and supplies, filing fees, regulatory support, and other third-party fees. Personnel expenses relate primarily to salaries, benefits and
share-based compensation. R&D expenditures are charged to operations as incurred.
We recognize R&D tax credits receivable from the United Kingdom
and Australian government for spending on R&D as a reduction of R&D expenses.
Stock-Based Compensation
We measure and recognize compensation
expense for all stock-based awards granted to service providers, employees, and directors based on the estimated fair value of the
award on the grant date. We calculate the estimated fair value of stock options on the date of grant using the Black-Scholes
option-pricing model, which is impacted by the fair value of our common stock, as well as changes in assumptions regarding a number
of highly complex and subjective variables. These variables include, but are not limited to, the market value of common stock on the
grant date, the expected dividend yield, the expected term of the awards, the risk-free interest rates and the expected common stock
price volatility over the term of the option awards. The expected volatility is based on the historical volatility of a few
unrelated public companies within our industry over the most recent period commensurate with the estimated expected term of our
stock options as we have insufficient historical information regarding the volatility of the share price of our common stock. The
risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at
the time of grant. We have never declared or paid dividends and have no plans to do so in the foreseeable future.
We recognize the fair value of stock options on
a straight-line basis over the period during which a service provider is required to provide services in exchange for the award (generally
the vesting period). We account for forfeitures as they occur.
Off-Balance Sheet Arrangements
During the periods presented, we did not have
any off-balance sheet arrangements as defined under SEC rules.
Licensing and Collaboration Agreements
We anticipate that in-licensing, out-licensing
and strategic collaborations will become an integral part of our operations, providing the company with opportunities to leverage our
partners’ expertise and capabilities to further expand the potential of our technologies, product candidates and revenue streams.
Xencor
In October 2017, we licensed INB03 (also known
as XPro) from Xencor. This exclusive, global, unrestricted license came with considerable know-how, intellectual property, pre-clinical
data, regulatory documentation and product stocks. Currently, we are focused on the immune-oncology uses of this unique asset. In the
future, we may develop the asset in a wide variety of therapeutic areas, with a variety of delivery techniques by ourselves or in conjunction
with partners.
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Results of Operations
Comparison of the Years Ended December 31,
2022 and December 31, 2021
Year Ended
(in thousands)
December 31,
2022
December 31,
2021
Change
Revenues
$ (374 )
$ (181 )
$ (193 )
General and Administrative
9,258
8,791
467
Research and Development
17,067
20,543
(3,476 )
Other Expense, net
1,348
1,187
161
Net loss
$ (27,299 )
$ (30,340 )
$ (3,041 )
Revenues
During 2022 and 2021, the Company sold MSC’s to one and three
customers, respectively, and recognized $374,000 and $181,000 of revenues, respectively.
General and Administrative
General and administrative expenses were $9.3 million for the year
ended December 31, 2022, compared to $8.8 million for the year ended December 31, 2021. The increase in general and administrative expenses
is largely due to higher compensation, including stock-based compensation ($1.5 million higher during the year ended December 31, 2022)
and higher rent expense and right of use asset impairment ($0.2 million higher during the year ended December 31, 2022), partially offset
by lower consulting expense ($1.5 million lower during the year ended December 31, 2022).
Research and Development
Research and development expenses decreased to
$17.1 million for the year ended December 31, 2022 from $20.5 million for the year ended December 31, 2021. The decrease in research
and development expenses during the year ended December 31, 2022 compared to 2021 is mainly due to the Company incurring $4.6 million
of lower manufacturing costs in connection with producing its DN-TNF product and also due to incurring $2.6 million of lower expenses
on the COVID-19 clinical trial, partially offset by the Company’s compensation (including stock-based compensation) which
was $1.8 million higher in 2022 compared to 2021.
Other Expense, net
Other expense, net increased
to $1.3 million during the year ending December 31, 2022, compared to $1.2 million during the year ending December 31, 2021. The increase
in other expense is due to higher interest expense on the Company’s debt ($1.0 million higher), partially offset by $0.7 million
higher interest income from money market investments.
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Liquidity and Capital Resources
Liquidity is the ability of a company to generate
funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis.
We incurred a net loss
of $27,299,000 and $30,340,000 for the years ended December 31, 2022 and 2021, respectively. Net cash used in operating activities
was $22,686,000 and $28,504,000 for the years ended December 31, 2022 and 2021, respectively. Since inception, we have funded our
operations primarily with proceeds from the sales of our common stock and from the receipts of grants. As of December 31, 2022, we
had cash and cash equivalents of $52,153,000. We anticipate that operating losses and net cash used in operating activities will
increase over the next few years as we advance our products under development.
Our primary uses of capital are, and we expect
will continue to be, third-party clinical and preclinical research and development services, costs incurred to manufacture our drugs under
development, compensation and related expenses, legal, patent and other regulatory expenses and general overhead costs. We believe our
use of CROs provides us with flexibility in managing our spending.
The Company incurs the majority of its research and development expenses
in Australia and the United Kingdom. Fluctuations in the rate of exchange between the United States dollar and the pound sterling
as well as the Australian dollar could adversely affect our financial results, including our expenses as well as assets and liabilities.
