Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
You should read the following discussion and
analysis of our financial condition and results of operations together with and our consolidated financial statements and the related
notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed
below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed
in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K. All amounts in this report are
in U.S. dollars, unless otherwise noted.
Overview
We are a clinical-stage biopharmaceutical company
focused on developing new generation therapies for unmet medical needs. We are focused on developing (i) a topical formulation for treating
side effects from drugs used for the treatment of cancer (HT-001); (ii) a treatment for mast-cell derived cancers and anaphylaxis (HT-KIT);
and (iii) a treatment and/or prevention for Alzheimer’s or other neuroinflammatory diseases (HT-ALZ). We also have preclinical assets
being developed for (i) atopic dermatitis (also known as eczema) (BioLexa);(ii) a treatment for asthma and allergies using inhalational
administration (HT-004); (iii) a treatment for lung diseases resulting from bacterial infections (HT-006); and (iv) a treatment for inflammatory
bowel diseases (HT-003). In addition, we are developing a diagnostic device via a mobile device. We also have interests in certain other
assets being developed by third parties including HT-005 for patients with lupus that is being developed
by Zylö and potential product candidates being developed pursuant to our agreement with Voltron for the prevention of COVID-19.
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Results of Operations
Comparison of Our Results of Operations for the Years Ended December
31, 2021 and 2020
Operating
Costs and Expenses
Research and Development Expenses
For the year ended December 31, 2021, research
and development expenses were approximately $7.5 million, of which approximately $0.2 million was related to licenses acquired and approximately
$7.4 million was related to other research and development expenses.
For the year ended December 31, 2020, research
and development expenses were approximately $2.9 million, of which approximately $0.6 million was related to licenses acquired and approximately
$2.3 million was related to other research and development expenses.
We expect our research and development activities
to increase as we develop our existing product candidates and potentially acquire new product candidates, reflecting increasing costs
associated with the following:
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employee-related expenses, which include salaries and benefits, and rent expenses;
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fees related to in-licensed products and technology;
●
expenses incurred under agreements with CROs, investigative sites and consultants that conduct our clinical trials and a substantial portion of our pre-clinical activities;
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the cost of acquiring and manufacturing clinical trial materials; and
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costs associated with non-clinical activities and regulatory approvals.
Compensation, Professional Fees, Rent and Other (“General
and Administrative Expenses”)
For the year ended December 31, 2021,
General and Administrative Expenses were approximately $6.6 million, which primarily consisted of approximately $3.0 million related
to payroll expenses and stock-based compensation, approximately $2.7 million for professional fees and approximately $0.8 million
for other expenses.
For the year ended December 31, 2020, General
and Administrative Expenses were approximately $4.4 million, which primarily consisted of approximately $1.5 million related to payroll
expenses and stock-based compensation, approximately $2.5 million for professional fees and approximately $0.5 million for other expenses.
We anticipate that our General and Administrative
expenses will increase in future periods, reflecting continued and increasing costs associated with:
●
support of our research and development activities;
●
stock compensation granted to key employees and non-employees;
●
support of business development activities; and
●
increased professional fees and other costs associated with the regulatory requirements.
Other Income (Expenses)
For the year ended December 31, 2021, other expenses
were approximately $0.2 million, which consisted of the realized gain or loss, unrealized gain or loss, and dividend income related to
marketable securities.
For the year ended December 31, 2020, other income
was approximately $0.1 million, which consisted of the realized gain or loss, unrealized gain or loss, and dividend income related to
marketable securities.
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Liquidity and Capital Resources
We have incurred substantial operating losses
since inception and expect to continue to incur significant operating losses for the foreseeable future and may never become profitable.
As of December 31, 2021, we had approximately $8.5 million in cash, marketable securities of $1.9 million, current liabilities of $0.9
million and an accumulated deficit of approximately $33.7 million.
We have entered into certain license, sublicense,
sponsored research and option agreements with third parties. Pursuant to such agreements, we may be required make certain: (i) license
maintenance fee payments; (ii) out-of-pocket expense payments, including, but not limited to, payments related to intellectual property
and research related expenses; (iii) development and commercialization expense payments; (iv) annual and quarterly minimum payments; (v)
diligence expense payments; and (vi) revenue interest payments. In addition, subject to the achievement of certain development and/or
commercialization events, we may also be required to make certain: (i) minimum royalty payments, ranging from middle to high five figures,
(ii) sales-based royalties and running royalties, ranging from low single digits to low double digits; and (iii) milestone payments, of
up to approximately $21 million (if all milestones in all of our current agreements are achieved). See Note 3 to the consolidated financial
statements for discussion of our agreements with third parties.
We have funded our operations from proceeds from
the sale of equity and debt securities. We will require significant additional capital to make the investments we need to execute our
longer-term business plan. Our ability to successfully raise sufficient funds through the sale of debt or equity securities when needed
is subject to many risks and uncertainties and, even if it were successful, future equity issuances would result in dilution to our existing
shareholders and future debt securities may contain covenants that limit our operations or ability to enter into certain transactions.
