ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following
discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and notes thereto
appearing elsewhere in this Annual Report. In addition to historical financial information, the following discussion and analysis contains
forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results could differ materially from those anticipated
by these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these
differences below and elsewhere in this Form 10-K, including those set forth under “Risk Factors” and “Forward-Looking
Statements.”
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 indications; INB03 or XPro, 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 MUC4+ breast cancer with advanced disease.
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Likewise, we believe
the DN-TNF platform can be used to treat selected neurodegenerative diseases by modifying the brain microenvironment (BME). The Company
believes the core pathology of cognitive decline is a combination of neurodegeneration and synaptic dysfunction. XPro 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 XPro 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 XPro 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. XPro, at the 1mg/kg/week dose decreased inflammatory cytokines
in the CSF and white matter free water in the brain demonstrating that XPro 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. XPro significantly decreases biomarkers of neurodegeneration as measured by changes in the CSF proteome
including neurofilament light chain, phospho Tau 217 and VILIP-1; decreases of 84%, 46% and 91% respectively after 3 months of therapy.
Three months of XPro 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 two Phase II trials in patients with AD; one in mild AD and the other in MCI. The
mild AD trial will be a blinded randomized trial to test if treatment of mild 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 ratio (XPro 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 early 2022. We expect top-line clinical data to be available late-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.
The second Phase II trial will be a blinded randomized
trial in patients with MCI in which the Company plans to enroll 60 patients in two arms in a 2:1 ratio (1mg/kg/week XPro, placebo). Patients
will be treated for 3 months. Patients must have at least one ApoE4 allele to qualify for the trial. The primary end-point is EMACC, a
sensitive cognitive end-point validated for use in patients with early AD. Secondary clinical endpoints include the CDR-SB, Cogstate Battery,
E-Cog, NPI, and ADCS-ADL. Imaging endpoints of neuroinflammation (White matter free water), white matter integrity (apparent fiber density,
radial diffusivity), and gray matter quality (cortical disarray measurement) will be assessed via MRI. Changes in brain metabolism will
be assessed via FDG-PET. Additional secondary measures of function include EEG, and speech and language. All patients will be eligible
to continue on XPro for at least 9 additional months. Clinical and MRI metrics will be followed during the extension trial. The
Company may amend the clinical trial design from time-to-time to improve the quality of the data or the probability of success.
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 XPro. 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 2022.
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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 development of cancer killing memory-like NK cells that can be found in the
patient’s circulation of 4 months. 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.
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.
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 December 31, 2021, we had an accumulated deficit of approximately $63.7 million. Our net losses were
$30,340,000 and $12,099,000 for the year ended December 31, 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 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.
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As a company with less than $1.07 billion in revenue
during our last fiscal year, 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:
● reduced disclosure about our executive compensation arrangements;
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.
Components of Operating Results
Operating Expenses
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:
● clinical trial and regulatory-related costs;
● manufacturing and testing costs and related supplies and materials; and
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.
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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. During 2022, the Company expects to receive a research and development tax rebate for eligible expenditures
incurred in 2021, however the Company will be ineligible for research and development tax incentives for expenditures incurred after 2021
as a result of changes 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:
● per patient trial costs;
● the number of sites included in the clinical trials;
● the countries in which the clinical trials are conducted;
● the length of time required to enroll eligible patients;
● the number of patients that participate in the clinical trials;
● the number of doses that patients receive;
● the cost of comparative agents used in clinical trials;
● the drop-out or discontinuation rates of patients;
● the duration of patient follow-up;
● the efficacy and safety profile of the product candidate; and
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:
● potentially seek regulatory approval for our product candidates;
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● seek to discover and develop additional product candidates;
● seek to comply with regulatory standards and laws;
● maintain, leverage and expand our intellectual property portfolio;
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;
insurance, overhead, including rent and utilities; and other general operating expenses not otherwise classified as research and development
expenses.
Other income (expense)
Other expense consists primarily of interest expense
incurred on debt in 2021. Other income primarily consists of income from a settlement in 2020.
