Allarity Therapeutics, Inc. 10-Q/A

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and plan of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from the plans, intentions, expectations and other forward-looking statements included in the discussion below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those factors discussed in the Risk Factors section of our information statement/prospectus which is part of our Form S-4 filed with the SEC on August 20, 2021, and which became effective on November 5, 2021. Overview We are a biopharmaceutical company focused on discovering and developing highly targeted anti-cancer drug candidates. Through the use of its Drug Response Predictor (DRP ® ) platform, the Company identifies the value in drug assets that have otherwise been discontinued by identifying patient populations where these drugs are active. The Company’s three lead drug candidates are: the tyrosine kinase inhibitor (TKI) dovitinib, the poly-ADP-ribose polymerase (PARP) inhibitor stenoparib, and the microtubule inhibitor agent IXEMPRA. Risks and Uncertainties The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel and collaboration partners, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations, and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. Even if the Company’s research and development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales. Impacts of COVID-19 on our Business — Update In March 2020, the World Health Organization declared COVID-19 a global pandemic. COVID-19 has had a modest impact on our operations as it caused some unexpected delays in our clinical program activities as clinical trials were delayed. Management is unable to estimate the future financial effects, if any, to our business as a result of COVID-19 because of the high level of uncertainties and unpredictable outcomes of this disease. We are continuing to evaluate the impact of COVID-19 pandemic on our business and are taking proactive measures to protect the health and safety of our employees, as well as to maintain business continuity. Based on guidance issued by federal, state and local authorities, we transitioned to a remote work model for our employees, effective March 16, 2020. During the three months ended September 30, 2021 restrictions due to COVID-19 have lifted significantly and as a result, our Danish employees have returned to work. Our North American employees are continuing to work remotely. We will continue to closely monitor and seek to comply with guidance from governmental authorities and adjust our activities as appropriate. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trial, healthcare systems or the global economy as a whole. However, these effects could harm our operations, and we will continue to monitor the COVID-19 situation closely. 31 Financial Operations Overview Since our inception in September of 2004, we have focused substantially all our resources on conducting research and development activities, including drug discovery and preclinical studies, establishing, and maintaining our intellectual property portfolio, the manufacturing of clinical and research material, hiring personnel, raising capital and providing general and administrative support for these operations. In recent years, we have recorded very limited revenue from collaboration activities, or any other sources. We have funded our operations to date primarily from convertible notes and the issuance and sale of our ordinary shares. We have incurred net losses in each year since inception. Our net losses were $9.8 million and $5.0 million for the nine months ended September 30, 2021, and 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $49.7 million. Substantially all our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses over at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities, as we: ● advance drug candidates through clinical trials; ● pursue regulatory approval of drug candidates; ● operate as a public company; ● continue our preclinical programs and clinical development efforts; ● continue research activities for the discovery of new drug candidates; and ● manufacture supplies for our preclinical studies and clinical trials. Components of Operating Expenses Research and Development Expenses Research and development expenses include: ● expenses incurred under agreements with third-party contract organizations, and consultants; ● costs related to production of drug substance, including fees paid to contract manufacturers; ● laboratory and vendor expenses related to the execution of preclinical trials; and ● employee-related expenses, which include salaries, benefits and stock-based compensation. We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks and estimates of services performed using information and data provided to us by our vendors and third-party service providers. Non-refundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and accounted for as prepaid expenses. The prepayments are then expensed as the related goods are delivered and as services are performed. To date, the majority of these expenses have been incurred to advance our lead drug candidates, dovitinib, stenoparib, and IXEMPRA ® . 