Onconetix, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Part I. “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K. Overview We are a commercial stage biotechnology company focused on the research, development, and commercialization of innovative solutions for men’s health and oncology. Through our recent acquisition of Proteomedix, we own Proclarix, an in vitro diagnostic test for prostate cancer approved for sale in the European Union under the In Vitro Diagnostic Regulation (“IVDR”), which is planned to be marketed in the U.S. as a lab developed test. We also own ENTADFI, an FDA-approved, once daily pill that combines finasteride and tadalafil for the treatment of BPH, a disorder of the prostate. Proclarix is an easy-to-use next generation protein-based blood test that can be done with the same sample as a patient’s regular Prostate-Specific Antigen (“PSA”) test. The PSA test is a well-established prostate specific marker that measures the concentration of PSA molecules in a blood sample. A high level of PSA can be a sign of prostate cancer. However, PSA levels can also be elevated for many other reasons including infections, prostate stimulation, vigorous exercise or even certain medications. PSA results can be confusing for many patients and even physicians. It is estimated over 50% of biopsies with elevated PSA are negative or clinically insignificant resulting in an overdiagnosis and overtreatment that impacts the physician’s routine, our healthcare system, and the quality of patients’ lives. Proclarix helps doctors and patients with unclear PSA test results through the use of our proprietary Proclarix Risk Score which delivers clear and immediate diagnostic support for further treatment decisions. No additional intervention is required, and results are available quickly. Local diagnostic laboratories can integrate this multiparametric test into their current workflow because Proclarix assays use the enzyme-linked immunosorbent assay (ELISA) standard, which most diagnostic laboratories are already equipped to process. 97 ENTADFI allows men to receive treatment for their symptoms of BPH without the negative sexual side effects typically seen in patients on finasteride alone. Following a recent business strategy shift towards the fields of men’s health and oncology and deprioritization of preclinical vaccine programs, we are building additional assets in therapeutics, diagnostics, and clinician services for men’s health and oncology. Since our inception in October 2018 until April 2023, when we acquired ENTADFI, we devoted substantially all of our resources to performing research and development, undertaking preclinical studies and enabling manufacturing activities in support of our product development efforts, hiring personnel, acquiring and developing our technology and now deprioritized vaccine candidates, organizing and staffing our company, performing business planning, establishing our intellectual property portfolio and raising capital to support and expand such activities. Prior to the acquisition of ENTADFI, we managed one distinct business segment, which was research and development. Beginning in the second quarter of 2023, as a result of the acquisition of ENTADFI, for which we are working towards commercial launch, we operated in two business segments: research and development and commercial. During the third quarter of 2023, we deprioritized our vaccine discovery and development programs, and accordingly, we now operate in one segment: commercial. Our acquisition during the fourth quarter of 2023 of Proteomedix and its diagnostic product Proclarix was determined to be within our commercial segment. The research and development segment was our historical business, and was dedicated to the research and development of various vaccines to prevent infectious diseases. The commercial segment was new in the second quarter of 2023 and is dedicated to the commercialization of our products approved for sale, namely ENTADFI in the U.S. and Proclarix in Europe. ENTADFI has not generated any revenue from product sales, and Proclarix has generated only minimal amounts of development revenue since its acquisition. In light of (i) the time and resources needed to continue pursuing commercialization of ENTADFI, and (ii) the Company’s cash runway and indebtedness, the Company has determined to temporarily pause its commercialization of ENTADFI, as it considers strategic alternatives. The Company expects to appoint a new Chief Executive Officer in early April 2024, after which the new CEO and the Board will reassess its ENTADFI program in light of the foregoing and other relevant factors. We are currently focusing our efforts on commercializing Proclarix. Given Proclarix is CE-marked for sale in the European Union, we expect to generate revenue from sales of Proclarix by 2025. Although we anticipate these sales to offset some expenses relating to commercial scale up and development, we expect our expenses will increase substantially in connection with our ongoing activities, as we: ● commercialize Proclarix and ENTADFI (if we decide to resume its commercialization), and other commercial-stage products ● hire additional personnel; and ● obtain, maintain, expand, and protect our intellectual property portfolio. To the extent that we resume the commercialization of ENTADFI, we also expect to incur significant commercialization expenses related to marketing, manufacturing and distribution for ENTADFI. We rely and will continue to rely on third parties for the manufacturing of ENTADFI and Proclarix. We have no internal manufacturing capabilities, and we will continue to rely on third parties, of which the main suppliers are single-source suppliers, for commercial products. 