Item 7. Management’s Discussion and Analysis
Item 7 –
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We are a biopharmaceutical company focused on
advancing innovative immune-oncology technologies addressing hard to treat cancers. Our Deoxyribonuclease (“DNase”) platform
is designed to improve outcomes of existing treatments, including immunotherapies, by targeting neutrophil extracellular traps (“NETs”),
which have been implicated in cancer progression and resistance to cancer treatments. We are currently focused on advancing our systemic
DNase program into the clinic as an adjunctive therapy for pancreatic carcinoma and locally advanced or metastatic solid tumors. 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.
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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 or approval in the United States (“U.S.”)
by the Food and Drug Administration (“FDA”) nor in any other countries or 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 year ended December 31, 2023, was on the advancement of our DNase platform.
Critical Accounting Policies and Estimates
The preparation of our financial statements in
conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates, judgments and assumptions
that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue,
costs and expenses during the reporting period. On an ongoing basis, we evaluate our estimates that are based on historical experience
and on various other assumptions that we believe to be reasonable under the circumstances. The result of these evaluations forms the basis
for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent
from other sources. Because future events and their effects cannot be determined with certainty, actual results and outcomes may differ
materially from our estimates, judgments and assumptions.
Management believes that the following accounting
estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s
most difficult subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently
uncertain. The following narrative describes these critical accounting estimates, judgments and assumptions and the effect if actual results
differ from these assumptions.
Revenue Recognition
We enter into supply, license and collaboration
arrangements with pharmaceutical and biotechnology partners, some of which include royalty agreements based on potential net sales of
approved commercial pharmaceutical products.
We recognize revenue in accordance with Accounting
Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard
applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance,
collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of
promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods
or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs
the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize
revenue at a point in time, or over time, as it satisfies a performance obligation. We only apply the five-step model to contracts when
it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within
each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then
recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance
obligation is satisfied.
As part of the accounting for these arrangements,
we must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above;
b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the
contract for the allocation of transaction price in step (iv) above. We use judgment to determine whether milestones or other variable
consideration should be included in the transaction price as described further below. The transaction price is allocated to each performance
obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under
the contract are satisfied. In developing the stand-alone price for a performance obligation, we consider applicable market conditions
and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated
costs. We validate the stand-alone selling price for performance obligations by evaluating whether changes in the key assumptions used
to determine the stand-alone selling prices will have a significant effect on the allocation of transaction price between multiple performance
obligations. We recognize a contract asset or liability for the difference between our performance (i.e., the goods or services transferred
to the customer) and the customer’s performance (i.e., the consideration paid by, and unconditionally due from, the customer).
55
The terms of our license agreements may include
delivery of an IP license to a collaboration partner. We may be compensated under license arrangements through a combination of non-refundable
upfront receipts, development and regulatory objective receipts and royalty receipts on future product sales by partners. We anticipate
recognizing non-refundable upfront license payments and development and regulatory milestone payments received by us in license and collaboration
arrangements that include future obligations, such as supply obligations, ratably over our expected performance period under each respective
arrangement. We make our best estimate of the period over which we expect to fulfill our performance obligations, which may include technology
transfer assistance, research activities, clinical development activities, and manufacturing activities from development through the commercialization
of the product. Given the uncertainties of these collaboration arrangements, significant judgment is required to determine the duration
of the performance period.
When we enter into an arrangement to sublicense
some of our patents, we will consider the performance obligations to determine if there is a single element or multiple elements to the
arrangement as we determine the proper method and timing of revenue recognition. We consider the terms of the license or sublicense for
such elements as price adjustments or refund clauses in addition to any performance obligations for us to provide such as services, patent
defense costs, technology support, marketing or sales assistance or any other elements to the arrangement that could constitute an additional
deliverable to it that could change the timing of the revenue recognition. Non-refundable upfront license and sublicense fees received,
whereby continued performance or future obligations are considered inconsequential or perfunctory to the relevant licensed technology,
are recognized as revenue upon delivery of the technology.