32 We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our drug candidates, as our drug candidates advance into later stages of development, and as we begin to conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our drug candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our drug candidates. General and Administrative Expenses General and administrative expenses consist primarily of personnel-related costs, facilities costs, depreciation and amortization expenses and professional services expenses, including legal, human resources, audit and accounting services. Personnel-related costs consist of salaries, benefits and stock-based compensation. Facilities costs consist of rent and maintenance of facilities. We expect our general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to advance our drug candidates and as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, Nasdaq Stock Market, additional insurance expenses, investor relations activities and other administrative and professional services. Summary Results of Operations for the Three and Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited) The following table summarizes our results of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands): For the three months ended September 30, Increase/ For the nine months ended September 30, Increase/ 2021 2020 (Decrease) 2021 2020 (Decrease) (In thousands) (In thousands) Operating costs and expenses: Research and development 1,355 785 570 4,674 2,552 2,122 General and administrative 2,619 953 1,666 6,140 3,245 2,895 Total operating costs and expenses 3,974 1,738 2,236 10,814 5,797 5,017 Loss from operations: $ 3,974 $ 1,738 $ 2,236 $ 10,814 $ 5,797 $ 5,017 Research and Development Expenses We currently do not track our research and development costs by product candidate. A breakdown by nature of type of expense for the three and nine month periods ended September 30, 2021 and September 30, 2020 is provided below. For the three months ended September 30, Increase/ For the nine months ended September 30, Increase/ 2021 2020 (Decrease) 2021 2020 (Decrease) (In thousands) (In thousands) Research study expenses $ 528 382 $ 146 $ 1,725 $ 1,630 $ 95 Recovery of R&D costs — (8 ) 8 — (23 ) 23 Tax credit (219 ) (227 ) 8 (656 ) (681 ) 26 Manufacturing & supplies 95 1 94 888 55 833 Contractors 555 235 320 1,634 542 1,092 Patents 177 162 15 244 228 16 Staffing 189 192 (3 ) 685 657 28 Amortization 21 37 (16 ) 89 109 (20 ) Other 9 11 (2 ) 64 35 29 $ 1,355 $ 785 $ 570 $ 4,674 $ 2,552 $ 2,122 33 For the three-month period ended September 30, 2021 versus September 30, 2020: The increase of $570 thousand in research and development cost was due to an increase of $146 thousand in research study expenses, a decrease of $8 thousand in recovery of R&D costs, a decrease in tax credit of $8 thousand, an increase of $94 thousand in manufacturing and supplies, an increase of $320 thousand in contractors, an increase in patent expenses of $15 thousand, a decrease of $3 thousand in staffing; a decrease of $16 thousand in amortization, and a decrease of $2 thousand in other expenses. Overall, the increase was because activity during the 3 months ended September 30, 2020 was paused or significantly slowed due to COVID-19. Research and development in the 3 months ended September 30, 2021 increased as activity in the clinical trials coming back to a pre-pandemic level. Manufacturing & supplies and contractor costs has increased in preparation of our NDA filing for Dovitinib. For the nine-month period ended September 30, 2021 versus September 30, 2020: The increase of $2.1 million in research and development cost was due to an increase of $95 thousand in research study expenses, a decrease of $23 thousand in recovery of R&D costs, a decrease in tax credit of $26 thousand, an increase of $833 thousand in manufacturing and supplies, an increase of $1,092 thousand in contractors; an increase of $16 thousand in patent expenses, an increase of $28 thousand in staffing expenses, a decrease of $20 thousand in amortization, and an increase of $28 thousand in other expenses. Overall, the increase was because activity during the 9 months ended September 30, 2020 was paused or significantly slowed due to COVID-19. Manufacturing & supplies and contractor costs increased in preparation of our NDA filing for Dovitinib. General and Administrative Expenses General and administrative expenses increased by $1.7 million for the three months ended September 30, 2021 compared to the same period in 2020. The increase was primarily due to an increase in professional fees of $1.4 million, staffing expenses of $481 thousand, listings expenses of $9 thousand, and premises expenses of $2 thousand; offset by reductions in other administrative expenses of $176 thousand, insurance of $34 thousand and communication expenses of $5 thousand. Professional fees increased as the Company prepared its prospectus to file with the SEC in its effort to move its listing to the US Nasdaq. General and administrative expenses increased by $2.9 million for the nine months ended September 30, 2021 compared to the same period in 2020. The increase was primarily due to an increase in professional fees of $2.4 million, staffing expense of $682 thousand, insurance of $31 thousand, premises of $17 thousand, listings expenses of $15 thousand, and communications expenses of $4 thousand, offset by reductions in other administrative expenses of $240 thousand. General administrative expenses increased in the nine months ended September 30, 2021 compared to the same period in 2020 primarily for the same reasons as the increase in cost in the three months ended September 30, 2021. Other Income (Expenses), Net (Restated) For the three-month period ended September 30, 2021 versus September 30, 2020 (Restated): Other income (expense) of $2.7 million recognized in the three months ended September 30, 2021, consisted primarily of gain on sale of IP of $1.0 million, a $1.8 million fair value adjustment to derivative