98 We do not have any products approved for sale, aside from Proclarix, from which we have generated only minimal amounts of development revenue since its acquisition, and ENTADFI, from which we have not generated any revenue from product sales, and for which we have determined to temporarily pause commercialization activities. To date, we have financed our operations primarily with proceeds from our sale of preferred securities to seed investors, the close of the IPO, the close of the 2022 Private Placements, the proceeds received from a warrant exercise in August 2023, and the proceeds received from the issuance of debt in January 2024. We will continue to require significant additional capital to commercialize Proclarix and ENTADFI (if we decide to resume its commercialization), and to fund operations for the foreseeable future. Accordingly, until such time as we can generate significant revenue, if ever, we expect to finance our cash needs through public or private equity or debt financings, third-party (including government) funding and to rely on third-party resources for marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches, to support our operations. We have incurred net losses since inception and expect to continue to incur net losses in the foreseeable future. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending in large part on timing and success of commercialization activities, the timing of clinical trials and manufacturing activities, and our expenditures on other research and development activities. As of December 31, 2023, the Company had a working capital deficit of approximately $11.4 million and an accumulated deficit of approximately $56.8 million. We will need to raise additional capital to sustain operations and meet our contractual commitments and obligations within the one-year period following the issuance of the accompanying consolidated financial statements. Until we generate revenue sufficient to support self-sustaining cash flows, if ever, we will need to continue to raise additional capital to fund our continued operations, including our product development and commercialization activities related to our current and future products. There can be no assurance that additional capital will be available to us on acceptable terms, or at all, or that we will ever generate revenue sufficient to provide for self-sustaining cash flows. These circumstances raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements incorporated by reference in this Report do not include any adjustment that might be necessary if the Company is unable to continue as a going concern. Because of the numerous risks and uncertainties associated with our business, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Additionally, even if we are able to generate revenue from Proclarix, or ENTADFI, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels andf10. may be forced to reduce our operations. Certain Significant Relationships We have entered into grant, license and collaboration arrangements with various third parties as summarized below. For further details regarding these and other agreements, see the section titled “Business - Intellectual Property” and Note 6 to our consolidated financial statements included elsewhere in this Report. On March 23, 2023, Proteomedix entered into a license agreement with Labcorp pursuant to which Labcorp has the exclusive right to develop and commercialize Proclarix and other products developed by Labcorp using Proteomedix’s intellectual property covered by the license, in the United States (“Licensed Products”). In consideration for granting Labcorp an exclusive license, Proteomedix received an initial license fee in the mid-six figures upon signing of the contract. Additionally, Proteomedix is entitled to royalty payments on the net sales recognized by Labcorp of any Licensed Products plus milestone payments as follows: ● After the first sale of Proclarix as a laboratory developed test, Labcorp will pay an amount in the mid-six figures; ● After Labcorp achieves a certain amount in the low seven figures in net sales of the Licensed Products, Labcorp will pay Proteomedix an amount in the low seven figures; and ● After a certain amount in the mid-seven figures in net sales of Licensed Products, Labcorp will pay Proteomedix an amount in the low seven figures. Labcorp is wholly responsible for the cost, if any, of research, development and commercialization of Licensed Products in the United States but has the right to offset a portion of those costs against future royalty and milestone payments. Additionally, Labcorp may deduct royalties or other payments made to third parties related to the manufacture or sale of Licensed Products up to a maximum amount of any royalty payments due to Proteomedix. 