Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Restatement
The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement adjustments made to the previously reported consolidated financial statements for the fiscal years ended December 31, 2023 and 2022, and for the fiscal quarters ended: March 31, June 30, and September 30, 2023, as well as March 31, June 30, and September 30, 2022. For additional information and a detailed discussion of the restatement, see Note 14: Restatement of Previously Issued Financial Statements in the Notes to our Restated Consolidated Financial Statements included in this Annual Report under Item 8. Financial Statements.
Overview
We are a late-stage clinical biopharmaceutical company focused on the discovery, development and commercialization of drugs for the treatment of cancer. Our core objective is to leverage our proprietary PDC delivery platform to develop PDCs that are designed to specifically target cancer cells and deliver improved efficacy and better safety as a result of fewer off-target effects. Our PDC platform possesses the potential for the discovery and development of the next generation of cancer-targeting treatments, and we plan to develop PDCs both independently and through research and development collaborations.
Our lead PDC therapeutic, iopofosine I 131, is a small-molecule PDC designed to provide targeted delivery of iodine-131 directly to cancer cells, while limiting exposure to healthy cells. We believe this profile differentiates iopofosine from many traditional on-market treatments. Iopofosine was recently evaluated in the completed CLOVER-WaM Phase 2 pivotal study in patients with r/r WM, while evaluation is ongoing in a Phase 2b study in r/r MM and CNS lymphoma patients and the CLOVER-2 Phase 1b study for pediatric patients with high grade gliomas.
Results of Operations
Research and development expenses. Research and development expenses consist of costs incurred in identifying, developing, testing, and manufacturing product candidates, which primarily include the cost of manufacturing materials, fees paid to contract research organizations, fees paid to medical institutions for clinical studies, and costs to secure intellectual property. We analyze our research and development expenses based on four categories as follows: clinical projects, manufacturing and related, preclinical projects, and general fixed and overhead costs that are not allocated to the functional project costs, including personnel costs, facility costs, and related overhead costs.
General and administrative expenses. General and administrative expenses consist primarily of salaries and other related costs for personnel in executive, finance, and administrative functions. Other costs include insurance, costs for public company activities, investor relations, directors’ fees, and professional fees for legal and accounting services.
Twelve Months Ended December 31, 2023 and 2022
Research and Development. Research and development expenses for the year ended December 31, 2023, were approximately $27,266,000, compared to approximately $18,266,000 for the year ended December 31, 2022.
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The following table provides a summary of research and development costs by category for the years ended December 31, 2023 and 2022:
Year Ended
December 31,
2023
2022
Variance
Clinical project costs
$
15,132,000
$
12,964,000
$
2,168,000
Manufacturing and related costs
9,341,000
4,238,000
5,103,000
Pre-clinical project costs
483,000
431,000
52,000
General research and development costs
2,310,000
633,000
1,677,000
$
27,266,000
$
18,266,000
$
9,000,000
The overall increase in research and development expenses of approximately $9,000,000, or 49%, was primarily a result of an increase in manufacturing and related costs related to greater production sourcing necessary to support clinical trials and establish commercial production capabilities of approximately $5,103,000 and clinical project costs of approximately $2,168,000, driven by the timing of the activities related to our pivotal and pediatric trials, and an increase in general research and development costs of approximately $1,677,000 primarily attributable to increased personnel-related costs.
General and Administrative. General and administrative expenses for the year ended December 31, 2023, were approximately $11,694,000, compared to approximately $10,548,000 in 2022. The increase of $1,146,000, or 11% in general and administrative costs was primarily driven by an increase in personnel costs partially offset by a reduction in professional fees.
Other income (expense), net . Other income (expense), net for 2023 was an expense of approximately $3,870,000, as compared to approximately $3,039,000 of expense in 2022. The decrease was largely a result of the cost of the September 2023 financing being substantially lower than that of the October 2022 financing, partially offset by the impact of the warrant revaluation having an unfavorable impact in 2023, whereas in 2022 the impact was favorable. Interest income, net, improved to approximately $387,000 in 2023 as compared to approximately $153,000 in 2022. The increase in interest earned is a result of higher interest rates supporting stronger returns on money market cash equivalents coupled with higher average balances of cash on hand in 2023.
Three Months Ended March 31, 2023 and 2022
Three Months Ended
March 31,
2023
2022
$ Change
% Change
OPERATING EXPENSES:
Research and development
$
6,359,000
$
3,704,000
$
2,655,000
72
%
General and administrative
2,346,000
2,436,000
(90,000)
(4)
%
OTHER INCOME (EXPENSE):
(Loss) gain on valuation of warrants
1,391,000
(100,000)
1,491,000
NM
Interest income
124,000
—
124,000
NM
In the three months ended March 31, 2023 and 2022, research and development expenses increased approximately 72%, primarily a result of increased clinical project costs driven by the timing of the activities related to our pivotal trial, an increase in manufacturing and related costs related to production sourcing, general research and development costs due to an increase in personnel, and pre-clinical project costs.
