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; these 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 increases 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 CNS (“central nervous system”) therapy to target glial activation to prevent progression of Alzheimer’s
disease (“AD”); to target neuroinflammation in treatment resistant depression (“TRD”); as a drug to prevent muscle
degeneration, prevent fibrosis and promote muscle regeneration in Duchene muscular dystrophy (“DMD”); and as a cancer therapy
to reduce resistance in immunotherapy. The primary focus of the company’s development efforts for XPro is AD. The next indication
to be developed with XPro will be TRD. Treatment of DMD and cancer will occur when partners for the programs are found. 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 may
change 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 pre-clinical data in MUC4+ expressing tumors and the clinical trial informs the design of a future 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. The company does not plan to commence a Phase II trial in patients with advanced MUC4+ expressing cancer until a partner can
be found.
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, synaptic dysfunction and prevents myelin repair
- key elements in the development of dementia. In animal models, elimination of sTNF prevents nerve cell dysfunction, reverses synaptic
pruning and promotes myelin repair. 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. ADi is
the term used to delineate patients with AD with biomarkers of inflammation. The endpoints of the trial were 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 brain microstructural changes. XPro, at the 1mg/kg/week dose, decreased inflammatory cytokines in the CSF 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 trial 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 and one 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 AD program is
open in the United States, Australia, Canada, the United Kingdom, France, Germany, Spain, Czech Republic and Slovakia. 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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There are at least 4 clinical
milestones associated with the Phase II trial in AD. Enrollment of 201 patients in the Phase II AD trial should be complete by mid-year.
Six months after the last patient is enrolled, top line cognition data with EMACC will be available. Secondary end-points which include
blood biomarker, neuroimaging and additional neuropsychiatric end-points will be available after data base lock 2-3 months after top line
data. Finally, several months after all the data are analyzed, the Company plans an end-of-phase II meeting with the FDA to finalize plans
for the pivotal Phase III trial. The Company plans to apply for an accelerated pathway during 2024. XPro for treatment of AD may be eligible
for one or both accelerated approval pathways. The Company plans to submit of Fast Track status in 2024. We expect to be eligible for
Break Through status after completion of the Phase II in 2025.
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 received authorization
to initiate a clinical trial in AD in the US during January 2024. The TRD trial is expected to start enrollment after the AD Phase II
trial finishes patient enrollment.
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 that 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 had a Phase I trial using INKmune to treat patients with high risk MDS/AML, a form
of leukemia. Two patients were treated in the Phase I trial for MDS, three patients have been treated compassionately in AML and another
MDS patient is expected to be treated shortly. During March 2024, the Company decided to terminate further enrollment in the MDS/AML trial.
In the patients, INKmune therapy is safe, produces memory-like NK cells that kill cancer in vitro, and promotes development of cancer
killing memory-like NK cells that can be found in the patient’s circulation of 4 months. The Company initiated a separate Phase
I/2 trial of INKmune in a metastatic castrate resistant prostate cancer. The open label trial enrolled the first patient in December 2023.
The Phase I/II trial using
INKmune to treat patients with metastatic castrate resistant prostate cancer (mCPRC) is an open label trial. Biomarker data from the patients
will be visible as patients are treated. The Company will report data from each cohort as it becomes available. In addition to clinical
data, the Company will communicate when the Phase I portion of the trial has completely enrolled. This is expected in September 2024.
Because of the modified Bayesian design, the Company estimates the trial will be completely enrolled 1H25 with top-line data available
6 months later. Topline data is divided into immunologic and tumor response variables. The most important immunologic response variable
is related to memory like NK cell persistence. This is how long are the number of mlNK cells in patients blood compared to baseline. There
are 3 important variables to tumor response: i) blood PSA changes; ii) change in PMSA scan and iii) change in circulating tumor DNA (ctDNA).
Ideally, the levels of all three variables decrease with treatment. We do not expect this 6 month trial to provide survival data.
