Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto found elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see Item 1A, “Risk Factors” of this Annual Report on Form 10-K. We caution readers not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update forward-looking statements which reflect events or circumstances occurring after the date of this Annual Report on Form 10-K, unless required by applicable securities laws.
Overview
This management’s discussion and analysis (“MD&A”) is presented in order to provide the reader with an overview of the financial results and changes to our financial position as at March 31, 2024 and for the year then ended. This MD&A explains the material variations in our operations, financial position and cash flows for the years ended March 31, 2024 and 2023.
Market data, and certain industry data and forecasts included in this MD&A were obtained from internal surveys and market research conducted by third parties hired by us, publicly available information, reports of governmental agencies and industry publications, and independent third-party surveys. We have relied upon industry publications as our primary sources for third-party industry data and forecasts. Industry surveys, publications and forecasts generally state that the information they contain has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information are not guaranteed. We have not independently verified any of the data from third-party sources or the underlying economic assumptions they have made. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable based upon management or contracted third parties’ knowledge of our industry, have not been independently verified. Our estimates involve risks and uncertainties, including assumptions that may prove not to be accurate, and these estimates and certain industry data are subject to change based on various factors, including those discussed in this Annual Report on Form 10-K.
This MD&A should be read in conjunction with our consolidated financial statements for the years ended March 31, 2024 and 2023 included elsewhere in this Annual Report on Form 10-K. Our annual financial statements were prepared in accordance with U.S. GAAP.
Our assets as at March 31, 2024, include cash and cash equivalents of $23.0 million and intangible assets and goodwill of $49.3 million. Our current liabilities were $1.7 million as of March 31, 2024 and are comprised primarily of amounts due to or accrued for creditors.
Reverse stock split
On June 29, 2023, our Board of Directors approved an amendment to our Articles of Incorporation to implement a reverse stock split of our common shares, at a ratio of 1-for-6 (the “Reverse Stock Split”). On July 4, 2023, we filed Articles of Amendment to our Articles of Incorporation with the Registraire des entreprises du Québec , to implement the Reverse Stock Split. All references in this MD&A to number of common shares, warrants and options, and number of shares outstanding have been adjusted to reflect the Reverse Stock Split, which became effective on July 10, 2023.
54
Results of Operations
Comparison of the year ended March 31, 2024, and 2023
The following table summarizes our results of operations for the years ended March 31, 2024 and 2023:
Year ended
March 31,
2024
March 31,
2023
Increase (Decrease)
$
$
$
(in thousands)
Operating expenses
Research and development expenses, net of government assistance
4,683
9,972
(5,289
)
General and administrative expenses
6,432
7,614
(1,182
)
Sales and marketing expenses
252
661
(409
)
Restructuring cost
1,485
—
1,485
Impairment of intangible assets
—
28,682
(28,682
)
Impairment of goodwill
—
4,826
(4,826
)
Impairment of assets held for sale
—
400
(400
)
Loss from operating activities
(12,852
)
(52,155
)
(39,303
)
Foreign exchange loss
(16
)
(72
)
56
Change in fair value of derivative warrant liabilities
(2,728
)
10
(2,738
)
Interest income and other expense, net
911
246
665
Income tax benefit
1,832
9,542
(7,710
)
Net loss
(12,853
)
(42,429
)
(29,576
)
Net Loss
The net loss of $12.9 million or $1.35 loss per share for the year ended March 31, 2024, decreased by $29.6 million from the net loss of $42.4 million or $5.71 loss per share for the year ended March 31, 2023. The decrease in net loss was primarily due to asset impairments, net of income tax benefit, totaling $25.3 million during the year ended March 31, 2023.
Research and development expenses
Research and development expenses consist primarily of:
• fees paid to external service providers such as contract research organizations ("CROs") and contract manufacturing organizations ("CMOs") related to clinical trials, including contractual obligations for clinical development, clinical sites, manufacturing and scale-up, and formulation of clinical drug supplies;
• fees paid to contract service providers related to drug discovery efforts including chemistry and biology services; and
• salaries and related expenses for research and development personnel, including expenses related to stock options.
We record research and development expenses as incurred.
Our research and development during the year ended March 31, 2024 was focused primarily on our clinical development programs for our GTX-104 drug candidate. Research and development expenses during the year ended March 31, 2023, were focused primarily on our clinical development programs GTX-104, GTX-102, and GTX-101 drug candidates.
