Inmune Bio, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

David Moss

225 NE Mizner Blvd., Suite 640,

Boca Raton, FL 33432

(Address of principal executive office) (Zip code)

(858) 964-3720

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐     No ☒

Securities registered pursuant to Section 12(b) of the Act:

As of November 3, 2021, there were 17,843,303 shares of our common stock, par value $0.001 per share, outstanding.

INMUNE BIO INC.

FORM 10-Q

FOR THE NINE MONTHS ENDED September 30, 2021

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements 

INMUNE BIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

INMUNE BIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

INMUNE BIO, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 

(In thousands, except share amounts)

(Unaudited) 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 

(In thousands, except share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

INMUNE BIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

INMUNE BIO, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

INmune Bio, Inc. (the “Company” or “INmune Bio”) was organized in the State of Nevada on September 25, 2015, and is a clinical stage biotechnology pharmaceutical company focused on developing and commercializing its product candidates to treat diseases where the innate immune system is not functioning normally and contributing to the patient’s disease. INmune Bio has two product platforms. The DN-TNF product platform utilizes dominant-negative technology to selectively neutralize soluble TNF, a key driver of innate immune dysfunction and mechanistic target of many diseases. DN-TNF is currently being developed for Alzheimer’s and treatment resistant depression (XPro595) and cancer (INB03). The Natural Killer Cell Priming Platform includes INKmune aimed at priming the patient’s NK cells to eliminate minimal residual disease in patients with cancer. INmune Bio’s product platforms utilize a precision medicine approach for the treatment of a wide variety of hematologic malignancies, solid tumors and chronic inflammation.

NOTE 2 – LIQUIDITY

As of September 30, 2021, the Company had an accumulated deficit of approximately $54.0 million and experienced losses since its inception. Losses have principally occurred as a result of non-cash stock-based compensation expense and the substantial resources required for research and development of the Company’s products, which included the general and administrative expenses associated with its organization and product development as well as the lack of sources of revenues until such time as the Company’s products are commercialized.

To meet its current and future obligations the Company has taken the following steps to capitalize the business and achieve its business plan:

Although it is difficult to predict the Company’s liquidity requirements, as of September 30, 2021, and based upon the Company’s current operating plan, the Company believes that it will have sufficient cash to meet its projected operating requirements for at least the next 12 months following the filing date of this Quarterly Report on Form 10-Q based on the balance of cash available as of September 30, 2021. The Company anticipates that it will continue to incur net losses for the foreseeable future as it continues the development of its clinical drug candidates and preclinical programs and incurs additional costs associated with being a public company.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of INmune Bio, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated.

In the opinion of management, the interim financial information includes all normal recurring adjustments necessary for a fair statement of the results for the interim periods. These unaudited consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 4, 2021.

Risks and Uncertainties

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict. Also, economies worldwide have also been negatively impacted by the COVID-19 pandemic, however policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remain uncertain.

In addition, the Company’s clinical trials have been affected by and may continue to be affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment have and may continue to be delayed due to prioritization of hospital resources toward the COVID-19 pandemic. Some patients have not and others may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Similarly, the ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, may adversely impact the Company’s clinical trial operations.

The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s service providers, suppliers, contract research organizations (“CROs”) and the Company’s clinical trials, all of which are uncertain and cannot be predicted. As of the date of issuance of Company’s financial statements, the extent to which the COVID-19 pandemic may materially impact the Company’s financial condition, liquidity or results of operations is uncertain.

Use of Estimates

Preparing financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. The Company’s significant estimates and assumptions include the valuation of stock-based compensation instruments, and the net realizable value of research and development tax credit receivables. Actual results and outcomes may differ from management’s estimates and assumptions.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents. The Company maintains cash balances that may be uninsured or in deposit accounts that exceed Federal Deposit Insurance Corporation limits. The Company maintains its cash deposits with major financial institutions.

Research and Development Tax Incentive Receivable

The Company, through its wholly-owned subsidiary in Australia (“AUS”), participates in the Australian research and development tax incentive program, such that a percentage of our qualifying research and development expenditures are reimbursed by the Australian government, and such incentives are reflected as a reduction of research and development expense. The Australian research and development tax incentive is recognized when there is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured. At each period end, management estimates the reimbursement available to the Company based on available information at the time.

The Company, through its wholly-owned subsidiary in the United Kingdom (“UK”), participates in the research and development program provided by the United Kingdom tax relief program, such that a percentage of our qualifying research and development expenditures are reimbursed by the United Kingdom government, and such incentives are reflected as a reduction of research and development expense. The United Kingdom research and development tax incentive is recognized when there is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured. At each period end, management estimates the reimbursement available to the Company based on available information at the time.

Intangible Assets

The Company capitalizes costs incurred in connection with in-process research and development purchased from others if the asset has alternative uses and such uses are not restricted under applicable license agreements; patent applications (principally legal fees), patent purchases, and trademarks related to its cell line as intangible assets. Acquired in-process research and development costs that do not have alternative uses are expensed as incurred. Amortization is initiated for acquired in-process research and development intangible assets when their useful lives have been determined. These acquired in-process research and development intangible assets are tested at least annually or when a triggering event occurs that could indicate a potential impairment.

Basic and Diluted Loss per Share

Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

At September 30, 2021 and 2020, the Company had potentially issuable shares as follows:

Revenue Recognition

The Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC Topic 606: (1) identify contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenues when (or as) the Company satisfies the performance obligations. The Company records the expenses related to revenue in research and development expense, in the periods such expenses were incurred.

The Company records deferred revenues when cash payments are received or due in advance of performance, including amounts which are refundable.

Stock-Based Compensation

The Company utilizes the Black-Scholes option pricing model to estimate the fair value of stock option awards at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions may be derived from our historical experience with stock-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances. The Company accounts for forfeitures of stock options as they occur.

Research and Development

Research and development (“R&D”) costs are expensed as incurred. Research and development credits are recorded by the Company as a reduction of research and development costs. Major components of research and development costs include cash compensation, stock-based compensation, costs of preclinical studies, clinical trials and related clinical manufacturing, costs of drug development, costs of materials and supplies, facilities cost, overhead costs, regulatory and compliance costs, and fees paid to consultants and other entities that conduct certain research and development activities on the Company’s behalf.

The Company recognizes grants as contra research and development expense in the consolidated statement of operations on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.

