Item 2. Management’s Discussion and Analysis
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A
of the Securities Act of 1933, as amended. All statements contained in this Quarterly Report other than statements of historical fact,
including statements regarding our future results of operations and financial position, our business strategy and plans, future revenues,
projected costs, prospects and our objectives for future operations, are forward-looking statements. These forward-looking statements
include, but are not limited to, statements concerning: the anticipated effects and duration of the novel coronavirus, or COVID-19, global
pandemic and the responses thereto, including the pandemic’s impact on general economic and market conditions, as well as on our
business, results of operations and financial condition; the uncertainty due to the conflict between Russia and Ukraine and associated
sanctions imposed by the United States (“U.S.”) and other countries in response; our plans to develop our proposed drug candidates;
our expectations regarding the nature, timing and extent of clinical trials and proposed clinical trials; our expectations regarding the
timing for proposed submissions of regulatory filings, including but not limited to, any Investigational New Drug filing or any New Drug
Application; the nature, timing and extent of collaboration arrangements; the expected results pursuant to collaboration arrangements,
including the receipts of future payments that may arise pursuant to collaboration arrangements; the outcome of our plans to obtain regulatory
approval of our drug candidates; the outcome of our plans for the commercialization of our drug candidates; our plans to address certain
markets, engage third party manufacturers, and evaluate additional drug candidates for subsequent commercial development along with the
likelihood and extent of competition to our drug candidates; our plans to advance innovative immune-oncology technologies addressing hard
to treat oncology indications; expectations regarding our Deoxyribonuclease (“DNase”) oncology platform, such as regarding
the DNase platform being in development for the treatment of solid tumors and being aimed at improving outcomes of existing treatments,
including immunotherapies, by targeting Neutrophil Extracellular Traps (“NETs”) and our expectations to prioritize our efforts
and resources on this newly acquired technology; the development of the XCART ™ Chimeric Antigen Receptor (“CAR”)
T cell technology and plans to develop cell-based therapeutics by targeting the unique B cell receptor on the surface of an individual
patient’s malignant tumor cells for the treatment of B-cell lymphomas; and our expectations regarding our PolyXen ®
platform, including concerning our plans to leverage the platform by partnering with biotechnology and pharmaceutical companies and its
application to protein or peptide therapeutics and its application to improve the half-life and other pharmaceutical properties of next-generation
biologic drugs.
In some cases, these statements may be identified
by terminology such as “may,” “will,” “would,” “could,” “should,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “seek,” “approximately,”
“intend,” “predict,” “potential,” “projects,” or “continue,” or the negative
of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements
contained herein are reasonable, we cannot guarantee future results, the levels of activity, performance or achievements. These statements
involve known and unknown risks and uncertainties that may cause our or our industry's results, levels of activity, performance or achievements
to be materially different from those expressed or implied by forward-looking statements.
The Management’s Discussion and Analysis
of Financial Condition and Results of Operations (the “MD&A”) should be read together with our condensed consolidated
financial statements and related notes included elsewhere in this Quarterly Report. This Quarterly Report, including the MD&A, contains
trend analysis and other forward-looking statements. Any statements in this Quarterly Report that are not statements of historical facts
are forward-looking statements. These forward-looking statements made herein are based on our current expectations, involve a number of
risks and uncertainties and should not be considered as guarantees of future performance.
