Indaptus Therapeutics(INDP) - 2021 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Intec Pharma Ltd. for the quarter ended March 31, 2021, including balance sheets, statements of operations, changes in shareholders' equity, and cash flows, along with detailed notes explaining the company's operations, significant accounting policies, commitments, share capital changes, and the proposed merger with Decoy Biosystems Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific reporting dates Condensed Consolidated Balance Sheets | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total Current Assets | $12,159 | $14,968 | | Total Non-Current Assets | $5,271 | $5,928 | | Total Assets | $17,430 | $20,896 | | Total Current Liabilities | $5,203 | $5,334 | | Total Long-Term Liabilities | $883 | $1,029 | | Total Liabilities | $6,086 | $6,363 | | Total Shareholders' Equity | $11,344 | $14,533 | | Total Liabilities and Shareholders' Equity | $17,430 | $20,896 | - Cash and cash equivalents decreased from $14,671 thousand at December 31, 2020, to $10,135 thousand at March 31, 2021, with restricted cash of $1,000 thousand added at March 31, 2021[23] Condensed Consolidated Statements of Comprehensive Loss This section details the company's financial performance over specific periods, outlining revenues, expenses, and the resulting net loss Condensed Consolidated Statements of Comprehensive Loss | Metric | Three months ended March 31, 2021 (in thousands) | Three months ended March 31, 2020 (in thousands) | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Research and Development Expenses | $(2,157) | $(2,024) | | General and Administrative Expenses | $(2,021) | $(1,715) | | Operating Loss | $(4,178) | $(3,739) | | Financial Expenses, net | $(31) | $(70) | | Loss Before Income Tax | $(4,209) | $(3,809) | | Income Tax | $(20) | $(61) | | Net Loss | $(4,229) | $(3,870) | | Loss Per Ordinary Share - Basic and Diluted | $(0.96) | $(1.65) | | Weighted Average Number of Shares Outstanding (in thousands) | 4,419 | 2,346 | - Net loss increased by approximately $359 thousand (8%) from $3,870 thousand in Q1 2020 to $4,229 thousand in Q1 2021[25] Condensed Consolidated Statement of Changes in Shareholders' Equity This section tracks changes in the company's shareholders' equity, reflecting net income, share issuances, and other equity transactions over the period Condensed Consolidated Statement of Changes in Shareholders' Equity | Metric | January 1, 2021 (in thousands) | March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Ordinary Shares (Amounts) | $727 | $727 | | Additional Paid-in Capital | $217,357 | $218,397 | | Accumulated Deficit | $(203,551) | $(207,780) | | Total Shareholders' Equity | $14,533 | $11,344 | - Shareholders' equity decreased by $3,189 thousand, primarily due to a net loss of $4,229 thousand, partially offset by $956 thousand from warrant exercises and $84 thousand from share-based compensation[29] Condensed Consolidated Statements of Cash Flows This section details the sources and uses of cash, categorized into operating, investing, and financing activities for the period Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three months ended March 31, 2021 (in thousands) | Three months ended March 31, 2020 (in thousands) | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net cash used in operating activities | $(4,311) | $(5,147) | | Net cash provided by (used in) investing activities | $(1) | $769 | | Net cash provided by financing activities | $956 | $6,113 | | Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash | $(3,356) | $1,735 | - The company experienced a net decrease in cash and cash equivalents and restricted cash of $3,356 thousand in Q1 2021, a significant change from the $1,735 thousand increase in Q1 2020[32] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION This note describes the company's business, ongoing merger, and the basis for financial statement preparation, including going concern considerations - Intec Pharma Ltd. is a clinical-stage biopharmaceutical company focused on developing drugs using its proprietary Accordion Pill platform technology, but has not yet generated revenues from operations[34][35] - The company is undergoing a merger and reorganization with Intec Parent, Inc. and Decoy Biosystems, Inc., which is expected to be completed in Q3 2021, with Intec Parent becoming the successor entity and Decoy's business becoming Intec Parent's business[6][7][35] - Due to cumulative losses of approximately $207.8 million as of March 31, 2021, and expected continued losses and negative cash flows, there is substantial doubt about the company's ability to continue as a going concern within one year[35][39] - The COVID-19 pandemic has disrupted partnering efforts and its full impact on the company's financial condition, liquidity, or results of operations remains uncertain[38] NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting principles and methods applied in preparing the consolidated financial statements - The consolidated financial statements include Intec Israel and its subsidiaries, with intercompany balances and transactions eliminated[44] - Fair value measurements are categorized into a three-level hierarchy based on input observability, prioritizing Level 1 (quoted prices in active markets) and minimizing Level 3 (unobservable inputs)[45][48] - Diluted loss per share calculation excludes outstanding stock options and warrants (totaling 1,244,666 in Q1 2021) because their effect would be anti-dilutive[47][50] NOTE 3 - COMMITMENTS AND CONTINGENT LIABILITIES This note details the company's contractual obligations, potential future liabilities, and legal