Chemomab Therapeutics Ltd. 10-Q

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 results of operations together with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis, particularly with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a preclinical biotechnology company committed to discovering and developing new cancer therapies designed to target the products of mutated genes that are drivers of human malignancies. Throughout most of 2019, we ran a Phase 2 study, designated Codex, evaluating inodiftagene vixtepasmid in patients with BCG-unresponsive NMIBC. However, in November 2019, after a thorough evaluation of data, we determined there was a low probability of surpassing the pre-defined futility threshold at the planned interim analysis of the study, and announced the discontinuation of the study and of active clinical development of inodiftagene vixtepasmid. On September 13, 2019, we entered into a Collaboration and License Agreement (the “License Agreement”) with ADT Pharmaceuticals, LLV (“ADT”), pursuant to which we acquired the rights to two small molecule developmental programs targeting oncogenic pathways, focused on pan-mutant RAS inhibitors (our “pan-RAS-inhibitor program”) and inhibitors of PDE10 and the β-catenin pathway, respectively. Under the License Agreement, we are primarily responsible for the research, development, manufacturing, regulatory and commercial activities with respect to the compounds conveyed and contemplated thereunder. Our operations are focused on the successful development, regulatory approval and commercialization of products derived from such compounds. Since entering into the License Agreement, we have focused our efforts on the development of our pan-RAS-inhibitor program. In order to advance this program, our management had been working to identify additional financing sources and/or potential co-development partners. Such efforts, however, have not resulted in opportunities that are sufficiently mature to date. As a result, we have decided to undertake certain cost-saving measures, including a workforce reduction and temporary pause of our internal and external research and development activities with respect to our pan-RAS-inhibitor program, in order to conserve cash and preserve optionality while alternatives are being identified and assessed. The workforce reduction is expected to include 3 employees, which represent approximately 60% of our workforce as of June 30, 2020, and is expected to be completed in the 3 rd quarter of 2020. We may incur severance related charges and other costs due to events associated with or resulting from the workforce reduction. We have also engaged Oppenheimer & Co. to act as our financial advisor to review strategic alternatives focused on maximizing stockholder value. Despite undertaking this process, we may not be successful in completing a transaction, and, even if a strategic transaction is completed, it ultimately may not deliver the anticipated benefits or enhance stockholder value. Our corporate structure consists of a parent company, Anchiano Therapeutics Ltd., incorporated in Israel, which wholly owns a subsidiary, Anchiano Therapeutics Israel Ltd, incorporated in Israel, which itself wholly owns a subsidiary, Anchiano Therapeutics, Inc. incorporated in Delaware. We currently maintain offices in Cambridge, Massachusetts. 13 License Agreement In September 2019, we publicly announced that we had entered into the License Agreement with ADT. Pursuant to the terms and conditions set forth in the License Agreement, we mutually agreed to use commercially reasonable efforts to conduct research and development activities of novel small-molecule inhibitors (RAS and PDE10/β-catenin). As part of the arrangement, we are primarily responsible for the research, development, manufacturing and regulatory activities and ADT will assist with the research activities as necessary in exchange for a quarterly fee. In connection with the License Agreement, ADT also granted us exclusive rights to research, develop, manufacture and commercialize the aforementioned compounds relating to patents owned by ADT and any products containing such compounds worldwide. In consideration for the rights granted under the License Agreement, we paid ADT a $3 million upfront fee in 2019, and agreed to pay to ADT (i) a fee upon transfer of the know-how and intellectual property rights to us; and (ii) additional payments, including milestone and royalty payments. We have the ability to terminate the License Agreement at any time in its entirety or on a compound-by-compound basis after providing 90 days written notice to ADT. Since there is no alternative future use for the upfront fee, we accounted for it as a research and development expense. In April 2020, we notified Yissum Technology Transfer Company of the Hebrew University Ltd. (“Yissum”) that as a result of our previous decision to discontinue clinical development of inodiftagene, we will cease payments to maintain intellectual property ("IP") we licensed from Yissum that supported the development. Yissum informed us that it deems the our decision a breach of the licensing and development agreement between the parties (“License Agreement”) and expects us to take steps necessary to return the licensed IP to Yissum promptly. Yissum did not assert any demands for monetary relief in its notice to us. We and Yissum have agreed on terms to terminate the License Agreement, return all IP documentation to Yissum and to mutually waive, release and discharge the other party from all claims of any type. An agreement