Item 7. Management’s Discussion and Analysis
Item
7. Management’s Discussion and Analysis of Financial Condition and Results Of Operations.
The
following discussion and analysis provide information which our management believes is relevant to an assessment and understanding of
Allarity consolidated results of operations and financial condition. You should read the following discussion and analysis of our financial
condition and results of operations together with our audited consolidated financial statements and notes thereto included elsewhere
in this report. In addition to historical financial information, this discussion contains forward-looking statements based upon our current
expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this report. Unless
otherwise indicated or the context otherwise requires, references in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations section to “Allarity,” “we,” “us,” “our,” and other similar
terms refer to Allarity Therapeutics, Inc. and its consolidated subsidiaries.
We
caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made.
We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements
to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that
may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
Overview
We
are a pharmaceutical company focused on discovering and developing highly targeted anti-cancer drug candidates. Using 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 t lead drug candidate is the poly-ADP-ribose polymerase (PARP)
inhibitor stenoparib. The microtubule inhibitor agent IXEMPRA, and the tyrosine kinase inhibitor (TKI) dovitinib have been deprioritized
and terminated, respectively.
Recent
Corporate Developments
Bridge
Loans
On
November 22, 2022, the Company entered into a Secured Note Purchase Agreement with 3i, LP (the “Secured Note Purchase Agreement”)
for a bridge loan to extend the Company’s cash runaway beyond December 31, 2022, in order to provide the Company with more time
to complete the process of amending its Certificate of Incorporation to increase it authorized share capital and proposed reverse stock
split to facilitate additional capital investments (the “Bridge Loan”). Under the Secured Note Purchase Agreement, the Company
has authorized the sale and issuance of three 3i Promissory Notes, with the first note in an aggregate principal amount of $350,000 to
be issued at closing (which loan was received in November 2022); the second note in the principal amount of $1,666,640 to be issued at
closing and which represents the payment of $1,666,640 due to 3i, LP in Alternative Conversion Floor Amounts, as defined in the Certificate
of Designations, that began to accrue on July 14, 2022; and the third note in an aggregate principal amount of $650,000 with respect
to a new loan to be funded upon the Company filing a registration statement with SEC in connection with a registered offering. As of
December 31, 2022, all of the notes have been issued and are outstanding. Each 3i Promissory Note matures on January 1, 2024, carries
an interest rate of 5% per annum, and is secured by all of the Company’s assets pursuant to the Security Agreement. In addition,
3i, LP may exchange the 3i Promissory Notes for the Company’s common stock, or other equity security, at an exchange price equal
to the lowest price per share of the equity security sold to other purchasers, rounded down to the nearest whole share, if the Company
concludes a future equity financing prior to the maturity date or other repayment of the 3i Promissory Notes. In addition, each 3i Promissory
Note and interest earned thereon may be redeemed by the Company at its option or the holder may demand redemption if the Company obtains
gross proceeds of at least $5 million in a financing in an amount of up to 35% of the gross proceeds of the financing.
On
January 18, 2024, we entered into a Securities Purchase Agreement with 3i, pursuant to which we issued and sold 3i a senior convertible
promissory note in an aggregate principal amount of $440,000 due on January 18, 2025 (the “First Note,” and together with
the Purchase Agreement, the “Transaction Documents”) for an aggregate purchase price of $400,000 representing an approximate
10% original issue discount. We agreed to use the net proceeds from the sale of the First Note for accounts payable and working capital
purposes. Unless the Transaction Documents state otherwise, we may not prepay any portion of the principal amount of the First Note without
the Purchaser’s prior written consent.