The following table summarizes our research and development expenses:
55
Research and development expenses
Year ended
March 31, 2024
March 31, 2023
Increase (Decrease)
$
$
$
(in thousands)
Total third-party research and development expenses 1
3,576
7,704
(4,128
)
Government grants & tax credits
55
(165
)
220
Salaries and benefits
844
1,742
(898
)
Research and development expense before stock-based compensation and depreciation
4,475
9,281
(4,806
)
Stock-based compensation
198
591
(393
)
Depreciation and loss on disposal
10
100
(90
)
Total
4,683
9,972
(5,289
)
1 Total third-party research and development expenses are calculated before salaries and benefits, depreciation, write-off of equipment and stock-based compensation. Because there is no standard method endorsed by U.S. GAAP, the results may not be comparable to similar measurements presented by other public companies.
Total third-party research and development expenses for the year ended March 31, 2024, were $3.6 million, compared to $7.7 million for the year ended March 31, 2023. This decrease of $4.1 million was primarily due to the restructuring to align our organizational and management cost structure to prioritize resources to GTX-104, thereby reducing losses to improve cash flow and extend available cash resources. Our clinical development programs for GTX-102, and GTX-101 were de-prioritized in the current year compared to the prior year.
Government grants and tax credits of $55 thousand for the year ended March 31, 2024, decreased by $220 thousand compared to $(165) thousand for the year ended March 31, 2023. The changes within government grants and tax credits were due to adjustments of provisions regarding the estimated realizability of credits receivable after assessments and correspondence from tax authorities.
Salaries and benefits of $844 thousand for the year ended March 31, 2024, decreased by $898 thousand compared to $1.7 million for the year ended March 31, 2023. The decrease was primarily due to a reduction in research and development headcount due to the restructuring.
Stock-based compensation of $198 thousand for the year ended March 31, 2024, decreased by $393 thousand compared to $591 thousand for the year ended March 31, 2023. The decrease was primarily due to a reduction in research and development headcount due to the restructuring.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, legal, and support functions, including professional fees for auditing, tax, consulting, rent and utilities and insurance.
General and administrative expenses
Year ended
March 31, 2024
March 31, 2023
Increase (Decrease)
$
$
$
(in thousands)
Salaries and benefits
1,164
2,362
(1,198
)
Professional fees
3,188
2,013
1,175
Other
1,343
2,053
(710
)
General and administrative expense before stock-based compensation and depreciation 1
5,695
6,428
(733
)
Stock-based compensation
697
1,123
(426
)
Depreciation and loss on disposal
40
63
(23
)
Total
6,432
7,614
(1,182
)
1 General and administrative sub-total expenses is calculated before stock-based compensation and depreciation. Because there is no
56
standard method endorsed by U.S. GAAP, the results may not be comparable to similar measurements presented by other public companies.
General and administrative expenses were $5.7 million before stock-based compensation and depreciation expense for the year ended March 31, 2024, a decrease of $733 thousand from $6.4 million for the year ended March 31, 2023. The decrease was primarily a result of decreased salaries and benefits due to a reduction in general and administrative headcount due to our restructuring and reorganization of our management structure offset by increased legal, tax, accounting and other professional fees related to the restructuring. Stock-based compensation of $697 thousand for the year ended March 31, 2024, decreased by $426 thousand compared to $1.1 million for the year ended March 31, 2023. The decrease was primarily due to a reduction in general and administrative headcount as a result of our restructuring.
Sales and marketing
Sales and marketing expenses consist primarily of salaries and benefits, including share-based compensation, related to our commercial functions.
Sales and marketing expenses
Year ended
March 31, 2024
March 31, 2023
Increase (Decrease)
$
$
$
(in thousands)
Salaries and benefits
20
428
(408
)
Professional fees
20
—
20
Other
194
136
58
Sales and Marketing expenses before stock-based compensation 1
234
564
(330
)
Stock-based compensation
18
97
(79
)
Total
252
661
(409
)
1 Sales and marketing sub-total expenses is calculated before stock-based compensation. Because there is no standard method endorsed by U.S. GAAP, the results may not be comparable to similar measurements presented by other public companies.
Sales and marketing expenses before stock-based compensation expense were $234 thousand for the year ended March 31, 2024, compared to $564 thousand for the year ended March 31, 2023. The decrease of $330 thousand was primarily due to the reduction of headcount due to our restructuring and reorganization of our management structure.
Stock-based compensation of $18 thousand for the year ended March 31, 2024, decreased by $79 thousand, compared to $97 thousand for the year ended March 31, 2023. The decrease is primarily due to a reduction in sales and marketing headcount due to our restructuring.