relating to such is expected to be signed in the third quarter of 2020. Components of Operating Results Revenues To date, we have not generated any revenue. We do not expect to receive any revenue unless and until we obtain regulatory approval and commercialize a future product candidate, or until we receive revenue from a collaboration such as a co-development or out-licensing agreement. There can be no assurance that we will receive such regulatory approvals, and if a future product candidate is approved, that we will be successful in commercializing it. Research and Development Expenses Research and development activities are our primary focus. Due to the inherently unpredictable nature of preclinical and clinical development, we are unable to estimate with certainty the costs we will incur and the timelines that will be required in the continued development and approval of our product candidates. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. In addition, we cannot forecast which product candidates may be subject to future collaborations, if and when such arrangements will be entered into, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We expect our research and development expenses to increase over the next several years as our development programs progress and as we seek to initiate clinical trials. We also expect to incur increased research and development expenses as we selectively identify and develop additional product candidates. Research and development expenses include the following: · employee-related expenses, such as salaries and share-based compensation; · expenses relating to outsourced and contracted services, such as CROs, external laboratories and consulting, research and advisory services; · preclinical study expenses and related developmental costs; and · costs associated with regulatory compliance. We recognize research and development expenses as we incur them. Starting in the third quarter of 2020, we expect our primary focus to shift away from research and development activities to general and administrative expenses as we execute our review of strategic alternatives focused on maximizing stockholder value. General and Administrative Expenses General and administrative expenses consist primarily of personnel costs, including share-based compensation related to directors and employees, facility costs, patent application and maintenance expenses, and external professional service costs, including legal, accounting, audit, finance, business development, investor relations and human resource services, and other consulting fees. Beginning with the third quarter of 2020, our general and administrative expenses are also expected to include costs related to the engagement of advisors in connection with our review of strategic alternatives to maximize stockholder value. 14 Finance (Income) Expense, Net Finance (Income) expense, net, consisted primarily of finance expenses recorded due to revaluation of investor warrants at fair value during a period where these could not be classified within equity (for more details, see Note [7a] in “Item 1. Financial Statements Unaudited” above), offset by interest income received on the Company’s cash and cash equivalents and foreign currency exchange gains and losses. Restructuring Expense We have recognized restructuring provisions for the direct expenditures arising from restructuring initiatives, where the plans are sufficiently detailed and where appropriate communication to those affected has been made to this end, we have recorded restructuring expenses comprised principally of contract termination costs, employee severance and associated termination costs related to the reduction of our workforce and costs associated with the early termination of facility leases. One-time termination benefits are expensed at the date the employees are notified, unless the employees must provide future services beyond a minimum retention period, in which case the benefits are expensed ratably over the future service periods. A provision for contract termination costs, in which a contract is terminated or the entity will continue to incur costs under a contract for its remaining term without economic benefit (an onerous contract), is recognized only when the contract is terminated or when the entity permanently ceases using the rights granted under the contract. Pursuant to our strategic decision to temporarily pause development of the pan-RAS-inhibitor program and to preserve liquid resources, we have decided to undertake certain cost-saving measures. These measures will include severing employees and vacating our Cambridge facility. We anticipate taking a restructuring charge in the third quarter of 2020 as a result of these restructuring activities. The Company is currently in the process of determining the amount of the restructuring charge. With regards to the resignation of Dr. Frank Haluska the Company has a potential maximum exposure of up to $0.4 million relating to claims of “Good Reason” resignation. It is the Company’s position that the CEO resigned without Good Reason, is not entitled to severance, and the Company will contest any and all claims for severance. Results of Operations Below is a summary of our results of operations for the periods indicated: Three months ended Six months ended June 30, Increase/(decrease) June 30, Increase/(decrease) 2020 2019 $ % 2020 2019 $ % (in thousands) Operating expenses: Research and development $ 1,307 $ 2,576 $ (1,269 ) -49 % $ 2,357 $ 6,711 $ (4,354 ) -65 % General and administrative 2,176 1,962 214 