proceedings - The company has recognized approximately $3.7 million in non-current other assets for production equipment under a Process Development Agreement with LTS, which was impaired by $4.1 million in 2019[51][52] - A lawsuit filed by two former directors was settled in February 2021 for NIS 400 thousand (approximately $125 thousand) per plaintiff, recorded as general and administrative expenses[54][55][56] - The company has entered into cooperation agreements with multinational companies for Accordion Pill development, with expenses reimbursed based on milestones, and is negotiating a non-binding term sheet for the sale or license of the AP-CD/LD program[58][59][60] NOTE 4 - SHARE CAPITAL This note provides details on the company's share capital, including changes from warrant exercises and share-based compensation - In February 2021, warrants to purchase 182,500 ordinary shares were exercised, generating approximately $956 thousand[61] - Share-based compensation expense for the three months ended March 31, 2021, was $84 thousand, a decrease from $442 thousand in the prior year period[66] NOTE 5 - ACCOUNTS PAYBLE AND ACCRUALS - OTHER This note details the composition of the company's accounts payable and other accrued liabilities Accounts Payable and Accruals - Other | Category | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Expenses payable | $3,217 | $2,859 | | Salary and related expenses | $876 | $1,057 | | Current operating lease liabilities | $581 | $596 | | Accrual for vacation days and recreation pay for employees | $193 | $180 | | Other | $153 | $274 | | Total | $5,020 | $4,966 | NOTE 6 - MERGER AGREEMENT This note outlines the terms and conditions of the proposed merger with Decoy Biosystems, including ownership structure and closing conditions - Intec Israel entered into a Merger Agreement with Intec Parent and Decoy Biosystems, where Decoy's business will become Intec Parent's business after the merger, with Decoy securityholders expected to own approximately 75% and Intec Israel securityholders 25% of Intec Parent post-merger, subject to adjustments[69][70] - Closing conditions for the merger include consummation of the Domestication Merger, shareholder approvals, effectiveness of the Registration Statement, disposition of Intec Israel's Accordion Pill business, and a closing financing of $30 million to $50 million[72] - Intec Israel transferred $650 thousand to Decoy for transaction expenses, and a reverse break-up fee of $1.0 million was deposited as restricted cash, which Intec Israel may forfeit if the merger agreement is terminated under specified circumstances[75] - The company agreed to dispose of its Accordion Pill business immediately after the merger closing, leading to accelerated depreciation of property and equipment and increasing loss per share by five cents[77] NOTE 7 - EVENTS SUBSEQUENT TO MARCH 31, 2021 This note reports significant events occurring after the balance sheet date, impacting the company's financial position or operations - In April 2021, Intec Pharma sold 319,393 ordinary shares to Aspire Capital Fund LLC for approximately $1.2 million[80] - An amendment to the Purchase Agreement with Aspire Capital in May 2021 updated the Exchange Cap to an additional 963,912 ordinary shares (19.99% of outstanding shares), unless shareholder approval is obtained or the average purchase price is at least $3.44 per share[80] - Four lawsuits were filed against the company and its board in May 2021, alleging federal securities law violations related to the merger, though two have since been voluntarily dismissed[79][80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting the proposed merger with Decoy Biosystems, recent clinical trial developments, detailed analysis of operating expenses and net loss, and an assessment of liquidity and capital resources, including the Aspire Capital financing arrangement and the company's going concern outlook Overview This section provides a general introduction to the company's business, proprietary technology, and primary product candidates - Intec Pharma Ltd. is a clinical-stage biopharmaceutical company developing drugs based on its proprietary Accordion Pill (AP) platform technology, designed to improve drug efficacy and safety through gastric retention and specific release mechanisms[86] - The company's most advanced product candidate, AP-CD/LD, was being developed for Parkinson's disease symptoms[86] Proposed Merger with Decoy Biosystems This section details the strategic rationale and structural components of the proposed merger with Decoy Biosystems - Intec Israel, Intec Parent, and Decoy Biosystems entered into a Merger Agreement on March 15, 2021, aiming for Intec Parent to become the successor to Intec Israel, with Decoy's business becoming Intec Parent's business[87] - The merger involves a domestication of Intec Israel into a wholly-owned subsidiary of Intec Parent, followed by Merger Sub merging into Decoy, making Decoy a wholly-owned subsidiary of Intec Parent[89][90] - Post-merger, Decoy securityholders are expected to own approximately 75% and Intec Israel securityholders 25% of Intec Parent's outstanding securities on a fully diluted basis, subject to net cash balance adjustments[91] The Domestication Merger This section describes the process by which Intec Israel will become a wholly-owned subsidiary of a Delaware corporation - Prior to the closing date, Intec Israel will domesticate as a wholly-owned subsidiary of a Delaware corporation by merging with Domestication Merger Sub, with Intec Israel surviving and becoming a subsidiary of Intec Parent[89] - All outstanding Intec Israel ordinary shares will convert on a