140
On
February 13, 2024 (the “Second Closing”), the parties to the Purchase Agreement entered into a Limited Waiver Agreement (the
“Waiver Agreement”) and agreed that the Second Closing can be consummated prior to the 30 th calendar day following
January 18, 2024. The parties to the Purchase Agreement further agreed to waive any rights or remedies that they may have under Section
2.3 of the Purchase Agreement, solely in connection with the Second Closing, including any rights of termination, defaults, amendment,
acceleration or cancellation that be triggered under the Purchase Agreement solely as a result of accelerating the Second Closing. As
of the Second Closing, we issued and sold to 3ia senior convertible promissory note in an aggregate principal amount of $440,000 due
on February 13, 2025 (the “Second Note,” and together with the First Note dated January 18, 2024, and Purchase Agreement,
the “Transaction Documents”) for an aggregate purchase price of $400,000, representing an approximately 10% original issue
discount (the “Second Transaction”). We agreed to use the net proceeds from the sale of the Second Note for accounts payable
and working capital purposes. Unless the Second Transaction Documents state otherwise, we may not prepay any portion of the principal
amount of the Second Note without the Purchaser’s prior written consent.
Termination
of Chief Executive Officer
On
December 8, 2023, James G. Cullem was terminated as our Chief Executive Officer for cause under his employment agreement. In addition,
Mr. Cullem was also terminated from all other officer positions with the Company and all other positions with its subsidiaries. Mr. Cullem
has indicated that his termination should be without cause. Under Mr. Cullem’s employment agreement, disputes are subject to mediation.
Effective January 27, 2024, Mr. Cullem resigned as a director of the Company.
On
December 8, 2023, Thomas Jensen, age 45, was appointed by the Company’s Board of Directors as Interim Chief Executive Officer to
replace Mr. Cullem. Since July 2022, Mr. Jensen has served as Senior Vice President, Investor Relations and was previously the Company’s
Senior Vice President, Information Technology since July 2021. Mr. Jensen has also served as Senior Vice President, Information Technology
of Allarity Therapeutics A/S, the Company’s predecessor, since June 2020. Mr. Jensen previously served as the Chief Technology
Officer of the Company’s predecessor from 2004 to June 2020. Mr. Jensen co-founded Allarity Therapeutics A/S in 2004. Mr. Jensen
also established and currently leads our laboratories in Denmark. Mr. Jensen is a current member of the Company’s Board of Directors.
There is no family relationship between Mr. Jensen and any director or executive officer of the Company. Prior to appointment as Chief
Executive Officer, Mr. Jensen was paid consulting fees for his services to the Company. At this time, Mr. Jensen and the Company have
not entered into any material plan, contract or arrangement related to his appointment as an officer.
Novartis
Termination Notice
On
January 26, 2024, we received written notice from Novartis indicating their decision to terminate our Agreement based on material breach
for lack of financial payment. The termination took effect on January 26, 2024.
Consulting
Agreement
On
November 21, 2023, the Company’s audit committee entered into a two month consulting agreement with Mr. Jeremy R. Graff, Ph.D.
Dr. Graff has been in the Biotech/ Pharma industry for more than 25 years, garnering deep experience and expertise in the preclinical
and clinical development of targeted, small and large molecule therapeutics as well as novel immunotherapeutics. His 16+ years of Big
Pharma experience included numerous leadership roles of increasing responsibility. He also served as a key scientific advisor for Lilly
Bioventures and the $6.5 billion acquisition of Imclone systems. He and his research groups have been responsible for delivering numerous
novel therapeutics to, and through, the clinic- most notably Lilly’s Verzenio (a CDK4/6 inhibitor for breast cancer).
Pursuant
to his consulting agreement, Dr. Graff will provide consulting and advisory services on Company’s research and development programs
in the field of small molecule inhibitors and their use in the treatment of cancer.
Additional
Issuances of Common Stock Upon Exercise of Certain Warrants
On
December 5, 2023, we received exercise notices from holders of certain warrants pursuant to which we authorized (i) the issuance of 562,311
shares of Common Stock pursuant to exercise of common stock purchase warrants at $1.00 per share for $562,311 in cash, and (ii) the issuance
of 500,000 shares of Common Stock pursuant to partial exercise of Exchange Warrant (as defined below) on a cashless exercise basis.
