ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements, as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current expectations and projections, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Annual Report to conform such statements to actual results or to changes in our expectations.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made in Item 1A of Part I of this Annual Report under the caption “Risk Factors.”
Risk factors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to: our history of losses; our lack of products that have received regulatory approval; uncertainties inherent in clinical trials and product development programs, including but not limited to the fact that pre-clinical and clinical results may not be indicative of results achievable in other trials or for other indications, that the studies or trials may not be successful or achieve desired results, that preclinical studies and clinical trials may not commence, have sufficient enrollment or be completed in the time periods anticipated, that results from one study may not necessarily be reflected or supported by the results of other similar studies, that results from an animal study may not be indicative of results achievable in human studies, that clinical testing is expensive and can take many years to complete, that the outcome of any clinical trial is uncertain and failure can occur at any time during the clinical trial process, and that our proprietary device technology and DNA medicine candidates may fail to show the desired safety and efficacy traits in clinical trials; the availability of funding; the ability to manufacture our DNA medicine candidates; the availability or potential availability of alternative therapies or treatments for the conditions targeted by us or our collaborators, including alternatives that may be more efficacious or cost-effective than any therapy or treatment that we and our collaborators hope to develop; our ability to receive development, regulatory and commercialization event-based payments under our collaborative agreements; whether our proprietary rights are enforceable or defensible or infringe or allegedly infringe on rights of others or can withstand claims of invalidity; and the impact of government healthcare laws and proposals.
Overview
We are a clinical-stage biotechnology company focused on developing and commercializing DNA medicines to help treat and protect people from diseases associated with human papillomavirus (HPV), cancer, and infectious diseases. Our platform harnesses the power of in vivo protein production, featuring optimized design and delivery of DNA medicines that teach the body to manufacture its own disease-fighting tools.
We use proprietary technology to design DNA plasmids which are small circular DNA molecules that work like software the body’s cells can download to produce specific proteins to target and fight disease. Our proprietary investigational CELLECTRA® delivery devices help our DNA medicines enter the body’s cells for optimal effect.
Our lead candidate is INO-3107 for the treatment of recurrent respiratory papillomatosis, or RRP, a rare and debilitating disease of the respiratory tract caused by HPV infection. In our completed Phase 1/2 clinical trial of INO-3107 for the treatment of HPV-6 and HPV-11-associated RRP, 81.3% of patients experienced a reduction in the number of surgical interventions in the year following administration of INO-3107, when compared with the year prior to treatment.
In February 2023, we announced data from the second cohort of our Phase 1/2 clinical trial, which followed the announcement of the first cohort in October 2022. In the second cohort of 11 patients who were administered INO-3107 via an exploratory side port injection needle, 10 of the 11 patients (91%) saw a reduction in surgical interventions in the year following initial treatment, with the measurement beginning on Day 0, the start of trial therapy. Of these 10 patients, four did not require surgery. There was a statistically significant median decrease of three surgical interventions when comparing the year following treatment to the year prior to treatment. INO-3107 was well-tolerated and immunogenic among patients in the second cohort. The safety and efficacy results for the second cohort were consistent with results announced for the first cohort in October 2022.
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In the fourth quarter of 2023, we received feedback from the U.S. Food and Drug Administration, or FDA, that the data from this completed trial could be used to support the submission of a Biologic License Application, or BLA, for review under the FDA’s accelerated approval program. As part of submitting our BLA under the accelerated program, we will need to satisfy all FDA filing requirements and initiate a confirmatory clinical trial prior to BLA submission.
In addition to our development efforts with INO-3107, we are actively developing or planning to develop DNA medicines for other indications, including HPV-related anal dysplasia and oropharyngeal squamous cell carcinoma, or OPSCC; glioblastoma multiforme, or GBM, a deadly form of brain cancer; and a potential vaccine booster to protect against the Ebola virus. We were previously conducting clinical trials of a DNA medicine candidate for the treatment of HPV-related cervical high-grade squamous intraepithelial lesions, or HSIL, but announced in August 2023 that we were ceasing development for this indication in the United States. However, our collaborator ApolloBio Corporation continues to conduct a Phase 3 clinical trial of this candidate in China and plans to seek regulatory approval for and potentially commercialize the candidate in that jurisdiction.
Our partners and collaborators include Advaccine Biopharmaceuticals Suzhou Co, ApolloBio Corporation, AstraZeneca, The Bill & Melinda Gates Foundation (Gates), Coalition for Epidemic Preparedness Innovations (CEPI), Coherus Biosciences, Defense Advanced Research Projects Agency (DARPA), The U.S. Department of Defense (DoD), HIV Vaccines Trial Network, International Vaccine Institute (IVI), Kaneka Eurogentec, National Cancer Institute (NCI), National Institutes of Health (NIH), National Institute of Allergy and Infectious Diseases (NIAID), Plumbline Life Sciences, Regeneron Pharmaceuticals, Richter-Helm BioLogics, Thermo Fisher Scientific, the University of Pennsylvania, the Walter Reed Army Institute of Research, and The Wistar Institute.
All of our DNA medicine candidates are in the research and development phase. We have not generated any revenues from the sale of any products, and we do not expect to generate any material revenues unless and until we obtain marketing approval for and successfully commercialize INO-3107 and our other product candidates. We earn revenue from license fees and milestone revenue and collaborative research and development agreements and contracts. Our DNA medicine candidates will require significant additional research and development efforts, including extensive preclinical and clinical testing. All DNA medicine candidates that we advance to clinical testing will require regulatory approval prior to commercial use, and will require significant costs for commercialization. We may not be successful in our research and development efforts, and we may never generate sufficient product revenue to be profitable.
As of December 31, 2023, we had an accumulated deficit of $1.6 billion. We expect to continue to incur substantial operating losses in the future due to our commitment to our research and development programs, the funding of preclinical studies, clinical trials and regulatory activities and the costs of general and administrative activities.
Critical Accounting Policies and Estimates
The SEC defines critical accounting policies as those that are, in management’s view, important to the portrayal of our financial condition and results of operations and require management’s judgment. Our discussion and analysis of our financial condition and results of operations are based on our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our significant accounting policies are outlined in Note 2 to the consolidated financial statements included in this report.
The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements:
Collaboration Agreements and Revenue Recognition
We assess whether our collaboration agreements are subject to Accounting Standards Codification ("ASC") Topic 808: Collaborative Arrangements (“Topic 808”) based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of Topic 808 and we conclude that our collaboration partner is not a customer, we present such payments as a reduction of research and development expense. If payments from our collaboration partner to us represent consideration from a customer, then we account for those payments within the scope of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”).
Research and Development Expenses - Clinical Trial Accruals
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Our activities have largely consisted of research and development efforts related to developing proprietary device technologies, DNA medicine candidates and dMABs. For clinical trial expenses, judgments used in estimating accruals rely on estimates of total costs incurred based on participant enrollment, completion of studies and other events. Accrued clinical trial costs are subject to revisions as trials progress. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. Historically, revisions have not resulted in material changes to research and development expense; however a modification in the protocol of a clinical trial or cancellation of a trial could result in a charge to our results of operations.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 to the consolidated financial statements, included elsewhere in this report.
Results of Operations
The consolidated financial data for the years ended December 31, 2023, 2022 and 2021 is presented in the following table and the results of these periods are used in the discussion thereafter.
Operating expenses:
*Not meaningful
Comparison of Years Ended December 31, 2023 and 2022
Revenue
Revenue was primarily derived under collaborative arrangements and other contracts, including arrangements with affiliated entities, for the years ended December 31, 2023 and 2022. The $9.4 million decrease in revenue was primarily due to no revenue from our Procurement Contract with the DoD as all performance obligations were satisfied during 2022.
Research and Development Expenses
Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for full-time research and development employees, facilities expenses, overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, fees paid to contract research organizations and other consultants, and outside expenses. We utilize a labor reporting system to record employee
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compensation on a project-by-project basis. Unallocated research and development expenses include engineering and device-related expenses that are not allocable to a specific project, as well as stock-based compensation, other employee-related expenses that are not related to a specific project, and facilities and depreciation expenses.
Research and development costs are expensed as incurred. Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
The following tables summarize our research and development expense by product candidate for the years ended December 31, 2023 and 2022:
Years Ended December 31, Increase (Decrease)
(a) Net of contributions received from grant agreements and recorded as contra-research and development expense.
(b) Includes impairment of intangible assets of $2.0 million recorded in the second quarter of 2023.
The $101.0 million overall decrease in research and development expenses year over year was primarily the result of:
•$61.4 million in lower drug manufacturing, clinical study expenses, outside services and expensed inventory related to INO-4800 after we discontinued this program in the fourth quarter of 2022;
•$17.9 million in lower drug manufacturing and clinical study expenses related to other COVID-19 studies that ceased after we discontinued development of INO-4800;
•$15.0 million in lower employee and consultant compensation, including stock-based compensation, primarily due to reductions in headcount in 2023;
•$9.4 million in lower expensed inventory and outside services related to our CELLECTRA 3PSP device and array automation project;
•$8.4 million in lower immunology, clinical study expenses and outside services related to VGX-3100 as we discontinued development of this product candidate in the third quarter of 2023; and
•$4.4 million in lower drug manufacturing related to the sub-grant through Wistar for COVID-19 dMAbs
These decreases were partially offset by:
•$17.7 million of lower contra-research and development expense recorded from grant agreements; and
•$5.8 million of higher other drug manufacturing costs.
Contributions received from current grant agreements and recorded as contra-research and development expense were $6.8 million and $24.5 million for the years ended December 31, 2023 and 2022, respectively. The decrease year over year was primarily due to decreases of $7.7 million earned under the sub-grant through Wistar primarily for DARPA COVID-19 dMAb, $6.1 million from the DoD 3PSP device development grant and $5.0 million earned under the CEPI Lassa and MERS grants. These decreases were offset by an increase of $2.4 million in reimbursements from Advaccine.
General and Administrative Expenses
General and administrative expenses, which include business development expenses, the amortization of intangible assets and patent expenses, were $47.6 million for the year ended December 31, 2023 as compared to $90.2 million in 2022. The $42.6 overall decrease year over year was primarily the result of:
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•$14.0 million in net expense related to the class action securities litigation settlement, which was accrued in 2022 but paid in 2023;
•$11.3 million in lower legal expenses, primarily the result of the conclusion of litigation in 2023;
•$6.9 million in one-time severance expenses related to the separation of our former President and Chief Executive Officer in 2022, including $4.2 million of stock-based compensation expense related to equity award modifications, that did not recur in 2023;
•$5.9 million in lower employee compensation, including employee and consultant stock-based compensation, as a result of headcount reductions in 2023;
•$1.9 million in lower insurance expenses; and
•$1.4 million in lower other outside services related to our discontinued INO-4800 and VGX-3100 programs.
Impairment of goodwill
In September 2023, we concluded that our goodwill was impaired due to a sustained decline in our stock price and related market capitalization, and a general decline in equity values in the biotechnology industry. Based on this analysis, we recognized a non-cash, pre-tax goodwill impairment charge of $10.5 million during the three months ended September 30, 2023. For more information, see Note 8 – Goodwilland Intangible Assets to the consolidated financial statements included in this report.
Stock-based compensation
Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period. Total employee stock-based compensation cost for the years ended December 31, 2023 and 2022 was $10.4 million and $22.2 million, of which $4.5 million and $8.8 million was included in research and development expenses and $5.9 million and $13.4 million was included in general and administrative expenses, respectively.