We continue to incur significant
development and other expenses related to our ongoing operations. As a result, we are not and have never been profitable and have incurred
losses in each period since our inception, resulting in substantial doubt in our ability to continue as a going concern. We reported a
net loss of $30.0 million and $27.3 million for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023 and
2022, we had cash and cash equivalents of $35.8 million and $52.2 million, respectively. We expect to continue to incur significant losses
for the foreseeable future, and we expect these losses to increase as we continue our research and development of, and seek regulatory
approvals for, our product candidates. The size of our future net losses will depend, in part, on the rate of future growth of our expenses
and our ability to generate revenues, if any.
Our recurring net losses
and negative cash flows from operations raised substantial doubt regarding our ability to continue as a going concern within one year
after the issuance of our consolidated financial statements for the year ended December 31, 2023. Until we can generate sufficient revenue
from the commercialization of our product candidates, we expect to finance our operations through the public or private sale of equity,
debt financings or other capital sources, such as government funding, collaborations, strategic alliances, divestment of non-core assets,
or licensing arrangements with third parties. To date, the Company has relied on equity and debt financing to fund its operations.
As
a company with less than $1.235 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;
61
●
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 $1.235 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
The
following table summarizes our research and development expenses by product candidate for the periods indicated (in thousands):
Year Ended
December 31,
2023
2022
External Costs
DN-TNF – Alzheimer’s disease
$ 13,817
$ 12,573
INKmune – High Risk MDS/AML & Prostate Cancer
3,296
1,495
Preclinical and other programs
921
1,903
Accrued research and development rebate
(3,040 )
(3,531 )
Total external costs
14,994
12,440
Internal Costs
5,279
4,627
$ 20,273
$ 17,067
We
typically use our employee resources across our development programs. We track outsourced development costs by product candidate or development
program, but we do not allocate internal costs personnel costs including salaries and stock-based compensation 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.
62
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;
63
●
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.
64
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 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. We use the simplified
approach to determine the expected term as we do not have sufficient data related to stock option exercises. 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 using this asset in a neurological indication.
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.
65
Results
of Operations
Comparison
of the Years Ended December 31, 2023 and December 31, 2022
Year Ended
(in thousands)
December 31,
2023
December 31,
2022
Change
Revenues
$ (155 )
$ (374 )
$ 219
General and Administrative
9,623
9,258
365
Research and Development
20,273
17,067
3,206
Other Expense, net
267
1,348
(1,081 )
Net loss
$ 30,008
$ 27,299
$ 2,709
Revenues
During
2023 and 2022, the Company sold MSC’s to one customer and recognized $155,000 and $374,000 of revenues, respectively.
General
and Administrative
General
and administrative expenses were $9.6 million for the year ended December 31, 2023, compared to $9.3 million for the year ended December
31, 2022. The increase in general and administrative expenses is due to higher stock-based compensation ($0.1 million higher during the
year ended December 31, 2023), higher travel expense ($0.1 million higher during the year ended December 31, 2023) and higher professional
fees ($0.1 million higher during the year ended December 31, 2023).
Research
and Development
Research and development expenses increased to $20.3 million for the
year ended December 31, 2023 from $17.1 million for the year ended December 31, 2022. The increase in research and development expenses
during the year ended December 31, 2023 compared to 2022 is mainly due to the Company incurring $1.8 million of higher costs in connection
with our INKmune clinical trials, $1.2 million higher costs with our Alzheimer’s clinical trial, $0.7 million higher internal costs
and $0.5 million lower accrued R&D rebate, partially offset by $1.0 million lower of preclinical and other expenses.
Other
Expense, net
Other
expense, net decreased to $0.3 million during the year ending December 31, 2023, compared to $1.3 million during the year ending December
31, 2022. The decrease in other expense is due to the Company earning higher interest income from money market investments in 2023 ($1.3
million higher) partially offset by higher interest expense on the Company’s debt in 2023 ($0.3 million higher).