141
NASDAQ
Delisting Notifications
On
October 27, 2023, we received notification from Nasdaq Listing Qualifications staff that it has determined that the bid price of our
Common Stock has closed at less than $1 per share over the previous 30 consecutive business days, and, as a result, does not comply with
Listing Rule 5550(a)(2). Further, Nasdaq also noted that we effected a 1:35 reverse stock split on March 24, 2023, and a 1:40 reverse
stock split on June 28, 2023. Because we effected one or more reverse stock splits over the prior two-year period with a cumulative ratio
of 250 shares or more to one, we will not be afforded a 180-calendar day period to demonstrate compliance with Listing Rule 5550(a)(2)
pursuant to Listing Rule 5810(c)(3)(A)(iv).In that regard, unless the Company requested an appeal from such determination, trading of
the Company’s Common Stock would have been suspended at the opening of business on November 7, 2023, and a Form 25-NSE would have
been filed with the Securities and Exchange Commission which would have removed the Company’s Common Stock from listing and registration
on The Nasdaq Stock Market.
The
Company requested an appeal for such determination and was given a hearing date of February 1, 2024 (the “Panel Hearing”).
During the appeal period, the Company’s Common Stock will continue to be listed on The Nasdaq Stock Market.
On
November 16, 2023, we received an additional notification indicating that the Company’s stockholders’ equity as reported
in its Quarterly Report on Form 10-Q for the period ended September 30, 2023, did not satisfy the continued listing requirement under
Nasdaq Listing Rule 5810(c)(3) which serves as an additional basis for delisting. The Company intends to present its views with respect
to this additional deficiency at the Panel Hearing.
In
November 2023, we received correspondence from Nasdaq Regulatory Compliance seeking more information surrounding our determination that
our April and July 2023 offerings were deemed “Public Offerings” within the meaning of Listing Rule IM5635-3 to avoid shareholder
approval for such offerings. We provided our response to Nasdaq Regulatory Compliance’s questions. In addition, in In November
2023, we received additional correspondence from Nasdaq Regulatory Compliance seeking information in connection with the issuance of
warrants in September 2023 pursuant to inducement letters sent to holders of public warrants issued in the April and July 2023 public
offerings. We believe that our April and July 2023 offerings were public offerings within the meaning of Listing Rule IM 5635-3, and
that the issuance of the warrants in September 2023 was structured in manner that such issuance did not require shareholder approval.
In this regard, we sought advice from consultants in structuring these issuances to comply with Nasdaq Listing Rules. No assurance can
be given that Nasdaq Regulatory Compliance will agree with our analysis and determine that the April and July 2023 public offerings and
issuance of the September 2023 warrants required shareholder approval. If Nasdaq Listing Qualifications determines that we should have
sought shareholder approval for the April and July 2023 public offerings and September 2023 warrant issuance, we may be subject to delisting.
On
February 1, 2024, we attended a de-listing appeal hearing with Nasdaq, the outcome of which is pending as of the date of this filing.
Amendments
to the Certificate of Designation of Series A Preferred Stock
On
January 14, 2024, pursuant to the terms of the January 14th, 2024, 3i LP Bridge Loan, the Company modified the conversion price of the
3i Exchange Warrants from $1.00 to $0.4476, thereby increasing the number of Exchange Warrants outstanding from 4,407,221 at December
31, 2023 to 9,846,339 outstanding at January 14, 2024. Also on January 14, 2024, the conversion price of the outstanding 1,417 shares
of Series A Preferred Stock was revised from $1.00 to $0.4476. We filed the Fifth Certificate of Amendment to Amended and Restated Certificate
of Designations of Series A Convertible Preferred Stock (the “Fifth Amendment”) with the Secretary of State of the State
of Delaware to reflect the new conversion price of the Series A Preferred Stock of $0.4476. At a stated value of $1,080 for each share
of Series A Preferred Stock, the revised price of $0.4476 per share results in the 1,417 shares being convertible into 3,419,035 common
shares as of January 14, 2024.