one-for-one basis into Intec Parent Common Stock, and all options and warrants will be exchanged for equivalent Intec Parent securities[89] The Merger This section outlines the merger of Merger Sub into Decoy, making Decoy a wholly-owned subsidiary of Intec Parent - After the Domestication Merger and subject to closing conditions, Merger Sub will merge into Decoy, making Decoy a wholly-owned subsidiary of Intec Parent[90] - Decoy common stock will convert into Intec Parent Common Stock based on an exchange ratio, and Decoy stock options will convert into Intec Parent stock options[94] Disposition of Accordion Pill Business This section details the company's commitment to divest its Accordion Pill business immediately following the merger's closing - Intec Israel agreed to use commercially reasonable efforts to sell, transfer, or assign its Accordion Pill business, or otherwise divest its assets and satisfy liabilities, immediately after the merger's closing[92] The Closing Financing This section outlines the financing condition required for the merger, ensuring the combined entity's net cash balance - The merger is conditioned on a closing financing by Intec Israel or Intec Parent to ensure the combined net cash of Decoy and Intec entities is between $30 million and $50 million immediately after closing[93] Recent Developments This section highlights key operational and clinical milestones achieved by the company in the recent period - In December 2020, the company initiated a clinical trial in Israel for an optimized AP-THC, which demonstrated a better controlled release profile with prolonged exposure and shorter lag time compared to Marinol[96] Results of Operations This section provides a detailed analysis of the company's financial performance, including key expense categories and net loss Research and Development Expenses This section analyzes changes in research and development expenditures and their primary drivers Research and Development Expenses | Metric | Three months ended March 31, 2021 (in thousands) | Three months ended March 31, 2020 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------- | | Research and Development Expenses | $(2,157) | $(2,024) | $(133) | 6.57% | - The increase in R&D expenses was primarily due to accelerated depreciation for property and equipment following the proposed merger[99] General and Administrative Expenses This section examines the trends and factors influencing general and administrative expenditures General and Administrative Expenses | Metric | Three months ended March 31, 2021 (in thousands) | Three months ended March 31, 2020 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------- | | General and Administrative Expenses | $(2,021) | $(1,715) | $(306) | 17.84% | - The increase in G&A expenses was primarily related to professional services expenses associated with the Merger Agreement[100] Operating Loss This section analyzes the company's operating loss, identifying the main contributors to its change Operating Loss | Metric | Three months ended March 31, 2021 (in thousands) | Three months ended March 31, 2020 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------- | | Operating Loss | $(4,178) | $(3,739) | $(439) | 11.74% | - The operating loss increased by approximately $400 thousand, mainly due to the rise in general and administrative expenses[101] Financial Expenses, Net This section reviews the company's net financial expenses, including interest and foreign currency exchange impacts Financial Expenses, Net | Metric | Three months ended March 31, 2021 (in thousands) | Three months ended March 31, 2020 (in thousands) | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Financial Expenses, net | $(31) | $(70) | - Net financial expenses decreased from $70 thousand in Q1 2020 to $31 thousand in Q1 2021, primarily due to lower foreign currency exchange expenses[102][103] Income tax This section discusses the company's income tax expenses and their contributing factors Income tax | Metric | Three months ended March 31, 2021 (in thousands) | Three months ended March 31, 2020 (in thousands) | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Income Tax | $(20) | $(61) | - Income tax expenses decreased from $61 thousand in Q1 2020 to $20 thousand in Q1 2021, incurred in Intec Pharma Inc. despite no taxable income in Israel[104] Net Loss This section summarizes the overall net loss for the period and its primary drivers Net Loss | Metric | Three months ended March 31, 2021 (in thousands) | Three months ended March 31, 2020 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------- | | Net Loss | $(4,229) | $(3,870) | $(359) | 9.28% | - Net loss increased by approximately $300 thousand, primarily due to the increase in general and administrative expenses[106] Liquidity and Capital Resources This section assesses the company's ability to meet short-term obligations and fund future operations, including financing arrangements - The company's operations have been funded primarily through equity offerings, grants, and payments from feasibility and related agreements[107] Cash and cash equivalents and restricted cash | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Cash and cash equivalents and restricted cash | $11,135 | $14,671 | Cash Flow Activity | Cash Flow Activity | Three months ended March 31, 2021 (in thousands) | Three months ended March 31, 2020 (in thousands) | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net cash used in operating activities | $(4,311) | $(5,147) | | Net cash provided by (used in) investing activities | $(1) | $769 | | Net cash provided by financing activities | $956 | $6,113 | Aspire Capital Financing Arrangement