11 % 4,001 3,253 748 23 % Restructuring expense - - - - 670 - 670 - Operating loss (3,483 ) (4,538 ) (1,055 ) 23 % (7,028 ) (9,964 ) (2,936 ) 29 % Financing (income) expense, net (2 ) (99 ) 97 -98 % (12 ) 4,388 (4,400 ) -100 % Net loss $ (3,481 ) $ (4,439 ) $ (958 ) 22 % $ (7,016 ) $ (14,352 ) $ (7,336 ) 51 % Our results of operations have varied in the past and can be expected to vary in the future due to numerous factors. We believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance. 15 Three and Six Months Ended June 30, 2020 Compared to the Three and Six Months Ended June 30, 2019 Research and development expenses Research and development expense decreased by approximately $1.3 million, or 49%, and $4.4 million, or 65%, in the three and six months ended June 30, 2020, respectively, from the comparable periods of 2019. The decrease is primarily due to reductions in third-party clinical trial and manufacturing costs associated with the Phase 2 Codex clinical trial which was discontinued in November 2019, partially offset by third-party development costs incurred in 2020 associated with the RAS program acquired in September 2019. As a result of the restructuring decisions made in July 2020, we anticipate research and development expenses will decrease significantly in future periods as the Company temporarily pauses its research activities on the RAS programs, severs its research and development employees and vacates its facilities. General and administrative expenses General and administrative costs increased by approximately $0.2 million, or 11%, and $0.7 million, or 23%, in the three and six months ended June 30, 2020, respectively, from the comparable period of 2019. The increase is primarily due to increased personnel costs, insurance costs and professional fees associated with establishing an infrastructure to support a U.S. publicly traded company after the Company’s initial public offering in February 2019. As a result of the restructuring decisions made in July 2020, we anticipate general and administrative expenses will decrease significantly in future periods as the Company rationalizes its general and administrative employees and other corporate activities and vacates its Cambridge facility. Restructuring expense In November 2019, we decided to discontinue our Phase 2 Codex study in patients with BCG-unresponsive NMIBC. In connection with this decision, we are required to make certain payments under contracts with CROs and with other manufactures of the drug in order to terminate the contracts and close the trials. Moreover, the restructuring plan included a reduction in the workforce of seven employees. In January 2020, our Board of Directors approved management’s recommendation to close our office and laboratories located in Israel. The closure resulted in the termination of employment of the Company’s remaining five Israeli employees. Restructuring expenses incurred during the second quarter of 2020 were comprised principally of contract termination costs, employee severance and associated termination costs related to the reduction of our workforce, and costs associated with the early termination of our lease facility. In July 2020, we made the strategic decision to temporarily pause development of our RAS program and to institute various cost savings measures to preserve liquid resources. These activities will include severing employees and vacating our Cambridge facility. We anticipate taking a restructuring charge in the third quarter of 2020 as a result of these restructuring activities. The Company is currently in the process of determining the amount of the restructuring charge. Financing (income) expense, net Financing (income) expense, net decreased by approximately $0.1 million, or 98%, and $4.4 million, or 100%, in the three and six months ended June 30, 2020, respectively, from the comparable periods of 2019. In the three and six months ended June 30, 2020, finance expense was primarily interest income, foreign currency exchange rate gains and gains associated with the sale of laboratory equipment from our now closed Israeli operation. 16 For the three and six months ended June 30, 2019, finance expense of was primarily related to the revaluation of investor warrants at fair value during a period where these could not be classified within shareholders’ equity, due to the following circumstances: On initial measurement, the warrants together with their price protections were classified as equity instruments that are not subsequently measured at fair value, and thus we allocated the proceeds according to the relative fair value of the instruments. However, we changed our functional currency from NIS to USD as of January 1, 2019. Due to this change from this date, the exercise price of the warrants was no longer denominated in our functional currency and the warrants were therefore not considered indexed to our own stock according to ASC 815-40 and no longer met all the criteria to be classified within equity. Therefore, the warrants were reclassified as a liability at their fair value as of January 1, 2019, and any difference was accounted for as an adjustment to equity. Upon our Nasdaq initial public offering of February 14, 2019, the warrants’ exercise price currency was changed to US dollars. As a result, the warrants were reclassified within equity. Consequently, the warrants were measured at fair value from January 1, 2019 until February 14, 2019, with resulting finance expenses of $4.6 million, until they were reclassified within equity. Cash Flows The table below shows a summary