142
Modification
to Conversion Price of Series A Preferred Stock
On
February 13, 2024, pursuant to the terms of the February 13, 2024, Bridge Loan, the Company modified the conversion price of the 3i Exchange
Warrants from $0.4476 to $0.4050 and thereby increased the number of Exchange Warrants outstanding from 9,846,339 on January 18, 2024,
to 10,882,028 on February 13, 2024. The Company also agreed to amend the conversion price of the Series A Preferred Stock to equal $0.405
as soon as practicable. We filed the Sixth Certificate of Amendment to Amended and Restated Certificate of Designations of Series A Convertible
Preferred Stock (the “Sixth Amendment”) with the Secretary of State of the State of Delaware to reflect the new conversion
price of the Series A Preferred Stock of $0.405. At a stated value of $1,080 for each share of Series A Preferred Stock, the revised
price of $0.405 per share results in the 1,296 shares being convertible into 3,456,000 common shares.
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.
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 securities.
Since
our inception of our predecessor, Allarity Therapeutics A/S, we have incurred losses and have an accumulated deficit of $94.5 million
as of December 31, 2023. Our net losses were $11.9 million and $16.1 million for the years ended December 31, 2023 and 2022, respectively.
As of December 31, 2023, our cash deposits of $166 thousand were determined to be insufficient to fund our current operating plan and
planned capital expenditures for the next twelve months. 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.
143
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, most of these expenses have been incurred
to advance our lead drug candidate stenoparib.
We
expect our research and development expenses on stenoparib to increase substantially for the foreseeable future as we continue to invest
to accelerate stenoparib in clinical trials designed to attain regulatory approval. Costs related to dovitinib and IXEMPRA will decrease
precipitously as these have been deprioritized/ terminated. We expect additional costs in research and development activities as we continue
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 because 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.
Results
of Operations
Comparison
of years ended December 31, 2023 and 2022
The
following table summarizes our results of operations for the years ended December 31, 2023 and 2022:
For
the years ended
December 31,
Increase/
2023
2022
(Decrease)
(In thousands)
Operating expenses:
Research and development
$ 7,103
$ 6,930
$ 173
Impairment of intangible assets
—
17,571
(17,571 )
General and administrative
10,026
9,962
64
Total operating costs
and expenses
17,129
34,463
(17,334 )
Loss
from operations:
$ (17,129 )
$ (34,463 )
$ (17,334 )
144
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 years
ended December 31, 2023 and 2022, is provided below.
For
the year ended
December 31,
Increase/
2023
2022
(Decrease)
(In thousands)
Research study expenses
$ 2,887
$ 1,847
$ 1,040
Tax credit
(800 )
(711 )
(89 )
Milestone payments
150
1,417
(1,267 )
Manufacturing & supplies
2,906
350
2,556
Contractors
996
1,778
(782 )
Patents
30
268
(238 )
Staffing
873
1,915
(1,042 )
Amortization
37
60
(23 )
Other
24
6
18
$ 7,103
$ 6,930
$ 173
For the
year ended December 31, 2023, versus December 31, 2022:
The
increase of $173 thousand in research and development cost was primarily due to increases of $2.6 million in manufacturing and supplies,
increases in research study expenses of $1 million and other of $18 thousand, offset by an increase in tax credit of $89 thousand and
decreases in the following: milestone payments of $1.3 million, staffing of $1 million, contractors of $782 thousand, patents of $238
thousand, and amortization of $23 thousand.
Overall,
the increase in research and development costs in the year ended December 31, 2023 was because during the year ended December 31, 2023,
our research and development activity increased as activity in the clinical trials came back to a pre-pandemic level. Staffing costs
decreased in 2023 primarily because stock option grants and bonuses were higher in 2022.
Impairment
of Intangible Assets
As
a result of both the Company’s February 15, 2022, receipt of a Refusal to File (“RTF”) from the U.S. Food and Drug
Administration regarding the Company’s new drug application (“NDA”) for Dovitinib, and the depressed state of the Company’s
stock price, the Company performed an impairment assessments on its individual intangible assets utilizing a discounted cash flow model
and recognized an impairment charge of $17.6 million during the year ended December 31, 2022. As of December 31, 2023, because of
continued downward pressure on the Company’s common stock, we performed an impairment assessment of our intangible assets and determined
that no further impairment was required.