Restructuring Costs
On May 8, 2023, we announced our decision to terminate a substantial amount of our workforce as part of a plan intended to align our organizational and management cost structure to prioritize resources to GTX-104, thereby reducing losses to improve cash flow and extend available cash resources. We incurred $1.5 million of related costs primarily consisting of employee severance costs.
Impairment
In April 2023, we announced the strategic decision to prioritize development of GTX-104 with a goal to advance to commercialization, while conserving resources as much as possible to complete development efficiently. We estimated that the deferral could be 3 years from April 2023, given the timeline to complete the development and commercial launch of GTX-104. Further development of GTX-102 and GTX-101 will occur at such time as we obtain additional funding or enter into strategic partnerships.
The decision to defer further development triggered a comprehensive impairment review of our intangible assets in March 2023. Given the extended timeline, we increased the discount rates used to value the assets in order to recognize additional risks related to prioritizing one asset over the others, financing the projects given limited available resources and the need to preserve cash to advance GTX-104 as far as possible, potential competitor advances that could arise over three years, and the general market depression affecting small cap development companies like us and the prohibitively high dilution and expense of available funding in the capital markets. Increasing the discount rates significantly reduced the discounted cash flow values for each of the programs deferred.
Accordingly, an impairment of intangible assets of $28.7 million resulted in the year ended March 31, 2023, compared to nil for the year ended March 31, 2024. In addition, an impairment of $4.8 million of goodwill resulted in the year ended March 31, 2023, compared
57
to nil for the year ended March 31, 2024.
Change in fair value of derivative warrant liabilities
The increase in fair value of derivative warrant liabilities for the year ended March 31, 2024 of $2.7 million was mainly attributable to an increase in our stock price.
Interest income
Interest income was $911 thousand for the year ended March 31, 2024, compared to $246 thousand for the year ended March 31, 2023. The $665 thousand increase in our interest income was due to higher interest rates earned on average balances of cash and cash equivalents.
Income tax benefit
Income tax benefit was $1.8 million for the year ended March 31, 2024, compared to $9.5 million for the year ended March 31, 2023. In 2023, the impairment of $28.7 million of the intangible assets resulted in an income tax recovery of $8.6 million of the related deferred tax liability. In 2024, there was no such impairment.
Liquidity and Capital Resources
Cash Flows and Financial Condition between the years ended March 31, 2024 and March 31, 2023
Summary
As of March 31, 2024, cash and cash equivalents were $23.0 million, a net decrease of $4.9 million compared to cash and cash equivalents of $27.9 million at March 31, 2023.
Net cash used in operating activities
During the years ended March 31, 2024 and 2023, our operating activities used cash of $12.3 million and $15.9 million, respectively, a decrease of $3.6 million. The reduction in cash used in operating activities during 2024 was primarily due to our May 2023 restructuring, which resulted in lower third-party research and development expenses of $4.1 million, lower salaries and benefits expenses of $2.5 million, and lower other general and administrative expenses of $0.7 million. In addition, during 2024, we earned higher interest income of $665 thousand. These amounts were offset in part in 2024 by additional cash used of $1.5 million to fund operating assets and liabilities, restructuring costs of $1.5 million, higher professional fees of $1.2 million, primarily related to the restructuring and private placement, and reduced government grants and credits of $220 thousand.
Investing activities
For the year ended March 31, 2024 our investing activities provided cash of $104 thousand compared to cash provided of $13.2 million for the year ended March 31, 2023. The decrease in cash provided was a result of a decrease in net maturities of short-term investments.
Financing activities
Net cash provided by financing activities for the year ended March 31, 2024, was $7.4 million due to the net proceeds from our September 2023 Offering of $7.3 million compared to cash provided of $304 thousand during the year ended March 31, 2023 from our at-the-market (“ATM”) program.