of our cash flow activities for the periods indicated: Six months ended June 30, Increase/(decrease) 2020 2019 $ % (in thousands) Net cash used in operating activities $ (8,966 ) $ (7,037 ) $ 1,929 27 % Net cash provided by (used in) investing activities 85 (91 ) (176 ) -193 % Net cash provided by financing activities - 26,621 (26,621 ) -100 % Net increase (decrease) in cash, cash equivalents and restricted cash $ (8,881 ) $ 19,493 $ (28,374 ) -146 % Operating activities Net cash used in operating activities increased by $1.9 million, or 27%, for the six months ended June 30, 2020 compared to the same period of 2019. Net loss adjusted for non-cash activities was $6.5 million for the six months ended June 30, 2020 compared to $8.9 million resulting in favorable cash flow of $2.4 million. This was more than offset by unfavorable changes in working capital of approximately $4.3 million. The unfavorable changes in working capital was primarily driven by a significant prepayment for contract manufacturing in 2018 which reversed and generated favorable cash flow in 2019 with no similar impact in 2020, and a decrease in accounts payables and accruals in 2020 reflecting the overall reduction in research and development expense in addition to payment of severance and contractual cancellation costs associated with restructuring activities accrued at December 31, 2019. Investing activities Investing activities in the six months ended June 30, 2020 reflect net proceeds of $0.1 million from the sale of laboratory equipment from our now closed facility in Israel, partially offset by purchases of fixed assets. Investing activities in the six months ended June 30, 2019 were purchases of fixed assets. Financing activities Financing activities in the six months ended June 30, 2019 reflect the net proceeds from our IPO on February 14, 2019. There were no financing activities in the six months ended June 30, 2020. Contractual Commitments The Company’s contractual commitments are as follows at June 30, 2020 (in thousands): 17 Operating Lease Remainder of 2020 $ 117 2021 189 2022 16 Total $ 322 Effects of Currency Fluctuation Currency fluctuations could affect us through increased or decreased costs, mainly for goods and services acquired outside of the United States. Currency fluctuations have not had a material effect on our results of operations during the six months ended June 30, 2020 or 2019. Off-Balance Sheet Arrangements We have not entered into any transactions with unconsolidated entities as to which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that would expose us to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations is based on our financial statements, which we prepared in accordance with U.S. GAAP. Comparative figures, which were previously presented and publicly reported in accordance with IFRS as issued by the International Accounting Standards Board, have been adjusted as necessary to be compliant with our policies under U.S. GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail throughout this section. We base our estimates on historical experience and on various other factors that we believe are 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 may differ from these estimates under different assumptions or conditions. For a discussion of our critical accounting policies, please read Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Form 10-K. There have been no material changes to these critical accounting policies since our 2019 Form 10-K. Recently-Issued Accounting Pronouncements Certain recently-issued accounting pronouncements are discussed in Note [2], Summary of Significant Accounting Policies, to the unaudited condensed consolidated financial statements included in “Item 1. Financial Statements Unaudited.” Liquidity and Capital Resources The condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company has incurred losses and cash flow deficits from operations since inception, resulting in an accumulated deficit at June 30, 2020 of $112.3 million. The Company has financed operations to date primarily through public and private placements of equity securities. The Company anticipates that it will continue to incur net losses for the foreseeable future, including in connection with costs associated with its strategic review process. The Company believes that its existing cash and cash equivalents will only be sufficient to fund its projected cash needs into the first quarter of 2021. Accordingly, these factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. To meet future capital needs, the Company would need to raise additional capital through equity or debt financing or other strategic transactions. However, any such financing may not be on favorable terms or even available to the Company. The failure of the Company to obtain sufficient funds on commercially-acceptable terms when needed, would have a material adverse effect on the Company’s business, results of operations and financial condition. The forecast of cash resources is forward-looking information that involves risks and uncertainties, and the actual amount of the Company’s expenses could vary materially and adversely as a result of a number of factors. The Company has based its estimates on assumptions that may prove to be wrong, and the Company’s expenses could prove to be significantly higher than it currently anticipates. 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are an emerging growth company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are not required to provide the information under this item.