We expect to recognize royalty revenue in the
period of sale, based on the underlying contract terms, provided that the reported sales are reliably measurable, we have no remaining
performance obligations, and all other revenue recognition criteria are met. We anticipate reimbursements for research and development
services completed by us related to the collaboration agreements to be recognized in operations as revenue on a gross basis. Our license
and collaboration agreements with certain collaboration partners could also provide for future milestone receipts to us based solely upon
the performance of the respective collaboration partner in consideration of deadline extensions or upon the achievement of specified sales
volumes of approved drugs. For such receipts, we expect to recognize the receipts as revenue when earned under the applicable contract
terms on a performance basis or ratably over the term of the agreement. These receipts may also be recognized as revenue when continued
performance or future obligations by us are considered inconsequential or perfunctory.
Research and Development Expenses
Research and development expenses consist of expenses
incurred in performing research and development activities, including compensation and benefits, facilities expenses, overhead expenses,
pre-clinical development, clinical trial and related clinical manufacturing expenses, fees paid to contract research organizations (“CROs”)
and contract manufacturing organizations (“CMOs") and other outside expenses. We expense research and development costs as
incurred. We expense upfront, non-refundable payments made for research and development services as obligations are incurred. The value
ascribed to intangible assets acquired but which have not met capitalization criteria is expensed as research and development at the time
of acquisition. Upfront payments under license agreements are expensed upon receipt of the license. Milestone payments under license agreements
are accrued, with a corresponding expense being recognized, in the period in which the milestone is determined to be probable of achievement
and the related amount is reasonably estimable.
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We are required to estimate accrued research and
development expenses at each reporting period. This process involves reviewing open contracts and purchase orders, communicating with
our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated
cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers
invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met. However, some require
advanced payments. We make estimates of accrued expenses as of each balance sheet date in the financial statements based on facts and
circumstances known at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments,
if necessary. Examples of estimated accrued research and development expenses include fees paid to:
·
Collaborative partners performing research and development and pre-clinical activities;
·
Program managers in connection with overall program management of clinical trials;
·
CMOs in connection with cGMP manufacturing;
·
CROs in connection with clinical trials; and
·
Investigative sites in connection with clinical trials.
We base our expenses related to research and development,
pre-clinical activities, manufacturing and clinical trials on our estimates of the services received and efforts expended pursuant to
quotes and contracts with multiple research institutions, CMOs and CROs that conduct and manage clinical trials on our behalf. The financial
terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may
be instances in which payments made to vendors will exceed the level of services provided and result in a prepayment of the expense. In
accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each
period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or
prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding
of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result
in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our
prior estimates of accrued research and development expenses.
Share-based Expense
Share-based expense includes grants of options
and restricted stock units (“RSUs”) to employees and non-employees to purchase shares of our common stock, Joint Share Ownership
Plan awards to employees and agreements to issue common stock in exchange for services provided by non-employees.
Share-based expense is based on the estimated
fair value of the option or calculated using the Black-Scholes option pricing model. Determining the appropriate fair value model and
related assumptions requires judgment, including estimating share price volatility and expected terms of the awards. The expected volatility
rates are estimated based on the historical volatility of the Company. To the extent Company data is not available for the full expected
term of the awards, we use a weighted average of our historical volatility and of a peer group of comparable publicly traded companies
over the expected term of the option. The expected term represents the time that options are expected to be outstanding. We account for
forfeitures as they occur and not at the time of grant. We have not paid dividends and do not anticipate paying cash dividends in the
foreseeable future and, accordingly, we use an expected dividend yield of zero. The risk-free interest rate is based on the rate of U.S.
Treasury securities with maturities consistent with the estimated expected term of the awards. Upon exercise, stock options are redeemed
for newly issued shares of our common stock. RSUs are redeemed for newly issued shares of our common stock as the vesting and settlement
provisions of the grant are met.