Interest Income
The $3.4 million increase in interest income for the year ended December 31, 2023 as compared to 2022 was primarily due to higher interest rates earned on our cash balance.
Interest Expense
There was a $31,000 decrease in interest expense for the year ended December 31, 2023 as compared to 2022. We expect interest expense to decrease materially in 2024 due to the maturity and repayment in full of our convertible senior notes on March 1, 2024.
Gain (Loss) on Investment in Affiliated Entity
The gain (loss) on investment in affiliated entity resulted from the change in the fair market value of our investment in PLS of $773,000 and $(1.9) million for the years ended December 31, 2023 and 2022, respectively. We record our investment in PLS at its market value based on the closing price of the shares on the Korea New Exchange Market at each balance sheet date, with changes in fair value reflected in the consolidated statements of operations.
Net Unrealized Gain (Loss) on Available-for-Sale Equity Securities
The net unrealized gain (loss) on available-for-sale equity securities for the years ended December 31, 2023 and 2022 was $5.9 million and $(7.8) million, respectively, which resulted from a change in the fair market value of the investments.
Other (Expense) Income , net.
Other (expense) income, net, for the years ended December 31, 2023 and 2022 was $(4.7) million and $(3.9) million, respectively, related primarily to the realized loss on short-term investments sold during the periods.
Share in Net Loss of Geneos
The share in net loss of Geneos represents our share of Geneos' losses during 2022. As described in Note 15 to the consolidated financial statements in this report, we reduced the carrying value of our investment in Geneos to zero in March 2022 and will not record our share of further net losses of Geneos as we have no obligation to fund its operations.
Income Taxes
Since inception, we have incurred operating losses and accordingly have not recorded a provision for U.S. income taxes for any of the periods presented. Utilization of net operating losses and tax credits are subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended, or IRC. As of December 31, 2023, we had net operating loss carry forwards for U.S. federal, California and Pennsylvania income tax purposes of $1,013.3 million, $251.4 million and $102.6 million, respectively, net of the net operating losses that will expire due to IRC Section 382
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limitations. We also had U.S. federal and state research and development tax credits of $41.6 million and $6.1 million, respectively, net of the federal research and development credits that will expire due to IRC Section 383 limitations. The net operating losses and credits began to expire during 2023.
Comparison of Years Ended December 31, 2022 and 2021
For a comparison of the years ended December 31, 2022 and 2021, you may refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 1, 2023.
Liquidity and Capital Resources
Our primary uses of cash are to finance research and development activities, including clinical trial activities for the advancement of our DNA medicine candidates. We have satisfied our cash requirements principally from proceeds from the sale of equity securities, indebtedness and grants and government contracts.
Working Capital and Liquidity
As of December 31, 2023, we had cash and short-term investments of $145.3 million and working capital of $110.5 million, as compared to $253.0 million and $218.4 million as of December 31, 2022, respectively.
Cash Flows
Operating Activities
Net cash used in operating activities was $124.4 million and $216.2 million for the years ended December 31, 2023 and 2022, respectively. The variance was primarily due to the timing and changes in working capital balances, offset by decreased operating expenses.
Investing Activities
Net cash provided by investing activities was $87.4 million and $109.6 million for the years ended December 31, 2023 and 2022, respectively. The variance was primarily the result of timing differences in short-term investment purchases, sales and maturities.
Financing Activities
Net cash provided by financing activities was $5.0 million and $81.8 million for the years ended December 31, 2023 and 2022, respectively. The variance was primarily due to net proceeds of $5.5 million from the sale of common stock under the Sales Agreement (defined below) in 2023 compared to net proceeds of $83.0 million received during 2022.
Issuances of Common Stock
On November 9, 2021, we entered into an ATM Equity OfferingSM Sales Agreement, or the Sales Agreement, with outside sales agents, or collectively, the Sales Agents, under which we may offer and sell, from time to time at our sole discretion, shares of our common stock with aggregate gross proceeds of up to $300.0 million, through the Sales Agents.
Subject to the terms and conditions of the Sales Agreement, the Sales Agents may sell the common stock by any method permitted by law deemed to be an “at the market" offering. The Sales Agents will use commercially reasonable efforts to sell the common stock from time to time, based upon instructions from us, including any price, time or size limits or other customary parameters or conditions we may impose. We will pay the Sales Agents a commission of up to three percent (3.0%) of the gross sales proceeds of any common stock sold through the Sales Agents under the Sales Agreement, and we have provided the Sales Agents with certain indemnification rights. During the year ended December 31, 2023, we sold 875,305 shares of our common stock under the Sales Agreement at a weighted average price of $6.33 per share, resulting in aggregate net proceeds of $5.5 million. During the year ended December 31, 2022, we sold 2,870,478 shares of common stock under the Sales Agreement for aggregate net proceeds of $83.0 million. From January 1, 2024 through the date of this report, we sold an additional 543,620 shares of common stock under the Sales Agreement for net proceeds of $5.2 million.
During the year ended December 31, 2023, no stock options were exercised and tax payments of $467,000 were made related to the net share settlement of RSU awards. During the year ended December 31, 2022, stock options to purchase 9,891 shares of common stock were exercised for aggregate net proceeds of $283,000, which proceeds were offset by tax payments made related to net share settlement of RSU awards of $1.4 million. During the year ended December 31, 2021, stock options to purchase 109,188 shares of common stock were exercised for aggregate net proceeds of $6.7 million, which proceeds were offset by tax payments made related to net share settlement of RSU awards of $4.6 million.
During the three months ended March 31, 2023, we issued 760,083 shares of common stock pursuant to a securities class action settlement, as described in Note 11 to our consolidated financial statements included in this report.
FundingRequirements
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As of December 31, 2023, we had an accumulated deficit of $1.6 billion and we expect to continue to operate at a loss in the near term. The amount of our accumulated deficit will continue to increase, as it will be expensive to continue research and development efforts. Our current cash resources, including amounts that we may be able to obtain through sales of common stock under the Sales Agreement, will not be sufficient to complete the clinical development of any of our product candidates, and we anticipate that additional financing will be required in order to complete the development of and to commercialize and generate revenues from the sale of any product candidates that receive regulatory approval. If these activities are successful and if we receive approval from the FDA to market our DNA medicine candidates, then we will need to raise additional funding to market and sell the approved products and equipment. In addition to the potential issuance of equity or debt securities in order to raise capital, we are also evaluating potential collaborations as an additional way to fund our operations. We believe that our current cash and short-term investments are sufficient to meet our planned working capital requirements for at least the next twelve months from the date of this report.
During 2023, we undertook actions to decrease our expenses, including multiple headcount reductions. Taking into account these actions, as well as the changes to our clinical development plan for INO-3107 as a result of FDA feedback, we expect our cash runway to extend into the second quarter of 2025, without giving effect to any further capital raising activities.
Contractual Obligations
As of December 31, 2023, future minimum payments due under our contractual obligations are set forth in the table below. We expect to be able to satisfy these obligations, both in the short-term and in the longer-term, with cash on hand.
Payments Due by Period
Total Less than1 year 1 – 3 years 3 – 5 years More than5 years
(1) On March 1, 2024 these Convertible Senior Notes matured and we satisfied the obligation in full from existing cash. See Note 9, Convertible Debt, to the consolidated financial statements in this report for additional information.
(2) We have entered into operating leases for our facilities, which expire from 2024 to 2029, and operating leases for office equipment, which expire in 2024. We have four active subleases for portions of our Plymouth Meeting corporate headquarters facility with periods through March 31, 2025, two through December 31, 2026 and the other month-to-month. As of December 31, 2023, we expect to receive aggregate future minimum lease payments totaling $1.3 million (non-discounted) over the duration of the sublease agreements, which expected payments are not included in the table above.
(3) Purchase obligations from supply agreements with contract manufacturers.
In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these types of agreements have not had a material effect on our business, consolidated results of operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to increase the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in short-term investment-grade securities. During much of 2022 and into the year ended December 31, 2023, there was a pronounced overall increase in prevailing interest rates in the United States compared to the first half of 2022, which contributed to the unrealized loss of $3.9 million in the market value of our investment portfolio as of December 31, 2023.
The interest rate on our indebtedness at December 31, 2023 was fixed and not subject to fluctuations in interest rates. As of March 1, 2024, we have no indebtedness.
Foreign Currency Risk
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We operate primarily in the United States and most transactions during the year ended December 31, 2023 were made in United States dollars. Accordingly, we do not have any material exposure to foreign currency rate fluctuations, with the exception of certain cash and cash equivalents held in South Korea that are denominated in South Korean Won and the valuation of our equity investment in PLS, which is denominated in South Korean Won and then translated into United States dollars.
Certain transactions are denominated primarily in foreign currencies, including South Korean Won, Euros, British Pounds and Canadian Dollars. These transactions give rise to monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. The value of these monetary assets and liabilities are subject to changes in currency exchange rates from the time the transactions are originated until settlement in cash. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets where we conduct business.
We do not use derivative financial instruments for speculative purposes and do not engage in exchange rate hedging or hold or issue foreign exchange contracts for trading purposes.
Inflation Risk
Inflation generally affects us by increasing our cost of labor. Although inflation has increased generally in the United States in recent years, we do not believe that inflation has had a material effect on our business, financial condition or results of operations during the year ended December 31, 2023.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to our Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm beginning at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, 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 our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate to allow timely decisions regarding required disclosures.
In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Based on an evaluation carried out as of the end of the period covered by this Annual Report, under the supervision and with the participation of our management, including our CEO and CFO, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of December 31, 2023 at the reasonable assurance level.
Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting and Attestation Report of Registered Public Accounting Firm
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide
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reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with United States generally accepted accounting principles.
As of December 31, 2023, management, with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment, management determined that we maintained effective internal control over financial reporting as of December 31, 2023.
This Annual Report does not include an attestation report of our registered public accounting firm regarding the effectiveness of internal control over financial reporting as required by Section 404(b) of the Sarbanes-Oxley Act of 2002. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit smaller reporting companies to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting that occurred during the fourth quarter of our fiscal year ended December 31, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 9B. OTHER INFORMATION
Trading Plans
During the fiscal quarter ended December 31, 2023, none of our officers or directors, as defined in Rule 16a-1(f), adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of Regulation S-K.
Severance Plan and Participation Agreements
On March 4, 2024, our board of directors approved and adopted the Company’s Severance Plan and Summary Plan Description (the “Plan”), which provides severance benefits to certain eligible of our executives (the “Covered Executives”) who become participants in the Plan in the event of termination of a Covered Executive’s employment with us other than for Cause (as defined in the Plan), or as a result of such Covered Executive’s resignation for Good Reason (as defined in the Plan) (any such termination, a “Covered Termination”).
Our Chief Executive Officer, Jacqueline Shea; our Chief Scientific Officer, Laurent Humeau; and our Chief Medical Officer, Michael Sumner, are participants in the Plan and have entered into Participation Agreements. The terms of the Plan described below will generally supersede any severance and change in control benefits set forth in any pre-existing employment agreement that those officers have with us. Our Chief Financial Officer, Peter Kies, is not a participant in the Plan, and the terms of his existing employment agreement will continue to apply.
Under the terms of the Plan, in the event of a Covered Termination, a Covered Executive will be eligible to receive as severance: (a) base salary continuation for the applicable number of months set forth in the Covered Executive’s Participation Agreement (18 months for Dr. Shea and 12 months for Drs. Humeau and Sumner), paid in equal installments on our regular payroll schedule (the “Severance Period”); and (b) Company-paid COBRA premiums for the Covered Executive’s continued coverage under our benefit plans, subject to timely COBRA election, for the number of months set forth in the Covered Executive’s Participation Agreement (or until the Covered Executive secures employment with similar benefits).
