What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-18 compared with 2023-03-24 · 53 added, 43 removed, 204 unchanged (32% of the section changed)

34 unchanged sentences

As of December 31, 2023, we had cash and cash equivalents of $70.6 million.

We believe that our cash and cash equivalents as of December 31, 2022, together with the approximately $50.0 million in cash and cash equivalents acquired in the merger with Flame, will enable us to fund our operating expenses and capital expenditure requirements for at least 12 months from the filing of this Annual Report on Form 10-K.

We believe that our cash and cash equivalents as of December 31, 2023 will enable us to fund our operating expenses and capital expenditure requirements for at least 12 months from the filing of this Annual Report on Form 10-K.

See “—Liquidity and Capital Resources.”

In connection with the merger with Flame and pursuant to the Certificate of Designation of the Series X non-voting convertible preferred stock (“Series X Preferred Stock”), if stockholder approval for the conversion of the Series X Preferred Stock to common stock (the “Stockholder Approval”) is not obtained from the holders of our common stock within six months from the date of issuance of the Series X Preferred Stock, the holders of the Series X Preferred Stock may require us to settle all of the then-outstanding shares of Series X Preferred Stock for cash at fair value.

We fully expect the vote to pass and for the Series X Preferred Stock to convert into common stock.

However, there can be no assurance that the Stockholder Approval will be received.

If we fail to receive the Stockholder Approval within six months from the date of issuance of the Series X Preferred Stock and are required to settle then-outstanding shares of Series X Preferred Stock for cash at fair value, our financial position would be materially adversely affected and we would be forced to seek additional funding, which may not be available on acceptable terms or at all, or reduce or eliminate certain clinical trials, programs and operating expenses, which would adversely affect our business prospects.

Financial Overview

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TRX518 program

FL-101 program

FL-301 program

FL-501 program

In-process research and development acquired from Flame

Total research and development expenses

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Companies engaged in research and development may be eligible for either:

● a 43.5% refundable tax offset for entities with an aggregated turnover of less than A$20 million per annum, or

● a 38.5% non-refundable tax offset for all other entities.

● a refundable tax offset at a rate of 18.5% above the company ’ s tax rate for entities with income of less than A$20 million per annum, or

● a non-refundable tax offset for all other entities which is a progressive marginal tiered R&D intensity threshold.

Increasing rates of benefit apply for incremental research and development expenditure by intensity:

- 0 to 2% intensity:

an 8.5% premium to the company ’ s tax rate

- Greater than 2% intensity:

a 16.5% premium to the company ’ s tax rate;

We recognize as other income the amount we expect to be reimbursed for qualified expenses.

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federal or state income tax benefits for the net losses we have incurred in each year, due to our uncertainty of realizing a benefit from those items.

As of December 31, 2022, we had federal, state and foreign net operating loss carryforwards of $210.5 million, $191.5 million and $0.4 million, respectively.

The federal and state net operating losses begin to expire in 2030, while the foreign net operating losses carryforward indefinitely.

Our federal net operating losses include $129.2 million which can also be carried forward indefinitely.

We may be able to utilize our net operating loss carryforwards to reduce future federal and state income tax liabilities.

However, these net operating losses are subject to various limitations under Internal Revenue Code (“IRC”) Section 382, which limits the use of net operating loss carryforwards to the extent there has been an ownership change of more than 50 percentage points.

In addition, the net operating loss carryforwards are subject to examination by the taxing authorities and could be adjusted or disallowed due to such exams.

Although we have not undergone an IRC Section 382 Analysis, it is possible that the utilization of our net operating loss carryforwards may be limited.

As of December 31, 2022, we also had federal and state research and development tax credits of $7.9 million and $1.8 million, respectively, which begin to expire in 2030.

As of December 31, 2023, we had federal and state net operating loss (“NOL”) carryforwards of $17.5 million and $18.5 million, respectively.

The federal NOL’s are indefinitely lived and state NOL’s begin to expire in 2038.

Under Internal Revenue Code Section 382, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited.

We have completed a study to assess whether an ownership change occurred or whether there were multiple ownership changes since we became a “loss corporation” as defined in Section 382.

