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); (iii) a treatment for traumatic brain injury and ischemic stroke (HT-TBI); and (iv) a treatment and/or prevention
for Alzheimer’s or other neuroinflammatory diseases (HT-ALZ). We also have assets being developed for (i) atopic dermatitis (also
known as eczema) (BioLexa); (ii) a treatment for asthma and allergies using inhalational administration (HT-004); and (iii) a treatment
for acne as well as inflammatory bowel diseases (HT-003). In addition, we are continuing to evaluate a novel peptide that may be used
to slow the transmission of SARS-CoV-2 (HT-002). We are also developing a diagnostic device via a mobile device. Furthermore, we have
interests in certain other assets being developed by third parties including a treatment 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, 2022 and 2021
Operating Costs and Expenses
Research and Development Expenses
For the year ended December 31, 2022, research
and development expenses were approximately $4.9 million, of which approximately $87,000 was related to licenses acquired and approximately
$4.8 million was related to other research and development expenses. Specifically, during the year ended December 31, 2022, our research
and development costs consisted primarily of the following costs for each of our key research and development projects: (i) BioLexa, approximately
$1 million related to clinical trial costs; (ii) HT-001, approximately $2.9 million related to manufacturing, preclinical and clinical
activities; (iii) HT-TBI, approximately $0.4 million related to manufacturing and preclinical activities; (iv) HT-003, approximately $41,000
related to preclinical studies; (v) HT-004, approximately $0.1 million related to sponsored research; (vi) HT-006, approximately $51,000
related to sponsored research (on July 12, 2022, our non-exclusive commercial evaluation license agreement with the United States Army
Medical Research and Development Command terminated and we are no longer pursuing HT-006); (vii) GW breath based diagnostic device, approximately
$76,000 related to research and development with respect to the design of device; (viii) HT-KIT, approximately $0.2 million related to
manufacturing and preclinical activities; and (ix) HT-ALZ, approximately $0.2 million in sponsored research. In addition to the foregoing,
we also incurred fees of approximately $0.3 million payable to members of our scientific advisory board for services.
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. Specifically, during the year ended December 31, 2021, our research
and development costs consisted primarily of the following costs for each of our key research and development projects: (i) BioLexa, approximately
$1.7 million related to clinical trial costs; (ii) HT-001, approximately $4.1 million related to manufacturing, preclinical and clinical
activities; (iii) HT-002, approximately $56,000 related to sponsored research; (iv) HT-003, approximately $0.4 million related to preclinical
studies; (v) HT-004, approximately $17,000 related to sponsored research; (vi) HT-006, approximately $51,000 related to sponsored research;
(vii) GW breath based diagnostic device, approximately $0.3 million related to research and development with respect to the design of
device; and (viii) HT-KIT, approximately $0.4 million related to research and development manufacturing. In addition to the foregoing,
we also incurred fees of approximately $0.2 million payable to members of our scientific advisory board for services.
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:
● employee-related expenses,
which include salaries and benefits, and rent expenses;
● 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;
● the cost of acquiring and manufacturing
clinical trial materials; and
● 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, 2022, General
and Administrative Expenses were approximately $6.1 million, which primarily consisted of approximately $2.6 million related to payroll
expenses and stock-based compensation, approximately $2.5 million for professional fees and approximately $1.0 million for other 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.
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.
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Other Income (Expenses)
For the year ended December 31, 2022, other expenses
was approximately $0.3 million, which primarily resulted from $0.4 million losses on marketable securities and $0.4 million change in
fair value of investments in joint ventures, partially offset by $0.5 million of other income related to a research and development tax
credit pursuant to Australian regulations.
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.
Liquidity and Capital Resources
To date we have funded our operations primarily
through the sale of equity and debt securities. As of December 31, 2022, we had approximately $6.4 million in cash, marketable securities
of approximately $0.2 million, working capital of approximately $5.3 million and an accumulated deficit of approximately $45.0 million.
Net cash used in operating activities was $9.3 million and $12.1 million for the years ended December 31, 2022 and 2021, respectively.
We incurred losses of approximately $11.4 million and $14.3 million for the years ended December 31, 2022 and 2021, respectively. We have
incurred substantial operating losses since inception and expect to continue to incur significant operating losses for the foreseeable
future as we continue our pre-clinical and clinical development of our product candidates. We have not yet commercialized any products
and have never generated any revenue from product sales. We believe that our existing cash as of December 31, 2022 will enable us to fund
our operating expenses and capital expenditure requirements for at least 12 months from the date that our audited financial statements
are available to be issued.
We have entered into certain license, sublicense,
sponsored research and option agreements with third parties. Pursuant to such agreements, we may be required to 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 $15.6 million (if all milestones in all of our current agreements are achieved).
Additional funding will be necessary to fund our
future clinical and pre-clinical activities. We may obtain additional financing through sales of our equity and debt securities or entering
into strategic partnership arrangements, or a combination of the foregoing. There are no assurances that we will be successful in obtaining
an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all, particularly in light
of the economic downturn. If we are unable to secure adequate additional funding as and when needed, we may have to significantly delay,
scale back or discontinue the development and commercialization of one or more of our product candidates. In addition, the magnitude and
duration of the COVID-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of
this Annually Report on Form 10-K.
Cash Flows from Operating Activities
For the year ended December 31, 2022, net cash
used in operating activities was approximately $9.3 million, which primarily resulted from a net loss of approximately $11.3 million and
$0.1 million unrealized gain on marketable securities, partially offset by approximately $0.6 million in stock-based compensation, $0.6
million realized loss on marketable securities, $0.4 million change in fair value of investments in joint ventures and changes in operating
assets and liabilities of approximately $0.4 million.
For the year ended December 31, 2021, net cash
used in operating activities 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.
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Cash Flows from Investing Activities
For the year ended December 31, 2022, net cash
provided by investing activities was approximately $1.2 million which was primarily related to the sale of marketable securities.
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.
Cash Flows from Financing Activities
For the year ended December 31, 2022, net cash
provided by financing activities was approximately $6.0 million, which primarily resulted from net proceeds from the issuance of common
stock.
For the year ended December 31, 2021, net cash
provided by financing activities was approximately $18.2 million. Which 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.
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 $1.235 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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