In the event such Covered Termination occurs within one (1) year after a Change in Control (as defined in our 2023 Omnibus Incentive Plan), the Covered Executive will be eligible for the following Change in Control severance benefits: (a) base salary continuation for the applicable number of months set forth in the Covered Executive’s Participation Agreement (24 months for Dr. Shea and 18 months for Drs. Humeau and Sumner), paid in equal installments on the Company’s regular payroll schedule; (b) an amount equal to the target annual bonus for the year of such Covered Termination multiplied by the applicable bonus multiple set forth in the Covered Executive’s Participation Agreement (two times for Dr. Shea and 1.5 times for Drs. Humeau and Sumner); (c) each of the Covered Executive’s then-outstanding equity awards, other than performance awards, subject to time-based vesting shall accelerate and become vested and exercisable as to the percentage of the unvested shares subject to the equity award set forth in the Covered Executive’s Participation Agreement (100% for each of Drs. Shea, Humeau and Sumner); and (d) Company-paid COBRA premiums for the Covered Executive’s continued coverage under the Company benefit plans, subject to timely COBRA election, for the number of months set forth in the Covered Executive’s Participation Agreement (24 months for Dr. Shea and 18 months for Drs. Humeau and Sumner) (or until the Covered Executive secures employment with similar benefits).
In the event of the termination of a Covered Executive’s employment due to Disability (as defined in the Plan), such Covered Executive will be eligible to receive: (a) base salary continuation for the applicable number of months set forth in the Covered Executive’s Participation Agreement (18 months for Dr. Shea and 12 months for Drs. Humeau and Sumner), paid in equal installments on the Company’s regular payroll schedule; (b) Company-paid COBRA premiums for the Covered Executive’s continued coverage under the Company benefit plans, subject to timely COBRA election, for the number of months set forth in the Covered Executive’s Participation Agreement (18 months for Dr. Shea and 12 months for Drs. Humeau and Sumner) (or until Covered Executive secures employment with similar benefits); and (c) such Covered Executive’s then-outstanding equity awards, other than performance awards, subject to time-based vesting shall continue to vest on the original vesting dates and any performance awards held by the Covered Executive shall remain outstanding and eligible to vest based on actual performance through the end of the applicable performance period.
In the event of termination of Covered Executive’s employment due to death, such Covered Executive’s then-outstanding equity awards, other than performance awards, subject to time-based vesting shall accelerate and become vested and exercisable as to the percentage of the unvested shares subject to the equity award set forth in the Covered Executive’s Participation Agreement and any performance awards held by the Covered Executive shall remain outstanding and eligible to vest based on the Company’s actual performance through the end of the applicable performance period.
As a condition to any Covered Executive receiving any severance benefits under the Plan, such Covered Executive must sign, and allow to become effective, a separation agreement containing among other provisions, a release of all claims in favor of us and our subsidiaries and affiliates (the “Release”) and the Covered Executive’s continued compliance with any proprietary information and inventions agreement, and any restrictive covenant agreement between the Covered Executive and us. The
66
benefits provided under the Plan will generally supersede any other change in control, severance benefit plan, or agreement between us and a Covered Executive. Any prior acceleration rights set forth in existing awards between the Covered Executive and us will not be impacted by participating in the Plan.
The foregoing description of the Plan is qualified in its entirety by reference to the full text of the Plan, a copy of which is filed as an exhibit to this Annual Report, and the individual Participation Agreements. The Participation Agreements for Drs. Shea, Humeau and Sumner are also filed as exhibits to this Annual Report.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of our 2023 fiscal year, under the captions “Election of Directors” and “Executive Officers and Other Information.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of our 2023 fiscal year, under the captions “Executive Compensation” and “Director Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of our 2023 fiscal year, under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director independence and other information required by this Item 13 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of our 2023 fiscal year, under the captions “Certain Relationships and Related Party Transactions” and “Election of Directors.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of our 2023 fiscal year, under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm.”
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.Financial Statements
Consolidated financial statements required to be filed hereunder begin on Page F-1 in this report.
2.Financial Statement Schedules
Schedules not listed herein have been omitted because the information required to be set forth therein is not applicable or is included in the Financial Statements or notes thereto.
3.Exhibits
The following exhibits are filed as part of this annual report on Form 10-K:
ExhibitNumber Description of Document
68
69
21.1 Subsidiaries of the registrant (filed herewith).
23.1 Consent of Independent Registered Public Accounting Firm (filed herewith).
24.1 Power of Attorney (included on signature page).
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101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
+ Designates management contract, compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 6, 2024.
Inovio Pharmaceuticals, Inc.
By: /s/ JACQUELINE E. SHEA
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jacqueline E. Shea and Peter Kies, and each of them severally, his or her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the United States Securities and Exchange Commission in connection with the Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
Jacqueline E. Shea
/s/ SIMON X. BENITO Chairman of the Board of Directors March 6, 2024
Simon X. Benito
Peter Kies
/s/ ROGER D. DANSEY Director March 6, 2024
Roger D. Dansey
/s/ ANN C. MILLER Director March 6, 2024
Ann C. Miller
/s/ JAY SHEPARD Director March 6, 2024
Jay Shepard
/s/ DAVID B. WEINER Director March 6, 2024
David B. Weiner
/s/ WENDY L. YARNO Director March 6, 2024
Wendy L. Yarno
/s/ LOTA S. ZOTH Director March 6, 2024
Lota S. Zoth
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INOVIO PHARMACEUTICALS, INC.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Comprehensive Loss F-6
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Inovio Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the consolidated balance sheets of Inovio Pharmaceuticals, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
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 audit 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Accrual of Clinical Trial Expenses
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2002.
San Diego, California
F-3
Inovio Pharmaceuticals, Inc.
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
Current assets:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Grant funding liability from affiliated entities 21,918 87,673
Deferred tax liabilities — 32,046
Commitments and contingencies
Inovio Pharmaceuticals, Inc. stockholders’ equity:
(1) The Company effected a reverse stock split of its outstanding shares of common stock on January 24, 2024 where every twelve shares of its common stock issued and outstanding was converted into one share of common stock.Any fractional post-split shares as a result of the reverse split were paid in cash. Shareholders of the Company authorized the Board of Directors to approve the reverse stock split at a special meeting of stockholders held on January 12, 2024.Outstanding share amounts have been restated to reflect the reverse stock split on a retroactive basis for all periods presented.
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Inovio Pharmaceuticals, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year ended December 31,
Operating expenses:
Other income (expense):
Net loss per share
Weighted average number of common shares outstanding
(1) Share and per share amounts have been restated to reflect the 1-for-12 reverse stock split effected in January 2024 on a retroactive basis for all periods presented.
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Inovio Pharmaceuticals, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Year ended December 31,
Other comprehensive loss:
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Inovio Pharmaceuticals, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Numberof shares Amount Numberof shares Amount
Unrealized gain on short-term investments, net of tax — — — — — — 4,048 4,048
Foreign currency translation — — — — — — (30,134) (30,134)
Foreign currency translation — — — — — — (25,556) (25,556)
Unrealized gain on short-term investments, net of tax — — — — — — 40,060 40,060
Foreign currency translation — — — — — — (3,920) (3,920)
(1) All share amounts in this column, including appropriate reclassifications between common stock and additional paid-in capital, have been restated to reflect the 1-for-12 reverse stock split effected in January 2024 on a retroactive basis for all periods presented.
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Inovio Pharmaceuticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year ended December 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Impairment of intangible assets 1,984,444 — —
Deferred taxes (32,046) — —
Gain on remeasurement of investment in Geneos — (165,215) —
Changes in operating assets and liabilities:
Deferred revenue, including from affiliated entity — (85,989) (39,853)
Cash flows from investing activities:
Proceeds from sale of capital assets 6,219,263 — —
Investment in Geneos — (1,999,998) —
Cash flows from financing activities:
Supplemental disclosure:
Amounts accrued for purchases of fixed assets $ — $ 108,181 $ 204,815
Issuance of common stock as part of litigation settlement $ 14,000,000 $ — $ —
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Inovio Pharmaceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Inovio Pharmaceuticals, Inc. (the “Company” or “INOVIO”) is a clinical-stage biotechnology company focused on developing and commercializing DNA medicines to help treat and protect people from diseases associated with human papillomavirus (HPV), cancer, and infectious diseases. INOVIO's platform harnesses the power of in vivo protein production, featuring optimized design and delivery of DNA medicines that teach the body to manufacture its own disease-fighting tools.
INOVIO uses proprietary technology to design DNA plasmids, which are small circular DNA molecules that work like software the body’s cells can download to produce specific proteins to target and fight disease. The Company's proprietary investigational CELLECTRA® delivery devices help its DNA medicines enter the body’s cells for optimal effect.
INOVIO's lead candidate is INO-3107 for the treatment of recurrent respiratory papillomatosis (RRP), a rare and debilitating disease of the respiratory tract caused by HPV infection. In its completed Phase 1/2 clinical trial of INO-3107 for the treatment of HPV-6 and HPV-11-associated RRP, 81.3% of patients experienced a reduction in the number of surgical interventions in the year following administration of INO-3107, when compared with the year prior to treatment.
In addition to its development efforts with INO-3107, INOVIO is actively developing or planning to develop DNA medicines for other indications, including HPV-related anal dysplasia and oropharyngeal squamous cell carcinoma (OPSCC); glioblastoma multiforme (GBM), a deadly form of brain cancer; and a potential vaccine booster to protect against the Ebola virus. The Company was previously conducting clinical trials of a DNA medicine candidate for the treatment of HPV-related cervical high-grade squamous intraepithelial lesions (HSIL) but announced in August 2023 that it was ceasing development for this indication in the United States. However, its collaborator ApolloBio Corporation continues to conduct a Phase 3 clinical trial of this candidate in China and plans to seek regulatory approval for and potentially commercialize the candidate in that jurisdiction.
The Company's partners and collaborators include Advaccine Biopharmaceuticals Suzhou Co, ApolloBio Corporation, AstraZeneca, The Bill & Melinda Gates Foundation (Gates), Coalition for Epidemic Preparedness Innovations (CEPI), Coherus Biosciences, Defense Advanced Research Projects Agency (DARPA), The U.S. Department of Defense (DoD), HIV Vaccines Trial Network, International Vaccine Institute (IVI), Kaneka Eurogentec, National Cancer Institute (NCI), National Institutes of Health (NIH), National Institute of Allergy and Infectious Diseases (NIAID), Plumbline Life Sciences, Regeneron Pharmaceuticals, Richter-Helm BioLogics, Thermo Fisher Scientific, the University of Pennsylvania, the Walter Reed Army Institute of Research, and The Wistar Institute.
INOVIO was incorporated in Delaware in 2001 and has its principal executive offices in Plymouth Meeting, Pennsylvania.
2. Summary of Significant Accounting Policies
Basis of Presentation and Liquidity
The Company incurred a net loss of $135.1 million for the year ended December 31, 2023. The Company had working capital of $110.5 million and an accumulated deficit of $1.6 billion as of December 31, 2023. The Company has incurred losses in each year since its inception and expects to continue to incur significant expenses and operating losses for the foreseeable future in connection with the research and preclinical and clinical development of its product candidates. The Company’s cash, cash equivalents and short-term investments of $145.3 million as of December 31, 2023 are sufficient to support the Company's operations for a period of at least 12 months from the date it is issuing these financial statements.