99 Ology Agreement (which was later acquired by National Resilience, Inc.) The Company entered into a Master Services Agreement (“Ology MSA”), dated July 19, 2019, with Ology, Inc. (“Ology”) to provide services from time to time, including but not limited to technology transfer, process development, analytical method optimization, cGMP manufacture, regulatory affairs, and stability studies of biologic products. Pursuant to the Ology MSA, the Company and Ology shall enter into a Project Addendum for each project to be governed by the terms and conditions of the Ology MSA. The Company entered into two Project Addendums as of December 31, 2023. The initial Project Addendum was executed on October 18, 2019, and the Company was required to pay Ology an aggregate of approximately $4 million. Due to unforeseen delays associated with COVID-19, the Company and Ology entered into a letter agreement dated January 9, 2020 to stop work on the project, at which point the Company had paid Ology $100,000 for services to be provided. The second Project Addendum was executed on May 21, 2021, and the Company is obligated to pay Ology an aggregate amount of approximately $2.8 million, plus reimbursement for materials and outsourced testing, which will be billed at cost plus 15%. During 2023 and 2022, the Company and Ology entered into contract amendments that resulted in a net decrease in the Company’s obligations of approximately $137,000. For additional details regarding our relationship with Ology, see the section entitled “Business - Manufacturing and Supply” and Note 6 to our consolidated financial statements included elsewhere in this Report. Cincinnati Children’s Hospital Medical Center Agreement On June 1, 2021, we entered into an exclusive, worldwide license agreement with Children’s Hospital Medical Center, d/b/a Cincinnati Children’s Hospital Medical Center, or CHMC, which we refer to as the CHMC Agreement, pursuant to which we obtained the right to develop and commercialize certain CHMC patents and related technology directed at a virus-like particle (VLP) vaccine platform that utilizes nanoparticle delivery technology, which may have potential broad application to develop vaccines for multiple infectious diseases. However, as Onconetix has now deprioritized its infectious disease vaccine programs based on a change in clinical focus, we are exploring ways in which CHMC’s VLP platform can be used in therapeutic and diagnostic applications in oncology. Under the CHMC Agreement, we agreed to pay CHMC certain license fees, deferred license fees, development milestone fees, and running royalties beginning on the first net sale (among others). For additional details regarding our relationship with CHMC, see the section entitled “Business - Intellectual Property - Exclusive License Agreement with Children’s Hospital Medical Center, d/b/a Cincinnati Children’s Hospital Medical Center” and Notes 6 and 10 to our consolidated financial statements included elsewhere in this Report. The CHMC license includes the following patents: U.S. Patent Application No. U.S. Patent No. Granted Claim Type U.S. Expiration Foreign Counterparts 12/797,396 8,486,421 Compositions of the vaccine/vaccine platform 1/13/2031 CN107043408B EP2440582B1 JP5894528B2 13/924,906 9,096,644 Method of treatment 9/20/2030 CN107043408B EP2440582B1 JP5894528B2 13/803,057 9,562,077 Compositions of the vaccine platform 4/10/2034 none 16/489,095 pending pending** [3/15/2038]* Pending applications in Canada, China, EU, Hong Kong and Japan 63/149,742 (filed 2/16/2021) pending pending** [February 2042] # TBD 63/162,369 (filed 3/17/2021) pending pending** [March 2042] # TBD * Projected expiration if patent issues: 20 years from earliest non-provisional application filing date. # Non-provisional application not yet filed. Expiration projected 21 years from provisional application filing date. Dependent on timely conversion to non-provisional application and issuance of patent. ** This is a pending application. Claim type will be determined after U.S. prosecution is complete. The claim type sought includes compositions of the vaccine and vaccine platform. 100 AbVacc Co-Development Agreement On February 1, 2023, the Company entered into a co-development agreement with AbVacc, Inc., for the purpose of conducting research aimed at co-development of specific vaccine candidates, including monkeypox and Marburg virus disease with the potential to expand to others using the Norovirus nanoparticle platform (“Co-Development Project”), and to govern the sharing of materials and information, as defined in the agreement, for the Co-Development Project. Under the agreement, AbVacc and the Company will collaborate, through a joint development committee, to establish and implement a development plan or statement of work for each Co-Development Project targeted product. Under the co-development agreement, either the Company or AbVacc, whichever party is the primary sponsor of any resulting product (as defined in the agreement), will be obligated to compensate the other party for certain milestone payments that would range between $2.1 million and $4.75 million, plus royalties of between 2% to 4%. The term of the agreement is three years from the effective date, unless previously terminated by either party, in accordance with the agreement. However, as Onconetix has now deprioritized its infectious disease vaccine programs, this agreement will have little strategic significance going forward. Services Agreement On July 21, 2023, the Company, entered into a Licensing and Services Master Agreement (“Master Services Agreement”) and a related statement of work with a vendor, pursuant to which the vendor was to provide to the Company commercialization services for the Company’s products, including recruiting, managing, supervising and evaluating sales personnel and providing sales-related services for such products, for fees totaling up to $29.1 million over the term of the statement of