Income Taxes

The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the financial statement carrying values and their respective income tax basis (temporary differences). The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Foreign Currency Translation

The Company’s financial statements are presented in the U.S. dollar (“$”), which is the Company’s reporting currency, while its functional currencies are the U.S. Dollar for its U.S. based operations, British Pound (“GBP”) for its United Kingdom-based operations and Australian Dollars (“AUD”) for its Australian-based operations. All assets and liabilities are translated at the exchange rate on the balance sheet date, stockholders’ equity is translated at historical rates and statement of operations items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statement of operations and comprehensive income (loss).

Recently Adopted Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to a have a material impact on the Company´s consolidated financial position, operations or cash flows.

Subsequent Events

The Company evaluates events that have occurred after the balance sheet date of September 30, 2021, through the date which the financial statements are issued.

NOTE 4 – RESEARCH AND DEVELOPMENT ACTIVITY

According to UK tax law, the Company is allowed an R&D tax credit that reduces a company’s tax bill in the UK for expenses incurred in R&D subject to certain requirements. The Company’s UK subsidiary submits R&D tax credit requests annually for research and development expenses incurred. At September 30, 2021 and December 31, 2020, the Company recorded a research and development tax credit receivable in the amount of $2,942,000 and $833,000, respectively. During the nine months ended September 30, 2021 and 2020, the Company received $0 of R&D tax credit reimbursements from the UK. The UK subsidiary expects to receive R&D tax credit reimbursements during the fourth quarter of 2021.

According to AUS tax law, the Company is allowed an R&D tax credit that reduces a company’s tax bill in AUS for expenses incurred in R&D subject to certain requirements. The Company’s Australian subsidiary submits R&D tax credit requests annually for research and development expenses incurred. At September 30, 2021 and December 31, 2020, the Company recorded a research and development tax credit receivable of $2,016,000 and $853,000, respectively, for R&D expenses incurred in Australia. During the nine months ended September 30, 2021 and 2020, the Company received $0 and $0.2 million, respectively, of R&D tax credit reimbursements from Australia. The Australian subsidiary received an R&D tax reimbursement of approximately $1.3 million during October 2021.

Xencor, Inc. License Agreement

On October 3, 2017, the Company entered into a license agreement (“Xencor License Agreement”) with Xencor, Inc. (“Xencor”), which has discovered and developed a proprietary biological molecule that inhibits soluble tumor necrosis factor. During June 2021, the Company entered into the First Amendment to License Agreement. Pursuant to the license agreement, Xencor granted the Company an exclusive worldwide, royalty-bearing license in licensed patent rights, licensed know-how and licensed materials (as defined in the license agreement) to make, develop, use, sell and import any pharmaceutical product that comprises, contains, or incorporates Xencor’s proprietary protein known as “XPro1595” that inhibits soluble tumor necrosis factor (or all modifications, formulations and variants of the licensed protein that specifically bind soluble tumor necrosis factor) alone or in combination with one or more active ingredients, in any dosage or formulation (“Licensed Products”). The Company believes the protein has numerous medical applications. Such additional alternative applications of the technology are available under the Xencor License Agreement. In connection with the Xencor License Agreement, the Company paid Xencor a one-time non-creditable and non-refundable fee of $100,000 and issued Xencor 1,585,000 shares of the Company’s common stock with a fair value of $12,221,000. In addition, the Company issued Xencor fully vested warrants with a fair value of $4,193,000 to purchase an additional number of shares of common stock equal to 10% of the fully diluted company shares immediately following such purchase. The aggregate purchase price for the full exercise of the option was $10,000,000.

The Company recorded $16,514,000 for the acquisition of intangible assets for the in-process research and development as the fair value of the cash, stock and warrants on the date of the License Agreement acquisition in accordance with Accounting Standards Codification 730 – Research and Development. The Company has the license rights to pursue alternative applications of the technology as part of its future development plans.

The Company also agreed to pay Xencor a royalty on Net Sales of all Licensed Products in a given calendar year, which are payable on a country-by- country and licensed product by licensed product basis until the date that is the later of (a) the expiration of the last to expire valid claim covering such Licensed Product in such country or (b) ten years following the first sale to a third party of the licensed product in such country.

Under the Xencor License Agreement, the Company also agreed to pay Xencor a percentage of any sublicensing revenue that it receives.

On June 10, 2021, the Company and Xencor entered into an Option Cancellation Agreement whereby Xencor terminated its warrant to purchase 10% of the fully diluted shares of the Company in exchange for a cash payment of $15,000,000 and 192,533 shares of the Company’s common stock with a fair value of $3,300,000 based on the market price of the common stock as of June 10, 2021, which the Company issued in June 2021. The Company filed a registration statement covering the resale of these shares during September 2021 and agreed to keep the registration statement continuously effective until all such shares cease to be outstanding or otherwise cease to be registrable securities as defined in the Option Cancellation Agreement. The Company charged the cash consideration paid to Xencor to enter into the Option Cancellation Agreement to equity as the fair value of the warrant immediately prior to the Option Cancellation Agreement was greater than the consideration paid to Xencor.

INKmune License Agreement

On October 29, 2015, the Company entered into an exclusive license agreement (the “INKmune License Agreement”) with Immune Ventures, LLC (“Immune Ventures”). Pursuant to the INKmune License Agreement, the Company was granted exclusive worldwide rights to the patents, including rights to incorporate any improvements or additions to the patents that may be developed in the future. In consideration for the patent rights, the Company agreed to the following milestone payments:

(in thousands)

During July 2021, the Company initiated a Phase I clinical trial using INKmune and the Company paid Immune Ventures a $25,000 milestone payment.

In addition, the Company agreed to pay Immune Ventures a royalty of 1% of net sales during the life of each patent granted to the Company. RJ Tesi, the Company’s President and a member of our Board of Directors, David Moss, its Chief Financial Officer and Treasurer and Mark Lowdell, its Chief Scientific Officer, are the owners of Immune Ventures. As of September 30, 2021, no sales had occurred under this license.

The term of the agreement began on October 29, 2015 and, if not terminated sooner pursuant to the agreement, ends on a country-by-country basis on the date of the expiration of the last to expire patent rights where patent rights exists. Upon the termination of the agreement, we shall have a fully paid up, perpetual, royalty-free license without further obligation to Immune Ventures. The agreement can be terminated by Immune Ventures if, after 60 days from the Company’s receipt of notice that the Company has not made a payment under the agreement, and the Company still does not make this payment. On July 20, 2018, the parties amended the agreement under which the Company was required achieve milestones pursuant to the agreement. On October 30, 2020, the parties executed an additional amendment to the agreement under which the Company is required to achieve the following milestones:

Initiation of Phase II clinical trials or equivalent by October 29, 2023

Initiation of Phase III clinical trials or equivalent by October 29, 2025

Filing of NDA or equivalent by October 29, 2026 or equivalent

If the Company doesn’t achieve the above milestones, it is required to negotiate in good faith with Immune Ventures to determine how it can either remedy the failure or achieve an alternate development. If the Company fails to make any required efforts, or if the efforts do not remedy the situation within 60 days of written notice by Immune Ventures, then Immune Ventures may provide notice to terminate the license or convert it to a non-exclusive license.