In order to continue to fund future research and development activities, the Company will need to seek additional capital. This may occur through strategic alliance and licensing arrangements, grant agreements and/or future public or private debt or equity financings, including under At-the-Market Equity Offering Sales Agreements (“Sales Agreements”). The Company has a history of conducting debt and equity financings, including the receipt of net proceeds of $5.5 million, $83.0 million and $47.7 million from equity offerings under Sales Agreements during the years ending December 31, 2023, 2022 and 2021, respectively, and $162.1 million from a January 2021 underwritten public offering of common stock. However, sufficient funding may not be available in the future, or if available, may be on terms that significantly dilute or otherwise adversely affect the rights of existing stockholders. If adequate funds are not available, the Company may need to delay, reduce the scope of or put on hold one or more of its clinical and/or preclinical programs.
The Company is and, from time to time, may in the future be subject to various legal proceedings and claims arising in the ordinary course of business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its consolidated financial statements. An estimated loss contingency is accrued in the consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal proceedings, including litigation, government investigations and enforcement actions, could result in material costs,
F-9
occupy significant management resources and entail civil and criminal penalties, even if the Company ultimately prevails. Any of the foregoing consequences could result in serious harm to the Company’s business, results of operations and financial condition.
Reverse Stock Split
On January 24, 2024, the Company filed with the Secretary of State of the State of Delaware a certificate of amendment to its certificate of incorporation, as previously amended, to effect a 1-for-12 reverse stock split of our common stock (the “Reverse Stock Split”). As a result of the Reverse Stock Split, every 12 issued and outstanding shares of the Company's common stock were automatically combined into one issued and outstanding share of common stock. The reverse stock split was reflected on the Nasdaq Capital Market beginning with the opening of trading on January 25, 2024. Accordingly, an amount equal to the par value of the decreased shares resulting from the reverse stock split was reclassified from "Additional paid-in capital" to "Common stock" on the balance sheet and statement of changes in stockholders’ equity. Any fractional post-split shares as a result of the reverse stock split were eliminated by the payment of cash for the value of such fractional share. As a result of the Reverse Stock Split, proportionate adjustments were made to the number of shares underlying, and the exercise or conversion prices of, the Company's outstanding stock options and outstanding shares of Series C Cumulative Convertible Preferred Stock and to the number of shares of common stock issuable under the Company's equity incentive plans. The reverse stock split did not change the par value of the Company's common stock or the authorized number of shares of the Company's common stock. All share amounts and per share amounts disclosed in this Annual Report on Form 10-K have been restated to reflect the reverse stock split on a retroactive basis for all periods presented.
Consolidation
The consolidated financial statements include the accounts of Inovio Pharmaceuticals, Inc. and its wholly-owned subsidiary Inovio Asia LLC.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business as one segment operating primarily within the United States.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and short-term investments. The Company limits its exposure to credit loss by placing its cash and investments with high credit quality financial institutions. Additionally, the Company has established guidelines regarding diversification of its investments and their maturities which are designed to maintain principal and maximize liquidity.
The Company has contracts with certain of its customers that have represented more than 10% of the Company's total revenues, as discussed in Note 3.
Fair Value Measurements
The guidance regarding fair value measurements establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets that are accessible at the measurement date; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s financial instruments include cash equivalents, short-term investments, investments in affiliated entity, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses, and convertible senior notes. The carrying amounts of cash equivalents, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses approximate the related fair values due to the short-term maturities of these instruments. Short-term investments are recorded at fair value on a recurring basis, based on current market valuations. The Company carries convertible senior notes at face value less unamortized debt discount and issuance costs on its consolidated balance sheet, and it presents the fair value of such convertible notes for disclosure purposes only.
Cash and Cash Equivalents
F-10
Cash equivalents are considered by the Company to be highly liquid investments purchased with original maturities of three months or less from the date of purchase. Cash and cash equivalents included certain mutual funds and U.S. treasury securities at December 31, 2023 and 2022.
Short-term Investments
The Company defines investments as income-yielding securities that can be readily converted into cash or equity investments classified as available-for-sale. Investments included mutual funds, U.S. treasury securities, certificates of deposit, U.S. agency mortgage-backed securities and an equity investment in the Company’s affiliated entity, PLS, at December 31, 2023 and 2022.
Short-term investments are recorded at fair value, based on current market valuations. Unrealized gains and losses on the Company's short-term debt investments are excluded from earnings and reported as a separate component of other comprehensive loss until realized. Realized gains and losses and unrealized gains and losses on available-for-sale equity securities are included in non-operating other income (expense) on theconsolidated statements of operations and are derived using the specific identification method for determining the cost of the securities sold.
Accounts Receivable
Accounts receivable are recorded at invoiced amounts and do not bear interest. The Company performs ongoing credit evaluations of its customers’ financial condition. Credit is extended to customers as deemed necessary and generally does not require collateral. Management believes that the risk of loss is significantly reduced due to the quality and financial position of the Company's customers. There wasno allowance for doubtful accounts for potential credit losses as of December 31, 2023 and 2022.
Fixed Assets
Fixed assets include property and equipment and leasehold improvements. Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful life of the assets, generally three to five years. Leasehold improvements are amortized over the shorter of the remaining term of the related leases or the estimated economic useful lives of the improvements. Repairs and maintenance are expensed as incurred.
The Company evaluates the carrying value of long-lived assets, which includes fixed assets and right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the asset may not be fully recoverable. No impairment losses have been recognized related to long-lived assets for the year ended December 31, 2023 and 2022.
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition cost over the fair value of the net assets of acquired businesses. Goodwill is reviewed for impairment at least annually, or more frequently if an event occurs indicating the potential for impairment. The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying amounts of the assets may not be recoverable.
During its goodwill impairment review, the Company may assess qualitative factors to determine whether it is likely that the fair value of its reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance of the Company. If, after assessing the totality of these qualitative factors, the Company determines that it is not likely that the fair value of its reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, the Company will proceed to perform the impairment test in which the fair value of the reporting unit is compared with its carrying amount, and an impairment charge will be recorded for the amount by which the carrying amount exceeds the reporting unit's fair value, if any.
Calculating the fair value of a reporting unit, an asset group and an individual asset involves significant estimates and assumptions. These estimates and assumptions include, among others, projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and the determination of appropriate market comparables. Changes in these factors and assumptions used can materially affect the amount of impairment loss recognized in the period the asset was considered impaired.
During 2023, the Company experienced a decline in its market capitalization as a result of a sustained decrease in the Company’s stock price. This sustained decrease was considered to represent a triggering event requiring management to perform a quantitative goodwill impairment test as of September 30, 2023. The Company first tested its long-lived assets for impairment. The Company determined that all of its long-lived assets, which include property and equipment, leasehold improvements and right-of-use assets, represented one asset group for purposes of its long-lived asset impairment assessment. The Company concluded that the long-lived assets were not impaired, as their carrying values were not in excess of their fair value. Next, the Company determined that the fair value of its reporting unit was less than its carrying value and the Company recorded a loss on impairment of goodwill of $10.5 million.
F-11
During 2023, the Company also recorded an impairment charge of $2.0 million to research and development expense for the remaining book value of intangible assets acquired in 2016 from Bioject Medical Technologies, as the Company had no plans to further develop or utilize this technology.
Refer to Note 8 for further information regarding Goodwill and Intangible Assets.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities along with net operating loss and tax credit carry forwards. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.
Valuation allowances against the Company’s deferred tax assets were $327.5 million and $299.1 million at December 31, 2023 and 2022, respectively. Changes in the valuation allowances, when they are recognized in the provision for income taxes, are included as a component of the estimated annual effective tax rate.
Collaboration Agreements and Revenue Recognition
The Company assesses whether its collaboration agreements are subject to Accounting Standards Codification ("ASC") Topic 808: Collaborative Arrangements (“Topic 808”) based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of Topic 808 and the Company concludes that its collaboration partner is not a customer, the Company presents such payments as a reduction of research and development expense. If payments from the collaboration partner to the Company represent consideration from a customer, then the Company accounts for those payments within the scope of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”).
Grants
The Company accounts for various grant agreements under the contributions guidance under Subtopic 958-605, Not-for-Profit Entities-Revenue Recognition, which is outside the scope of Topic 606, as the government agencies granting the Company funds are not receiving reciprocal value for their contributions. All contributions received from current grant agreements are recorded as a contra-research and development expense as opposed to revenue on the consolidated statement of operations.
Foreign Currency Transactions
The functional and presentation currency of the Company is the U.S. dollar. Transactions denominated in a currency other than the functional currency are recorded on the initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at the end of each reporting period into the functional currency at the exchange rate at that date. The cumulative translation adjustment is included in the accumulated other comprehensive income (loss) within the statement of stockholders' equity. Exchange differences are included in general and administrative expenses in the consolidated statement of operations. Non-monetary assets and liabilities measured at cost are remeasured at the exchange rate at the date of the transaction.
Variable Interest Entities (VIE)
The Company evaluates its ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are VIEs, and, if so, whether the Company is the primary beneficiary of the VIE. In determining whether the Company is the primary beneficiary of a VIE and therefore required to consolidate the VIE, the Company applies a qualitative approach that determines whether it has both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. The Company will continuously perform this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE.
Equity Investments
Under ASC Topic 321, Investments - Equity Securities, the Company must measure equity investments (except those accounted for under the equity method, those that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in the consolidated statement of operations. The Company can elect a measurement alternative for equity investments that do not have readily determinable fair values and do not qualify for the practical expedient in ASC Topic 820, Fair Value Measurement, to estimate fair value using the net asset value per share (or its equivalent). The Company's equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient for estimating fair value are measured at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identifiable or similar investments of the same issuer.
F-12
Research and Development Expenses - Clinical Trial Accruals
The Company's activities have largely consisted of research and development efforts related to developing its proprietary device technology and DNA medicine candidates. For clinical trial expenses, judgements used in estimating accruals rely on estimates of total costs incurred based on participant enrollment, completion of studies and other events. Accrued clinical trial costs are subject to revisions as trials progress. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. Historically, revisions have not resulted in material changes to research and development expense; however, a modification in the protocol of a clinical trial or cancellation of a trial could result in a charge to the Company's results of operations.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss for the year by the weighted average number of shares of common stock outstanding during the year. Diluted net loss per share is calculated in accordance with the treasury stock method for the outstanding stock options and restricted stock units ("RSUs") and reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock. The dilutive impact of the outstanding Notes issued by the Company (discussed in Note 9) has been considered using the "if-converted" method. The calculation of diluted net loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the options or other securities and the presumed exercise of such securities are dilutive to net loss per share for the period, an adjustment to net loss used in the calculation is required to remove the change in fair value of such securities from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any. For the years ended December 31, 2023, 2022 and 2021, basic and diluted net loss per share are the same, as the assumed exercise or settlement of stock options, RSUs and the potentially dilutive shares issuable upon conversion of the Notes would have been anti-dilutive.
The following table summarizes potential shares of common stock that were excluded from diluted net loss per share calculation because of their anti-dilutive effect:
Year Ended December 31,
Performance-based restricted stock units — 9,328 55,279
Leases
For its long-term operating leases, the Company recognized an operating lease right-of-use asset and an operating lease liability on its consolidated balance sheets. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that the Company would pay to borrow equivalent funds on a collateralized basis at the lease commencement date. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. The Company determines the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise.
Fixed rent expense for the Company's operating leases is recognized on a straight-line basis over the term of the lease and is included in operating expenses on the consolidated statements of operations. Variable lease payments including lease operating expenses are recorded as incurred.