Critical Accounting Policies and Significant
Judgments and Estimates
This management’s discussion and analysis
of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with accounting
principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our
financial statements, as well as the reported revenues and expenses during the reported periods. We evaluate these estimates and judgments
on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
In-Process Research and Development
The Company evaluates the carrying value of indefinite-lived
intangible assets, which consists of in-process research and development (“IPR&D”), on an annual basis or more frequently
when indicators of impairment exist. An impairment of indefinite-lived intangible assets would occur if the fair value of the intangible
asset is less than the carrying value. Intangible assets with finite lives are tested for impairment when events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. If these facts and circumstances exist, the Company assesses
for recovery by comparing the carrying values of the assets with their future undiscounted net cash flows. Significant management judgment
is required in the forecast of future operating results that are used in the preparation of expected undiscounted cash flows.
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IPR&D assets are considered to be indefinite-lived
until the completion or abandonment of the associated research and development projects. During the period the assets are considered indefinite-lived,
they are tested for impairment. If the related project is terminated or abandoned, the Company may have a full or partial impairment related
to the IPR&D assets, calculated as the excess of their carrying value over fair value. The valuation process is very complex and requires
significant input and judgment using internal and external sources with respect to the Company’s future revenue and expense growth
rates, changes in working capital use, the selection of an appropriate discount rate, and other assumptions and estimates.
Research and Development (“R&D”)
R&D expenses consist primarily of costs related
to clinical studies and outside services, personnel expenses, and other R&D expenses. Clinical studies and outside services costs
relate primarily to services performed by clinical research organizations and related clinical or development manufacturing costs, materials
and supplies, filing fees, regulatory support, and other third-party fees. Personnel expenses relate primarily to salaries, benefits and
share-based compensation. R&D expenditures are charged to operations as incurred.
We recognize R&D tax credits receivable from
the United Kingdom and Australian government for spending on R&D as an offset of R&D expenses.
Stock-Based Compensation
We measure and recognize compensation
expense for all stock-based awards granted to service providers, employees, and directors based on the estimated fair value of the
award on the grant date. We calculate the estimated fair value of stock options on the date of grant using the Black-Scholes
option-pricing model, which is impacted by the fair value of our common stock, as well as changes in assumptions regarding a number
of highly complex and subjective variables. These variables include, but are not limited to, the market value of common stock on the
grant date, the expected dividend yield, the expected term of the awards, the risk-free interest rates and the expected common stock
price volatility over the term of the option awards. The expected volatility is based on the historical volatility of a few
unrelated public companies within our industry over the most recent period commensurate with the estimated expected term of our
stock options as we have insufficient historical information regarding the volatility of the share price of our common stock. The
risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at
the time of grant. We have never declared or paid dividends and have no plans to do so in the foreseeable future.
We recognize the fair value of stock options on
a straight-line basis over the period during which a service provider is required to provide services in exchange for the award (generally
the vesting period). We account for forfeitures as they occur.
Off-Balance Sheet Arrangements
During the periods presented, we did not have
any off-balance sheet arrangements as defined under SEC rules.
Licensing and Collaboration Agreements
We anticipate that in-licensing, out-licensing
and strategic collaborations will become an integral part of our operations, providing the company with opportunities to leverage our
partners’ expertise and capabilities to further expand the potential of our technologies, product candidates and revenue streams.
Xencor
In October 2017, we licensed INB03 (also known
as XPro) from Xencor. This exclusive, global, unrestricted license came with considerable know-how, intellectual property, pre-clinical
data, regulatory documentation and product stocks. Currently, we are focused on the immune-oncology uses of this unique asset. In the
future, we may develop the asset in a wide variety of therapeutic areas, with a variety of delivery techniques by ourselves or in conjunction
with partners.
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Results of Operations
Comparison of the Years Ended December 31,
2021 and December 31, 2020
Year Ended
Revenues
During 2021, the Company sold MSC’s to three
customers and recognized $181,000 of revenues. We recorded $11,000 of revenues in 2020 as a result of selling MSC’s to one customer.
General and Administrative
General and administrative expenses were $8.8 million for the year
ended December 31, 2021, compared to $6.3 million for the year ended December 31, 2020. The increase was primarily attributable to higher
professional fees ($1.0 million higher in 2021), higher stock-based compensation expense ($0.6 million higher in 2021), and higher salary
expense ($0.5 million higher in 2021).
Research and Development
Research and development expenses increased to $20.5 million for the
year ended December 31, 2021 from $5.9 million for the year ended December 31, 2020. The increase in research and development expenses
during the year ended December 31, 2021 compared to 2020 is due to $5.4 million of higher expenses for the Alzheimer’s clinical
program, $1.9 million of higher expenses on the COVID-19 clinical trial, and due to the Company incurring $5.5 million of higher manufacturing
costs in connection with producing its DN-TNF product. In addition, the Company’s stock-based compensation was $1.1 million higher
in 2021 compared to 2020.