We currently do not hedge foreign currencies but will continue to assess whether that strategy is appropriate. As of December 31, 2022,
the cash balance held by our foreign subsidiaries with currencies other than the United States dollar was approximately $0.1 million.
As of December 31, 2022, the Company had an accumulated deficit of
$91.0 million and working capital of $53.8 million. Losses have principally occurred as a result of the substantial resources required
for research and development of the Company’s products which included the general and administrative expenses associated with its
organization and product development, as well as the lack of sources of material revenues until such time as the Company’s products
are commercialized. As of December 31, 2022, we had cash and cash equivalents of $52.2 million. We believe our cash and cash equivalents
will be sufficient to fund our operations for at least the next 12 months following the filing date of this Annual Report on Form 10-K.
Registered Direct
Offering
During
July 2021, the Company completed a registered direct offering whereby the Company sold 1,818,182 shares of its common stock to investors
for net proceeds of $36.9 million.
ATM Sales Agreements
During the year ended
December 31, 2021, we issued and sold 1,439,480 shares of common stock at an average price of $20.17 per share under the 2020 ATM agreement.
The aggregate net proceeds were approximately $28.4 million after BTIG’s commission and other offering expenses. As of December
31, 2021, sales of our common stock pursuant to the 2020 ATM have been completed.
During March 2021, the Company entered into the 2021 ATM agreement
with BTIG, as sales agent, to establish an ATM offering of up to $45 million of common stock. During the year ended December 31, 2021,
the Company sold 713,192 shares at an average price per share of $21.73 for net proceeds of approximately $14.9 million under the 2021
ATM agreement.
Term Loan
On
June 10, 2021, we entered into a Loan and Security Agreement with SVB and an affiliate of SVB, providing for a $15.0 million term loan.
The Term Loan also provides for us to request an additional $5.0 million term loan from the Lenders, which may be granted or denied at
the sole discretion of the Lenders. The Term Loan provides for an annual interest rate equal to the greater of (i) the prime rate then
in effect as reported in The Wall Street Journal plus 4.50% and (ii) 7.75% and also includes a final payment fee equal to 6.5%
of the original principal amount borrowed payable on the earlier of the repayment of the loan in full and the maturity date. The Company
used the proceeds of the term loan to fund the cash consideration for the Option Cancellation Agreement with Xencor.
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Cash Flows
The following table provides information regarding our cash flows for
the years ended December 31, 2022 and 2021:
Year Ended
December 31,
2022
2021
Net cash used in operating activities
$ (22,686 )
$ (28,504 )
Net cash used in investing activities
-
(15,000 )
Net cash provided by financing activities
729
96,357
Impact on cash from foreign currency translation
(700 )
(10 )
Net(decrease) increase in cash and cash equivalents
$ (22,657 )
$ 52,843
Net Cash Used in Operating Activities
Our cash used in operating activities was primarily
driven by our net loss.
Operating activities
used $22.7 million of cash for the year ended December 31, 2022, primarily resulting from our net loss of $27.3 million, a net cash
outflow of $2.9 million for changes in our net operating assets and liabilities, and non-cash stock-based compensation charges of
$7.1 million. The change in our net operating assets and liabilities was primarily due to an increase in research and development
tax credit receivable of $3.2 million and an increase in prepaid expenses and other current assets of $1.7 million, partially offset
by an increase in accounts payable and accrued liabilities of $1.5 million.
Operating activities
used $28.5 million of cash for the year ended December 31, 2021, primarily resulting from our net loss of $30.3 million, a net cash
outflow of $3.1 million for changes in our net operating assets and liabilities, and non-cash stock-based compensation charges of
$4.8 million. The change in our net operating assets and liabilities was primarily due to an increase in research and development
tax credit receivable of $3.2 million and an increase in prepaid expenses and other current assets of $2.1 million, partially offset
by an increase in accounts payable and accrued liabilities of $2.2 million.
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Investing
Activities
Investing activities used $15.0 million of cash for the year ended
December 31, 2021. During the year ended December 31, 2021, the Company paid Xencor $15.0 million to settle an option to acquire 10%
of the Company’s common stock on a fully diluted basis which was issued to acquire the Company’s acquired in-process research
and development intangible asset.
Net Cash Provided by Financing Activities
During the year ended December
31, 2022, the Company sold 82,900 shares of its common stock to certain officers and directors for approximately $0.7 million.
During the year ended
December 31, 2021, the Company sold 1,439,480 shares of its common stock under its 2020 ATM agreement for net proceeds of approximately
$28.4 million.
During the year ended
December 31, 2021, the Company sold 713,192 shares of its common stock under the 2021 ATM agreement for net proceeds of approximately
$14.9 million.
During July 2021, the
Company completed a registered direct offering whereby the Company sold 1,818,182 shares of its common stock to investors for net proceeds
of $36.9 million.
During June 2021, we
entered into a Loan and Security Agreement with SVB and an affiliate of SVB, providing for a $15.0 million term loan.
During the year ended December 31, 2021, the Company received approximately
1.2 million in connection with the exercise of stock options and warrants.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
We are exposed to market risk from changes in
foreign currency rates.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.