Stock-Based Compensation
The Company incurs stock-based compensation expense related to RSUs and stock options. The fair value of restricted stock is determined by the closing price of the Company's common stock reported on the Nasdaq Global Select Market on the date of grant. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions, including the expected stock price volatility and expected option life. The Company amortizes the fair value of the awards on a straight-line basis over the requisite vesting period of the awards. Expected volatility is based on historical volatility. The expected life of options granted is based on historical expected life. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The dividend yield is based on the fact that no dividends have been paid historically and none are currently expected to be paid in the foreseeable future. The Company recognizes forfeitures as they occur.
F-13
The weighted average assumptions used in the Black-Scholes model for option grants to employees and directors are presented below:
Year Ended December 31,
Expected life in years 5.5 5.7 6
Dividend yield — — —
The weighted average assumptions used in the Black-Scholes model for option grants to non-employees are presented below:
Year Ended December 31,
Expected volatility 89% 87% 87%
Expected life in years 10 10 10
Dividend yield — — —
Recent Accounting Pronouncements
The recent accounting pronouncements below may have a significant effect on the Company's financial statements. Recent accounting pronouncements that are not anticipated to have an impact on or are unrelated to the Company's financial condition, results of operations, or related disclosures are not discussed.
ASU No. 2023-07. In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly reviewed by the Chief Operating Decision Maker (CODM) and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. The ASU also allows, in addition to the measure that is most consistent with U.S. GAAP, the disclosure of additional measures of segment profit or loss that are used by the CODM in assessing segment performance and deciding how to allocate resources. All disclosure requirements under ASU 2023-07 are also required for public entities with a single reportable segment. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, on a retrospective basis, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
ASU No. 2023-09. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective for public entities with annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
3. Revenue Recognition and Concentration of Credit Risk
During the years ended December 31, 2023, 2022 and 2021, the Company recognized revenue from various license and other agreements. The following table indicates the percentage of total revenues in excess of 10% with any single customer:
F-14
ApolloBio Corporation $ 245,056 29 % $ — — % $ — — %
Plumbline Life Sciences, Inc. (affiliated entity) — — 33,596 — 245,310 14
No revenue recognized during the year ended December 31, 2023 was in deferred revenue as of December 31, 2022. During the year ended December 31, 2022, the Company recognized revenue of $14,000 that was included in deferred revenue at December 31, 2021. Performance obligations are generally satisfied within 12 months of the initial contract date.
As of December 31, 2023, the Company had no accounts receivable balance. As of December 31, 2022, all of the Company's accounts receivable was attributable to the CEPI MERS grant. There is minimal credit risk with the Company's customers based upon the short-term nature of the accounts receivable, collection history, their size and financial condition. Accordingly, the Company does not record an allowance for potential credit losses against its accounts receivable.
4. Collaborative Agreements
Advaccine Biopharmaceuticals Suzhou Co., Ltd.
On December 31, 2020, the Company entered into a Collaboration and License Agreement with Advaccine Biopharmaceuticals Suzhou Co., Ltd. (“Advaccine”), which was amended and restated on June 7, 2021 (as amended and restated, the “Advaccine Agreement”). Under the terms of the Advaccine Agreement, the Company granted to Advaccine the exclusive right to develop, manufacture and commercialize the Company’s vaccine candidate INO-4800 within the territories of China, Taiwan, Hong Kong and Macau (referred to collectively as “Greater China”) and 33 additional countries in Asia. The June 2021 amendment related to a collaboration between the Company and Advaccine to jointly conduct a global Phase 3 segment of the Company’s clinical trial of INO-4800 that was planned. The parties were jointly participating in the trial and were to equally share the global development costs for the trial, including the Company’s manufacturing costs to supply INO-4800. Advaccine agreed to be fully responsible for conducting the trial in Greater China, including its costs and expenses incurred. In the fourth quarter of 2022, the Company discontinued its internally funded efforts to develop INO-4800 as a COVID-19 heterologous booster vaccine. Advaccine continues to develop INO-4800 with its own resources under the terms of the Advaccine Agreement.
In connection with the June 2021 amendment, the Company determined that the global Phase 3 trial component of the agreement was a collaboration and not a contract with a customer and therefore accounted for the June 2021 amendment under ASC Topic 808. Reimbursements from Advaccine were recognized as contra-research and development expense on the consolidated statement of operations once earned and collectibility was assured.During the years ended December 31, 2023, 2022 and 2021, the Company received funding of $3.6 million, $1.2 million and $4.5 million, respectively, from Advaccine that was recorded as contra-research and development expense.
ApolloBio Corporation
On December 29, 2017, the Company entered into an Amended and Restated License and Collaboration Agreement (the "ApolloBio Agreement"),with ApolloBio Corporation ("ApolloBio"), which was amended on June 14, 2023. Under the terms of the ApolloBio Agreement, the Company granted to ApolloBio the exclusive right to develop and commercialize VGX-3100, its DNA immunotherapy product candidate designed to treat pre-cancers caused by HPV, within the agreed upon territories.
The Company is entitled to receive up to an aggregate of $20.0 million, less required income, withholding or other taxes, upon the achievement of specified milestones related to the regulatory approval of VGX-3100 in accordance with the ApolloBio Agreement. In the event that VGX-3100 is approved for marketing, the Company will be entitled to receive royalty payments based on a tiered percentage of annual net sales, with such percentage being in the low- to mid-teens, subject to reduction in the event of generic competition in a particular territory. ApolloBio’s obligation to pay royalties will continue for 10 years after the first commercial sale in a particular territory or, if later, until the expiration of the last-to-expire patent covering the licensed products in the specified territory.
During the year ended December 31, 2023, the Company received funding of $245,000 from the ApolloBio Agreement that was recorded as revenue. For the years ended December 31,2022 and 2021, there were nosignificant reimbursable program costs under the ApolloBio Agreement.
Coalition for Epidemic Preparedness Innovations
F-15
The Company previously entered into agreements with CEPI, pursuant to which the Company intended to develop vaccine candidates against Lassa fever and MERS. As part of the arrangement between the parties, CEPI agreed to fund up to an aggregate of $56 million of costs over a five-year period for preclinical studies, as well as planned Phase 1 and Phase 2 clinical trials, to be conducted by the Company and collaborators, with funding from CEPI based on the achievement of identified milestones. In November 2022, the Company announced that it and CEPI would discontinue the development of these product candidates targeting Lassa fever and MERS, following the initial analysis of data from the studies conducted by the Company and funded by CEPI. During the years ended December 31, 2023, 2022 and 2021, the Company received funding of $1.8 million, $6.7 million and $10.0 million, respectively, related to these grants and recorded those payments as contra-research and development expense. As of December 31, 2023 and 2022, the Company had an accounts receivable balance of $0 and $1.7 million, respectively, on the consolidated balance sheet related to these CEPI grants. As of December 31, 2023, the Company had $2.2 million recorded as an accrued liability, and at December 31, 2022, had $0 recorded as deferred grant funding on the consolidated balance sheet related to these CEPI grants.
In January 2020, CEPI awarded the Company a grant of up to $9.0 million to support preclinical and clinical development of INO-4800 through Phase 1 human testing in the United States. In April 2020, CEPI awarded the Company a grant of $6.9 million to work with the International Vaccine Institute ("IVI") and the Korea National Institute of Health ("KNIH") to conduct clinical trials of INO-4800 in South Korea, a grant of $5.0 million to accelerate development of the Company's next-generation intradermal electroporation device, known as CELLECTRA 3PSP, for the intradermal delivery of INO-4800, and a grant of $1.3 million to support large-scale manufacturing of INO-4800. During the years ended December 31, 2023, 2022 and 2021, the Company received funding of $330,000, $1.1 million and $6.9 million, respectively, from CEPI related to these grants for INO-4800 and recorded such amounts as contra-research and development expense. As of December 31, 2023, the Company had $2.1 million recorded as an accrued liability, and at December 31, 2022, had $2.3 million recorded as deferred grant funding on the consolidated balance sheet related to the CEPI grants related to INO-4800.
Bill & Melinda Gates Foundation
In October 2018, Gates awarded and funded the Company a grant of $2.2 million to advance the development of dMAbs to address issues in infectious disease prevention and therapy. This technology has high relevance for the control of influenza and HIV. This next-generation approach to the delivery of monoclonal antibodies would make the technology accessible to low and middle-income countries. In August 2019, Gates funded an additional $1.1 million for the project. During the years ended December 31, 2023, 2022 and 2021, the Company recorded $70,000, $233,000 and $182,000, respectively, as contra-research and development expense related to the Gates dMAb grant. As of December 31, 2023 and 2022, the Company had $87,000 and $153,000, respectively, recorded as deferred grant funding on the consolidated balance sheet related to the grant.
Department of Defense (DoD)
In June 2020, the Company entered into an Other Transaction Authority for Prototype Agreement (the “OTA Agreement”) with the DoD to fund the Company’s efforts in developing the CELLECTRA® 3PSP device and associated arrays to be used for delivery of INO-4800 against COVID-19. The total amount of funding provided to the Company under the OTA Agreement was $54.5 million. The Company determined that the OTA Agreement should be considered under Subtopic 958-605, Not-for-Profit Entities-Revenue Recognition, which is outside the scope of Topic 606, as the government agency granting the Company funds was not receiving reciprocal value for their contributions. The Company recorded contra-research and development expense on the consolidated statement of operations in the same period that the underlying expenses were incurred. During the years ended December 31, 2023, 2022 and 2021, the Company recorded $0, $6.1 million and $27.1 million, respectively, as contra-research and development expense related to the OTA agreement.
Additionally, in June 2020, the Company was awarded a fixed-price contract (the “Procurement Contract”) from the DoD for the purchase of the Company’s intradermal CELLECTRA® 2000 device and accessories. The total purchase price under the Procurement Contract was $16.8 million. The Company determined that the Procurement Contract fell under the scope of ASC Topic 606 as the contract was with a customer and the Company was able to satisfy its obligations under the arrangement. Performance obligations under the Procurement Contract consisted of the delivery of a specified number of CELLECTRA® 2000 devices and accessories. The total transaction price was allocated to the individual performance obligations based on the determined standalone selling price for the devices and accessories. In 2021, the DoD announced that it would discontinue funding for the Phase 3 segment of the Company's clinical trials for INO-4800 and in January 2022, the total purchase price under the Procurement Contract was reduced to $10.7 million. During the year ended December 31, 2022, all performance obligations under the Procurement Contract were satisfied. During the years ended December 31, 2023, 2022 and 2021, the Company recorded revenue of $0, $9.6 million and $755,000, respectively, from the Procurement Contract.
5. Short-term Investments and Fair Value Measurements
The following is a summary of available-for-sale securities as of December 31, 2023 and 2022:
F-16
*No single maturity date.
During the years ended December 31, 2023 and 2022, the Company recorded gross realized gain on investments of $1,000 and $21,000, respectively, and gross realized loss on investments of $4.8 million and $4.1 million, respectively. During the years ended December 31, 2023 and 2022, the Company recorded net unrealized gain (loss) on available-for-sale equity securities of $5.9 million and $(7.8) million, respectively. No material balances were reclassified out of accumulated other comprehensive loss for the years ended December 31, 2023, 2022 and 2021. Interest and dividends on investments classified as available-for-sale are included in interest income in the consolidated statements of operations. As of December 31, 2023, the Company had 21 available-for-sale securities in a gross unrealized loss position, of which 20 with an aggregate total unrealized loss of $3.9 million were in such position for longer than 12 months.