Private Placement
On September 24, 2023, we entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional and accredited investors in connection with a private placement offering of our securities (the “Offering”). Pursuant to the Purchase Agreement, sold 1,951,371 Class A common shares, no par value per share (the “Common Shares”), at a purchase price of $1.848 per Common Share and pre-funded warrants (the “Pre-funded Warrants”) to purchase up to 2,106,853 Common Shares at a purchase price equal to the purchase price per Common Share less $0.0001. Each Pre-funded Warrant is exercisable for one Common Share at an exercise price of $0.0001 per Common Share, was immediately exercisable, and will expire once exercised in full. Pursuant to the Purchase Agreement, we also issued to such institutional and accredited investors common warrants (the “Common Warrants”) to purchase Common Shares, exercisable for an aggregate of 2,536,391 Common Shares. Under the terms of the Purchase Agreement, for each Common Share and each Pre-funded Warrant issued in the Offering, an accompanying five-eighths (0.625) of a Common Warrant was issued to the purchaser thereof. Each whole Common Warrant is exercisable for one Common Share at an exercise price of $3.003
58
per Common Share, was immediately exercisable, and will expire on the earlier of (i) the 60th day after the date of the acceptance by the U.S. Food and Drug Administration (the “FDA”) of a New Drug Application for our product candidate GTX-104 or (ii) five years from the date of issuance. The Offering closed on September 25, 2023. The net proceeds to us from the Offering were approximately $7.3 million, after deducting fees and expenses.
At-the-Market ("ATM") Program
On June 29, 2020, we entered into an amended and restated At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc., Oppenheimer & Co. Inc. and H.C. Wainwright & Co., LLC (collectively, the “Agents”) to amend our then existing at-the-market program (the "ATM Program"). Under the terms of the Sales Agreement, which had a three-year term, we could issue and sell from time to time, common shares of the Company ("Common Shares") having an aggregate offering price of up to $75 million through the Agents. Subject to the terms and conditions of the Sales Agreement, the Agents would use their commercially reasonable efforts to sell the Common Shares from time to time, based upon our instructions. We had no obligation to sell any of the Common Shares and could, at any time, suspend sales under the Sales Agreement. We and the Agents could terminate the Sales Agreement in accordance with its terms. Under the terms of the Sales Agreement, we provided the Agents with customary indemnification rights and the Agents were entitled to compensation at a commission rate equal to 3.0% of the gross proceeds from each sale of the Common Shares. The Sales Agreement expired pursuant to its terms on June 29, 2023. We intend to examine our financing strategies on a go-forward basis and may consider entering into a new at-the-market program in the future.
During the year ended March 31, 2024, no Common Shares were sold under the ATM program. During the year ended March 31, 2023, 54,108 Common Shares were sold for total net proceeds of $304 thousand with commissions, legal expenses and costs related to the share sale amounting to $10 thousand. The Common Shares were sold at the prevailing market prices, which resulted in an average price of approximately $5.70 per share.
Contractual Obligations and Commitments
Our contractual obligations and commitments include trade payables, operating lease obligations, CMO and CRO agreements, as described below.
Research and development contracts and contract research organizations agreements
We utilize CMOs, for the development and production of clinical materials and CROs to perform services related to our clinical trials. Pursuant to the agreements with CMOs and CROs, we have either the right to terminate the agreements without penalties or under certain penalty conditions. As of March 31, 2024, we have no commitments with CMOs and $6.0 million of commitments for the next twelve months to CROs.
Raw krill oil supply contract
On October 25, 2019, we entered into a supply agreement with Aker BioMarine Antarctic AS. (“AKBM”) to purchase raw krill oil product for a committed volume of commercial starting material for CaPre, one of our former drug candidates, for a total fixed value of $3.1 million based on the value of krill oil at that time. As of March 31, 2022, the remaining balance of commitment amounted to $2.8 million. During the second calendar quarter of 2022, AKBM informed us that AKBM believed it had satisfied the terms of the supply agreement as to their obligation to deliver the remaining balance of raw krill oil product, and that we were therefore required to accept the remaining product commitment. We disagreed with AKBM’s position and believed that AKBM was not entitled to further payment under the supply agreement. Accordingly, no liability was recorded by us. The dispute remained unresolved as of both March 31, 2023 and 2022. On October 18, 2023, we entered into an agreement with AKBM to settle any and all potential claims regarding amounts due under the supply agreement (the “Settlement Agreement”). Pursuant to the terms of the Settlement Agreement, in exchange for a release and waiver of claims arising out of the supply agreement by AKBM and any of AKBM’s affiliates, we agreed to the following: (a) AKBM retained ownership of all raw krill oil product, including amounts previously delivered to us; (b) AKBM acquired and took ownership of all of our production equipment related to the production of CaPre; (c) AKBM acquired and took ownership of all of our data from research, clinical trials and pre-clinical studies with respect to CaPre; and (d) AKBM acquired and took ownership over all of our rights, title and interest in and to all intellectual property rights, including all patents and trademarks, related to CaPre owned by us. Further, AKBM acknowledged that the CaPre assets were transferred on an “as is” basis, and in connection therewith we disclaimed all representations and warranties in connection with the CaPre assets, including any representations with respect to performance or sufficiency. The value of the raw krill oil previously delivered to us, the production equipment, and the intellectual property rights related to CaPre were fully impaired in prior reporting periods and had a carrying value of nil as of March 31, 2023. As of March 31, 2024, no liability was recorded.