Other Expense (Income)
Other expense increased during the year ended
December 31, 2021 compared to 2020 as a result of the incurring $1.0 million of interest expense
from a loan the Company obtained in June 2021. During 2020, the Company received a refund from a third-party vendor pursuant to
a release and settlement agreement of approximately $0.1 million for services provided in a previous year.
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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 $30,340,000 and $12,099,000 for the years
ended December 31, 2021 and 2020, respectively. Net cash used in operating activities was $28,504,000 and $8,943,000 for the years ended
December 31, 2021 and 2020, respectively. Since inception, we have funded our operations primarily with proceeds from the sales of our
common stock and from the receipts of grants. As of December 31, 2021, we had cash and cash equivalents of $74.8 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, costs incurred to manufacture our drugs under
development, compensation and related expenses, legal, 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 December 31, 2021, the cash balance held by our foreign subsidiaries with currencies other than the United States dollar was approximately
$0.2 million. We do not have any material financial exposure to one customer or one country that would significantly hinder our liquidity.
As of December 31, 2021, the Company had an accumulated deficit of
$63.7 million and working capital of $78.2 million. Losses have principally occurred as a result of 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 material revenues until such time as the Company’s products
are commercialized. As of December 31, 2021, we had cash and cash equivalents of $74.8 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 Annual Report on Form 10-K.
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 year ended
December 31, 2020, we issued and sold 178,600 shares of common stock at an average price of $5.45 per share under the 2020 ATM agreement.
The aggregate net proceeds were approximately $0.8 million after BTIG’s commission and other offering expenses.
During the year ended
December 31, 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 agreement.
The aggregate net proceeds were approximately $28.4 million after BTIG’s commission and other offering expenses. As of December
31, 2021, sales of our common stock pursuant to the 2020 ATM have been completed.
During March 2021, the Company entered into the 2021 ATM agreement
with BTIG, as sales agent, to establish an ATM offering of up to $45 million of common stock. During the year ended December 31, 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 agreement.
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 year ended December 31, 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.
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Cash Flows
The following table provides information regarding
our cash flows for the years ended December 31, 2021 and 2020:
Year Ended December 31,
Net cash used in operating activities $ (28,504 ) $ (8,943 )
Net cash used in investing activities (15,000 ) -
Net cash provided by financing activities 96,357 23,895
Impact on cash from foreign currency translation (10 ) 19
Net increase in cash and cash equivalents $ 52,843 $ 14,971
Net Cash Used in Operating Activities
Our cash used in operating activities was primarily
driven by our net loss.
Operating activities used $28.5 million of cash for the year ended
December 31, 2021, primarily resulting from our net loss of $30.3 million, a net cash outflow of $3.1 million for changes in our net operating
assets and liabilities, and non-cash stock-based compensation charges of $4.8 million. The change in our net operating assets and liabilities
was primarily due to an increase in research and development tax credit receivable of $3.2 million and an increase in prepaid expenses
of $2.1 million, partially offset by an increase in accounts payable and accrued liabilities of $2.2 million.
Operating activities used $8.9 million of cash
for the year ended December 31, 2020, primarily resulting from our net loss of $12.1 million, partially offset by non-cash stock-based
compensation charges of $3.1 million.
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Investing
Activities
Investing activities used $15.0 million of cash for the year ended
December 31, 2021 compared to $0 for the year ended December 31, 2020. During the year ended December 31, 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.
Net Cash Provided by Financing Activities
During the year ended
December 31, 2021, the Company sold 1,439,480 shares of its common stock under its 2020 ATM agreement for net proceeds of approximately
$28.4 million.
During the year ended
December 31, 2021, the Company sold 713,192 shares of its common stock under the 2021 ATM agreement 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 year ended December 31, 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 year ended December 31, 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 year ended December 31, 2020, the Company issued and sold
178,600 shares of common stock at an average price of $5.45 per share under the ATM agreement for net cash proceeds of approximately $0.8
million.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
We are exposed to market risk from changes in
foreign currency rates.