We believe our current cash is sufficient to fund
operations for at least the next 12 months from the date that our audited financial statements are available to be issued. However,
we will need to raise additional funding through strategic relationships, public or private equity or debt financings, grants or other
arrangements to develop and seek regulatory approvals for our existing and new product candidates. If such funding is not available, or
not available on terms acceptable to us, our current development plan and plans for expansion of our general and administrative infrastructure
may be curtailed.
Cash Flows from Operating Activities
For the year ended December 31, 2021, net cash
used in operations was approximately $12.1 million, which primarily resulted from a net loss of approximately $14.3 million, and was partially
offset by changes in operating assets and liabilities of approximately $0.5 million, unrealized loss on marketable securities of approximately
$0.2 million, and approximately $1.3 million stock-based compensation.
For the year ended December 31, 2020, net cash
used in operations was approximately $6.1 million, which primarily resulted from a net loss of approximately $7.2 million and changes
in operating assets and liabilities of approximately $0.1 million, partially offset by approximately $0.5 million research and development
expense related to license acquisitions and $0.7 million of stock-based compensation.
Cash Flows from Investing Activities
For the year ended December 31, 2021, net cash
used in investing activities was approximately $0.2 million, which was primarily related to the sale of marketable securities of approximately
$2.5 million, and was partially offset by the purchase of marketable securities of approximately $2.6 million.
For the year ended December 31, 2020, net cash
used in investing activities was approximately $1.8 million, which was primarily related to the purchase of marketable securities of approximately
$2.3 million and purchase of investments in HaloVax, LLC and Zylö of approximately $0.4 million, partially offset by the sale of
marketable securities of approximately $1.1 million.
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Cash Flows from Financing Activities
For the year ended December 31, 2021, net cash
provided by financing activities was approximately $18.2 million. The cash provided by financing activities primarily resulted from approximately
$17.8 million in net proceeds from the issuance of common stock, common stock warrants and pre-funded warrants, and $0.4 million in proceeds
from the exercise of warrants.
For the year ended December 31, 2020, net cash
provided by financing activities was approximately $8.7 million. The cash provided by financing activities primarily resulted from approximately
$8.7 million in net proceeds from the issuance of common stock and warrants.
Our ultimate success is dependent on our ability
to obtain additional financing and generate sufficient cash flow to meet our obligations on a timely basis. We will require significant
amounts of capital to sustain operations, and we will need to make the investments we need to execute our longer-term business plan to
support new technologies and help advance innovation. Absent generation of sufficient revenue from the execution of our long-term business
plan, we will need to obtain debt or equity financing, especially if we experience downturns in our business that are more severe or longer
than anticipated, or if we experience significant increases in expense levels resulting from being a publicly traded company or from operations.
Such additional debt or equity financing may not be available to us on favorable terms, if at all.
We plan to pursue our plans with respect to the
research and development of our pre-clinical products which will require resources beyond those that we currently have, ultimately requiring
additional capital from third party sources. We currently do not expect to generate any revenue.
Critical Accounting
Policies and Significant Judgments and Estimates
Our management’s discussion and analysis
of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements requires
us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities as of the date of the balance sheet and the reported amounts of expenses during the reporting period. In accordance with
GAAP, we evaluate our estimates and judgments on an ongoing basis. The most significant estimates relate to the valuation of stock options
and the valuation allowance of deferred tax assets resulting from net operating losses. We base our estimates and assumptions on current
facts, our limited historical experience and 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.
We define our critical accounting policies as
those accounting principles that require us to make subjective estimates and judgments about matters that are uncertain and are likely
to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those
principles. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing
elsewhere in Annual Report on Form 10-K, we believe the following are the critical accounting policies used in the preparation of our
consolidated financial statements that require significant estimates and judgments:
Stock-based compensation
We expense stock-based compensation to employees
and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. Stock-based awards with
graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion
of the award. We record the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining
service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of
a performance-based milestone is probable based on the expected satisfaction of the performance conditions at each reporting date. All
stock-based compensation costs are recorded in general and administrative or research and development costs in the statements of operations
based upon the underlying employees’ or non-employees’ roles.
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Income taxes
Income taxes are recorded in accordance with Accounting
Standards Codification (“ASC”) 740, Income Taxes (“ASC 740”) which provides for deferred taxes using an asset
and liability approach. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have
been included in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the
difference between our financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be realized.
We account for uncertain tax positions in accordance
with the provisions of ASC 740. When uncertain tax positions exist, we recognize the tax benefit of tax positions to the extent that the
benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit
will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available
facts and circumstances.
Significant Accounting Policies
See Note 2 to the
consolidated financial statements for a discussion of recent accounting policies.
JOBS Act
On April 5, 2012, the JOBS Act was enacted. Section
107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided
in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging
growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We have chosen to take advantage of the extended
transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards until
those standards would otherwise apply to private companies provided under the JOBS Act. As a result, our consolidated financial statements
may not be comparable to those of companies that comply with public company effective dates for complying with new or revised accounting
standards.
Subject to certain conditions set forth in the
JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including, without limitation,
(i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b)
of Sarbanes-Oxley and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial
statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of
(i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal
year following the fifth anniversary of the date of our initial public offering; (iii) the date on which we have issued more than $1 billion
in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under
the rules of the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, we are not required
to provide the information required by this item.
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