16
Some factors that could
cause actual results to differ materially include without limitation:
·
unexpected costs, charges or expenses resulting from the transaction with CLS Therapeutics LTD (“CLS”) and the licensing of the DNase platform;
·
uncertainty of the expected financial performance of the Company following completion of the transaction with CLS and the licensing of the DNase platform;
·
failure to realize the anticipated potential of the DNase, XCART or PolyXen technologies;
·
our ability to implement our business strategy;
·
our failure to meet the continued listing requirements of the Nasdaq Capital Market;
·
our need to raise additional working capital in the future for the purpose of further developing our DNase and XCART technologies and to continue as a going concern;
·
our ability to finance our business;
·
our ability to successfully execute, manage and integrate key acquisitions and mergers;
·
product development and commercialization risks, including our ability to successfully develop the DNase and XCART technologies;
·
the impact of adverse safety outcomes and clinical trial results for our therapies;
·
our ability to secure and maintain a manufacturer for our technologies;
·
the impact of new therapies and new uses of existing therapies on the competitive environment;
·
our ability to successfully commercialize our current and future drug candidates;
·
our ability to achieve milestone and other payments associated with our current and future co-development collaborations and strategic arrangements;
·
the impact of new technologies on our drug candidates and our competition;
·
changes in laws or regulations of governmental agencies;
·
interruptions or cancellation of existing contracts;
·
impact of competitive products and pricing;
·
product demand and market acceptance and risks;
·
the presence of competitors with greater financial resources;
·
continued availability of supplies or materials used in manufacturing at the current prices;
·
the ability of management to execute plans and motivate personnel in the execution of those plans;
·
our ability to attract and retain key personnel;
·
adverse publicity related to our products or the Company itself;
·
adverse claims relating to our intellectual property;
·
the adoption of new, or changes in, accounting principles;
·
the costs inherent with complying with statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002;
·
other new lines of business that the Company may enter in the future;
·
general economic and business conditions, as well as inflationary trends;
·
the impact of natural disasters or public health emergencies, such as the COVID-19 global pandemic, and geopolitical events, such as the Russian invasion of Ukraine, and related sanctions and other economic disruptions or concerns, on our financial condition and results of operations; and
·
other factors set forth in the Risk Factors section of our Annual Report on Form 10-K and in subsequent filings with the Securities and Exchange Commission (“SEC”).
These factors are not necessarily all of the important
factors that could cause actual results to differ materially from those expressed in the forward-looking statements in this Quarterly
Report. Other unknown or unpredictable factors also could have material adverse effects on our future results, including, but not limited
to, those discussed in the section titled “Risk Factors.” The forward-looking statements in this Quarterly Report are made
only as of the date of this Quarterly Report, and we do not undertake any obligation to publicly update any forward-looking statements
to reflect subsequent events or circumstances. We intend that all forward-looking statements be subject to the safe-harbor provisions
of the Private Securities Litigation Reform Act of 1995.
17
BUSINESS OVERVIEW
We are a biopharmaceutical company focused on
advancing innovative immune-oncology technologies addressing hard to treat cancers. The Company’s DNase platform is designed to
improve outcomes of existing treatments, including immunotherapies, by targeting NETs. The Company is also developing its personalized
CAR T platform technology, XCART ™ , to develop cell-based therapeutics targeting the unique B-cell receptor on the surface
of an individual patient’s malignant tumor cells for the treatment of B-cell lymphomas. We licensed the DNase oncology platform
in April 2022 and expect to prioritize our efforts and resources on the development of this newly acquired technology. Additionally, we
have partnered with biotechnology and pharmaceutical companies to develop our proprietary drug delivery platform, PolyXen, and receive
royalty payments under an exclusive license arrangement in the field of blood coagulation disorders.
We incorporate our patented and proprietary technologies
into drug candidates currently under development with biotechnology and pharmaceutical industry collaborators to create what we believe
will be the next-generation biologic drugs with improved pharmacological properties over existing therapeutics. Our drug candidates have
resulted from our research activities or that of our collaborators and are in the development stage. As a result, we continue to commit
a significant amount of our resources to our research and development activities and anticipate continuing to do so for the near future.
To date, none of our drug candidates have received regulatory marketing authorization in the U.S. by the Food and Drug Administration
(“FDA”) nor in any other territories by any applicable agencies. We are receiving ongoing royalties pursuant to a license
of our PolyXen technology to an industry partner. Although we hold a broad patent portfolio, the focus of our internal efforts during
the three and six months ended June 30, 2022, was on advancing the development of our XCART platform technology and the acquisition of
our DNase oncology platform.
Effects of the COVID-19 Pandemic
During March 2020, a global pandemic was declared
by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, or COVID-19. The pandemic has
significantly affected economic conditions in the U.S., accelerating during the first half of March 2020 and continuing throughout 2021
and into 2022, as federal, state and local governments reacted to the public health crisis with mitigation measures, creating significant
uncertainties in the U.S. economy. We continue to evaluate the effects of the COVID-19 pandemic on our business, and while there has been
no significant impact to our operations to date despite social distancing and other measures taken in response to the pandemic, the ultimate
impact of the COVID-19 pandemic on our results of operations and financial condition is dependent on future developments, including the
duration of the pandemic and the related extent of its severity, the pace and rate at which vaccines are administered, and the continued
emergence of new strains of COVID-19, such as the Delta and Omicron variants and any subvariants, as well as its impact on macroeconomic
conditions, which are uncertain and cannot be predicted at this time. If the global response to contain the COVID-19 pandemic escalates
further or is unsuccessful, or if governmental decisions to ease pandemic related restrictions are ineffective, premature or counterproductive,
we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.