University of Pittsburg License Agreement

On October 3, 2017, the Company entered into an Assignment and Assumption Agreement with Immune Ventures related to intellectual property licensed from the University of Pittsburgh. Pursuant to the Assignment and Assumption Agreement (“Assignment Agreement”), Immune Ventures assigned all of its rights, obligations and liabilities under an Exclusive License Agreement between the University of Pittsburgh – Of the Commonwealth System of Higher Education (“Licensor”) and Immune Ventures to INmune Bio (“Licensee”), (the “PITT Agreement”).

Consideration under the PITT Agreement includes: (i) annual maintenance fees, (ii) royalty payments based on the sale of products making use of the licensed technology, and (iii) milestone payments.

Annual maintenance fees under the PITT Agreement include the following:

(in thousands)

Upon first commercial sale of a product making use of the licensed technology under the PITT Agreement, the Licensee is required to pay royalties equal to 2.5% of Net Sales each calendar quarter.

Moreover, under the PITT Agreement the Licensee is required to make milestone payments as follows:

(in thousands)

The Company had no amounts owed pursuant to the PITT Agreement as of September 30, 2021.

The PITT Agreement expires upon the earlier of: (i) expiration of the last claim of the Patent Rights (as defined in the PITT Agreement) forming the subject matter of the PITT Agreement; or (ii) the date that is 20 years from the effective date of the agreement (June 26, 2037).

The Licensee may terminate the PITT Agreement upon 3 months prior written notice provided all payments under the license are current. The Licensor may terminate the PITT Agreement upon written notice if: (i) Licensee defaults as to performance of material obligations which have not been cured within 60 days after receiving written notice; or (ii) Licensee ceases to carry out its business, becomes bankrupt or insolvent, applies for or consents to the appointment of a trustee, receiver or liquidator of its assets or seeks relief under any law for the aid of debtors.

University College London License Agreement – MSC

On July 19, 2019, the Company entered into license agreement with UCL Business PLC (“UCLB”) with a ten (10) year term. Pursuant to the license agreement, the Company acquired an exclusive license (and a right to sub-license) to the technology and know-how relating to an isolation and commercial scale expansion methodology of GMP grade human umbilical cord mesenchymal stem/stromal cells (“MSC”). During July 2021, the Company terminated its license agreement with UCLB.

NOTE 5 – LEASE 

In May 2019, the Company signed a sublease agreement with a related party for office space in La Jolla, California. The lease has a 61-month term, which corresponds to the lease term of the lessor. The lessor is CTI Clinical Trial & Consulting Services (“CTI”). CTI is majority-owned by a member of the Company’s Board of Directors. The lessor may extend its lease for an additional 5 years, and, if it does, the Company may also extend its sublease for 5 years. The Company did not include the option to extend in the calculation of the lease liabilities as such extension is not reasonably certain to occur. Variable lease costs for the Company’s lease consists of operating expenses for the spaces.

In September 2021, the Company signed a lease for office space in Boca Raton, Florida. See Note 10.

Below is a summary of the Company’s right-of-use assets and liabilities as of September 30, 2021:

(in thousands, except years and rate)  

NOTE 6 – RELATED PARTY TRANSACTIONS

UCL

At September 30, 2021 and December 31, 2020, the Company owed UCL Consultants Limited (“UCL”) $10,000 and $34,000, respectively, in connection with medical research performed on behalf of the Company. At September 30, 2021 and December 31, 2020, the Company recorded prepaid expenses of $14,000 and $0, respectively, for medical research to be performed on behalf of the Company by UCL. During the nine months ended September 30, 2021 and 2020, the Company paid UCL $176,000 and $335,000, respectively, for medical research performed on behalf of the Company. UCL is a wholly owned subsidiary of the University of London. The Company’s Chief Scientific and Manufacturing Officer is a professor at the University of London.

CTI

During the nine months ended September 30, 2021 and 2020, the Company paid CTI $0 and $127,000, respectively, for medical research performed on behalf of the Company. During the nine months ended September 30, 2020, the Company recorded a capital contribution of $216,000 for the forgiveness of certain accounts payable due to CTI. The Company had no amounts payable to CTI as of September 30, 2021 and December 31, 2020.

NOTE 7 – DEBT

On June 10, 2021, the Company entered into a Loan and Security Agreement (the “Term Loan”) with Silicon Valley Bank and SVB Innovation Credit Fund VIII, L.P., together (the “Lenders”).  The Term Loan provides for a $15.0 million term loan, of which the Company borrowed the entire amount on June 10, 2021, and is secured by the Company’s assets.  The Term Loan also provides for the Company to request an additional $5.0 million term loan from the Lenders, which may be granted or denied at the sole discretion of the Lenders.

The Company paid the Lenders $47,000 to access the term loan, which has been included as a component of the debt discount and is amortized to interest expense over the term of the loan. The term loan and debt discount are as follows as of September 30, 2021:

(in thousands)  

For the three and nine months ended September 30, 2021 the Company recognized interest expense of $0.4 million and $0.5 million, respectively, related to the Term Loan.  

The term loan repayment schedule provided for interest only payments beginning on July 1, 2021, and continuing for 12 months, followed by monthly principal and interest payments, starting on July 1, 2022 and continuing through the maturity date of January 1, 2025. During August, the Lenders extended the interest-only period for one year due to the Company achieving an equity milestone as fully defined in the Term Loan. As a result of achieving the equity milestone, monthly principal and interest payments begin on July 1, 2023. All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date.  The Term Loan provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 4.50% and (ii) 7.75%. At September 30, 2021, the interest rate was 7.75%.

The Term Loan includes a final payment fee equal to 6.5% of the original principal amount borrowed payable on the earlier of the repayment of the loan in full and the maturity date.  The Company has the option to prepay the outstanding balance of the term loans in full, subject to a prepayment premium of (i) 3% of the original principal amount borrowed for any prepayment on or prior to the first anniversary of the loan, (ii) 2% of the original principal amount borrowed for any prepayment after the first anniversary and on or before the second anniversary of the loan or (iii) 1% of the original principal amount borrowed for any prepayment after the second anniversary of the loan but before the maturity date.