66
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 $30,008,000 and $27,299,000 for the years
ended December 31, 2023 and 2022, respectively. Net cash used in operating activities was $11,980,000 and $22,686,000 for the years ended
December 31, 2023 and 2022, respectively. Since inception, we have funded our operations primarily with proceeds from the sales of our
common stock. As of December 31, 2023, we had cash and cash equivalents of $35,848,000. 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 significant
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, 2023, the cash balance held by our foreign subsidiaries with currencies other than the United States dollar was approximately
$0.5 million.
Our recurring net losses and
negative cash flows from operations, as well as forecast of continued losses and negative cash flows from operations, raised substantial
doubt regarding our ability to continue as a going concern within one year after the issuance of our consolidated financial statements
for the year ended December 31, 2023. Until we can generate sufficient revenue from the commercialization of our product candidates,
we expect to finance our operations through the public or private sale of equity, debt financing or other capital sources, such as government
funding, collaborations, strategic alliances, divestment of non-core assets, or licensing arrangements with third parties. Our cash and
cash equivalents were $35.8 million and total current assets were $21.5 million at December 31, 2023, which the Company is projecting
will be insufficient to sustain its operations through one year following the date that the financial statements are issued.
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 of one or more of our product candidates or cease
operations. If we raise additional funds through the issuance of additional debt or equity securities it could result in dilution to our
existing stockholders, increased fixed payment obligations and these securities may have rights senior to those of our common stock and
could contain covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability
to incur additional debt, limitations on our ability to acquire, sell or license our intellectual property rights and other operating
restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business,
financial condition and prospects.
Financing strategies we
may pursue include, but are not limited to, the public or private sale of equity, debt financing or funds from other capital sources,
such as government or grant funding, collaborations, strategic alliances, divestment of non-core assets, or licensing arrangements with
third parties. There can be no assurances additional capital will be available to secure additional financing, or if available, that it
will be sufficient to meet our needs on favorable terms. 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 of one or more of our product candidates.
If we raise additional funds through the public or private sale of equity or debt financings, it could result in dilution to our existing
stockholders or increased fixed payment obligations and these securities may have rights senior to those of our common stock and could
contain covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to
incur additional debt, limitations on our ability to acquire, sell or license our intellectual property rights and other operating restrictions
that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial
condition and prospects.
ATM
Sales Agreement
During
July 2023, the Company sold 75,697 shares
of its common stock at an average price of $ 10.56 per share under the ATM program.
The aggregate net proceeds were approximately $ 775,000 after offering expenses.
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 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 Term loan is payable in 2024.
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Cash
Flows
The
following table provides information regarding our cash flows for the years ended December 31, 2023 and 2022:
Year Ended
December 31,
2023
2022
Net cash used in operating activities
$ (11,980 )
$ (22,686 )
Net cash provided by financing activities
(4,225 )
729
Impact on cash from foreign currency translation
(100 )
(700 )
Net decrease in cash and cash equivalents
$ (16,305 )
$ (22,657 )
Net
Cash Used in Operating Activities
Our
cash used in operating activities was primarily driven by our net loss.
Operating activities used $12.0 million of cash for the year ended
December 31, 2023, primarily resulting from our net loss of $30.0 million, partially offset by a net cash inflow of $10.4 million for
changes in our net operating assets and liabilities, and non-cash stock-based compensation charges of $7.4 million. The change in our
net operating assets and liabilities was primarily due to a decrease in research and development tax credit receivable of $6.2 million,
a decrease in prepaid expenses and other current assets of $2.5 million and an increase in accounts payable and accrued liabilities of
$2.7 million, partially offset by a decrease in accrued liability – long term of $0.6 million.
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.
Net
Cash Provided by Financing Activities
During
the year ended December 31, 2023, the Company sold 75,697 shares of its common stock for net proceeds of $0.8 million under the Company’s
ATM program with BTIG.
During
the year ended December 31, 2023, the Company repaid $5 million of its debt.
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.
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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