work. The statement of work had a term through September 6, 2026, unless earlier terminated in accordance with the Master Services Agreement and the statement of work. On July 29, 2023, a second statement of work was entered into with the same vendor for certain subscription services providing prescription market data access to the Company. The fees under the second statement of work totaled approximately $800,000, and the term was through July 14, 2025. On October 12, 2023, the Company terminated the Master Services Agreement and the statements of work. The Company recorded approximately $3.1 million in expense related to this contract during the year ended December 31, 2023, which is included in selling, general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss. The Company had approximately $1.8 million recorded in related accounts payable as of December 31, 2023, which includes amounts due for early termination of the contract. See Note 6 to our consolidated financial statements included elsewhere in this Report. Components of Results of Operations Selling, General and Administrative Expenses Selling, general and administrative expenses consist principally of commercialization activities , payroll, and personnel expenses, including salaries and bonuses, benefits and stock-based compensation expenses, professional fees for legal, consulting, accounting and tax services, information technology costs, costs incurred with respect to acquisitions and potential acquisitions, and other general operating expenses. We anticipate that our selling, general and administrative expenses will continue to increase when compared to historical levels as a result of our dedication to commercialization of our products approved for sale, which includes. Proclarix in Europe and ENTADFI in the U.S (if we decide to resume its commercialization), costs associated with integration of these assets and commercial operations, as well as expanded infrastructure and higher consulting, legal and accounting services costs associated with complying with the applicable stock exchange and the SEC requirements, investor relations costs and director and officer insurance premiums associated with being a public company. Research and Development Expenses Substantially all of our research and development expenses consist of expenses incurred in connection with the development of our product candidates. These expenses historically have included fees paid to third parties to conduct certain research and development activities on our behalf, consulting costs, costs for laboratory supplies, product acquisition and license costs, certain payroll, and personnel-related expenses, including salaries and bonuses, employee benefit costs and stock-based compensation expenses for our research and product development employees. We expense both internal and external research and development expenses as they are incurred. 101 We do not allocate our costs by product candidate, as a significant amount of research and development expenses include internal costs, such as payroll and other personnel expenses, laboratory supplies, and external costs, such as fees paid to third parties to conduct research and development activities on our behalf, that are not tracked by product candidate. We expect our research and development expenses to increase once research and development activities are resumed. Predicting the timing or cost to complete our clinical programs for future product candidates, or validation of our commercial manufacturing and supply processes is difficult and delays may occur because of many factors, including factors outside of our control, such as regulatory approvals. Furthermore, we are unable to predict when or if our future product candidates will receive regulatory approval with any certainty. Other Income (Expense) Other income (expense) is comprised of interest expense on notes payable, the change in fair value of financial instruments that are recorded as liabilities, which includes the subscription agreement liability, contingent warrant liability, and other financing-related costs. Results of Operations Comparison of the Years Ended December 31, 2023 and 2022 The following table summarizes our statements of operations and comprehensive loss for the periods indicated: Year Ended December 31, 2023 Year Ended December 31, 2022 $ Change % Change Revenue $ 58,465 $ - $ 58,465 100 % Cost of revenue 1,185,630 - 1,185,630 100 % Gross loss (1,127,165 ) - (1,127,165 ) (100 )% Operating expenses Selling, general and administrative $ 14,770,678 $ 9,351,552 5,419,126 57.9 % Research and development 1,949,406 4,129,688 (2,180,282 ) (52.8 )% Impairment of ENTADFI assets 14,687,346 - 14,687,346 100.0 % Impairment of deposit on asset purchase agreement 3,500,000 - 3,500,000 100.0 % Total operating expenses 34,907,430 13,481,240 21,426,190 158.9 % Loss from operations (36,034,595 ) (13,481,240 ) (22,553,355 ) (167.3 )% Other income (expense) Loss on extinguishment of note payable (490,000 ) - (490,000 ) (100 )% Interest expense (671,625 ) - (671,625 ) (100 )% Change in fair value of subscription agreement liability (134,100 ) - (134,100 ) (100 )% Change in fair value of contingent warrant liability (91,967 ) 61,410 (153,377 ) (249.8 )% Total other income (expense) (1,387,692 ) 61,410 (1,449,102 ) (2,359.7 )% Loss before income taxes (37,422,287 ) (13,419,830 ) (24,002,457 ) (178.9 )% Income tax benefit 12,593 - 12,593 100 % Net loss $ (37,409,694 ) $ (13,419,830 ) (23,989,864 ) (178.8 )% 102 Revenue, Cost of Revenue, and Gross Margin For the year ended December 31, 2023, the Company had less than $0.1 million of revenue, which was attributable to Proteomedix revenue recorded from the date of acquisition through December 31, 2023. Cost of revenue of approximately $1.2 million, and the resulting negative margin, is attributable to costs incurred on Proteomedix revenue including amortization of the product rights intangible asset of approximately $31,000, and an impairment of inventory related to ENTADFI of approximately $1.2 million. The Company did not have any revenue during the year ended December 31, 2022. Selling, General and Administrative Expenses For the year ended December 31, 2023, selling, general and administrative expenses increased by approximately $5.4 million compared to 2022. The increase was mainly due to approximately $4.7 million in expenses incurred related to commercialization activities and an increase in professional services of approximately $1.7 million, which is comprised primarily of audit, accounting, and legal services, a significant portion of which were in support of the Company’s acquisition activities. In addition, the Company incurred approximately $1.7 million related to the acquisition of Proteomedix, which consists primarily of transaction costs and Proteomedix’s selling, general and administrative expenses since the acquisition date. The Company also recorded an impairment of long-lived assets of $0.3 million during 2023. These increases were offset by a decrease in employee and director compensation and benefits of approximately $1.0 million, primarily due to a decrease in stock-based compensation expense. Also, the Company recorded approximately $1.3 million of expense in 2022 related to the settlement agreement with Boustead and approximately $0.3 million for a non-recurring termination fee to the Company’s former underwriter, for early termination of the agreement with that underwriter, with no related expenses in 2023. The remaining decrease is due to a decrease in various business activities that occurred during the last half of the year related to the Company’s change in business strategy, including decreases in business advisory services, patent costs, travel related expenses, and rent expense, totaling $0.4 million. Research and Development Expenses For the year ended December 31, 2023, research and development expenses decreased by approximately $2.2 million compared to 2022. The decrease was primarily due to the Company’s decision to deprioritize its vaccine programs and focus on commercialization activities, which occurred during the third quarter of 2023. This change in business strategy led to a pause on the Company’s clinical and other research activities, and a resulting decrease of approximately $2.3 million due to decreased costs for related outside services and reduced compensation expense. This was slightly offset by an increase related to Proteomedix’s research and development activities since the acquisition date, of approximately $0.1 million. Impairments The Company recorded an impairment charge of $14.7 million on the assets acquired as part of the ENTADFI acquisition during the fourth quarter of 2023. In addition, the Company recorded an impairment charge of $3.5 million on a deposit that was made as part of the WraSer APA. No such impairments were recorded during 2022. Other Income (Expense) Other expense incurred during the year ended December 31, 2023 increased by approximately $1.4 million compared to 2022 and relates to the change in fair value of the subscription agreement liability of approximately $0.1 million, $0.7 million of interest expense, primarily incurred on notes payable issued in April 2023 related to the acquisition of ENTADFI, a loss on extinguishment of a note payable of $0.5 million in connection with the Veru APA Amendment, and the change in fair value of the contingent warrant liability of approximately $0.1 million. Other income recorded during the year ended December 31, 2022, relates to the change in fair value of the contingent warrant liability. Income Tax Benefit The Company recorded an income tax benefit of approximately $13,000 during the year ended December 31, 2023, in connection with the acquisition accounting for the Proteomedix transaction. There was no income tax benefit or expense recorded during the year ended December 31, 2022. 103 Liquidity and Capital Resources The Company’s operating activities to date have been primarily devoted to seeking licenses, engaging in research and development activities, potential asset and business acquisitions, and expenditures associated with the commercial launch of ENTADFI. The Company has financed its operations since inception primarily using proceeds received from seed investors and proceeds received from its IPO and subsequent debt and equity offerings. During the year ended December 31, 2022, the Company received an aggregate of approximately $33.1 million in net cash proceeds from its IPO and two private placements, and during the year ended December 31, 2023, the Company received net proceeds of approximately $2.3 million in connection with the exercise by an investor of preferred investment options (see Note 9). In addition, on January 23, 2024, the Company received net cash proceeds of $4.6 million in exchange for the issuance of a debenture. The debenture is repayable in full upon the earlier of (i) the closing of a subscription agreement, which was entered into in connection