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. Legal costs incurred
in connection with patents are accounted for as general and administrative expenses. 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 because of operating
as a public company, including expenses related to compliance with the rules and regulations of the SEC, Nasdaq, additional insurance
expenses, investor relations activities and other administrative and professional services.
145
General
and administrative expenses increased by $64 thousand for the year ended December 31, 2023, compared to the year ended December 31, 2022.
The increase was primarily due to increased finance expenses of $1.2 million (which were primarily non-cash and related to the value
of derivative warrants), increased financial consultant expenses of $160 thousand, communications expenses of $84 thousand, insurance
expense of $42 thousand, premises expense of $89 thousand and Delaware franchise tax of $19 thousand, offset by decreases in staffing
costs of $1.2 million, audit and legal costs of $264 thousand and other administrative of $105 thousand. Staffing costs decreased primarily
because of reduced stock option costs and reduced staff.
Other
Income (Expense)
Other
income (expense) of $5.3 million recognized in the year ended December 31, 2023, consisted primarily of a $10.4 million fair value adjustment
of warrant derivate liabilities, ($4.2) million fair value of inducement warrants, ($591) thousand loss on modification to warrants,
foreign exchange gains of $133 thousand, and interest expenses of ($498) thousand, offset by interest income of $22 thousand.
Other
income (expense) of $16.9 million recognized in the year ended December 31, 2022, consisted primarily of a $17.1 million fair value adjustment
of warrant derivative liabilities, $1.8 million of other income received in connection with the sale of intangible IP assets, and $30
thousand of interest income, offset by ($913) thousand in net foreign exchange losses, ($800) thousand penalty on our Series A preferred
stock liability, loss on investment of ($115) thousand, and ($223) thousand in interest expenses.
Changes
in the fair value of our derivative and warrant liabilities and convertible debt are measured using level 3 inputs as described in our
consolidated financial statements.
Income
taxes
During
the years ended December 31, 2023, and 2022, we recognized ($83) thousand and $1.5 million in income tax recovery (expense), respectively.
Liquidity,
Capital Resources and Plan of Operations
Since
our inception through December 31, 2023, our operations have been financed primarily by the sale of preferred stock, convertible promissory
notes, and the sale and issuance of our ordinary shares. As of December 31, 2023, we had $166 thousand in cash, and an accumulated deficit
of $94.5 million.
In
the year ended December 31, 2023, we received $11 million, net from financing activities inclusive of: $19.1 million from equity issuances
in April, July and September; $1 million from the issuance of a note to 3i; and $1.1 million from the issuance of Series C Preferred
Stock; and we repaid $3.7 million in debt and redeemed $6.7 million in Series A Preferred Stock.
In
the year ended December 31, 2022, we received $1.0 million in proceeds from convertible debt. We also paid $1.5 million in cash on the
conversion of Series A preferred shares as well as $800 thousand in penalties on the Series A preferred share liability. Our investing
activities included the receipt of $809 thousand on the sale of IP and expenditures of $18 thousand on the purchase of property and equipment.
Our
primary use of cash is to fund operating expenses, which consist of research and development as well as regulatory expenses related to
our most advanced therapeutic 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 December 31, 2023, the Company’s cash deposits of $166 thousand were determined to be insufficient to fund its current operating
plan and planned capital expenditures for at least the next 12 months. We estimate that as of the date of this filing, our cash reserves
are sufficient for approximately 3 months. These conditions give rise to substantial doubt over the Company’s ability to continue
as a going concern.
146
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 when needed would have a negative impact on
its business, results of operations and financial condition and its ability to develop its product candidates.