For employee options that vest based solely on
service conditions, the fair value measurement date is generally on the date of grant and the related compensation expense is recognized
on a straight-line basis over the requisite vesting period of the awards. For non-employee options issued in exchange for goods or services
consumed in our operations, the fair value measurement date is the earlier of the date the performance of services is complete or the
date the performance commitment has been reached. We generally determine that the fair value of the stock options is more reliably measurable
than the fair value of the services received. Compensation expense related to stock options granted to non-employees is recognized on
a straight-line basis over requisite vesting periods of the awards.
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Warrants
In connection with certain financing, consulting
and collaboration arrangements, we issued warrants to purchase shares of our common stock. The outstanding warrants are standalone instruments
that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. We measure the fair value of the awards
using the Black-Scholes option pricing model as of the measurement date. Warrants issued to collaboration partners in conjunction with
the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued.
All other warrants are recorded at fair value
as expense on a straight-line basis over the requisite service period or at the date of issuance if there is not a service period or if
service has already been rendered. For warrants that contain vesting triggers based on the achievement of certain objectives, we apply
judgment to estimate the probability and timing of the achievement of those objectives. These estimates involve inherent uncertainties,
and as a result, if the probability or timing of the achievement of those objectives change, expense related warrants could be materially
different in the future. For warrants issued in connection with financing arrangements we allocate the proceeds based on the relative
fair value of the award and other instrument(s).
Indefinite-lived Intangible Assets
Assets acquired and liabilities assumed in business
combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective fair values. At
acquisition, we generally determine the fair value of intangible assets, including in-process research and development (“IPR&D”),
using the “income method.” Acquired IPR&D intangible assets are considered indefinite-lived intangible assets until completion
or abandonment of the associated research and development efforts. Substantial additional research and development may be required before
the Company’s IPR&D reaches technological feasibility. Upon completion of the IPR&D project, the IPR&D assets will be
amortized over their estimated useful lives.
Indefinite lived intangibles are not amortized
but are reviewed for impairment at least annually or when events or changes in the business environment indicate it is more likely than
not that the carrying value may be impaired. Our annual assessment may consist of a qualitative or quantitative analysis to determine
if it is more likely than not that its fair value exceeds the carrying value. When performing the qualitative method, we determine whether
the existence of events or circumstances leads us to determine that it is more likely than not (that is, a likelihood of more than 50%)
that indefinite lived intangibles are impaired. If we choose to first assess qualitative factors and it is determined that it is not more
likely than not that intangible assets are impaired, then we are not required to take further action to test for impairment. We also have
the option to bypass the qualitative assessment and perform only the quantitative impairment test, which we may choose to perform in some
periods but not in others. As the option to perform the qualitative assessment is not a permanent election, we reassess this option during
each annual impairment review. An impairment loss, if any, is measured as the excess of the carrying value of the intangible asset over
its fair value.
Intangible assets are highly vulnerable to impairment
charges, particularly newly acquired assets for IPR&D. Considering the high risk nature of research and development and the industry’s
success rate of bringing developmental compounds to market, IPR&D impairment charges are likely to occur in future periods. Estimating
the fair value of IPR&D for potential impairment is highly sensitive to changes in projections and assumptions and changes in assumptions
could potentially lead to impairment.
We believe our estimates and assumptions are reasonable
and otherwise consistent with assumptions that market participants would use in their estimates of fair value. However, if future results
are not consistent with our estimates and assumptions, then we may be exposed to an impairment charge, which could be material. Use of
different estimates and judgments could yield materially different results in our analysis and could result in materially different asset
values or expense.
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Impact of the Global Conflicts on Our Operations
The short and long-term implications of Russia’s
invasion of Ukraine and conflict in the Middle East are difficult to predict at this time. The imposition of current and future sanctions
and counter sanctions may have an adverse effect on the economic markets generally and could impact our business, financial condition,
and results of operations.