The expected repayment of the $15.0 million Term loan principal is as follows as of September 30, 2021:

(in thousands, except years)

Upon the occurrence of certain events, including but not limited to the Company’s failure to satisfy its payment obligations under the Term Loan, the breach of certain of its other covenants under the Term Loan, or the occurrence of a material adverse change, the Lenders will have the right, among other remedies, to declare all principal and interest immediately due and payable, and will have the right to receive the final payment fee and, if the payment of principal and interest is due prior to maturity, the applicable prepayment fee.

NOTE 8 – STOCKHOLDERS’ EQUITY

Lincoln Park

On May 15, 2019, the Company entered into both a securities purchase agreement and registration rights agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Under the terms and subject to the conditions of the securities purchase agreement, the Company had the right to sell to Lincoln Park, and Lincoln Park was obligated to purchase, up to $20.0 million in shares of the Company’s common stock, subject to certain limitations, over the 24-month period that commenced on May 15, 2019. During the nine months ended September 30, 2020, the Company issued 196,000 shares of its common stock to Lincoln Park for approximately $1.0 million of cash.

During April 2021, the Company terminated the securities purchase agreement with Lincoln Park.

Purchase and retirement of common stock

During January 2020, the Company purchased and cancelled 220,000 shares of its common stock from a shareholder in exchange for approximately $1.0 million of cash.

Underwritten Stock Offering

During July 2020, the Company completed an underwritten public offering in which it sold 2,500,000 shares of common stock at a public offering price of $10.00 per share. The 2,500,000 shares sold included the full exercise of the underwriters’ option to purchase 326,086 shares at a price of $10.00 per share. Aggregate net proceeds from the underwritten public offering were $23.1 million, net of $1.9 million in underwriting discounts and commissions and offering expenses.

Common Stock – At the Market Offering

During the nine months ended September 30, 2020, we issued and sold 178,600 shares of common stock at an average price of $5.45 per share under the 2020 ATM program. The aggregate net proceeds were approximately $0.8 million after BTIG’s commission and other offering expenses. 

During the nine months ended September 30, 2021, the Company sold 1,439,480 shares of its common stock at an average price of $20.17 per share under the 2020 ATM program. The aggregate net proceeds were approximately $28.4 million after BTIG’s commission and other offering expenses. 

During the nine months ended September 30, 2021, the Company sold 713,192 shares of its common stock at an average price of $21.73 per share under the 2021 ATM program. The aggregate net proceeds were approximately $14.9 million after BTIG’s commission and other offering expenses. 

Registered Direct Offering

During July 2021, the Company completed a registered direct offering whereby the Company sold 1,818,182 shares of its common stock to investors for net proceeds of $36.9 million.

Common Stock Issued for Services

During July 2020, the Company granted a consultant 50,000 fully vested warrants with a 5-year term, of which 25,000 warrants had an exercise price of $5.50 per share and 25,000 warrants had an exercise price of $10.00 per share. The fair value of these warrants was $356,874 based on the Black-Scholes Option Pricing Model and was recorded within general and administrative expense. The assumptions used for these warrants consist of the exercise prices, expected dividends of 0%, expected volatility of 111.67% based on the trading history of similar companies, risk-free rate of 0.30% based on the applicable US Treasury bill rate and an expected life of 5.0 years. During July 2020, the Company issued the consultant 20,000 shares of common stock and cancelled the 50,000 warrants. The 20,000 shares were issued from the Company’s 2019 Incentive Stock Plan and had a fair value of approximately $230,000 based on the market value of the Company’s common stock on the grant date. The Company accounted for the exchange of the warrants for shares of common stock as a modification and recorded no additional expense in connection with the exchange as the fair value of warrants exceeded the fair value of the shares issued.

Issuance of shares to Xencor

On June 10, 2021, the Company and Xencor entered into an Option Cancellation Agreement whereby the Company issued 192,533 shares of its common stock to Xencor (See Note 4).

Stock options

During January 2021, the Company granted certain employees and directors options to purchase 198,549 shares of its common stock pursuant to the 2017 and 2019 Incentive Stock Plans. The stock options have a fair value of approximately $4.2 million that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 0.78% based on the applicable US Treasury bill rate (2) expected life of 6.0 - 6.25 years, (3) expected volatility of approximately 113% - 114% based on the trading history of similar companies, and (4) zero expected dividends.

During June 2021, the Company granted certain employees and directors options to purchase 236,451 shares of its common stock pursuant to the 2021 Incentive Stock Plan. The stock options have a fair value of approximately $3.3 million that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 1.23% based on the applicable US Treasury bill rate (2) expected life of 6.0 - 6.25 years, (3) expected volatility of approximately 107% - 108% based on the trading history of similar companies, and (4) zero expected dividends.

During July, August and September 2021, the Company granted certain employees and consultants options to purchase in aggregate 373,000 shares of its common stock pursuant to the 2021 Incentive Stock Plan. The stock options have a fair value of approximately $6.3 million that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 0.96% - 1.31% based on the applicable US Treasury bill rate (2) expected life of 6.0 – 10.0 years, (3) expected volatility of approximately 105% - 109% based on the trading history of similar companies, and (4) zero expected dividends.

The following table summarizes stock option activity during the nine months ended September 30, 2021:

During the nine months ended September 30, 2021 and 2020, the Company recognized stock-based compensation expense of approximately $3.3 million and $2.1 million, respectively, related to the vesting of stock options. As of September 30, 2021, there was approximately $14.6 million of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of 2.73 years.

Warrants

The Company issued 45,386 warrants to the Company’s lenders upon obtaining its loan in June 2021. The warrants have a 10-year term and an exercise price of $14.05. The warrants have a fair value of approximately $0.6 million that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 1.45% based on the applicable US Treasury bill rate (2) expected life of 10.0 years, (3) expected volatility of approximately 103% based on the trading history of similar companies, and (4) zero expected dividends. At September 30, 2021, the intrinsic value of these warrants is $244,000.

In connection with the Company’s initial public offering in February 2019, the Company issued warrants to the placement agents to purchase the Company’s common stock at an exercise price of $9.60 per common share, which warrants are exercisable until December 19, 2023. During the nine months ended September 30, 2021, 6,147 of these warrants were exercised on a cashless basis in exchange for 3,758 shares of common stock. At September 30, 2021, 28,688 of these warrants are outstanding and the intrinsic value is $282,000.

On June 30, 2017, the Company issued fully vested warrants to purchase 31,667 shares of the Company’s common stock to a third party in conjunction with the common stock sold for cash. The warrants have a $1.50 exercise price and expire on June 30, 2022. During the nine months ended September 30, 2021, 11,875 of these warrants were exercised for cash proceeds of $18,000. At September 30, 2021, 19,792 of these warrants are outstanding, with an intrinsic value of $355,000.