The Company periodically reviews its portfolio of available-for-sale debt securities to determine if any investment is impaired due to credit loss or other potential valuation concerns. For the debt securities where the fair value of the investment is less than the amortized cost basis, the Company has assessed at the individual security level for various quantitative factors including, but not limited to, the nature of the investments, changes in credit ratings, interest rate fluctuations, industry analyst reports, and the severity of impairment. Unrealized losses on available-for-sale debt securities as of December 31, 2023 were primarily due to changes in interest rates, and not due to increased credit risks associated with specific securities. Based on the credit quality of the available-for-sale debt securities that are in an unrealized loss position, and the Company’s estimates of future cash flows to be collected from those securities, the Company believes the unrealized losses are not credit losses. Accordingly, at December 31, 2023, the Company did not record an allowance for credit losses related to its available-for-sale debt securities.
The following table presents the Company’s assets that were measured at fair value on a recurring basis, determined using the following inputs as of December 31, 2023:
F-17
Fair Value Measurements at
Short-term investments
The following table presents the Company’s assets that were measured at fair value on a recurring basis, determined using the following inputs as of December 31, 2022:
Fair Value Measurements at
Short-term investments
Level 1 assets at December 31, 2023 and 2022 consisted of mutual funds and U.S. treasury securities held by the Company that are valued at quoted market prices, as well as the Company’s investment in its affiliated entity, PLS. The Company accounts for its investment in 597,808 common shares of PLS based on the closing price of the shares on the Korea New Exchange Market on the applicable balance sheet date. Unrealized gains and losses on the Company's equity securities are reported in the consolidated statement of operations as unrealized gain or loss on available-for-sale equity securities or as a gain or loss on investment in affiliated entity.
Level 2 assets at December 31, 2023 and 2022 consisted of certificates of deposit and U.S. agency mortgage-backed securities held by the Company that are initially valued at the transaction price and subsequently valued, at the end of each reporting period, typically utilizing market observable data. The Company obtains the fair value of its Level 2 assets from a professional pricing service, which may use quoted market prices for identical or comparable instruments, or inputs other than quoted prices that are observable either directly or indirectly. The professional pricing service gathers quoted market prices and observable inputs from a variety of industry data providers. The valuation techniques used to measure the fair value of the Company's Level 2 financial instruments were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. The Company validates the quoted market prices provided by the primary pricing service by comparing the service's assessment of the fair values of the Company's investment portfolio balance against the fair values of the Company's investment portfolio balance obtained from an independent source.
F-18
There were no Level 3 assets held as of December 31, 2023 or 2022.
6. Certain Balance Sheet Items
Prepaid and other current assets at December 31, 2023 and 2022 consisted of the following:
Accounts payable and accrued expenses at December 31, 2023 and 2022 consisted of the following:
Accrued litigation settlement (a) — 44,000,000
(a)In July 2022, the Company entered into a memorandum of understanding for the proposed settlement of class action securities litigation (see Note 11). The final judicial order for the settlement was issued in January 2023. The settlement consisted of $30.0 million in cash and $14.0 million in shares of the Company's common stock to settle all outstanding claims. As of December 31, 2022, the Company's insurance carriers had paid the cash component of the proposed settlement, which amounts were being held in escrow. The Company's insurance carriers paid $252,000 of other expenses on behalf of the Company, which amounts were offset against the insurers' cash commitment as part of the settlement. During the three months ended March 31, 2023, the cash component of the settlement was released from escrow and the Company issued 760,083 shares of common stock pursuant to the securities class action settlement.
(b) In March 2023, the Company entered into a stipulation of settlement for the proposed settlement of shareholder derivative litigation (see Note 11). In June 2023, the court preliminarily approved the proposed settlement. As part of the settlement, in July 2023, the Company paid $1.2 million to plaintiffs’ counsel for their fees and expenses. This amount was accrued within “Other accrued expenses” as of December 31, 2022. On October 12, 2023, the court entered an order and final judgment approving the Settlement, which was effective on November 13, 2023.
(c) December 31, 2023 balance includes $4.3 million liability for unused grant funding.
7. Fixed Assets
F-19
Fixed assets at December 31, 2023 and 2022 consisted of the following:
Cost AccumulatedDepreciationandAmortization Net BookValue
Depreciation expense for the years ended December 31, 2023, 2022 and 2021 was $2.6 million, $3.7 million and $3.0 million, respectively. The Company determined that the carrying value of its fixed assets was not impaired during the periods presented. During the year ended December 31, 2023, the Company sold fixed assets with no net book value for a gain of $148,000 and disposed of fixed assets with a net book value of $466,000. During the year ended December 31, 2022 the Company sold fixed assets with a net book value of $6.1 million and disposed of fixed assets with a net book value of $1.1 million.
8. Goodwill and Intangible Assets
During the three months ended September 30, 2023, as a result of the sustained decline in the Company’s stock price and related market capitalization, and a general decline in equity values in the biotechnology industry, the Company performed an impairment assessment of its goodwill and long-lived assets.
The Company operates as a single reporting unit based on its business and reporting structure. For goodwill, a quantitative impairment assessment was performed using a market approach, whereby the Company’s fair value of equity was compared to its carrying value. The fair value of equity was derived using both the market capitalization of the Company and an estimate of a reasonable range of values of a control premium applied to the Company’s implied business enterprise value. The control premium was estimated based upon control premiums observed in comparable market transactions. This represented a level 2 nonrecurring fair value measurement. Based on this analysis, the Company recognized a non-cash, pre-tax goodwill impairment charge of $10.5 million during the three months ended September 30, 2023. As a result, the goodwill was fully impaired as of September 30, 2023.
Before completing the goodwill impairment assessment, the Company first tested its long-lived assets for impairment. The Company held no indefinite-lived intangible assets as of September 30, 2023. The Company determined that all of its long-lived assets, which included property and equipment, leasehold improvements and right-of-use assets, represented one asset group for purposes of its long-lived asset impairment assessment. The Company concluded that the long-lived assets were not impaired, as their carrying values were not in excess of their fair value.
During the quarter ended June 30, 2023, the Company recorded an impairment charge of $2.0 million to research and development expense for the remaining book value of intangible assets acquired in 2016 from Bioject Medical Technologies, as the Company had no plans to further develop or utilize this technology.
The following sets forth goodwill and intangible assets by major asset class:
F-20
Indefinite lived:
Definite lived:
(a)Other intangible assets represent the estimated fair value of acquired intellectual property.
Aggregate amortization expense related to intangible assets was $145,000, $496,000 and $520,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
There were no impairment or impairment indicators present and no losses were recorded during the years ended December 31, 2022 and 2021.
9. Convertible Debt
Convertible Senior Notes
On February 19, 2019 and March 1, 2019, the Company completed a private placement of $78.5 million aggregate principal amount of its 6.50% convertible senior notes due 2024 (the “Notes”). The Notes were sold in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Net proceeds from the offering were $75.7 million.
The Notes were senior unsecured obligations of the Company and accrued interest payable in cash semi-annually in arrears on March 1 and September 1 of each year at a rate of 6.50% per annum. The Notes matured on March 1, 2024 and the Company paid the then remaining $16.9 million obligation in full, including accrued interest.
Initially, in accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments, which do not have an associated convertible feature. The carrying amount of the equity component representing the conversion option for the Notes was $16.3 million and was recorded as a debt discount, which was being amortized to interest expense at an effective interest rate of 13.1%. In addition, the Company allocated $592,000 of debt issuance costs to the equity component and the remaining debt issuance costs of $2.2 million were allocated to the liability component, which were being amortized to interest expense under the effective interest rate method.
On January 1, 2022, the Company adopted ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The ASU eliminated the cash conversion feature models in ASC 470-20, Debt with Conversion and Other Options, which required an issuer of certain convertible debt to separately account for embedded conversion features as a component of equity. Instead, the Company accounted for these securities as a single unit of account, unless the conversion feature met certain criteria. The Company adopted the new standard using the modified retrospective method and recorded a net reduction to accumulated deficit of $1.8 million, a decrease to additional paid-in capital of $3.3 million, and an increase to convertible senior notes of $1.5 million to reflect the impact of the accounting change. The Notes were subsequently accounted for as a single liability measured at amortized cost, as no other embedded features required bifurcation and recognition as derivatives.
The balance of the Notes at December 31, 2023 was as follows:
Principal amount converted into common shares (62,085,000)
Unamortized debt issuance cost —
F-21
For the years ended December 31, 2023, 2022 and 2021, the Company recognized $1.2 million, $1.3 million and $1.9 million, respectively, of interest expense related to the Notes, of which $1.1 million related to the contractual interest coupon in each year.
10. Stockholders’ Equity
Preferred Stock
Shares Outstanding as ofDecember 31,
Shares Authorized Shares Issued 2023 2022
The holder of a share or shares of Series C preferred stock has the right at any time, at such holder’s option, to convert all or any lesser portion of such holder’s shares of the preferred stock into fully paid and non-assessable shares of common stock. As of December 31, 2021, the conversion value was $326.40 per share, such that the outstanding shares of Series C preferred stock were convertible into an aggregate of 275 shares of common stock.
Issuances of Common Stock
On November 9, 2021, the Company entered into an ATM Equity OfferingSM Sales Agreement (the “2021 Sales Agreement”) with outside sales agents (collectively, the “Sales Agents”) for the offer and sale of its common stock for an aggregate offering price of up to $300.0 million. The 2021 Sales Agreement provides that the Sales Agents will be entitled to compensation in an amount equal to up to 3.0% of the gross sales proceeds of any common stock sold through the Sales Agents under the 2021 Sales Agreement. During the years ended December 31, 2023 and 2022, the Company sold 875,305 and 2,870,478 shares, respectively, of its common stock under the 2021 Sales Agreement. The sales were made at a weighted average price of $6.33 and $29.34 per share, respectively, resulting in aggregate net proceeds of $5.5 million and $83.0 million, respectively. As of December 31, 2023 there was $161.8 million of remaining capacity under the 2021 Sales Agreement.
During the three months ended March 31, 2023, the Company issued 760,083 shares of common stock pursuant to the securities class action settlement, as described in Note 11.
Stock Options and Restricted Stock Units
The Company's Board of Directors adopted the 2023 Omnibus Incentive Plan (the “2023 Plan”) on March 24, 2023, pursuant to which the Company may grant stock options, restricted stock awards, RSUs and other stock-based awards or short-term cash incentive awards to employees, directors and consultants.
The 2023 Plan was approved by stockholders on May 16, 2023. The aggregate number of shares of the Company’s common stock that may be issued under the 2023 Plan will not exceed the sum of 1,166,666 shares plus any shares that may return from time to time from the 2016 Omnibus Incentive Plan (as amended, the “2016 Plan”) as a result of expirations, terminations or forfeitures of awards outstanding under the 2016 Plan as of May 16, 2023. At December 31, 2023, the Company had 1,334,012 shares of common stock available for future grant under the 2023 Plan, 1,875 shares underlying outstanding but unvested RSUs and 3,150 shares underlying options outstanding to purchase common stock under the 2023 Plan. The awards granted and available for future grant under the 2023 Plan generally vest over three years and have a maximum contractual term of ten years. The 2023 Plan terminates by its terms on March 24, 2033.
At December 31, 2023, the Company had 262,641 shares underlying outstanding but unvested RSU and options outstanding to purchase 961,499 shares of common stock under the 2016 Plan. The outstanding awards granted under the 2016 Plan generally vest over three years and have a maximum contractual term of ten years. Following adoption of the 2023 Plan, no further awards may be made under the 2016 Plan, but outstanding awards continue to be governed by their existing terms.