Cash
Flows
The
following table summarizes our cash flows for the years indicated:
(In thousands)
Year Ended
December 31,
2023
Year Ended
December 31,
2022
Net Cash used in operating activities
$ (12,745 )
$ (16,817 )
Net Cash provided by investing activities
—
791
Net Cash (used in) provided by financing activities
10,995
(1,311 )
Effect of foreign exchange
rates on cash
(113 )
(189 )
Net decrease in cash
$ (1,863 )
$ (17,526 )
Operating
Activities
During
the year ended December 31, 2023, cash used in operating activities of $12.8 million was attributable to a net loss of $11.9 million,
$4.2 million in net non-cash charges, offset by a $3.3 million change in net operating assets and liabilities.
The
non-cash of charges consisted of a $4.2 million fair value of inducement warrants, a $591 thousand loss on modification of warrants,
non-cash interest of $464 thousand, depreciation and amortization of $37 thousand, offset by a $10.4 million fair value adjustment to
derivative liabilities, stock-based compensation of ($71) thousand and unrealized gain on foreign currency of $179 thousand. The change
in operating assets and liabilities of $3.3 million was primarily due to a $2.2 million increase in accounts payable, a $1.4 million
decrease in other current assets, a $43 thousand decrease in accrued liabilities, and an $18 thousand increase in income taxes payable,
offset by an increase of $26 thousand in tax credit receivable, and an $8 thousand decrease in operating lease liability.
During
the year ended December 31, 2022, cash used in operating activities of $16.8 million was attributable to a net loss of $16.1 million,
$400 thousand in net non-cash charges, and a $300 thousand change in net operating assets and liabilities.
The
non-cash charges consisted of intangible asset impairment of $17.6 million, stock-based compensation of $1.7 million, non-cash interest
of $138 thousand, loss on investment of $115 thousand, depreciation and amortization of $60 thousand, and unrealized loss on foreign
currency of $450 thousand, offset by a $17.1 million fair value adjustment to derivative liabilities, a $1.8 million gain from the sale
of IP and deferred tax benefit of $1.6 million. The change in operating assets and liabilities of $300 thousand was primarily due to
a $4.7 million decrease in accrued liabilities, an increase in prepaid expenses of $618 thousand, a decrease in income taxes payable
of $19 thousand, a $1.1 million increase in other current assets, and a decrease in operating lease liability of $99 thousand, offset
by a $6.2 million increase in accounts payable.
Investing
Activities
During
the year ended December 31, 2023, the Company did not incur any cash flows as a result of investing activities. During the year ended
December 31, 2022, the Company received $809 thousand in proceeds from the sale of IP and invested $18 thousand in property and equipment.
147
Financing
Activities
During
the year ended December 31, 2023, cash provided by financing activities of $11.0 million consisted of $19.1 million from equity financings
in April, July and September, and $1.1 million in net proceeds from the issuance of Series C Preferred, offset by the repayment of $3.7
million in debt and $6.7 million for the redemption of Series A Preferred Stock.
During
the year ended December 31, 2022, cash used by financing activities of $1.3 million consisted of $1.0 million in proceeds from the issuance
of convertible debt offset by $1.5 million in cash paid on the conversion of Series A preferred shares and $800 thousand in penalties
on the Series A preferred share liability.
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 our existing cash and cash equivalents as of the date of this report, based on our anticipated expenditures and commitments
for the next twelve months including contractual obligations for milestone payments, will not 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 our cash
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.
In
January and February 2024, we entered into a Securities Purchase Agreement with 3i, LP for bridge loans in the total amount of $880 thousand
to extend our cash runaway beyond February 29, 2024, in order to provide us more time to complete a financing within Q1 2024.
As
previously discussed, we do not have sufficient cash to support our anticipated expenditures and commitments and the Company is seeking
capital to support its current and planned operations.
No
assurances can be given that any ongoing discussions will be successful or that we will be able to raise additional capital on favorable
terms, or at all. Our failure to raise capital or enter into other such arrangements when needed would have a negative impact on our
business, results of operations and financial condition and our ability to maintain current operations and develop our product candidates
which in turn may force us to seek protection under the U.S. bankruptcy laws. We are actively exploring raising capital through equity
and debt financing which may require collateralizing debt financing with our assets. However, if the share increase and/or reverse stock
split proposals are not approved by the required stockholder vote, we will be limited in the ways we can raise additional capital.