This section details the company's equity purchase agreement with Aspire Capital, outlining terms and recent transactions - The company has a purchase agreement with Aspire Capital Fund LLC, amended in May 2021, allowing Aspire Capital to purchase up to $10.0 million of ordinary shares over 30 months[112] - In April 2021, 319,393 ordinary shares were sold to Aspire Capital for approximately $1.2 million at $3.7767 per share[119] - Sales under the agreement are limited to 963,912 ordinary shares (19.99% of outstanding shares) unless shareholder approval is obtained or the average purchase price is at least $3.44[120] Current Outlook This section provides management's perspective on future liquidity, funding needs, and the company's going concern status - The company believes it has adequate cash to fund operations through the completion of the merger and into Q1 2022, but acknowledges uncertainties that could accelerate cash consumption[121] - There is substantial doubt about the company's ability to continue as a going concern within one year, due to the uncertainty of merger completion, the need to dispose of the Accordion Pill business, and the impact of the COVID-19 pandemic[121][122] - Significant additional financing will be required to fund future operations, including clinical trials, regulatory approvals, manufacturing, and commercialization, with availability and terms uncertain[123][125] Off-Balance Sheet Arrangements This section confirms the absence of any material off-balance sheet arrangements impacting the company's financial condition - The company has no off-balance sheet arrangements that are material to its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources[126] Critical Accounting Policies This section discusses significant accounting policies and estimates requiring management's judgment that can materially affect financial reporting - The company's financial statements are prepared in accordance with U.S. GAAP, requiring estimates that affect reported amounts of assets, liabilities, and expenses[127] - There have been no material changes to the critical accounting policies and estimates disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020, during the three months ended March 31, 2021[128] Recently Issued Accounting Pronouncements This section reports on any new accounting standards or pronouncements recently issued and their potential impact - There are no recently issued accounting pronouncements to report[129] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not required for smaller reporting companies - Quantitative and Qualitative Disclosures About Market Risk are not required for smaller reporting companies[130] Item 4. Controls and Procedures Management evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2021, concluding they were effective at a reasonable assurance level, with no material changes in internal control over financial reporting identified during the quarter - Management, including the principal executive and financial officers, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2021, and concluded they were effective at the reasonable assurance level[133][134] - No changes in internal control over financial reporting were identified during the quarter ended March 31, 2021, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[135] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various lawsuits and legal proceedings in the ordinary course of business. Four lawsuits were filed in May 2021 alleging federal securities law violations related to the merger, though two have been voluntarily dismissed. The company believes these lawsuits are without merit and intends to defend against them vigorously - Four lawsuits were filed against the company and its board in May 2021, alleging federal securities law violations related to the merger, with two voluntarily dismissed as moot[139] - The company believes these lawsuits are without merit and intends to defend vigorously against them, with the probable outcome and potential loss currently inestimable[139] - A settlement agreement for a lawsuit with former directors was resolved in March 2021, as detailed in Note 3b to the financial statements[140] Item 1A. Risk Factors This item is not required for a smaller reporting company - Risk Factors are not required for a smaller reporting company[141] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report - There were no unregistered sales of equity securities and use of proceeds to report[142] Item 3. Defaults upon Senior Securities There were no defaults upon senior securities to report - There were no defaults upon senior securities to report[143] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[144] Item 5. Other Information This section discloses an amendment to the Ordinary Shares Purchase Agreement with Aspire Capital, which updates the Exchange Cap for share issuance - On May 16, 2021, the company entered into a First Amendment to Ordinary Shares Purchase Agreement with Aspire Capital, updating the Exchange Cap[145] - The amendment allows for the issuance of up to an additional 963,912 ordinary shares (19.99% of outstanding shares) unless shareholder approval or a Nasdaq rule exception is obtained, or if the average purchase price is at least $3.44 per share[145] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the Articles of Association, the First Amendment to Ordinary Shares Purchase Agreement, certifications of principal officers, and XBRL documents - Key exhibits include the First Amendment to Ordinary Shares Purchase Agreement, certifications of the Principal Executive Officer and Principal Financial Officer, and various XBRL documents[147]