liabilities, $28 thousand in net interest income, and $9 thousand in net foreign exchange gains, offset by a ($137) thousand loss on investment and ($27) thousand in interest expense. In the three months ended September 30, 2020, other income of $290 thousand consisted primarily of net interest income of $221 thousand, gain on investment of $243 thousand, and net foreign exchange gains of $32 thousand, offset by a ($104) thousand fair value adjustment on derivative liabilities, ($78) thousand increase in fair value of convertible debt, and ($24) thousand in interest expenses. For the nine-month period ended September 30, 2021 versus September 30, 2020 (Restated): Other income (expense) of $1.1 million recognized in the nine months ended September 30, 2021, consisted primarily of a $1.7 million fair value adjustment to derivative liabilities, and $1.0 million proceeds on sale of IP, offset by ($393) thousand interest expense, ($317) thousand loss on investment, ($474) thousand increase in fair value of convertible debt, ($141) thousand loss on extinguishment of convertible debt, and net foreign exchange losses of ($71) thousand. In the nine months ended September 30, 2020, other income of $1.0 million comprised a $957 thousand fair value adjustment of derivative liabilities, a $654 thousand gain on investment, and net foreign exchange gains of $118 thousand, offset by a ($553) increase in fair value of convertible debt, and net interest expense of ($184) thousand. Changes in fair value of our derivative liabilities and convertible debt are measured using level 3 inputs as described in our consolidated financial statements. 34 Liquidity, Capital Resources and Plan of Operations (Restated) Since our inception through September 30, 2021, our operations have been financed primarily by the sale of convertible promissory notes and the sale and issuance of our ordinary shares. As of September 30, 2021, we had $5.6 million in cash, and an accumulated deficit of $49.7 million. In the nine months ended September 30, 2021, $14.9 million in gross proceeds from the issuance of shares, and $1.2 million in proceeds from convertible debt. We also received and repaid a bridge loan of $2.9 million in the nine months ended September 30, 2021. In the nine months ended September 30, 2020, we received $1.0 million in net proceeds from the sale and issuance of convertible notes. We also received $2.9 million in proceeds from share issuance. Our primary use of cash is to fund operating expenses, which consist of research and development as well as regulatory expenses related to our lead drug candidate, dovitinib, and clinical programs for stenoparib and IXEMPRA ® , and to a lesser extent, general and administrative expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. As of September 30, 2021, the Company’s cash deposits of $5.6 million were determined to be insufficient to fund its current operating plan and planned capital expenditures for at least the next 12 months. These conditions give rise to a substantial doubt over the Company’s ability to continue as a going concern. Management’s plans to mitigate the conditions or events that raise substantial doubt include additional funding through public equity, private equity, debt financing, collaboration partnerships, or other sources. There are no assurances, however, that the Company will be successful in raising additional working capital, or if it is able to raise additional working capital, it may be unable to do so on commercially favorable terms. The Company’s failure to raise capital or enter into other such arrangements if and when needed would have a negative impact on its business, results of operations and financial condition and its ability to develop its product candidates. The Company has also entered into a Securities Purchase Agreement with the Investor that provides for a $20 million equity investment in the Company. Please refer to the subsequent event disclosures in note 19(b) for further information. We expect to incur substantial expenses in the foreseeable future for the development and potential commercialization of our drug candidates and ongoing internal research and development programs. At this time, we cannot reasonably estimate the nature, timing or aggregate amount of costs for our development, potential commercialization, and internal research and development programs. However, in order to complete our current and future preclinical studies and clinical trials, and to complete the process of obtaining regulatory approval for our drug candidates, as well as to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our drug candidates, if approved, we may require substantial additional funding in the future. Cash Flows (Restated) The following table summarizes our cash flows for the periods indicated: (In thousands) Nine months ended September 30, (Restated) 2021 2020 Net Cash used in operating activities $ (10,567 ) $ (4,812 ) Net Cash provided by investing activities 1,000 — Net Cash provided by financing activities 15,381 3,333 Net increase (decrease) in cash $ 5,814 $ (1,479 ) 35 Operating Activities (Restated) During the nine months ended September 30, 2021, cash used in operating activities of $10.6 million was attributable to a net loss of $9.8 million and $271 thousand in net other non-cash charges. This was offset by a $1.0 million net change in net operating assets and liabilities. The non-cash charges consisted of $1.0 million in proceeds from the sale of IP, stock-based compensation of $1.2 million, non-cash interest of $148 thousand, non-cash finance expense of $393 