The decrease in general and administrative expense of $90,000, or 4%, was primarily driven by a decrease in professional fees, partially offset by an increase in personnel costs, including stock-based compensation expense.
The gain on valuation of warrants was nearly $1.4 million in the first quarter of 2023 as compared to a $100,000 loss in 2022. Fluctuations in the fair value of warrants outstanding correlate to changes in the Company’s stock price, with a decrease in the stock price decreasing the fair value of the warrants, thereby resulting in a gain.
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Three Months Ended June 30, 2023 and 2022
Three Months Ended
June 30,
2023
2022
$ Change
% Change
OPERATING EXPENSES:
Research and development
$
6,135,000
$
4,145,000
$
1,990,000
48
%
General and administrative
2,159,000
3,291,000
(1,132,000)
(34)
%
OTHER INCOME (EXPENSE):
(Loss) gain on valuation of warrants
(1,957,000)
1,800,000
(3,757,000)
NM
Interest income
73,000
—
73,000
NM
In the three months ended June 30, 2023 and 2022, research and development expenses increased approximately 48%, primarily a result of increased manufacturing and production sourcing costs, increased clinical project costs driven by the timing of the activities related to our pivotal trial, and higher general research and development costs due to an increase in personnel.
General and administrative. General and administrative expense decreased 34%, primarily driven by a decrease in professional fees and personnel costs.
The loss on valuation of warrants was nearly $2.0 million for the second quarter of 2023 as compared to a gain of $1.8 million in 2022. These changes were largely the result of changes in the Company’s stock price, with an increase in the stock price resulting in a loss being recorded.
Six Months Ended June 30, 2023 and 2022
Six Months Ended
June 30,
2023
2022
$ Change
% Change
OPERATING EXPENSES:
Research and development
$
12,494,000
$
7,849,000
$
4,645,000
59
%
General and administrative
4,505,000
5,727,000
(1,222,000)
(21)
%
OTHER INCOME (EXPENSE):
(Loss) gain on valuation of warrants
(566,000)
1,700,000
(2,266,000)
NM
Interest income
197,000
—
197,000
NM
In the six months ended June 30, 2023 and 2022, research and development expenses increased approximately 59%. As is the case for the second quarter, the year-to-date increase through June 30, 2023 was primarily a result of increased manufacturing and production sourcing costs to support the increased activity in our pivotal trial and to establish a secure supply chain in anticipation of commercialization, coupled with increased headcount.
General and administrative. General and administrative expense decreased 21%, largely due to lower professional fees and personnel costs.
The loss on valuation of warrants was $566,000 for the six months ended June 30, 2023, as compared to a gain of $1.7 million in 2022. As is the case for all periods presented, the Company’s stock price is the main driver of this activity, with an increase in the stock price resulting in a loss being recorded, whereas the stock price declined in the same period in 2022.
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Three Months Ended September 30, 2023 and 2022
Three Months Ended
September 30,
2023
2022
$ Change
% Change
OPERATING EXPENSES:
Research and development
$
7,035,000
$
5,211,000
$
1,824,000
35
%
General and administrative
2,379,000
2,605,000
(226,000)
(9)
%
OTHER INCOME (EXPENSE):
Warrant issuance costs
(470,000)
—
(470,000)
NM
(Loss) gain on valuation of warrants
(7,688,000)
300,000
(7,988,000)
NM
Interest income
51,000
4,000
47,000
NM
Research and development expenses increased 35%, as the Company continued to focus on supporting the higher level of activity in its pivotal clinical trial and building out the supply chain by developing redundancies in both subcomponent and final product production and the related raw material sourcing, including incremental personnel and professional fees.
General and administrative expenses decreased 9%, resulting from lower professional fees partially offset by a slight increase in personnel costs.
Warrant issuance costs were $470,000 and the loss on valuation of warrants was a $7.7 million loss for the third quarter, as compared to a gain of $300,000 in 2022. The Company executed a financing in the quarter, which is the reason for the warrant issuance charge. There was no financing in the comparable period for 2022. In addition to the increase in the quantity of warrants outstanding, the Company’s stock price reacted positively to the financing activity, which drove the substantial charge for warrant valuation.
Nine Months Ended September 30, 2023 and 2022
Nine Months Ended
September 30,
2023
2022
$ Change
% Change
OPERATING EXPENSES:
Research and development
$
19,529,000
$
13,060,000
$
6,469,000
50
%
General and administrative
6,884,000
8,332,000
(1,448,000)
(17)
%
OTHER INCOME (EXPENSE):
Warrant issuance costs
(470,000)
—
(470,000)
NM
(Loss) gain on valuation of warrants
(8,254,000)
2,000,000
(10,254,000)
NM
Interest income
248,000
4,000
244,000
NM
Year-to-date through September 30, 2023 and 2022, research and development expenses increased 50%. Throughout 2023, the Company was focused on driving enrollment in the clinical pivotal trial and ensuring that product sourcing was as robust as possible, necessitating incremental spending on iopofosine I 131 production for trial patients and increased supply chain and personnel expenditures.