59
Use of Estimates and Measurement of Uncertainty
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income, and expenses. Actual results may differ from these estimates.
Estimates are based on management’s best knowledge of current events and actions that management may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Estimates and assumptions include the measurement of stock-based compensation, derivative warrant liabilities, accruals for research and development contracts and contract organization agreements, and valuation of intangibles and goodwill. Estimates and assumptions are also involved in determining which research and development expenses qualify for research and development tax credits and in what amounts. We recognize the tax credits once we have reasonable assurance that they will be realized.
Critical Accounting Policies
Valuation of Intangible Assets and Goodwill
In a business combination, the fair value of in-process research and development ("IPR&D") acquired is capitalized and accounted for as indefinite-lived intangible assets, and not amortized until the underlying project receives regulatory approval, at which point the intangible assets will be accounted for as definite-lived intangible assets or discontinued. If discontinued, the intangible assets will be written off. R&D costs incurred after the acquisition are expensed as incurred.
Our IPR&D and Goodwill was $49.3 million as of March 31, 2024, which represents 67% of total assets. Goodwill and indefinite lived assets are not amortized but are subject to an impairment review annually and more frequently when indicators of impairment exist. An impairment of goodwill could occur if the carrying amount of a reporting unit exceeds the fair value of that reporting unit. An impairment of indefinite-lived intangible assets would occur if the fair value of the intangible asset is less than the carrying value.
The nature of the assumptions in the intangible asset's impairment tests are considered critical due to a high level of subjectivity and judgment necessary to account for highly uncertain matters, and the impact of the assumptions on our financial condition and our operating performance could be material.
We test goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If we conclude it is more likely than not that fair value of the reporting unit is less than its carrying amount, a quantitative impairment test is performed. We test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. Events that could result in an impairment, or trigger an interim impairment assessment, include the decision to discontinue the development of a drug, the receipt of additional clinical or nonclinical data regarding our drug candidates or a potentially competitive drug candidates, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug candidates and increases in our weighted average cost of capital.
Individual IPR&D projects and goodwill are tested for impairment on an annual basis in the fourth quarter, and in between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of each technology or our reporting unit below its carrying value. We identified the strategic realignment plan announced on April 4, 2023 to prioritize resources to GTX-104, from GTX-101 and GTX-102 triggered a comprehensive impairment review of our intangible assets and have considered these facts in our annual impairment test. Deferral of development for GTX-101 and 102 extended the cash runway from existing resources and also reduced the values in the discounted cashflow due to the deferral. The result of the impairment assessment resulted in the following activity between March 31, 2023 and March 31, 2024:
GTX-104
GTX-102
GTX-101
Total
$
$
$
$
(in thousands)
Intangible assets – in-process research and development
Balance, March 31, 2022
27,595
31,908
10,307
69,810
Impairment
—
(22,712
)
(5,970
)
(28,682
)
Balance, March 31, 2023
27,595
9,196
4,337
41,128
Impairment
—
—
—
—
Balance, March 31, 2024
27,595
9,196
4,337
41,128
60
The impairment of $28.7 million of the identified intangible assets recorded for the year ended March 31, 2023 resulted in a recovery of $8.6 million of the related deferred tax liability.
$
(in thousands)
Goodwill
Balance, March 31, 2022
12,964
Impairment
(4,826
)
Balance, March 31, 2023
8,138
Impairment
—
Balance, March 31, 2024
8,138
The estimated fair values of our intangible assets were determined using the multi-period excess earnings method, which is a valuation methodology that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. The projected discounted cash flow models used to estimate the fair value of assets of our IPR&D reflect significant assumptions and are Level 3 unobservable data regarding the estimates a market participant would make in order to evaluate a drug development asset, including the following:
• Probability of clinical success of research and development and obtaining regulatory approval. This estimate was based on various publicly available studies conducted by third parties;
• Forecasted net sales from up-front and milestone payments, royalties and product sales. Comparable market transactions were used to estimate milestone and royalty revenues. The addressable market and patient acquisition rates were estimated based on studies we commissioned a third-party to conduct. The estimated sales prices of our technologies are based on competitors with similar drug products. We have made estimates related to deductions expected to be provided based on conventional commercial models to access the market; and
• A discount rate reflecting our weighted average cost of capital and specific risk inherent in the underlying assets.