Stock-based Compensation by Class of Expense

The following summarizes the components of stock-based compensation expense in the consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 respectively:

Shareholder Rights Agreement

On December 30, 2020, the Board of Directors (the “Board”) of the Company approved and adopted a Rights Agreement, dated as of December 30, 2020, by and between the Company and VStock Transfer, LLC, as rights agent, pursuant to which the Board declared a dividend of one preferred share purchase right (each, a “Right”) for each outstanding share of the Company’s common stock held by stockholders as of the close of business on January 11, 2021. When exercisable, each right initially would represent the right to purchase from the Company one one-thousandth of a share of a newly designated series of preferred stock, Series A Junior Participating Preferred Stock, par value $0.001 per share, of the Company, at an exercise price of $300.00 per one one-thousandth of a Series A Junior Participating Preferred Share, subject to adjustment. Subject to various exceptions, the Rights become exercisable in the event any person (excluding certain exempted or grandfathered persons) becomes the beneficial owner of twenty percent or more of the Company’s common stock without the approval of the Board. The Rights are scheduled to expire on December 30, 2021.

NOTE 9 – COLLABORATIVE AGREEMENTS

During 2020, the Company was awarded a $0.5 million grant from the Amyotrophic Lateral Sclerosis (“ALS”) Association to fund a study of the efficacy of XPro1595 to reverse ALS in vitro and to fund a study of the efficacy of XPro1595 to protect against ALS model phenotypes in vivo. During the nine months ended September 30, 2021 and 2020, the Company received $0.1 million and $0.3 million, respectively, of cash proceeds pursuant to this grant which the Company recorded as deferred liabilities. The Company offsets costs incurred related to this research against the grants. As of September 30, 2021 and December 31, 2020, the Company recorded approximately $0.2 million and $0.1 million, respectively, as deferred liabilities in the consolidated balance sheet related to the ALS grant.

During September 2020, the Company was awarded a grant of up to $2.9 million from the National Institutes of Health (“NIH”). The grant will support a Phase 2 study of XPro1595 in patients with treatment resistant depression. As of September 30, 2021, the Company has not received any proceeds pursuant to this grant. 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Lease

In May 2019, the Company signed a sublease agreement with a related party for office space in La Jolla, California. The lease has a 61-month term, which corresponds to the lease term of the lessor. The lessor is CTI.

During September 2021, the Company signed a lease agreement with a third party for office space in Boca Raton, Florida. The lease agreement has a 64-month term and will commence during the fourth quarter of 2021.

Future minimum payments pursuant to the leases are as follows:

(in thousands, except years)

During the three and nine months ended September 30, 2021, the Company recognized $19,000 and $45,000, respectively, in operating lease expense, which is included in general and administrative expenses in the Company’s consolidated statement of operations.

Litigation

The Company is subject to claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact in the Company’s consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the industries in which we may participate; competition within our chosen industry, including competition from much larger competitors; technological advances and failure to successfully develop business relationships.

Description of Business

Overview

We are a clinical-stage immunotherapy company focused on developing drugs that may reprogram the patient’s innate immune system to treat disease. We believe this may be done by targeting cells of the innate immune system that cause acute and chronic inflammation and are involved in the immune dysfunction associated with chronic diseases such as cancer and neurodegenerative diseases. The Company has two therapeutic platforms – dominant-negative TNF platform (“DN-TNF”) and the Natural Killer (“NK”) platform. The DN-TNF platform neutralizes soluble TNF (“sTNF”) without affecting trans-membrane TNF (“tmTNF”) or TNF receptors -TNFR1 and TNFR2. This unique biologic mechanism differentiates the DN-TNF drugs from currently approved non-selective TNF inhibitors that inhibit both sTNF and tmTNF. Protecting the function of tmTNF while neutralizing the function of sTNF is a potent anti-inflammatory strategy that does not cause immunosuppression or demyelination which occur in the currently approved non-selective TNF inhibitors. Currently approved non-selective TNF inhibitors are approved to treat autoimmune disease, but are contraindicated in patients with infection, cancer and neurologic diseases because they increase the risk of infection, cancer and demyelinating neurologic diseases, respectively; all the safety problems are due to off-target effects on inhibiting tmTNF. The NK platform targets the dysfunctional natural killer cells (“NK cells”) in patients with cancer. NK cells are part of the normal immunologic response to cancer with important roles in immunosurveillance to prevent cancer and in preventing relapse by eliminating residual disease. Residual disease is the cancer left behind after therapy is finished. Residual disease, can grow to cause relapse. The NK cells of cancer patients loses the ability to bind and kill cancer cells. The strength of the bond of binding to cancer cells, called avidity, is a necessary step NK killing of cancer cells. INKmune improves avidity of the patients NK cells to overcome the immune evasion of the patient’s cancer cells. We believe INKmune is best used to eliminate residual disease after the patient has completed other cancer therapies. Both the DN-TNF platform and the INKmune platform can be used to treat multiple diseases. The DN-TNF platform will be used as an immunotherapy for the treatment of cancer and neurodegenerative disease. INKmune is being developed to treat NK sensitive hematologic malignancies and solid tumors.

We believe our DN-TNF platform can be used as a cancer therapy to reverse resistance in immunotherapy and as a CNS therapy to target glial activation to prevent progression of Alzheimer’s disease (“AD”), and to target neuroinflammation in treatment resistant depression (“TRD”). The drug is named differently for the oncology and CNS indication; INB03 or XPro1595, respectively, but it is the same drug product. In each case, we believe neutralizing sTNF is a cornerstone to the treatment of these diseases. As an immunotherapy for cancer, we are using INB03 to neutralize sTNF produced by HER2+ trastuzumab resistant breast cancers to reverse resistance to therapy. sTNF causes an up-regulation of MUC4 expression that causes steric hindrance of trastuzumab binding to the HER2/Neu receptor on HER2+ breast cancer cells. Without binding, trastuzumab is not effective. In addition, INB03 changes the immunobiology of the tumor microenvironment by decreasing the number of immunosuppressive myeloid cells, both myeloid derived suppressor cells and tumor active macrophages, and increasing the number of cytotoxic lymphocytes in the TME. The Company has completed an open label dose escalation trial in cancer patients with metastatic solid tumors that have failed multiple lines of therapy. The trial informs the design of the Phase II trial by demonstrating that INB03 was safe and well tolerated, defined the dose of INB03 to carry into Phase II trials, and demonstrated a pharmacodynamic end-point. A Phase II trial is planned in women with advanced HER2+ breast cancer with metastasis. 