We experienced multiple ownership changes occurring in 2019, 2020, and 2023.

The ownership changes have and will continue to subject our pre-ownership change NOL carryforwards to an annual limitation, which will significantly restrict our ability to use them to offset taxable income in periods following the ownership changes.

In general, the annual use limitation equals the aggregate value of our stock at the time of the ownership change multiplied by a specified tax-exempt interest rate.

As a result of the ownership changes, we are limited to a $0.0 million annual limitation on our ability to utilize our NOL’s and R&D credits recognized prior to the Flame merger.

Due to this limitation, approximately $210.8 million of the federal NOL’s and $7.9 million of federal R&D credits will expire unutilized.

Additionally, approximately $192.7 million and $1.8 million, respectively, of state NOL’s and R&D tax credits will expire unutilized.

As a result, we have reduced our deferred tax assets related to the federal and state NOL’s and R&D credits which are offset by the corresponding decrease in the valuation allowance.

As of December 31, 2023, we also had federal and state R&D tax credits of $1.5 million and $0.2 million, respectively, which begin to expire in 2030.

There is no provision for income taxes in the United States because we have historically incurred operating losses and maintain a full valuation allowance against our deferred tax assets in these jurisdictions.

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(in thousands)

License revenue

Operating expenses:

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Foreign currency losses

Change in fair value of Series X preferred stock warrant liability

Loss before income taxes

Benefit from (provision for) income taxes

License revenue for the year ended December 31, 2021 was $1.5 million, related to the Exclusive Option and License Agreement with BeiGene (the “BeiGene Agreement”) for the development and commercialization of DKN- 01 in Asia (excluding Japan), Australia, and New Zealand.

The BeiGene Agreement became effective on January 3, 2020.

There was no such license revenue recognized during the year ended December 31, 2022 as the upfront payment was recognized in full as of December 31, 2021.

Provision for income taxes

Research and Development Expenses

4 unchanged sentences

TRX518 program

FL-101 program

FL-301 program

FL-501 program

In-process research and development acquired from Flame

Total research and development expenses

Research and development expenses were $73.2 million for the year ended December 31, 2023, compared to $45.0 million for the year ended December 31, 2022.

The increase of $12.8 million in research and development expenses was primarily due to an increase of $6.3 million in manufacturing costs related to clinical trial material due to timing of manufacturing campaigns, an increase of $3.6 million in clinical trial costs due to patient enrollment and the duration of patients on study, an increase of $1.8 million in payroll and other related expenses due to an increase in headcount of our research and development full time employees and an increase of $0.9 million in stock based compensation expense due to new stock options granted to employees during the year ended December 31, 2022.

There was also an increase of $0.2 million in consulting fees associated with research and development activities.

The increase of $28.2 million in research and development expenses was primarily due to $29.6 million of in-process research and development (“IPR&D”) acquired in the Flame merger which we expensed during the year ended December 31, 2023, as we concluded that the IPR&D acquired did not have an alternative future use.

There was also an increase of $3.8 million in clinical trial costs due to patient enrollment and the duration of patients on study, an increase of $3.0 million in payroll and other related expenses due to an increase in headcount of our research and development full-time employees and an increase of $0.1 million in stock-based compensation expense due to new stock options granted to employees during the year ended December 31, 2023.

These increases were partially offset by a decrease of $8.1 million in manufacturing costs related to clinical trial material due to timing of manufacturing campaigns and a decrease of $0.2 million in consulting fees associated with research and development activities.

General and Administrative Expenses

General and administrative expenses were $13.8 million for the year ended December 31, 2023, compared to $11.8 million for the year ended December 31, 2022.

The increase of $1.0 million was primarily due to an increase of $0.6 million in stock based compensation expense due to new stock options granted to employees during the year ended December 31, 2022, and a $0.3 million increase in payroll and other related expenses due to an increase in headcount of our general and administrative full time employees.

There was also a $0.1 million increase in professional fees during the year ended December 31, 2022 as compared to 2021, primarily due to higher recruiting costs.