thousand, fair value adjustment to convertible debt of $474 thousand, loss on extinguishment of convertible debt of $141 thousand, loss on investment of $317 thousand, depreciation and amortization of $90 thousand, deferred taxes of $146 thousand, and loss on foreign currency of $71 thousand, offset by a $1.7 million fair value adjustment to derivative liabilities. The change in operating assets and liabilities of $1.0 million was primarily due to a $1.4 million decrease in accounts payable, a $1.1 million increase in accrued liabilities, an increase in income tax credit receivable of $589 thousand, a decrease in operating lease liability of $98 thousand, an increase in other current assets of $97 thousand, and a decrease in prepaid expenses of $49 thousand. During the nine months ended September 30, 2020, cash used in operating activities of $4.8 million was attributable to a net loss of $5.0 million, $183 thousand of deferred income taxes and $214 thousand in net other non-cash charges. The non-cash charges consisted of a $654 thousand gain on investment, a $957 thousand fair value adjustment of derivative liabilities, and a net $261 thousand gain on foreign exchange offset by $110 thousand in depreciation and amortization, $628 thousand in stock-based compensation, $30 thousand in non-cash lease expense, $184 thousand in non-cash interest, and $553 thousand increase in fair value to convertible debt. The net change in operating assets and liabilities of $326 thousand was primarily due to a decrease in other current assets of $623 thousand, a decrease in accounts receivable of $95 thousand, a decrease in income tax credit receivable of $254 thousand, and an increase of $6 thousand in accrued liabilities, offset by a decrease in accounts payable of $395 thousand, an increase in prepaid expenses of $168 thousand, and a decrease in operating lease liability of $46 thousand. Investing Activities During the nine months ended September 30, 2021, cash provided by investing activities of $1.0 million was related to proceeds from the sale of IP. There were no cash flows from investing activities in the nine months ended September 30, 2021. Financing Activities During the nine months ended September 30, 2021, cash provided by financing activities of $15.4 million was related to proceeds from share issuance of $14.9 million and convertible loan proceeds of $1.2 million, offset by $620 thousand in share issuance costs and $84 thousand repayment of our line of credit. We also received and repaid $2.9 million in loan funding during the nine months ended September 30, 2021. During the nine months ended September 30, 2020, cash provided by financing activities of $3.3 million was related to proceeds from share issuance of $2.9 million, convertible loan proceeds of $1.0 million, and line of credit of $110 thousand, offset by share issuance costs of $156 thousand and $536 thousand for repayment of loan. Contractual Obligations and Commitments We enter into agreements in the normal course of business with vendors for preclinical studies, clinical trials and other service providers for operating purposes. We have not included these payments in the table of contractual obligations above since these contracts are generally cancellable at any time by us following a certain period after notice and therefore, we believe that our non-cancellable obligations under these agreements are not material. Operating Capital and Capital Expenditure Requirements We believe that the net proceeds from the PIPE Investment, together with our existing cash and cash equivalents as of the date of this 10-Q, and our anticipated expenditures and commitments for calendar year 2021 and 2022, will enable us to fund our operating expenses and capital expenditure requirements for at least 12 months from the date of this report. Our estimate as to how long we expect the net proceeds from the PIPE Investment, together with our existing cash and cash equivalents, to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements. 36 Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of financial condition and results of operations is based upon our unaudited condensed consolidated financial statements for the three and nine month periods ended September 30, 2021 and September 30, 2020, and our audited consolidated financial statements for the years ended December 31, 2020 and December 31, 2019, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in 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 these estimates under different assumptions and conditions. Our significant accounting policies are described in the notes to our consolidated financial statements for the years ended December 31, 2020, and December 31, 2019, included in our Form S-4 for the year ended December 31, 2020, filed on August 20, 2021, and as amended, and there have been no significant changes to our significant accounting policies during the nine months ended September 30, 2021. These interim financial statements should be read in conjunction with the Company’s audited financial statements and accompanying notes Recently Issued Accounting Pronouncements See the sections titled “ Recently Issued Accounting Pronouncements ” in Note 1(m) to the Company’s unaudited interim condensed consolidated financial statements for the three and nine month periods ended September 30, 2021 and September 30, 2020 and in “ Significant Accounting Policies — Accounting pronouncements not yet adopted ” in Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2020 and December 31, 2019, respectively, appearing in the Company’s 2021 Form S-4.