18
RESULTS OF OPERATIONS
Comparison of Quarter Ended June 30, 2022
and 2021
The comparison of our historical results of operations
for the fiscal quarter ended June 30, 2022 to the fiscal quarter ended June 30, 2021 is as follows:
Description
Quarter Ended
June 30, 2022
Quarter Ended
June 30, 2021
Increase
(Decrease)
Percentage
Change
Revenues:
Royalty revenue
$
416,710
$
287,603
$
129,107
44.9
%
Operating costs and expenses:
Research and development
(2,077,499
)
(524,550
)
1,552,949
296.1
General and administrative
(1,026,290
)
(890,704
)
135,586
15.2
Total operating costs and expenses
(3,103,789
)
(1,415,254
)
1,688,535
119.3
Loss from operations
(2,687,079
)
(1,127,651
)
1,559,428
138.3
Other income (expense):
Other income (expense)
(1,076
)
238
(1,314
)
(552.1
)
Interest income, net
15,965
20,735
(4,770
)
(23.0
)
Net loss
$
(2,672,190
)
$
(1,106,678
)
$
1,565,512
141.5
Revenue
Revenue for the three months ended June 30, 2022
increased by $0.1 million, or 44.9%, to $0.4 million from approximately $0.3 million for the three months ended June 30, 2021. This increase
represents an increase in royalty revenue related to our sublicense agreement with Takeda Pharmaceuticals Co. Ltd. (“Takeda”)
as compared to the same period in 2021 as Takeda’s sublicensee continued its worldwide launch of the product.
Research and Development Expenses
Overall, research & development (“R&D”)
expenses for the three months ended June 30, 2022 increased by $1.6 million, or 296.1% to $2.1 million from $0.5 million in the comparable
quarter in 2021 primarily due to in-process research and development (“IPR&D”) expense of $1.3 million. During the three
months ended June 30, 2022, the Company expensed $1.3 million of IPR&D associated with the Company’s licensing of the DNase
oncology platform. There was no similar expense in 2021. Excluding the $1.3 million of IPR&D expense from total R&D expense of
approximately $2.1 million, R&D expense for the three months ended June 30, 2022 increased by approximately $0.3 million, or 47.3%,
to approximately $0.8 million from approximately $0.5 million in the comparable quarter in 2021. The table below sets forth the R&D
costs incurred by the Company by category of expense for the quarters ended June 30, 2022 and 2021:
Quarter Ended,
Category of Expense
June 30, 2022
June 30, 2021
IPR&D expense
$
1,305,000
$
–
Outside services and contract research organizations
598,399
358,389
Salaries and wages
120,373
108,747
Share-based expense
23,128
19,026
Other
30,599
38,388
Total research and development expense
$
2,077,499
$
524,550
19
The increase in outside
services and contract research organizations expense was primarily due to increased spending related to our XCART platform technology
and, to a lesser extent, spending related to our DNase oncology platform during the three months ended June 30, 2022 as compared to the
same period in the prior year. Costs related to our XCART program were significantly higher in 2022 as compared to the same period in
2021 as we continued our U.S. pre-clinical development efforts.
General and Administrative Expenses
General and administrative expenses for the three
months ended June 30, 2022 increased by approximately $0.1 million, or 15.2%, to approximately $1.0 million from approximately $0.9 million
in the comparable quarter in 2021. The increase was primarily due to an increase in legal costs related to the licensing of the DNase
oncology platform from CLS during the three months ended June 30, 2022 compared to the same period in 2021.
Other Income (Expense)
Other expense was approximately $1,100 for the
three months ended June 30, 2022 compared to approximately $200 of other income for the same period in 2021. This increase in other expense
was primarily related to changes in foreign currency exchange rates during the three months ended June 30, 2022 as compared to the same
period in 2021.