Results of Operations
The table below sets forth the comparison of our
historical results of operations for the year ended December 31, 2023 to the year ended December 31, 2022.
Description
2023
2022
Increase
(Decrease)
Percentage
Change
Revenue:
Royalty revenue
$ 2,539,986
$ 1,706,925
$ 833,061
48.8%
Operating costs and expenses:
Research and development
(3,494,765 )
(4,770,834 )
(1,276,069 )
(26.7 )%
General and administrative
(3,560,936 )
(3,653,999 )
(93,063 )
(2.5 )%
Total operating costs and expenses
(7,055,701 )
(8,424,833 )
(1,369,132 )
(16.3 )%
Loss from operations
(4,515,715 )
(6,717,908 )
(2,202,193 )
(32.8 )%
Other income (expense):
Other income (expense)
25,380
(1,597 )
26,977
1,689.2 %
Interest income, net
355,757
167,152
188,605
112.8 %
Net loss
$ (4,134,578 )
$ (6,552,353 )
$ (2,417,775 )
(36.9 )%
Revenue
Revenue for the year ended December 31, 2023 increased
by $0.8 million, or 48.8%, to $2.5 million from approximately $1.7 million for the year ended December 31, 2022. The increase represents
an increase in royalty revenue related to our sublicense agreement with Takeda as compared to the same period in 2022.
Research and Development Expense
Overall, R&D expenses for the year ended December
31, 2023 decreased by $1.3 million, or 26.7% to $3.5 million from $4.8 million in the comparable period in 2022 primarily due to IPR&D
expense of $1.8 million. During the year ended December 31, 2022, the Company expensed $1.8 million of IPR&D associated with our licensing
of the DNase platform. There was no similar expense in 2023. Excluding the $1.8 million of IPR&D expense from total R&D expense
of $4.8 million for the year ended December 31, 2022, R&D expenses for the year ended December 31, 2023 increased approximately $0.5
million, or 17.4% to $3.5 million, from $3.0 million for the year ended December 31, 2022. The table below sets forth the R&D costs
incurred by us, by category of expense, for the years ended December 31, 2023 and 2022:
Year ended December 31,
Category of Expense
2023
2022
IPR&D expense
$ –
$ 1,793,750
Outside services and contract research organizations
2,886,985
2,314,513
Salaries and wages
417,952
435,564
Share-based expense
56,112
86,305
Other
133,716
140,702
Total research and development expense
$ 3,494,765
$ 4,770,834
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The increase in outside
services and contract research organizations expense was primarily due to increased spending in connection with our pre-clinical development
efforts associated with our DNase platform. We licensed the DNase platform in April 2022 and directed our R&D efforts and resources
on the development of this newly acquired technology. As a result, we suspended development of our XCART technology platform.
General and Administrative Expense
General and administrative expenses for the year
ended December 31, 2023 was $3.6 million, decreasing by approximately $0.1 million, or 2.5%, compared to the same period in the prior
year. The decrease was primarily due to a decrease in employee related costs substantially offset by increases in consulting and legal
costs during the year ended December 31, 2023 compared to the prior year.
Other Income (Expense)
Other income was approximately $25,000 for the
year ended December 31, 2023 compared to other expense of approximately $1,600 for the same period in 2022. This increase in other income
was primarily related to fees associated with the Pharmsynthez Loan recognized during the year ended December 31, 2023 for which there
were no similar fees received in 2022.
Interest Income, net
Interest income, net increased to approximately
$0.4 million during the year ended December 31, 2023 as compared to approximately $0.2 million in the prior year. This increase is due
to higher interest rates on invested funds during the year ended December 31, 2023 compared to the prior year, as well as an increase
in interest income on the Pharmsynthez Loan.