Likewise, we believe the DN-TNF platform can be used to treat selected neurodegenerative diseases. The Company believes the core pathology of cognitive decline is a combination of neurodegeneration and synaptic dysfunction. XPro1595 completed a Phase I trial treating patients with Alzheimer’s disease that was partially funded by a Part-the-Clouds Award from the Alzheimer’s Association. We believe XPro1595 targets activated microglia and astrocytes of the brain that produce sTNF that promotes nerve cell loss and synaptic dysfunction, key elements in the development of dementia. In animal models, elimination of sTNF prevents nerve cell dysfunction and reverses synaptic pruning. The Phase I trial in patients with biomarkers of inflammation with AD has been completed. The open label, dose escalation trial is designed to demonstrate that XPro1595 can safely decrease neuroinflammation in patients with AD. The endpoints of the trial are measures of neuroinflammation and neurodegeneration in blood and cerebral spinal fluid, measures of neuroinflammation by measuring cytokines in the CSF and MRI by measuring white matter free water. XPro1595, at the 1mg/kg/week dose decreased inflammatory cytokines in the CSF and white matter free water in the brain demonstrating that XPro1595 can decrease neuroinflammation in patients with AD. We also studied downstream benefits of decreasing neuroinflammation by measuring changes in the CSF proteome and quantifying changes in novel white matter MRI biomarkers. XPro1595 significantly decreases biomarkers of neurodegeneration as measure by decreases in the CSF proteome of neurofilament light chain, phospho Tau 217 and VILIP-1; decreases of 84%, 46% and 91% respectively after 3 months of therapy. Three months of XPro1595 therapy improved measures of synaptic function, as measured in the CSF proteome including a 222% increase in Contactin 2 and a 56% decrease neurogranin, proteins that contribute to improved synaptic function.

The successful completion of the Phase I trial in AD has informed the design of the Phase II trial in patients with mild AD. The Company plans a blinded randomized trial to test if treatment of AD patients with neuroinflammation will affect cognitive decline. The Phase II trial has six important elements. Two hundred patients will be enrolled in a 2:1 ration (XPro1595 vs placebo). The patients will receive 1mg/kg/week as a subcutaneous injection for six months. An enrichment strategy identical to the successful strategy used in the Phase I trial will be used to ensure patients have neuroinflammation. Patients will need to have some combination of elevated C-reactive protein, hemoglobin A1c, erythrocyte sedimentation rated in the blood and at least one allele of ApoE4. The primary end-point will be Early/mild Alzheimer’s Cognitive Composite (“EMACC”), a validated cognitive measure that is more sensitive than traditional end-points used in many studies of patients with early AD. The trial will be performed in North America and Australia, is expected to start enrolling patients in December 2021. We expect top-line clinical data to be available mid-2023. All patients will be offered to stay on therapy for at least 12 months in an extension trial. Clinical and biomarker data will be collected during the extension trial.

Effective therapy for TRD is a large unmet need. Twenty percent of patients with a Major Depressive Disorder have TRD. Once third of TRD patients have peripheral biomarkers to inflammation (elevated CRP). This is a large patient population. The role of TNF and anti-TNF therapeutics was explored in a small open label clinical trial by Prof. Andrew Miller, MD of Emory University demonstrated the patients have elevated TNF levels and treatment with infliximab treated their depression (Miller, 2011). The Company received a $2.9M USD award from the National Institute of Mental Health (“NIMH”) to treat TRD with XPro1595. The blinded, randomized Phase II trial will use a biomarkers of peripheral inflammation to select patients with TRD for enrollment. Patients will be treated for 6 weeks. Primary end-points include both clinical and neuroimaging measures. The final trial design has is ongoing and discussions with the FDA are not complete. The Company anticipates receiving authorization to initiate the clinical trial in the second half of 2021.

We believe that INKmune improves the ability of the patient’s own NK cells to attack their tumor. INKmune interacts with the patient’s NK cells to convert them from inert resting NK cells into memory-like NK cells that kill the patient’s cancer cells. INKmune is a replication incompetent proprietary cell line that is given to the patient after determining that i) the patient has adequate NK cells in their circulation and ii) those NK cells are functional when exposed to INKmune in vitro. INKmune is designed to be given to patients after their immune system has recovered after cytotoxic chemotherapy to target the residual disease the remains after treatment with cytotoxic therapy. We believe INKmune can be used to treat numerous hematologic malignancies and solid tumors including leukemia, multiple myeloma, lymphoma, lung, ovary, breast, renal and prostate cancer. The Company has initiated a Phase I trial using INKmune to treat patients with high risk MDS, a form of leukemia. One patient has been treated in the Phase I trial. In the single patient, INKmune therapy is safe, produces memory-like NK cells that kill cancer in vitro, promotes proliferation and persistence of the NK cells. The Company will continue to enroll patients in the Phase I trial with a goal of completing patient enrollment in 2022. The Company intends to treat women with relapsed refractory ovarian in separate Phase I trial beginning during 2022.

Since our inception in 2015, we have devoted substantially all of our resources to the discovery and development of our product candidates, including clinical trials and preclinical studies as well as general and administrative support for these operations. To date, we have generated no significant revenue. We have incurred net losses in each year since our inception and, as of September 30, 2021, we had an accumulated deficit of approximately $54.0 million. Our net losses were $20,669,000 and $8,900,000 for the nine months ended September 30, 2021 and 2020, respectively. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations, including stock-based compensation. 

The Company has supported a trial using Quellor, the DN-TNF platform, to treat patients with hypoxia due to COVID-19 infection. This blinded randomized Phase II trial has been closed by the Company because of the changing COVID-19 therapeutic landscape. The FDA is no longer offering emergency use authorization approvals for this type of therapy. This means at least one large Phase III clinical trial will be required in addition to the Phase II trial. The therapeutic landscape has changed dramatically since the first patient was enrolled. Mortality rates have decreased 10-fold. Immunosuppressive corticosteroid treatments are routine. High risk patients have receive vaccinations and oral therapies have been developed to prevent the need for hospitalization. The Company has decided clinical development for prevention of respiratory failure is a high risk, low reward program that will dilute efforts from our core programs in CNS disease and oncology.

The Company has presented pre-clinical data on the use of DN-TNF to treat non-alcoholic steatohepatitis (“NASH”). The Company has decided to defer the NASH program for the near future due to the complex and evolving clinical and regulatory environment. The Company may choose to reactivate the program or abandon the program in the future.

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict. Also, economies worldwide have also been negatively impacted by the COVID-19 pandemic, however policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remain uncertain.