On June 24, 2022, the Company's board of directors adopted a stock-based incentive plan (the "2022 Inducement Plan"), which provides for the discretionary grant of nonstatutory stock options, stock appreciation rights, restricted stock awards, RSU awards, performance awards, and other awards to individuals as a material inducement to entering into employment with the Company. The aggregate number of shares of the Company’s common stock that may be issued under the 2022 Inducement Plan will not exceed 166,666 shares. At December 31, 2023 the Company had 125,575 shares of common stock available for future grant under the 2022 Inducement Plan, 10,278 shares underlying outstanding but unvested RSUs and options outstanding to purchase 27,759 shares of common stock under the 2022 Inducement Plan. The 2022 Inducement Plan can be terminated by the Company's board of directors at any time.
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The Amended and Restated 2007 Omnibus Incentive Plan (the "2007 Incentive Plan") was adopted on March 31, 2007 and terminated by its terms on March 31, 2017. At December 31, 2023, the Company had options outstanding to purchase 136,456 shares of common stock under the 2007 Incentive Plan. The awards granted under the 2007 Incentive Plan generally vest over three years and have a maximum contractual term of ten years.
Total employee and director stock-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2023, 2022 and 2021 was $10.4 million, $22.2 million and $25.0 million, respectively, of which $4.5 million, $8.8 million and $13.4 million was included in research and development expenses and $5.9 million, $13.4 million and $11.6 million was included in general and administrative expenses, respectively.
At December 31, 2023 and 2022, there was $4.3 million and $10.5 million, respectively, of total unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.3 years and 1.6 years, respectively.
At December 31, 2023 and 2022, there was $3.5 million and $7.2 million, respectively, of total unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 1.5 years and 1.7 years, respectively.
The fair value of stock options granted to non-employees was estimated using the Black-Scholes pricing model. Total stock-based compensation expense for stock options and RSUs granted to non-employees for the years ended December 31, 2023, 2022 and 2021 was $669,000, $1.3 million and $1.4 million, respectively. As of December 31, 2023, options to purchase 61,808 shares of common stock granted to non-employees remained outstanding.
The following table summarizes total stock options outstanding at December 31, 2023:
Options Outstanding Options Exercisable
At December 31, 2023, the aggregate intrinsic value of options outstanding was $2,000, the aggregate intrinsic value of options exercisable was $1,000, and the weighted average remaining contractual term of options exercisable was 5.5 years.
At December 31, 2023, the aggregate intrinsic value of unvested RSUs was $1.7 million and the aggregate intrinsic value of RSUs which vested during the year ended December 31, 2023 was $1.3 million.
At December 31, 2023, options to purchase 1,128,864 shares of common stock and 274,794 RSUs were expected to vest.
Stock option activity under the Company’s equity incentive plans during the year ended December 31, 2023 was as follows:
Number ofShares Weighted-AverageExercise Price
Exercised — —
Restricted stock unit activity under the Company’s equity incentive plans during the year ended December 31, 2023 was as follows:
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Number ofShares
The weighted average exercise price per share was $38.86 for the 9,357 options which expired during the year ended December 31, 2023, $101.64 for the 6,437 options which expired during the year ended December 31, 2022 and $54.72 for the 583 options which expired during the year ended December 31, 2021.
The weighted average grant date fair value per share was $11.19, $28.08 and $91.32 for options granted during the years ended December 31, 2023, 2022 and 2021, respectively.
The weighted average grant date fair value was $10.34, $37.44 and $124.44 per share for RSUs granted during the years ended December 31, 2023, 2022 and 2021, respectively.
No stock options were exercised during the year ended December 31, 2023. The Company received $283,000 and $6.7 million in proceeds from the exercise of stock options during the years ended December 31, 2022 and 2021, respectively. The aggregate intrinsic value of options exercised was $81,000 and $7.0 million during the years ended December 31, 2022 and 2021, respectively.
11. Commitments and Contingencies
Leases
The Company leases approximately 56,600 square feet of office, laboratory, and manufacturing space in San Diego, California and 57,360 square feet of office space in Plymouth Meeting, Pennsylvania under various non-cancellable operating lease agreements with remaining lease terms as of December 31, 2023 of 3.4 years to 6.0 years, which represent the non-cancellable periods of the leases. The Company has excluded the extension options from its lease terms in the calculation of future lease payments as they are not reasonably certain to be exercised. The Company's lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms as well as payments for common area maintenance and administrative services. The Company has received customary incentives from its landlords, such as reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases.
In November 2023, the Company amended one of its leases representing 31,207 square feet of office and laboratory space with a lease term expiring in November 2023, to extend the term to February 29, 2024.
In November 2023, the Company entered into a lease agreement for research and development laboratory space in San Diego, California ("New San Diego Lease"). The total space under the New San Diego Lease is approximately 5,563 square feet. The term of the New San Diego Lease commenced on February 10, 2024 and the initial term is 4.3 years.
The base rent adjusts periodically throughout the term of the New San Diego Lease. Rent payments under the New San Diego Lease will include base rent with an annual increase of approximately three percent, and additional monthly fees to cover the Company's share of certain facility expenses, including utilities, property taxes, insurance and maintenance. In addition, the Company has paid a security deposit of $33,000.
The Company performed an evaluation of its contracts with customers and suppliers in accordance with ASC Topic 842 and determined that, except for the real estate leases described above and various copier leases, none of its other contracts contain a right-of-use asset.
Operating lease right-of-use assets and liabilities on the consolidated balance sheet represents the present value of the remaining lease payments over the remaining lease terms. Payments for additional monthly fees to cover the Company's share of certain facility expenses are not included in operating lease right-of-use assets and liabilities. The Company uses its incremental borrowing rate to calculate the present value of its lease payments, as the implicit rates in the leases are not readily determinable.
As of December 31, 2023, the maturities of the Company's operating lease liabilities were as follows:
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Year ending December 31,
Total remaining lease payments 17,665,000
Less: present value adjustment (4,226,000)
Total operating lease liabilities 13,439,000
Long-term operating lease liabilities $ 11,032,000
Weighted-average remaining lease term 5.3 years
Weighted-average discount rate 8.9 %
Lease costs included in operating expenses in the consolidated statements of operations for the years ended December 31, 2023, 2022 and 2021 were $3.5 million, $3.4 million and $3.4 million, respectively. Operating lease costs consisting of the fixed lease payments included in operating lease liabilities are recorded on a straight-line basis over the lease terms. Variable lease costs are recorded as incurred.
In the third and fourth quarters of 2023, the Company entered into agreements to sublease a total of approximately 4,400 and 7,000 square feet, respectively, in its Plymouth Meeting headquarters, in each case with sublease terms through December 31, 2026.
In the fourth quarter of 2019, the Company entered into two agreements to sublease a total of approximately 13,500 square feet in its Plymouth Meeting headquarters, with one sublease term through March 31, 2025 and the other month-to-month.
In the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these types of agreements have not had a material effect on its business, consolidated results of operations or financial condition.
Legal Proceedings
Securities Litigation
In March 2020, a purported shareholder class action complaint, McDermid v. Inovio Pharmaceuticals, Inc. and J. Joseph Kim, was filed in the United States District Court for the Eastern District of Pennsylvania, naming the Company and its former President and Chief Executive Officer as defendants. The lawsuit alleged that the Company made materially false and misleading statements in violation of certain federal securities laws. The plaintiffs sought unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including reasonable attorneys’ fees. The plaintiffs’ complaint was later amended to include certain of the Company’s other officers as defendants. After additional motions were filed in the case, in June 2022 the parties negotiated an agreement in principle to settle the shareholder class action complaint, which was approved by the court in January 2023. Under the settlement, the Company agreed to pay $30.0 million in cash and $14.0 million in shares of its common stock to settle all outstanding claims. The Company's insurance carriers paid the $30.0 million cash component of the settlement. During the three months ended March 31, 2023, the Company issued 760,083 shares of common stock pursuant to the securities class action settlement.
Shareholder Derivative Litigation
In April 2020, a purported shareholder derivative complaint, Behesti v. Kim, et al., was filed in the United States District Court for the Eastern District of Pennsylvania, naming eight current and former directors of the Company as defendants. The lawsuit asserted state and federal claims and was based on the same alleged misstatements as the shareholder class action complaint described above. The lawsuit accused the Company’s board of directors of failing to exercise reasonable and prudent supervision over the Company’s management, policies, practices, and internal controls. The plaintiff sought unspecified
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monetary damages on behalf of the Company as well as governance reforms. Between June 2020 and August 2020, additional shareholder derivative complaints were filed and later consolidated by the court.
In March 2022, an additional shareholder derivative complaint was filed in the Delaware Court of Chancery, asserting substantially similar claims as those in the consolidated derivative action. In May 2022, the Delaware Court of Chancery entered a stay of the litigation.
In March 2023, the parties submitted a joint status report to the Court of Chancery reporting that the parties agreed to a settlement in principle, which also provided for the resolution of the consolidated derivative action and certain stockholder demands.
In April 2023, the plaintiffs in the consolidated derivative action filed a motion for preliminary approval of settlement with the United States District Court for the Eastern District of Pennsylvania. The proposed settlement provided for resolution of the consolidated derivative action, the derivative action pending in the Delaware Court of Chancery, and certain stockholder demands.
In June 2023, the court entered an order preliminarily approving the proposed settlement of the derivative claims, in accordance with a Stipulation of Settlement. The Stipulation of Settlement contemplated that, following the settlement hearing and the final approval of the settlement by the court, the Company would implement certain corporate governance reforms described in the Stipulation of Settlement. The preliminary order also approved the form and manner of the notice of the Settlement. As part of the Settlement, in July 2023 the Company paid $1.2 million to plaintiffs’ counsel for their fees and expenses. In October 2023, the court entered an order and final judgment approving the Settlement, which became effective in November 2023. The Company has implemented the corporate governance reforms in response to the provisions of the Stipulation of Settlement.
VGXI Litigation
In June 2020, the Company filed a complaint in the Court of Common Pleas of Montgomery County, Pennsylvania against VGXI, Inc. and GeneOne Life Science, Inc., or GeneOne, and together with VGXI, Inc. collectively referred to as VGXI, alleging that VGXI had materially breached the Company’s supply agreement with them. The complaint seeks declaratory judgments, specific performance of the agreement, injunctive relief, an accounting, damages, attorneys’ fees, interest, costs and other relief from VGXI. In June 2020, the Company filed a petition for preliminary injunction, which was denied.
Following an appeal by the Company, in July 2020, VGXI filed counterclaims against the Company, alleging that the Company had breached the supply agreement, as well as misappropriation of trade secrets and unjust enrichment. The counterclaims seek injunctive relief, damages, attorneys’ fees, interest, costs and other relief from the Company. VGXI also filed a third-party complaint against Ology Bioservices, Inc., a contract manufacturing organization that the Company had engaged to provide services similar to those that were being provided by VGXI. The Company filed an answer to VGXI’s counterclaims, disputing the allegations and the claims raised in VGXI’s filing. In October 2020, the Company filed a notice of discontinuance of appeal with the Pennsylvania Superior Court. A trial date for the litigation has not been set.
The Company intends to aggressively prosecute the claims set forth in its complaint against VGXI and to vigorously defend itself against VGXI’s counterclaims.