The projected discounted cash flow model used to estimate the fair value of our reporting unit and intangible assets as of March 31, 2024 includes a significant assumption related to each project's probability of clinical success, which is reflected in the cash flows.
The projected discounted cash flow model used to estimate the fair value of our reporting unit and the intangibles as of March 31, 2024, includes a significant assumption related to each project's projected net sales levels, which is reflected in the cash flows. Based on our fair value assessment, an impairment loss of GTX-101, GTX-102 and GTX-104 would result if the net sales assumptions decreased more than approximately 32.3%, 21.0% and 50.7% respectively, for each year, all other assumptions remaining constant. We believe that the net sales assumptions developed were applied with a conservative framework such as the exclusion of addressable markets outside the United States, which markets we expect to provide revenue upside if and when GTX-101, GTX-102 and GTX-104 are approved by the FDA.
The valuation of our IPR&D has significant measurement uncertainty given the risks and uncertainties associated with the timely and successful completion of the development and commercialization of drug candidates. We engaged a third-party valuation firm to assist us with the valuation of the IPR&D and goodwill. Assumptions are difficult to make accurately and were mainly derived from life science studies, industry data, and peer company information that our management believes represent appropriate comparable data. Estimates of value are required to be discounted to account for risks related to the inherent uncertainties of the overall development and commercialization processes.
The impairment assessment is sensitive to changes in forecasted cash flows, our selected discount rates as well as the implied control premiums. Changes to our assumptions, in particular changes in technological feasibility or changes in the regulatory approval process could materially affect the estimation of the fair value and could result in impairment charges in future quarters.
Financial Instruments
Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are all invested in accordance with the Company’s Investment Policy with the primary objective being the preservation of capital and the maintenance of liquidity, which risk is managed by dealing only with highly rated Canadian and U.S. institutions. The Company maintains its cash and cash equivalents at accredited financial institutions in amounts that exceed
61
federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market rates. Our exposure to interest rate risk as at March 31, 2024 was as follows:
Cash and cash equivalents
Short-term fixed interest rate
Our capacity to reinvest the short-term amounts with equivalent return will be impacted by variations in short-term fixed interest rates available on the market. Management believes the risk we will realize a loss as a result of the decline in the fair value of our short-term investments is limited because these investments have short-term maturities and are held to maturity.
Our contractual obligations related to financial instruments and other obligations and liquidity resources are presented in the liquidity and capital resources of this MD&A.
We have incurred operating losses and negative cash flows from operations in each year since our inception. We expect to incur significant expenses and continued operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, particularly as we advance clinical development for our drug candidates in our pipeline; continue to engage contract manufacturing organizations to manufacture our clinical study materials and to ultimately develop large-scale manufacturing capabilities in preparation for commercial launch; seek regulatory approval for our drug candidates; and add personnel to support our drug product development and future drug product launch and commercialization.
We do not expect to generate revenue from product sales unless and until we successfully complete drug development and obtain regulatory approval, which we expect will take several years and is subject to significant uncertainty. To date, we have financed our operations primarily through public offerings and private placements of our common shares, warrants and convertible debt and with the proceeds from research tax credits. Until such time that we can generate significant revenue from drug product sales, if ever, we will require additional financing, which we expect to be sourced from a combination of public or private equity offerings or debt financing's or other non-dilutive sources, which may include fees, milestone payments and royalties from collaborations with third parties. Arrangements with collaborators or others may require us to relinquish certain rights related to our technologies or drug product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategy.
We expect to have sufficient cash resources to satisfy our objectives into the second calendar quarter of 2026, which is 22 months from the issuance date of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We require additional capital to fund our daily operating needs beyond that time. We plan to raise additional capital prior to that time in order to maintain adequate liquidity. Negative results from studies, if any, and depressed prices of our common shares could impact our ability to raise additional financing. Raising additional equity capital is subject to market conditions not within our control. If we do not raise additional funds in this time period, we may not be able to realize our assets and discharge our liabilities in the normal course of business.
Future Accounting Changes
We have considered recent accounting pronouncements and concluded that they are either not applicable to our business or that the effect is not expected to be material to our consolidated financial statements as a result of future adoption.
62
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
As a smaller reporting company, we are not required to provide this information.
Item 8. Financial Statements and Supplementary Data
See our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.