72
Item 8. Financial Statements and Supplementary
Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
AUDITED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2021 AND 2020 F-2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Stockholders and the Board of Directors
of
INmune Bio, Inc.
Boca Raton, Florida
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of INmune Bio, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements
of operations and comprehensive loss, changes in stockholders’ equity and cash flows for each of the two years in the period ended
December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results
of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2017.
Houston, Texas
March 3, 2022
F-1
INMUNE BIO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
CURRENT ASSETS
Research and development tax credit receivable 4,913 1,686
Prepaid expenses – related party 14 -
Operating lease – right of use assets 726 156
Other assets 99 -
Acquired in-process research and development intangible assets 16,514 16,514
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 3,733 $ 1,518
Accounts payable and accrued liabilities – related parties 80 34
Operating lease, current liabilities 72 34
Long-term debt, less debt discount 14,458 -
Long-term operating lease liabilities 704 126
Accrued liability – long-term 199 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Accumulated other comprehensive income 1 11
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 99,945 $ 40,656
See accompanying notes to these consolidated financial
statements.
F-2
INMUNE BIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(In
thousands, except share and per share amounts)
OPERATING EXPENSES
OTHER (EXPENSE) INCOME
Total other (expense) income (1,187 ) 129
Net loss per common share – basic and diluted $ (1.88 ) $ (1.01 )
COMPREHENSIVE LOSS
Other comprehensive (loss) income – foreign currency translation (10 ) 20
See accompanying notes to these consolidated financial
statements.
F-3
INMUNE BIO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(In thousands, except share amounts)
Accumulated
Additional Common Other Total
Common Stock Paid-In Stock Comprehensive Accumulated Stockholders’
Shares Amount Capital Issuable Income (loss) Deficit Equity
Acquisition and retirement of common stock (220,000 ) - (1,012 ) - - - (1,012 )
Capital contribution - - 216 - - - 216
Cashless exercise of warrants 2,400 - - - - - -
Issuance of common stock issuable 33,335 - 50 (50 ) - - -
Gain on foreign currency translation - - - - 20 - 20
Warrants issued to lenders as debt inducement - - 619 - - - 619
Stock-based compensation - - 4,796 - - - 4,796
Loss on foreign currency translation - - - - (10 ) - (10 )
See accompanying notes to these consolidated financial
statements.
F-4
INMUNE BIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of debt discount 126 -
Changes in operating assets and liabilities:
Research and development tax credit receivable (3,227 ) (1,118 )
Other tax receivable (478 ) (36 )
Prepaid expenses – related party (14 ) 26
Other assets (99 ) -
Accounts payable and accrued liabilities 2,215 1,116
Accounts payable and accrued liabilities – related parties 46 (40 )
Accrued liability – long-term 199 -
Operating lease liabilities 46 27
Net cash used in operating activities (28,504 ) (8,943 )
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities (15,000 ) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of debt 14,951 -
Net proceeds from sale of common stock 80,253 24,907
Net proceeds from the exercise of stock options 1,135 -
Net proceeds from the exercise of warrants 18 -
Purchase of common stock - (1,012 )
Net cash provided by financing activities 96,357 23,895
Impact on cash from foreign currency translation (10 ) 19
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for income taxes $ - $ -
Cash paid for interest expense $ 559 $ -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Warrants issued to lenders as debt inducement $ 619 $ -
Capital contribution $ - $ 216
Issuance of common stock issuable $ - $ 50
See accompanying notes to these consolidated financial
statements.
F-5
INMUNE BIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BASIS
OF PRESENTATION
Organization and Business Overview
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 (XPro) 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.
Basis of Presentation and Principles of
Consolidation
The accompanying consolidated financial statements
of the Company have been prepared in accordance with Generally Accepted Accounting Principles (“US GAAP”) in the United States
of America and the rules of the Securities and Exchange Commission (“SEC”).
The consolidated financial statements herein have
been prepared in accordance with US GAAP and include the accounts of INmune Bio, its wholly-owned UK subsidiary, and its wholly-owned
Australia subsidiary (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated.
NOTE 2 – LIQUIDITY
As of December 31, 2021, the Company had an accumulated
deficit of $63,715,000 and experienced losses since its inception. Losses have principally occurred as a result of 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.
F-6
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 December 31, 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 Annual Report on Form 10-K based on the balance of cash available as of December 31, 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
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.
Actual results and outcomes may differ from management’s estimates and assumptions.
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