GeneOne Litigation
In December 2020, GeneOne filed a complaint in the Court of Common Pleas of Montgomery County, Pennsylvania against the Company, alleging that the Company had breached the CELLECTRA Device License Agreement, or the Agreement, between the Company and GeneOne. The Company terminated the Agreement in October 2020. The complaint asserts claims for breach of contract, declaratory judgment, unfair competition, and unjust enrichment. The complaint seeks injunctive relief, an accounting, damages, disgorgement of profits, attorneys’ fees, interest, and other relief from the Company. The Company filed preliminary objections to the complaint, which were overruled by the court. In September 2021, the Company filed an answer to the complaint, new matter, and counterclaims. The Company’s counterclaims allege that GeneOne breached the Agreement and assert claims for breach of contract and declaratory judgment.The counterclaims seek damages, interest, expenses, attorney’s fees, and costs.A trial date for this litigation has not been set.
The Company intends to aggressively prosecute the claims set forth in its counterclaims against GeneOne and to vigorously defend itself against the claims in GeneOne’s complaint.
Other Matters
From time to time, the Company may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of its business. Any of these claims could subject the Company to costly legal expenses and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, its insurance carriers may deny coverage or its policy limits may be inadequate to fully satisfy any damage awards or settlements. If this
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were to happen, the payment of any such awards could have a material adverse effect on the Company's consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage the Company's reputation and business. Except as described above, the Company is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would be reasonably expected to have a material adverse effect on the Company’s consolidated results of operations or financial position.
12. Income Taxes
In accordance with the guidance pursuant to accounting for income taxes, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax asset will be realized.
The components of pretax loss from operations are as follows:
Year Ended December 31,
There was no provision for or benefit from income taxes for the years ended December 31, 2023, 2022 and 2021.
The reconciliation of income taxes attributable to continuing operations computed at the statutory tax rates to income tax benefit, using a 21% statutory tax rate for December 31, 2023, 2022 and 2021, is as follows:
Year Ended December 31,
$ — $ — $ —
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2023 and 2022 are shown below:
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As of December 31,
Deferred tax assets:
Deferred tax liabilities:
Acquired intangibles — (199,000)
Net deferred tax liabilities $ — $ (32,000)
As of December 31, 2023, the Company had federal, California and other state tax net operating loss (NOL) carryforwards of $1,013.3 million, $251.4 million and $102.6 million, respectively, net of the net operating losses that will expire due to IRC Section 382 limitations. The aggregate federal net operating losses generated in 2018 and after for the amount of $719.3 million will carryforward indefinitely and be available to offset up to 80% of future taxable income each year. The federal NOL carryforward began to expire in 2023, and the California and other state NOL carryforwards will begin and have begun to expire in 2028 and 2023, respectively, unless previously utilized.
The Company also had Korean NOL carryforwards of $1.1 million as of December 31, 2023. The Korean NOLs are available to offset up to 60% of future taxable income and will begin to expire in 2035, unless previously utilized.
In addition, as of December 31, 2023, the Company had federal and state research and development (R&D) tax credit carryforwards of $41.6 million and $6.1 million, respectively. The federal tax credit carryforwards will begin to expire in 2029. The California research tax credits do not expire.
Based upon statute, federal and state losses and credits are expected to expire as follows (in millions):
Expiration Date: Federal NOLs State NOLs Foreign NOLs Federal R&D State R&D
Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Company’s NOL and R&D credit carryforwards may be limited in the event that a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has completed an IRC Section 382/383 analysis regarding the limitation of NOL and R&D credit carryforwards as of December 31, 2023. As a result of the analysis, the Company estimates that approximately $7.3 million of tax benefits related to NOL and R&D carryforwards will expire unused. Accordingly, the related NOL and R&D credit carryforwards have been removed from deferred tax assets accompanied by a corresponding reduction of the valuation
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allowance. Due to the existence of the valuation allowance, limitations created by current and future ownership changes, if any, related to the Company's operations in the United States will not impact its effective tax rate. Any additional ownership changes, may further limit the ability to use the NOL and R&D carryforwards.
The Tax Cuts and Jobs Act of 2017 subjects a U.S. stockholder to tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. For 2023, 2022 and 2021, the Company did not generate any GILTI due to losses earned by its foreign subsidiary.
The following table summarizes the activity related to the Company's unrecognized tax benefits:
Year ended December 31,
The amount of unrecognized tax benefits that, if recognized and realized, would affect the effective tax rate was $20.5 million, $19.7 million and $17.4 million as of December 31, 2023, 2022 and 2021, respectively, subject to valuation allowances. The Company has not recorded any interest and penalties on the unrecognized tax positions as the Company has continued to generate net operating losses after accounting for the unrecognized tax benefits. The Company does not anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. With few exceptions, the Company is no longer subject to United States federal income tax examinations for years before 2020 and state and local income tax examinations before 2019. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the NOL carryforward amount. The Company is not to its knowledge currently under Internal Revenue Service (“IRS”), state, local or foreign tax examination.
13. 401(k) Plan
The Company has adopted a 401(k) Profit Sharing Plan covering substantially all of its employees. The defined contribution plan allows the employees to contribute a percentage of their compensation each year. The Company currently matches 50% of its employees’ contributions, up to 6% of their annual compensation. The Company’s contributions are recorded as expense in the accompanying consolidated statements of operations and totaled $1.4 million, $1.8 million and $1.5 million for the years ended December 31, 2023, 2022 and 2021, respectively.
14. Related Party Transactions
Plumbline Life Sciences, Inc.
The Company owned 597,808 shares of common stock in PLS as of December 31, 2023 and 2022, representing a 17.8% and 18.7% ownership interest, respectively. One of the Company's directors, Dr. David B. Weiner, acts as a consultant to PLS.
Revenue recognized from PLS consists of milestone, license and patent fees. For the years ended December 31, 2023, 2022 and 2021, the Company recognized revenue from PLS of $0, $34,000 and $245,000, respectively. At December 31, 2023 and 2022, the Company had an accounts receivable balance of $0 and $59,000, respectively, related to PLS.
The Wistar Institute
The Company's director Dr. David B. Weiner is a director of the Vaccine Center of The Wistar Institute ("Wistar"). Dr. Weiner is also the Executive Vice President of Wistar.
In March 2016, the Company entered into collaborative research agreements with Wistar for preventive and therapeutic DNA-based immunotherapy applications and products developed by Dr. Weiner and Wistar for the treatment of cancers and infectious diseases. Under the terms of the agreement, the Company reimbursed Wistar for all direct and indirect costs incurred
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in the conduct of the collaborative research, not to exceed $3.1 million during the five-year term of the agreement. In March 2021, upon expiration of the March 2016 agreements, the Company entered into new collaborative research agreements with Wistar with the same terms. The Company has the exclusive right to in-license new intellectual property developed under this agreement.
In 2020, the Company received a $10.7 million sub-grant through Wistar, which was amended in 2021 to $13.6 million, for the preclinical development and translational studies of dMAbs as countermeasures for COVID-19, with funding extended through August 2024. The sub-grant also includes an option for an additional $1.6 million in funding through September 2025.
In December 2022, the Company received a $1.2 million sub-grant through Wistar with funding through November 2023, with an option for an additional $5.4 million in funding through November 2027. The Company will support the Wistar lead consortium in the research and development of synthetic DNA-launched nanoparticles (dLNPs) for vaccination against HIV infection.
Deferred grant funding recognized from Wistar and recorded as contra-research and development expense is related to work performed by the Company on the research sub-contract agreements. For the years ended December 31, 2023 and 2022, the Company recorded $1.0 million and $8.7 million, respectively, as contra-research and development expense from Wistar.
Research and development expenses recorded from Wistar relate primarily to the collaborative research agreements and sub-contract agreements related to Gates and CEPI (see Note 4). Research and development expenses recorded from Wistar for the years ended December 31, 2023, 2022 and 2021 were $1.8 million, $1.4 million and $2.9 million, respectively. At December 31, 2023 and 2022, the Company had an accounts receivable balance of $2.4 million and $9.9 million, respectively, and an accounts payable and accrued liability balance of $1.1 million and $1.2 million, respectively, related to Wistar. As of December 31, 2023 and 2022, the Company had a prepaid expense balance of $20,000 and $375,000, respectively, and recorded $22,000 and $88,000, respectively, as deferred grant funding on its consolidated balance sheet related to Wistar.
15. Geneos Therapeutics, Inc.
In 2016, the Company formed Geneos to develop and commercialize neoantigen-based personalized cancer therapies. Geneos was considered a variable interest entity (VIE) for which the Company was the primary beneficiary. The Company's Chief Scientific Officer Dr. Laurent Humeau is on the Board of Directors of Geneos. The Company's director Dr. David B. Weiner is the Chairman of the Scientific Advisory Board of Geneos.
Following a series of financing transactions through June 2020, the Company less than a majority of the outstanding equity of Geneos on an as-converted to common stock basis, which triggered a VIE reconsideration, as the Company no longer held a controlling financial interest. Based on the Company’s assessment, Geneos continued to be a VIE as it did not have sufficient equity at risk to finance its activities without additional subordinated financial support. However, the Company was not the primary beneficiary of Geneos, as it did not have the power to direct the activities that most significantly impact Geneos’ economic performance. Accordingly, the Company deconsolidated its investment in Geneos in 2020.
Following the deconsolidation, the Company accounts for its common stock investment in Geneos, in which the Company lacks control but does have the ability to exercise significant influence over operating and financial policies, using the equity method. Generally, the ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. The Company's equity method investments are reviewed for indicators of impairment at each reporting period and are written down to fair value if there is evidence of a loss in value that is other-than-temporary. Any difference between the carrying amount of the Company’s investment and the amount of underlying equity in Geneos’ net assets is amortized into income or expense accordingly. There were no basis differences identified as of the deconsolidation date that would need to be amortized.
Upon deconsolidation, the Company recorded its investment at fair value. The Company determined that its investment in Geneos did not have a readily determinable fair value and therefore elected the measurement alternative in ASC 321 to subsequently record the investment at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. When fair value becomes determinable, from observable price changes in orderly transactions, the Company’s investment is marked to fair value. There have been no observable price changes or impairments identified since the deconsolidation date.
The Company’s share of net losses of Geneos for the three months ended March 31, 2021 was $1.5 million; however, only $434,000 was recorded, reducing the Company's total investment in Geneos to $0. Of the total amount, $819,000 was allocated to the equity method investment, reducing the balance to $0 as of March 31, 2021. The remaining $4.2 million loss was allocated to the Company’s Series A and Series A-1 preferred stock investment in Geneos, on a ratable basis, reducing the balance to $0 as of March 31, 2021.
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In February 2021, Geneos completed a second closing of its Series A-1 preferred stock financing, in which the Company did not participate. Following this transaction, the Company held approximately 35% of the outstanding equity, on an as-converted to common stock basis.
In March 2022, Geneos completed the closing of a Series A-2 preferred stock financing. The Company invested $2.0 million in the Series A-2 preferred stock financing, which was led by outside investors. The closing date of this transaction was determined to be a VIE reconsideration event; based on the Company’s assessment, Geneos continued to be a VIE as it did not have sufficient equity at risk to finance its activities without additional subordinated financial support. The Company continued to not be the primary beneficiary of Geneos, as it did not have the power to direct the activities that most significantly impact Geneos’s economic performance and should not consolidate Geneos. Following this transaction, the Company held approximately 28% of the outstanding equity, on an as-converted to common stock basis. Accordingly, the Company continued to account for its common stock investment in Geneos as an equity method investment under ASC 323 and its preferred stock investments as equity securities under ASC 321.