In addition, the Company’s clinical trials have been affected by and may continue to be affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment have and may continue to be delayed due to prioritization of hospital resources toward the COVID-19 pandemic. Some patients have not and others may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Similarly, the ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, may adversely impact the Company’s clinical trial operations.

The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s service providers, suppliers, contract research organizations (“CROs”) and the Company’s clinical trials, all of which are uncertain and cannot be predicted. As of the date of issuance of Company’s financial statements, the extent to which the COVID-19 pandemic may materially impact the Company’s financial condition, liquidity or results of operations is uncertain.

We classify our operating expenses into two categories: research and development; and general and administrative expenses. Personnel costs including salaries, benefits and stock-based compensation expense comprise a significant component of our research and development and general and administrative expense categories.

We qualify as an “emerging growth company” under the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

We have elected to take advantage of the above-referenced exemptions and we may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenues, we have more than $700 million in market value of our stock held by non-affiliates, or we issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens.

Research and Development

Research and development expense consists of expenses incurred while performing research and development activities to discover and develop our product candidates. This includes conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Our research and development expense primarily consist of:

We typically use our employee, consultant and infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, other internal costs or external consultant costs to specific product candidates or development programs.

We participate, through our wholly-owned subsidiary in Australia, in the Australian research and development tax incentive program, such that a percentage of our qualifying research and development expenditures are reimbursed by the Australian government, and such incentives are reflected as a reduction of research and development expense. The Australian research and development tax incentive is recognized when there is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured. In the future, the Company may elect to cease to perform research and development in Australia at which point the Company may not participate the Australian research and development tax incentive program.

We participate, through our wholly-owned subsidiary in the United Kingdom, in the research and development program provided by the United Kingdom tax relief program, such that a percentage of our qualifying research and development expenditures are reimbursed by the United Kingdom government, and such incentives are reflected as a reduction of research and development expense. The United Kingdom research and development tax incentive is recognized when there is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured. In the future, the Company may elect to cease to perform research and development in the United Kingdom at which point the Company may not participate in the United Kingdom tax relief program.

Substantially all of our research and development expenses to date have been incurred in connection with our current and future product candidates. We expect our research and development expenses to increase significantly for the foreseeable future as we advance an increased number of our product candidates through clinical development, including the conduct of our planned clinical trials and manufacturing drug to be used in those clinical trials. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. The successful development of product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of any product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates. 

The costs of clinical trials may vary significantly over the life of a project owing to, but not limited to, the following:

We do not expect any of our product candidates to be commercially available for at least the next several years, if ever. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future, which may fluctuate significantly from quarter-to-quarter and year-to-year. We anticipate that our expenses will increase substantially as we:

General and Administrative Expenses

General and administrative expenses consist principally of payroll and personnel expenses, including stock-based compensation; professional fees for legal, consulting, accounting and tax services; overhead, including rent and utilities; and other general operating expenses not otherwise classified as research and development expenses.

Other income (expense)

Other income (expense) primarily consists of interest expense on debt, interest income on money market accounts and foreign currency exchange gains and losses.

Results of Operations

Comparison of the Three Months Ended September 30, 2021 and 2020

The following table summarizes our results of operations for the periods indicated:

Revenues

During the three months ended September 30, 2021, the Company sold MSC’s to one third-party and recognized $14,000 of revenues. There were no revenues during the three months ended September 30, 2020.

General and Administrative

General and administrative expenses were approximately $2.5 million during the three months ended September 30, 2021 and September 30, 2020.

Research and Development

Research and development expenses were approximately $6.5 million during the three months ended September 30, 2021, compared to approximately $2.4 million during the three months ended September 30, 2020.   The increase in research and development expenses during the three months ending September 30, 2021 compared to the three months ending September 30, 2020 is largely due to incurring costs in connection with the Company’s Phase 2 Alzheimer’s clinical trial ($2.1 million increase), higher costs associated with manufacturing additional drugs ($1.4 million increase), and incurring higher compensation expense, including stock-based compensation ($0.7 million increase).

Other Expense

The Company’s other expense is higher in 2021 due to the Company incurring interest expense from a loan the Company obtained in June 2021.

Comparison of the Nine Months Ended September 30, 2021 and 2020

The following table summarizes our results of operations for the periods indicated:

Revenues

During the nine months ended September 30, 2021, the Company sold MSC’s to one third-party and recognized $18,000 of revenues. There were no revenues during the nine months ended September 30, 2020.

General and Administrative

General and administrative expenses were approximately $6.7 million during the nine months ended September 30, 2021, compared to approximately $5.0 million during the nine months ended September 30, 2020. The increase in general and administrative expenses is largely due to higher professional fees ($0.9 million higher during the nine months ended September 30, 2021), and higher compensation expense, including stock-based compensation ($0.6 million higher during the nine months ended September 30, 2021).

Research and Development

Research and development expenses were approximately $13.5 million during the nine months ended September 30, 2021, compared to approximately $4.1 million during the nine months ended September 30, 2020.   The increase in research and development expenses during the nine months ending September 30, 2021 compared to the nine months ending September 30, 2020 is largely due to additional amounts incurred related to manufacturing additional drugs ($2.7 million increase), incurring costs in connection with the Company’s Phase 2 Alzheimer’s clinical trial ($2.2 million increase), incurring additional costs in connection with the Company’s COVID-19 clinical trial ($2.0 million increase), and incurring higher compensation expense, including stock-based compensation ($1.0 million increase).

Other Income (Expense)

The Company’s other expense is higher in 2021 due to the Company incurring interest expense from a loan the Company obtained in June 2021.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis.

We incurred a net loss of $20,669,000 and $8,895,000 for the nine months ended September 30, 2021 and 2020, respectively. Net cash used in operating activities was $18,724,000 and $6,551,000 for the nine months ended September 30, 2021 and 2020, respectively. Since inception, we have funded our operations primarily with proceeds from the sales of our common stock. As of September 30, 2021, we had cash and cash equivalents of approximately $84.5 million. We anticipate that operating losses and net cash used in operating activities will increase over the next few years as we advance our products under development.

Our primary uses of capital are, and we expect will continue to be, third-party clinical and preclinical research and development services, compensation and related expenses, professional fees, patent and other regulatory expenses and general overhead costs. We believe our use of CROs provides us with flexibility in managing our spending.

The Company incurs the majority of its research and development expenses in Australia and the United Kingdom. Fluctuations in the rate of exchange between the United States dollar and the pound sterling as well as the Australian dollar could adversely affect our financial results, including our expenses as well as assets and liabilities. We currently do not hedge foreign currencies but will continue to assess whether that strategy is appropriate. As of September 30, 2021, the cash balance held by our foreign subsidiaries with currencies other than the United States dollar was approximately $0.4 million. We do not have any material financial exposure to one customer or one country that would significantly hinder our liquidity.

As a publicly traded company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and The Nasdaq Stock Market, require public companies to implement specified corporate governance practices that were inapplicable to us as a private company. We expect these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

As of September 30, 2021, the Company had an accumulated deficit of $54,044,000 and working capital of $86,121,000. Losses have principally occurred as a result of stock-based compensation expense as well as the substantial resources required for research and development of the Company’s products which included the general and administrative expenses associated with its organization and product development, as well as the lack of sources of revenues until such time as the Company’s products are commercialized. As of September 30, 2021, we had cash and cash equivalents of approximately $84.5 million. We believe our cash and cash equivalents will be sufficient to fund our operations for at least the next 12 months following the filing date of this Quarterly Report on Form 10-Q based on the balance of cash available as of September 30, 2021.

Registered Direct Offering

During July 2021, the Company completed a registered direct offering whereby the Company sold 1,818,182 shares of its common stock to investors for net proceeds of $36.9 million.

ATM Sales Agreements

During the nine months ended September 30, 2020, we issued and sold 150,682 shares of common stock at an average price of $5.44 per share under the 2020 ATM program. The aggregate net proceeds were approximately $0.7 million after BTIG’s commission and other offering expenses. 

During the nine months ended September 30, 2021, we issued and sold 1,439,480 shares of common stock at an average price of $20.17 per share under the 2020 ATM program. The aggregate net proceeds were approximately $28.4 million after BTIG’s commission and other offering expenses. As of September 30, 2021, sales of our common stock pursuant to the 2020 ATM have been completed. 

During March 2021, the Company entered into the 2021 ATM program with BTIG, as sales agent, to establish an ATM offering program of up to $45 million of common stock. During the nine months ended September 30, 2021, the Company sold 713,192 shares at an average price per share of $21.73 for net proceeds of approximately $14.9 million under the 2021 ATM program.

Term Loan

On June 10, 2021, we entered into a Loan and Security Agreement with SVB and an affiliate of SVB, providing for a $15.0 million term loan. The Term Loan also provides for us to request an additional $5.0 million term loan from the Lenders, which may be granted or denied at the sole discretion of the Lenders. The Term Loan provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 4.50% and (ii) 7.75% and also includes a final payment fee equal to 6.5% of the original principal amount borrowed payable on the earlier of the repayment of the loan in full and the maturity date. The Company used the proceeds of the term loan to fund the cash consideration for the Option Cancellation Agreement with Xencor.

The Lincoln Park Transaction

On May 15, 2019, the Company and Lincoln Park entered into a purchase agreement (the “Purchase Agreement”) pursuant to which the Company had the right to sell to Lincoln Park up to $20.0 million in shares of the Company’s common stock, subject to certain limitations and conditions set forth in the Purchase Agreement. During the nine months ended September 30, 2020, the Company issued 196,000 shares of the Company’s common stock to Lincoln Park for gross proceeds of $1,003,000. During April 2021, the Company terminated the Purchase Agreement.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

Operating Activities

Our cash used in operating activities was primarily driven by our net loss.

Operating activities used approximately $18.7 million of cash during the nine months ended September 30, 2021, resulting from our loss of $20.7 million and changes in our net operating assets and liabilities of $1.4 million, partially offset by non-cash stock-based compensation of $3.3 million. The change in our net operating assets and liabilities was mainly due to an increase in prepaid expenses of approximately $1.1 million, and an increase in research and development tax credit receivable of $3.3 million, partially offset by an increase in accounts payable and accrued liabilities of $2.7 million and an increase in deferred liabilities of approximately $0.4 million.

Operating activities used approximately $6.6 million of cash for the nine months ended September 30, 2020, primarily resulting from our net loss of approximately $8.9 million, a net cash outflow of approximately $0.1 million for changes in our net operating assets and liabilities, and non-cash stock-based compensation charges of approximately $2.4 million. The change in our net operating assets and liabilities was primarily driven by an increase in research and development tax incentive receivable of approximately $0.9 million, partially offset by an increase in accounts payable and accrued liabilities of approximately $0.8 million.  

Investing Activities

Investing activities used $15.0 million of cash for the nine months ended September 30, 2021 compared to $0 for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, the Company paid Xencor $15.0 million to settle an option to acquire 10% of the Company’s common stock on a fully diluted basis which was issued to acquire the Company’s acquired in-process research and development intangible asset.

Financing Activities

During the nine months ended September 30, 2021, the Company sold 1,439,480 shares of its common stock under its 2020 ATM program for net proceeds of approximately $28.4 million.

During the nine months ended September 30, 2021, the Company sold 713,192 shares of its common stock under the 2021 ATM program for net proceeds of approximately $14.9 million.

During July 2021, the Company completed a registered direct offering whereby the Company sold 1,818,182 shares of its common stock to investors for net proceeds of $36.9 million.

During June 2021, we entered into a Loan and Security Agreement with SVB and an affiliate of SVB, providing for a $15.0 million term loan.

During the nine months ended September 30, 2021, the Company received approximately 1.2 million in connection with the exercise of stock options and warrants.

During July 2020, the Company completed an underwritten public offering in which it sold 2,500,000 shares of common stock at a public offering price of $10.00 per share. Aggregate net proceeds from the underwritten public offering were approximately $23.1 million, net of approximately $1.9 million in underwriting discounts and commissions and offering expenses.

During the nine months ended September 30, 2020, the Company purchased 220,000 shares from an investor for approximately $1.0 million. In addition, the Company sold 196,000 shares of its common stock to Lincoln Park for cash proceeds of approximately $1.0 million.

During the nine months ended September 30, 2020, the Company issued and sold 178,600 shares of common stock at an average price of $5.45 per share under the ATM program for net cash proceeds of approximately $0.9 million.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. Actual results may differ from these estimates. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and there have been no material changes during the nine months ended September 30, 2021.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1). 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) at the end of the period covered by this quarterly report.

Based on this evaluation, we concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We recognize that any controls system, no matter how well designed and operated, can provide only reasonable assurance of achieving its objectives, and our management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the period covered by this quarterly report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently a party to any pending legal proceedings that we believe will have a material adverse effect on our business or financial conditions. We may, however, be subject to various claims and legal actions arising in the ordinary course of business from time to time.

Item 1A. Risk Factors

Not required for smaller reporting companies.

Item 2. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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