The increase of $2.0 million was primarily due to an increase of $1.4 million in professional fees due to higher finance and legal costs associated with our business development activities and an increase of $0.8 million in payroll and other related expenses due to an increase in headcount of our general and administrative full-time employees.

These increases were partially offset by a decrease in stock-based compensation expense of $0.2 million.

Interest Income

We recorded interest income of $0.9 million during the year ended December 31, 2022.

During the year ended December 31, 2021, we recorded an immaterial amount of interest income.

The increase in interest income is primarily due to higher interest rates during the year ended December 31, 2022 as compared to 2021.

We recorded interest income of $4.0 million and $0.9 million, respectively, during the years ended December 31, 2023 and 2022.

The increase during the year ended December 31, 2023 as compared to the same period in 2022 was due to higher interest rates earned on interest bearing cash accounts.

Australian Research and Development Incentives

We recorded R&D incentive income of $2.1 million and $1.2 million for the years ended December 31, 2022 and 2021, respectively, based upon the applicable percentage of eligible research and development activities under the Australian Incentive Program, net of our Australia tax liability, which expenses included the cost of manufacturing of clinical trial material.

We recorded R&D incentive income of $1.1 million and $2.1 million for the years ended December 31, 2023 and 2022, respectively, based upon the applicable percentage of eligible research and development activities under the Australian Incentive Program, net of our Australian tax liability, which expenses included the cost of manufacturing of clinical trial material.

We perform certain supporting research and development activity outside of Australia when there are no Australian facilities that support the activity (“Overseas research and development activities”).

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Foreign Currency Losses

We recorded foreign currency losses of $0.6 million and $0.4 million, respectively, for the years ended December 31, 2022 and 2021.

We recorded foreign currency losses of $0.6 million for the year ended December 31, 2022.

We recorded an immaterial amount of foreign currency losses for the year ended December 31, 2023.

The change in foreign currency losses is due to the changes in the Australian dollar exchange rate related to activities of the Australian entity.

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We expect to continue to generate operating losses in the foreseeable future.

We believe that our cash and cash equivalents of $65.5 million as of December 31, 2022, along with approximately $50.0 million in cash and cash equivalents that we acquired through the merger with Flame, will be sufficient to fund our operating expenses for at least the next 12 months from the issuance of this Annual Report on Form 10-K.

In connection with the merger with Flame and pursuant to the Certificate of Designation of the Series X non-voting convertible preferred stock (the “Series X Preferred Stock”), if stockholder approval for the conversion of the Series X Preferred Stock to common stock (the “Stockholder Approval”) is not obtained from the holders of our common stock within six months from the date of issuance of the Series X Preferred Stock, the holders of Series X Preferred Stock may require us to settle all of the then-outstanding shares of Series X Preferred Stock for cash at fair value.

We fully expect the vote to pass and for the Series X Preferred Stock to convert to common stock.

However, there can be no assurance that the Stockholder Approval will be received.

We believe that our cash and cash equivalents of $70.6 million as of December 31, 2023, will be sufficient to fund our operating expenses for at least the next 12 months from the issuance of this Annual Report on Form 10-K.

In addition, to support our future operations, we will seek additional funding through public or private equity financings or government programs and will seek funding or development program cost-sharing through collaboration agreements or licenses with larger pharmaceutical or biotechnology companies.

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Cash used in operating activities

Cash provided by (used in) financing activities

Cash provided by investing activities

Cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

1 unchanged sentence

Operating activities.

Net cash used in operating activities for the year ended December 31, 2023 was primarily related to our net loss of $81.4 million and net changes in working capital, including a decrease in lease liabilities of $0.4 million.

These changes were partially offset by a decrease in research and development incentive receivable of $1.3 million, a decrease of $0.7 million in other assets, an increase in accounts payable and accrued expenses of $0.7 million, a decrease of $0.2 million in prepaid expenses and other assets, noncash IPR&D expense of $29.6 million, noncash stock-based compensation expense of $5.1 million and change in a right-of-use asset of $0.4 million.