Interest Income
Interest income decreased to approximately $16,000
during the three months ended June 30, 2022 as compared to approximately $21,000 for the same period in the prior year. This decrease
is primarily due to no interest income being recorded on the Pharmsynthez Loan during the second quarter of 2022 compared to approximately
$11,000 during the same period in 2021.
Comparison of Six Months Ended June 30,
2022 and 2021
The comparison of our historical results of operations for the six
months ended June 30, 2022 to the six months ended June 30, 2021 is as follows:
Description
Six Months
Ended
June 30,
2022
Six Months
Ended
June 30,
2021
Increase
(Decrease)
Percentage
Change
Revenues:
Royalty revenue
$
805,703
$
478,819
$
326,884
68.3
%
Operating costs and expenses:
Research and development
(3,178,898
)
(1,154,279
)
2,024,619
175.4
General and administrative
(1,933,599
)
(1,821,282
)
112,317
6.2
Total operating costs and expenses
(5,112,497
)
(2,975,561
)
2,136,936
71.8
Loss from operations
(4,306,794
)
(2,496,742
)
1,810,052
72.5
Other income (expense):
Other income (expense)
(877
)
1,122
(1,999
)
(178.2
)
Interest income, net
41,870
42,997
(1,127
)
(2.6
)
Net loss
$
(4,265,801
)
$
(2,452,623
)
$
1,813,178
73.9
20
Revenue
Revenue for the six months ended June 30, 2022
increased by $0.3 million, or 68.3%, to $0.8 million from approximately $0.5 million for the six months ended June 30, 2021. This increase
represents an increase in royalty revenue related to our sublicense agreement with Takeda as compared to the same period in 2021, as the
sublicensee continued its worldwide launch of the product.
Research and Development Expenses
Overall, R&D expenses for the six months ended
June 30, 2022 increased by $2.0 million, or 175.4% to $3.2 million from $1.2 million in the comparable period in 2021 primarily due to
IPR&D expense of $1.3 million. During the six months ended June 30, 2022, the Company expensed $1.3 million of IPR&D associated
with the Company’s licensing of the DNase oncology platform. There was no similar expense in 2021. Excluding the $1.3 million of
IPR&D expense from total R&D expense of $3.2 million, R&D expenses increased approximately $0.7 million, or 62.3% to $1.9
million for the six months ended June 30, 2022, from $1.2 million for the six months ended June 30, 2021. The table below sets forth the
R&D costs incurred by us, by category of expense, for the six months ended June 30, 2022 and 2021:
Six Months Ended,
Category of Expense
June 30, 2022
June 30, 2021
IPR&D expense
$
1,305,000
$
–
Outside services and contract research organizations
1,426,749
811,013
Salaries and wages
232,357
238,795
Share-based expense
42,306
29,736
Other
172,486
74,735
Total research and development expense
$
3,178,898
$
1,154,279
The increase in outside
services and contract research organizations expense was primarily due to increased spending related to our XCART platform technology
and, to a lesser extent, spending related to our DNase oncology platform during the six months ended June 30, 2022 as compared to the
same period in the prior year. Costs related to our XCART program were higher in 2022 as compared to the same period in 2021 as we continued
our U.S. pre-clinical development efforts. The increase in other expense was due to consulting costs incurred in 2022 in connection with
the licensing of our DNase oncology platform.
General and Administrative Expenses
General and administrative expenses for the six
months ended June 30, 2022 was $1.9 million, increasing $0.1 million, or 6.2%, compared to the same period in the prior year. The increase
was primarily due to an increase in legal costs related to the licensing of the DNase oncology platform from CLS during the six months
ended June 30, 2022 compared to the same period in 2021.
Other Income (Expense)
Other expense was approximately $900 for the six
months ended June 30, 2022 compared to other income of approximately $1,100 for the same period in 2021. This increase in other expense
was primarily related to changes in foreign currency exchange rates during the six months ended June 30, 2022 as compared to the same
period in 2021.
21
Interest Income
Interest income decreased to approximately $42,000
during the six months ended June 30, 2022 as compared to approximately $43,000 for the same period in the prior year. This decrease is
primarily due to a decrease in interest income on the Pharmsynthez Loan substantially offset by an increase in interest income on invested
funds due to a higher cash balance in the first six months of 2022 compared to the same period in 2021.
Liquidity and Capital Resources
We incurred a net loss
of approximately $4.3 million for the six months ended June 30, 2022. We had an accumulated deficit of approximately $186.8 million at
June 30, 2022, as compared to an accumulated deficit of approximately $182.5 million at December 31, 2021. Working capital was approximately
$14.1 million at June 30, 2022, and $17.3 million at December 31, 2021, respectively. During the six months ended June 30, 2022, our working
capital decreased by $3.2 million primarily due to our net loss for the six months ended June 30, 2022 and cash used of $0.5 million to
obtain a license to the DNase oncology platform. Our principal source of liquidity consists of cash. At June 30, 2022, we had approximately
$14.9 million in cash and $1.3 million in current liabilities. At December 31, 2021, we had approximately $18.2 million in cash and $1.4
million in current liabilities.
We evaluate whether there
are conditions or events, considered in the aggregate that raise substantial doubt about our ability to continue as a going concern within
one year after the date that the financial statements are issued. We have incurred substantial losses since our inception, and we expect
to continue to incur operating losses in the near-term. These factors raise substantial doubt about our ability to continue as a going
concern. We believe that we have access to capital resources through possible public or private equity offerings, debt financings, corporate
collaborations, related party funding, or other means to continue as a going concern. We believe that our existing resources will be adequate
to fund our operations into the third quarter of 2023. However, we anticipate we may need additional capital in the long-term to pursue
our business initiatives. The terms, timing and extent of any future financing will depend upon several factors, including the achievement
of progress in our clinical development programs, our ability to identify and enter into licensing or other strategic arrangements, our
continued listing on the Nasdaq Stock Market (“Nasdaq”), and factors related to financial, economic, geo-political, industry
and market conditions, many of which are beyond our control. The capital markets for the biotech industry can be highly volatile, which
make the terms, timing and extent of any future financing uncertain. On June 3, 2022, we received a written notification (the “Notice”)
from the Listing Qualifications Department of Nasdaq notifying us that the closing bid price for our common stock had been below $1.00
for 30 consecutive business days and that we therefore are not in compliance with the minimum bid price requirement for continued inclusion
on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). The Notice has no immediate
effect on the listing of our common stock on the Nasdaq Capital Market. Under the Nasdaq Listing Rules, we have 180 calendar days from
the date of the Notice to regain compliance with the Bid Price Requirement. Accordingly, we have until November 30, 2022 to regain compliance
with the Bid Price Requirement and may be eligible for an additional 180 calendar day compliance period if certain other criteria are
met.
Cash Flows from Operating Activities
Cash flows used in operating activities for the
six months ended June 30, 2022 totaled approximately $2.8 million, which was primarily due to our net loss for the period, partially offset
by non-cash charges associated with acquired IPR&D and share-based expense. In addition, current liabilities decreased during the
six months ended June 30, 2022. Cash flows used in operating activities for the six months ended June 30, 2021 totaled approximately $2.2
million, which was primarily due to our net loss for the period, partially offset by non-cash charges associated with share-based expense.
Cash Flows from Investing Activities
Cash flows used in investing activities for the
six months ended June 30, 2022 totaled $500,000, which represented cash paid to license the DNase oncology platform. There were no cash
flows from investing activities for the six months ended June 30, 2021.
22
Cash Flow from Financing Activities
There were no cash flows from financing activities
for the six months ended June 30, 2022 and 2021.
Contractual Obligations and Commitments
As of June 30, 2022, there were no material changes
in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31,
2021, filed with the SEC on March 22, 2022, as amended on April 28, 2022.
Off Balance Sheet Arrangements
We do not have any off-balance sheet financing
arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Recent Accounting Standards
See Note 3 in our Annual Report on Form 10-K for
the year ended December 31, 2021, filed with the SEC on March 22, 2022, as amended on April 28, 2022, for a discussion of recent accounting
standards.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements
are prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates,
assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates
and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates
and assumptions on an ongoing basis. Our actual results may differ from these estimates. There have been no material changes in our critical
accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, filed
with the SEC on March 22, 2022, as amended on April 28, 2022.
23
ITEM 3 –
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not required to provide the information
required by this Item because we are a “smaller reporting company” (as defined in Rule 12b-2 of the Exchange Act).