General and administrative expenses continued the trend of being lower year-over-year largely from decreased professional fees.
The third quarter financing resulted in the warrant issuance costs of $470,000. The loss on valuation of warrants was $8.3 million year-to-date, while the amount for the comparable period in 2022 was a gain of $2.0 million. The increase in the Company’s stock price at the end of the period was the nearly exclusive driver of the loss on valuation of warrants.
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Liquidity and Capital Resources
Year ended December 31, 2023, Compared to Year Ended December 31, 2022
As of December 31, 2023, we had cash and cash equivalents of $9.6 million, compared to $19.9 million as of December 31, 2022, a decrease of $10.3 million. This decrease was primarily a result of increased research and development expense and general and administrative expenses, partially offset by funds raised through equity securities. The cash used in operating activities during the twelve months ended December 31, 2023, was approximately $32,377,000.
Investing activities consist exclusively of fixed asset purchases. The increase in 2023 over 2022 relates to development of the infrastructure necessary to support our manufacturing capabilities, particularly ensuring that we have redundancy in each aspect of the supply chain to eliminate disruptions to product availability upon commercialization.
Net cash proceeds from the issuance of common stock, preferred stock, warrants, and the exercise of warrants by investors during 2023 was approximately $22,940,000, as compared to approximately $9,611,000 for similar financing activities in 2022.
Our cash requirements have historically been for our research and development activities, finance and administrative costs, capital expenditures and overall working capital. We have experienced negative operating cash flows since inception and have funded our operations primarily from sales of common stock and other securities. As of December 31, 2023, we had an accumulated deficit of approximately $202,761,000.
Liquidity Outlook
We have incurred losses since inception in devoting substantially all of our efforts toward research and development. During the year ended December 31, 2023, we generated a net loss of approximately $42.8 million and used approximately $32.4 million in cash for operations. We expect that we will continue to generate operating losses for the foreseeable future. As of December 31, 2023, our consolidated cash balance was approximately $9.6 million. As of the date the accompanying consolidated financial statements were issued (the “issuance date”), the Company’s available liquidity to fund the Company’s operations over the next twelve months beyond the issuance date was limited to approximately $34.3 million of unrestricted cash and cash equivalents. Absent further action taken by management to increase its liquidity, the Company may be unable to fund its operations under normal course beyond the second quarter of 2025. To improve the Company’s liquidity, management plans to secure additional outside capital via the sale of equity and/or debt securities or execute a strategic transaction. Management also plans to preserve liquidity, as needed, by implementing temporary cost saving measures. While management believes their plans will be successful, no assurance can be provided such plans will be effectively implemented over the next twelve months beyond the issuance date. In the event management’s plans are not effectively implemented, the Company will be required to seek other alternatives which may include, among others, the sale of assets, discontinuance of certain operations, a wind-down of operations and/or filing for bankruptcy protection.
These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates it will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the U.S., or GAAP, requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Management bases its estimates and judgments on historical experience, knowledge of current conditions and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We review these estimates and assumptions periodically and reflect the effects of revisions in the period that they are determined to be necessary.
We believe that the following accounting policies reflect our more significant judgments and estimates used in the preparation of our financial statements.
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Accrued Liabilities . As part of the process of preparing financial statements, we are required to estimate accrued liabilities. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements. Examples of estimated expenses for which we accrue include contract service fees, such as amounts paid to clinical research organizations and investigators in conjunction with clinical studies, fees paid to vendors in conjunction with the manufacturing of clinical materials, and professional service fees, such as for lawyers and accountants. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs that have begun to be incurred, or we over or underestimate the level of services performed or the costs of such services, our reported expenses for such period would be too high or too low. The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often determined based on subjective judgments. We make these judgments based on the facts and circumstances known to us, in accordance with GAAP.
Fair value measurements. We account for certain financial assets at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in the principal, most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that is determined based on assumptions that a market participant would use in pricing an asset or liability. In conjunction with the financings conducted in September 2023 and October 2022, we recorded the preferred stock and warrants separately based on the estimated fair values. Subsequent to their issuance, to the extent that such securities are liability classified, they are marked to market, with the change reflected in the statement of operations at each reporting date. If management made different assumptions or judgments, material differences in measurements of fair value could occur.
Warrants . We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of our control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. If these instruments are initially classified as either liabilities or equity and a subsequent assessment determines that the classification has changed, we reflect that change in the financial statements.
Preferred Stock. We account for preferred stock based upon their specific terms and the authoritative guidance in ASC 480 and ASC 815, including whether they are freestanding instruments, whether any redemption or conversion aspects exist and how they are required to be settled (particularly if there is a cash settlement aspect), whether they contain characteristics that are predominantly debt-like or equity-like, whether they have embedded derivatives, and if they have redemption features. Based upon analysis of these criteria, the preferred stock will be classified as either debt, temporary (or “mezzanine”) equity, or permanent equity. The resultant classification is then evaluated quarterly to determine whether any change to the classification is required.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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