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, 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.
148
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 audited consolidated
financial statements for the years ended December 31, 2023 and 2022, which have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting years. Significant estimates and assumptions reflected in these consolidated financial statements include, but are
not limited to, the fair value of the Series A preferred shares, warrants, convertible debt and the accrual for research and development
expenses, fair values of acquired intangible assets and impairment review of those assets, share based compensation expense, and income
tax uncertainties and valuation allowances. The Company bases its estimates on historical experience, known trends and other market-specific
or other relevant factors that it believes to be reasonable under the circumstances. Estimates are periodically reviewed considering
reasonable changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known
and if material, their effects are disclosed in the notes to the consolidated financial statements. Actual results could differ from
those estimates or assumptions.
While
our significant accounting policies are described in the notes to our consolidated financial statements for the years ended December
31, 2023 and 2022, we believe that the following critical accounting policies are most important to understanding and evaluating our
reported financial results.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting years. Significant estimates and assumptions reflected in these
consolidated financial statements include, but are not limited to, the fair value of the Series A preferred shares, warrants, convertible
debt, and the accrual for research and development expenses, fair values of acquired intangible assets and impairment review of those
assets, share based compensation expense, and income tax uncertainties and valuation allowances. The Company bases its estimates on historical
experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances.
Estimates are periodically reviewed considering reasonable changes in circumstances, facts, and experience. Changes in estimates are
recorded in the period in which they become known and if material, their effects are disclosed in the notes to the consolidated financial
statements. Actual results could differ from those estimates or assumptions.
Acquired
in-process research and development (IPR&D)
Acquired
IPR&D represents the fair value assigned to research and development assets that the Company acquired as part of a business combination
and have not been completed at the acquisition date. The fair value of IPR&D acquired in a business combination is recorded on the
consolidated balance sheets at the acquisition-date fair value and is determined by estimating the costs to develop the technology into
commercially viable products, estimating the resulting revenue from the projects, and discounting the projected net cash flows to present
value. IPR&D is not amortized, but rather is reviewed for impairment on an annual basis or more frequently if indicators of impairment
are present, until the project is completed, abandoned, or transferred to a third-party. Management assesses its acquired IPR&D for
impairment at year end as well as when events and circumstances indicate there is a potential impairment. Significant quantitative indicators
considered are the Company’s market capitalization, market share, length of remaining clinical trials, and projected revenue per
treatment. The projected discounted cash flow models used to estimate the fair value of partnered assets and cost approach model used
to estimate proprietary assets as part of the Company’s IPR&D reflect significant assumptions regarding the estimates a market
participant would make to evaluate a drug development asset, including the following:
●
Estimates of obsolescence
of development expenditure;
●
Probability of successfully
completing clinical trials and obtaining regulatory approval;
●
Estimates of future cash
flows from potential milestone payments and royalties related to out-licensed product sales; and
●
A discount rate reflecting
the Company’s weighted average cost of capital and specific risk inherent in the underlying assets.
149
Once
brought into use, intangible assets are amortized over their estimated useful economic lives using the economic consumption method if
anticipated future revenues can be reasonably estimated. The straight-line method is used when revenues cannot be reasonably estimated.
The Company has recorded impairment losses of $17,571 on its intangible assets in the year ended December 31, 2022. During the year ended
December 31, 2023, no additional impairment losses were recognized.
Research
contract costs and accruals
The
Company has entered into various research and development contracts with companies both inside and outside of the United States.
These agreements are generally cancellable, and related payments are recorded as research and development expenses as incurred. The Company
records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes
progress of the studies or trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments
and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s
estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.
Convertible
debt instruments
The
Company follows ASC 480-10, Distinguishing Liabilities from Equity in its evaluation of the accounting for a hybrid
instrument. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share
that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be
classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely
or predominantly on any one of the following: (a) a fixed monetary amount known at inception; (b) variations in something other than
the fair value of the issuer’s equity shares; or (c) variations inversely related to changes in the fair value of the issuer’s
equity shares. Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives and are carried as a
liability at fair value at each balance sheet date with remeasurements reported in change on fair value expense in the accompanying Statements
of Operations and Comprehensive Loss.