Net cash used in operating activities for the year ended December 31, 2022 was primarily related to our net loss of $54.6 million and net changes in working capital, including an increase in research and development receivable of $1.0 million, an increase of $0.8 million in other assets and a decrease in lease liabilities of $0.4 million.

1 unchanged sentence

There was also a noncash change of $0.6 million due to foreign currency losses.

Net cash used in operating activities for the year ended December 31, 2021 was primarily related to our net loss from the operation of our business of $40.6 million and net changes in working capital, including a decrease in deferred revenue of $1.5 million, an increase in research and development receivable of $1.2 million, an increase in prepaid expenses and other assets of $0.6 million, a decrease in lease liabilities of $0.4 million and change in restricted stock liability of $0.2 million.

These changes were partially offset by an increase in accounts payable and accrued expenses of $3.9 million, a decrease in other assets of $0.6 million, an increase in deferred offering costs of $0.2 million, noncash stock-based compensation expense of $3.7 million, noncash lease expense of $0.4 million and amortization of contract asset of $0.1 million.

There was also a noncash change of $0.4 million due to foreign currency losses.

Investing Activities.

There were no investing activities during the years ended December 31, 2022 and 2021.

Net cash provided by investing activities for the year ended December 31, 2023 was related to cash acquired in connection with the acquisition of Flame of $50.4 million and payment of direct and incremental costs of $1.4 million associated with the acquisition of Flame.

There were no investing activities during the year ended December 31, 2022.

Financing Activities.

Net cash used in financing activities for the year ended December 31, 2023 primarily consisted of an immaterial amount paid by the Company for the redemption of 10,000 shares of the warrants issued in connection with a public offering in 2019.

Net cash used in financing activities for the year ended December 31, 2022 consisted of payments of offering costs of $0.2 million.

Net cash provided by financing activities for the year ended December 31, 2021 consisted of $97.2 million in proceeds from the issuance of common stock in connection with the public offering we completed in September 2021 (the “2021 Public Offering”) and $1.0 million in proceeds from the issuance of common stock upon the exercise of stock options and warrants.

These increases were partially offset by payments of $0.2 million for offering costs.

Capital Requirements

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Our expenses will also increase as we:

● pursue the clinical development of our most advanced product candidate, DKN-01, and our newly acquired product candidates, FL-301, FL-302 and FL-501;

● pursue the clinical development of our most advanced product candidate, DKN-01, and our recently acquired product candidates, FL-301, FL-302 and FL-501;

● maintain, expand and protect our intellectual property portfolio;

4 unchanged sentences

Under the Third Amendment, we extended the term of the 47 Thorndike Street Lease through July 31, 2024.

Under the Third Amendment, we will continue to pay the current monthly base rent amount of $37,000 contemplated by the 47 Thorndike Street Lease through January 31, 2023, with an increase commencing on February 1, 2023 adjusting the monthly base rent amount to approximately $37,696 through January 31, 2024, and then another increase commencing on February 1, 2024 adjusting the monthly base rent amount to $38,335 for the period of February 2024 through July 31, 2024.

Under the Third Amendment, we paid the monthly base rent amount of $37,000 contemplated by the 47 Thorndike Street Lease through January 31, 2023, with an increase that commenced on February 1, 2023 adjusting the monthly base rent amount to approximately $37,696 through January 31, 2024, and then another increase commencing on February 1, 2024 adjusting the monthly base rent amount to $38,335 for the period of February 2024 through July 31, 2024.

On January 3, 2024, we entered into a fourth amendment to the 47 Thorndike Street Lease, the (“Fourth Amendment”).

Under the Fourth Amendment, we extended the term of the 47 Thorndike Street Lease through July 31, 2025.

Under the Fourth Amendment, we will continue to pay the current monthly base rent amount of $38,335 contemplated by the 47 Thorndike Street Lease through July 31, 2024, with an increase commencing on August 1, 2024 adjusting the monthly base rent amount to approximately $38,974 through July 31, 2025.

We remain committed to $0.6 million of non-cancellable commitments under manufacturing agreements with vendors to manufacture DKN-01 for use in clinical trials.

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis