Nuvectis Pharma, Inc. 10-K

Item 7. Management’s Discussion and Analysis of the Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this report, our actual results could 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 biopharmaceutical company focused on the development of novel targeted small molecule therapeutics for the treatment of cancer in genetically defined patient populations. Our precision medicine approach translates key scientific insights relating to the oncogenic drivers and pathway addiction of cancer into potent and highly selective anticancer drugs. In addition, we will investigate the relevance of specific mutations and other DNA alterations as a potential patient selection marker and to identify synthetic lethality targets. This work could support our use of a tumor agnostic development strategy wherein we enroll patients based on the cancer’s genetic and molecular features without regard to the type or location of the cancer. Since our inception in 2020, we have devoted substantially all of our efforts and financial resources to organizing and staffing our company, business planning, raising capital, acquiring, discovering product candidates and securing related intellectual property rights and conducting research and development activities for our programs. We do not have any products approved for sale and have not generated any revenue from product sales. We may never be able to develop or commercialize a marketable product. We have not yet successfully completed any pivotal clinical trials, obtained any regulatory approvals, manufactured a commercial-scale drug, or conducted sales and marketing activities. Results of Operations From our inception on July 27, 2020, through December 31, 2021, we did not generate any revenue. Our main activities through December 31, 2021 have been organizational and capital raising activities and the completion of the in-license agreements for our two drug candidates, NXP800 and NXP900, CTA filing with the MHRA and preparation for the Phase 1a clinical trial for NXP800, which commenced in December 2021, and preparing for our initial public offering. For the year ended December 31, 2021, we incurred research and development expenses of $9.6 million, primarily related to the one-time upfront payments totaling $7.0 million paid out in connection with the exclusive license agreements for our product candidates, NXP800 and NXP900, and $0.9 million of non-cash equity-based expenses. During the period from our inception to December 31, 2020, we did not incur any research and development expenses. For the year ended December 31, 2021, our general and administrative expenses were $3.3 million, primarily attributable to $1.0 million of non-cash equity-based expenses and $2.0 paid to certain third-party service providers and consultants. During the period from our inception to December 31, 2020, we did not incur any material general and administrative expenses. As a result of the foregoing, our loss from operations for the year ended December 31, 2021 was $12.9 million, compared to a loss from operations of $10,000 for the period from our inception to December 31, 2020. We expect our research and development and general and administrative expenses to increase substantially in the future as we begin the execution of our business plan for our two pipeline product candidates, NXP800 and NXP900 and continue to build-out our infrastructure to support such research and development activities. Liquidity and Capital Resources As of December 31, 2021, we had $5.7 million of cash and cash equivalents. 47 In June and July 2021, we completed a $15.3 million capital raise through the issuance of preferred stock which was paid out in connection with an exclusive licensing agreement related to our lead product candidate, NXP800. In June 2021 we paid an upfront payment of $3.5 million in connection with the NXP800 license agreement. In August 2021 we closed the exclusive license agreement related to our second product candidate, NXP900. In September 2021 we paid the upfront payment in connection with this license agreement, also in the amount of $3.5 million. On February 4, 2022, we entered into an underwriting agreement with H.C. Wainwright & Co. (the “Underwriter”), as sole book-running manager, in connection with our initial public offering of common stock (the “IPO”). On February 4, 2022, we announced the pricing of our IPO of 3,200,000 shares of common stock for a price of $5.00 per share, less certain underwriting discounts and commissions. Upon closing of the IPO, we issued 128,000 representative warrants, with an exercise price of $6.25, to purchase common stock to the Underwriter, equaling 4% of the total shares sold in the IPO. We also granted the Underwriter a 30-day option to purchase up to 480,000 additional shares of common stock to cover any over-allotments (the “Over-Allotment Option"), and the right to receive, upon exercise of the Over-allotment Option, a number of additional warrants to purchase common stock totaling 4% of the shares sold in the IPO (including the 128,000 previously issued), on the same terms and conditions for the purpose of covering any over-allotments in connection with the IPO. No overallotment shares were purchased by the Underwriter and no Over-Allotment Options were granted to the Underwriter. As part of the UoE license agreement, the Company owes UoE $0.4 million associated with this fund raising. We will pay UoE 2.5% of the gross amount of each of the Company’s future fund raisings up to a cumulative total of $3.0 million, including this $0.4 million. The IPO closed on February 8, 2022, with a result of gross proceeds of $16.0 million, before deducting underwriting discounts and expenses (for net proceeds of $13.6 million). The sole book-running manager did not exercise the over-allotment option which has already expired. We believe that the proceeds from our IPO will enable us to fund our operating expenses and capital expenditures through at least the next 12 months from the issuance of our financial statements. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. Our future viability in the long term is dependent on our ability to raise additional capital to finance our operations. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our current or future product candidates, including payments of milestones and sponsored research commitments associated with our license agreements for NXP800 and NXP900. In addition, now that we have closed our initial public offering, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. The timing and amount of our operating expenditures will depend largely on our ability to: ➢ advance development of our clinical and preclinical programs; ➢ acquire additional product candidates; ➢ manufacture, or procure the manufacturing of, our preclinical and clinical drug material and develop processes for late stage and commercial manufacturing; ➢ seek regulatory approvals for any current or future product candidates that successfully complete clinical trials; ➢ achieve milestones in accordance with our license agreements; ➢ establish a sales, marketing, medical affairs and distribution infrastructure to commercialize any current or future product candidates for which we may obtain marketing approval for; ➢ hire additional clinical, quality control and scientific personnel; 48 ➢ expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company; and ➢ obtain, maintain, expand and protect our intellectual property portfolio. We anticipate that we will require additional capital as we seek regulatory approval of our product candidates and if we choose to pursue in-licenses or acquisitions of other product candidates. If we receive regulatory approval for our other future product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize. Because of the numerous risks and uncertainties associated with research, development and commercialization of our product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including: ➢ the scope, progress, results and costs of researching and developing our current or future product candidates, and conducting preclinical and clinical trials; ➢ the costs, timing and outcome of regulatory review of our current or future product candidates; ➢ the costs, timing and ability to manufacture our current or future product candidates to supply our clinical and preclinical development efforts and our clinical trials; ➢ the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, for any of our current or future product candidates for which we receive marketing approval; ➢ the costs of manufacturing commercial-grade products and necessary inventory to support commercial launch; ➢ the ability to receive additional non-dilutive funding, including grants from organizations and foundations; ➢ the revenue, if any, received from commercial sale of our products, should any of our current or future product candidates receive marketing approval; ➢ the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining, expanding and enforcing our intellectual property rights and defending intellectual property-related claims; ➢ our ability to establish and maintain collaborations on favorable terms, if at all; and ➢ the extent to which we acquire or in-license other product candidates and technologies. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of public or private equity offerings, debt financings, governmental funding, collaborations, strategic partnerships and alliances or marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, debt financing would result in fixed payment obligations. If we raise additional funds through governmental funding, collaborations, strategic partnerships and alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. 49 Contractual obligations and other commitments We do not have any material principal contractual obligations and commitments as of December 31, 2021. We enter into contracts in the normal course of business with CROs, CMOs and other third parties for clinical trials, preclinical research studies and testing and manufacturing services. These contracts are cancelable by us upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. The amount and timing of such payments are not known. We have also entered into license and collaboration agreements with third parties, which are in the normal course of business. We have not included future payments under these agreements since obligations under these agreements are contingent upon future events such as our achievement of specified development, regulatory, and commercial milestones, or royalties on net product sales. Pursuant to the NXP800 License Agreement, we are required to make payments to the ICR for certain development and regulatory milestones. As of December 31, 2021, we were obligated to pay up to $23.0 million in milestone payments to the ICR related to pre-approval milestones, up to $178 million (in addition to the $23.0 million) in regulatory and commercial sales milestones and mid-single digit to 10% royalties on a tiered basis on net sales. Additionally, the Company will provide the ICR with up to an additional $0.5 million in research and development support. Pursuant to the NXP900 License Agreement, we are required to make payments to the UoE for certain development and regulatory milestones. At December 31, 2021, we were obligated to make up to $46.0 million in milestone payments to the UoE related to pre-approval milestones including $0.5 million on the first anniversary of the agreement, up to $279.5 million in regulatory and commercial sales milestones, mid-single digit to 8% royalties on a tiered basis on net sales and 2.5% of the gross amount of each of the Company’s future fund raising up to a cumulative total of $3.0 million. Additionally, the Company will provide UoE with up to an additional £580,000 in research and development support. We do not currently have any long-term leases. We rent our office space in Fort Lee, New Jersey based on a one-year agreement signed on May 3, 2021. Critical Accounting Policies and Significant Judgments and Estimates Our financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. Stock-based compensation We maintain an equity incentive plan as a long-term incentive for employees, consultants and members of our board of directors. The plan allows for the issuance of non-statutory options, or NSOs, and incentive stock options to employees and NSOs to nonemployees. 50 Stock-based compensation is measured using estimated grant date fair value and recognized as compensation expense over the service period in which the awards are expected to vest. We estimate the grant date fair value, and the resulting stock-based compensation, using the Black-Scholes option-pricing model, and we use the straight-line method for expense attribution. The fair-value-based measurements of options granted to nonemployees are remeasured at each period end until the options vest and are amortized to expense as earned. The valuation model used for calculating the estimated fair value of stock awards is the Black-Scholes option-pricing model. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculations, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the expected volatility of our common stock, the related risk-free interest rate and the expected dividend. We have elected to recognize forfeitures of stock-based awards as they occur. The Black-Scholes option-pricing model requires the use of highly subjective assumptions to determine the fair value of stock-based awards. These assumptions include: · Expected Term—The expected term represents the weighted-average period the stock options are expected to remain outstanding and is based on the options’ vesting terms, contractual terms and industry peers, as we did not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. · Expected Volatility—Since we have been privately held and do not have any trading history for our common stock, the expected volatility is estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty. · Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option. · Expected Dividend—We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero. Income Taxes In evaluating our valuation allowance, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance. As of December 31, 2021, we had net operating loss carryforwards for income tax purposes of approximately $9.3 million and all of the NOL does not expire. Utilization of the net operating loss and credit carryforwards may be subject to an annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended and similar state provisions. While our significant accounting policies are described in more detail in Note 2 to our financial statements appearing elsewhere in this report, we commenced our principal operations in May 2021 and we believe that the accounting policies discussed are critical to understanding our historical and future performance as these policies relate to the more significant areas involving management’s judgement and estimates. 51 Emerging Growth Company and Smaller Reporting Company Status The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to not “opt out” of this provision and, as a result, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company. We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of our initial public offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We will continue to be a smaller reporting company for as long as either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. 52 Item 7A. Quantitative and Qualitative Disclosures About Market Risks This disclosure is not applicable as we are a smaller reporting company. Item 8. Financial Statements and Supplementary Data The information required by this Item is set forth in the financial statements and notes thereto beginning at 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.