Additionally,
the Company accounts for certain convertible debt (“Convertible Notes”) issued under the fair value option election of ASC
825, Financial Instruments wherein the financial instrument is initially measured at its issue-date estimated fair value and
then subsequently re-measured at estimated fair value on a recurring basis at each reporting period date. The estimated fair value adjustment
is recognized as other income (expense) in the accompanying consolidated statements of operations and the portion of the fair value adjustment
attributed to a change in the instrument-specific credit risk is recognized as a component of other comprehensive loss. Convertible Notes
are settled with shares at fair value of the stock issued with any differences recorded to other income (expense), as a gain or (loss)
on extinguishment.
Warrants
When
the Company issues warrants it evaluates the proper balance sheet classification to determine classification as either equity or as a
derivative liability on the consolidated balance sheets. In accordance with ASC 815-40, Derivatives and Hedging-Contracts in the
Entity’s Own Equity (“ASC 815-40”), the Company classifies a warrant as equity so long as it is “indexed to the
Company’s equity” and several specific conditions for equity classification are met. A warrant is not considered indexed
to the Company’s equity, in general, when it contains certain types of exercise contingencies or adjustments to exercise price.
If a warrant is not indexed to the Company’s equity or it has net cash settlement that results in the warrants to be accounted
for under ASC 480, Distinguishing Liabilities from Equity, or ASC 815-40, it is classified as a derivative liability, which is carried
on the Consolidated Balance Sheet at fair value with any changes in its fair value recognized immediately in the Consolidated Statement
of Operations and Comprehensive Loss. As of December 31, 2023, and 2022, the Company had warrants outstanding for share-based compensation
that were classified as equity, and outstanding investor warrants that were classified as derivative liabilities and classified as “Warrant
liabilities” in the Consolidated Balance Sheets.
150
Derivative
financial instruments
The
Company does not use derivative instruments to hedge exposures to interest rate, market, or foreign currency risks. The Company evaluates
all its financial instruments to determine if such instruments contain features that qualify as embedded derivatives. Embedded derivatives
must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions
surrounding the bifurcation of embedded derivatives depends on the nature of the host contract. Bifurcated embedded derivatives are recognized
at fair value, with changes in fair value recognized in the Consolidated Statements of Operations and Comprehensive Loss each reporting
period. Bifurcated embedded derivatives are classified as “Derivative liabilities” in the Consolidated Balance Sheets.
Share-based
compensation
The
Company accounts for share-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC
718”). ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant. The value of
the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s
consolidated statements of operations and comprehensive loss.
The
Company records the expense for option awards using either a graded or straight-line vesting method. The Company accounts for forfeitures
as they occur. For share-based awards granted to employees, directors and non-employee consultants, the measurement date is the date
of grant. The compensation expense is then recognized over the requisite service period, which is the vesting period of the respective
award.
The
Company reviews stock award modifications when there is an exchange of original award for a new award. The Company calculates the incremental
fair value based on the difference between the fair value of the modified award and the fair value of the original award immediately
before it was modified. The Company immediately recognizes the incremental value as compensation cost for vested awards and recognizes,
on a prospective basis over the remaining requisite service period, the sum of the incremental compensation cost and any remaining unrecognized
compensation cost for the original award on the modification date.
The
fair value of stock options (“options”) on the grant date is estimated using the Black-Scholes option-pricing model using
the single-option approach. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions, including
the option’s expected term and the price volatility of the underlying stock, to determine the fair value of the award. The Company
applies the Black-Scholes model as it believes it is the most appropriate fair value method for all equity awards.
Recently
Issued Accounting Pronouncements
See
the section titled in Note 2 (x) to the Company’s consolidated financial statements for the year ended December 31, 2023,
appearing elsewhere herein.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
The
Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required
under this item.