Non-GAAP Measures
In our narrative discussion of operations above,
we exclude the impact of non-cash expenses from certain operating measures, which narrative discussion includes reconciliation of such
adjusted financial measures to the directly comparable GAAP financial measure. We believe these adjusted operating measures may provide
investors with useful information regarding our underlying performance from period to period and allow investors to better understand
our results of operations. Management uses these adjusted measures when assessing the performance of the business.
Liquidity and Capital Resources
We incurred a net loss
of approximately $4.1 million for the year ended December 31, 2023. We had an accumulated deficit of approximately $193.2 million at December
31, 2023, as compared to an accumulated deficit of approximately $189.1 million at December 31, 2022. Working capital was approximately
$8.8 million at December 31, 2023, and $12.6 million at December 31, 2022, respectively. During the year ended December 31, 2023, our
working capital decreased by $3.8 million primarily due to our net loss for the year ended December 31, 2023 and, to a lesser extent,
decreases in current liabilities.
Our principal source
of liquidity consists of cash. At December 31, 2023, we had approximately $9.0 million in cash and $0.8 million in current liabilities.
At December 31, 2022, we had approximately $13.1 million in cash and $1.1 million in current liabilities.
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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 for a period of at least twelve months from the date of the issuance of these financial statements. 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 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 were not in compliance with the
minimum bid price requirement for continued inclusion on Nasdaq under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”).
On May 15, 2023, we effected a reduction, on a 1-for-10 basis, in our authorized common stock, par value $0.001, along with a corresponding
and proportional decrease in the number of shares issued and outstanding. On May 30, 2023, we received a letter from Nasdaq notifying
us that we had regained compliance with the Bid Price Requirement as a result of the closing bid price of the Company’s common stock
being at $1.00 per share or greater for the 10 consecutive business days from May 15, 2023 through May 26, 2023 and that this matter is
closed.
Cash Flows from Operating Activities
Cash flows used in operating activities for the
year ended December 31, 2023 totaled approximately $4.1 million, which was primarily due to our net loss for the period, partially offset
by non-cash charges associated with share-based expense and, to a lesser extent, a decrease in current liabilities. Cash flows used in
operating activities for the year ended December 31, 2022 totaled approximately $4.6 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 year ended December 31, 2022.
Cash Flows from Investing Activities
There were no cash flows from investing activities
for the year ended December 31, 2023. Cash flows used in investing activities for the year ended December 31, 2022 totaled $500,000, which
represented cash paid to license the DNase oncology platform.
Cash Flows from Financing Activities
There were no cash flows from financing activities
for each of the years ended December 31, 2023 and 2022.
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Contractual Obligations
Contractual obligations represent future cash
commitments and liabilities under agreements with third-parties and exclude contingent liabilities for which we cannot reasonably predict
future payment. Our contractual obligations result from property leases for office space. Although we do have obligations for CMO and
CRO services, the table below excludes potential payments we may be required to make under our agreements with CMOs and CROs because timing
of payments and actual amounts paid under those agreements may be different depending on the timing of receipt of goods or services or
changes to agreed-upon terms or amounts for some obligations, and those agreements are cancelable upon written notice by the Company and
therefore, not long-term liabilities. The contracts may also contain variable costs that are hard to predict as they are based on such
things as patients enrolled and clinical trial sites, which can vary and, therefore, are also not included in the table below. Additionally,
the expected timing of payment of the obligations presented below is estimated based on current information.
The following tables represent our contractual
obligations as of December 31, 2023, aggregated by type:
Payments Due by Period
As of December 31, 2023
Total
Less
than
1 year
1-3
years
3-5
years
More
than
5 years
Lease obligations
$
30,290
$
30,290
$
–
$
–
$
–
Total
$
30,290
$
30,290
$
–
$
–
$
–
Recent Accounting Standards
Refer to Note 3, Summary of Significant Accounting Policies ,
of the accompanying financial statements set forth in Item 8.
ITEM 7A – 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).
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