with the acquisition of Proteomedix, and (ii) June 30, 2024 (see Note 13). The Company has incurred substantial operating losses since inception and expects to continue to incur significant operating losses for the foreseeable future. As of December 31, 2023, the Company had cash of approximately $4.6 million, a working capital deficit of approximately $11.4 million and an accumulated deficit of approximately $56.8 million. These factors, along with the Company’s forecasted future cash flows, indicate that the Company will be unable to meet its contractual commitments and obligations as they come due in the ordinary course of business, within one year following the issuance of these consolidated financial statements. The Company will require significant additional capital in the short-term to fund its continuing operations, satisfy existing and future obligations and liabilities, including the remaining payments due for the acquisition of the ENTADFI assets, payment due on the Debenture, in addition to funds needed to support the Company’s working capital needs and business activities. These business activities include the commercialization of Proclarix and ENTADFI (if we decide to resume its commercialization), and the development and commercialization of the Company’s future product candidates. In addition, as discussed more fully in Note 5, if stockholder approval is not obtained by January 1, 2025 with respect to the Series B Convertible Redeemable Preferred Stock issued in connection with the acquisition of Proteomedix, these shares become redeemable for cash, and the Company currently does not have sufficient cash to redeem such shares. Based on the closing price of $0.166 for the Company’s stock as of April 5, 2024, the Series B Preferred Stock would be redeemable for approximately $44.8 million. Management’s plans for funding the Company’s operations include generating product revenue from sales of Proclarix, which may still be subject to further successful commercialization activities within certain jurisdictions, and ENTADFI, which is subject to further successful commercialization activities which we have temporarily paused as discussed above. Certain of the commercialization activities are outside of the Company’s control, including but not limited to, securing contracts with wholesalers and third-party payers, securing contracts with third-party logistics providers, and obtaining required licensure in various jurisdictions, as well as attempting to secure additional required funding through equity or debt financings if available. However, there are currently no commitments in place for further financing nor is there any assurance that such financing will be available to the Company on favorable terms, if at all. This creates significant uncertainty that the Company will have the funds available to be able to successfully launch ENTADFI and expand commercialization of Proclarix. If the Company is unable to secure additional capital, it may be required to curtail any future clinical trials, development and/or commercialization of products and product candidates, and it may take additional measures to reduce expenses in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations. Because of historical and expected operating losses and net operating cash flow deficits, there is substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the consolidated financial statements, which is not alleviated by management’s plans. The consolidated financial statements have been prepared assuming the Company will continue as a going concern. These consolidated financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty. Future Funding Requirements Our primary uses of cash to date have been to fund our operations, which consist primarily of research and development expenditures related to our programs, costs related to acquisitions and potential acquisitions, commercializing ENTADFI and other selling, general and administrative expenditures. We anticipate that we will continue to incur significant expenses for the foreseeable future as we continue to commercialize Proclarix and ENTADFI, if we proceed with its commercialization, and expand our corporate infrastructure, including the costs associated with being a public company. We are subject to all of the risks typically related to the development of new drug candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. 104 We will require significant amounts of additional capital in the short-term, to continue to fund our continuing operations, satisfy existing and future obligations and liabilities, including the remaining payments due under the Veru APA and other contracts entered into in support of the Company’s commercialization plans, in addition to funds needed to support our working capital needs and business activities, including the commercialization of Proclarix and ENTADFI (if we decide to resume its commercialization), and the development and commercialization of our future product candidates. Until we can generate a sufficient amount of revenue from sales of Proclarix or ENTADFI, we expect to finance our future cash needs through public or private equity or debt financings, third-party (including government) funding and marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. The future sale of equity or convertible debt securities may result in dilution to our stockholders, and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. Debt financing may subject us to covenant limitations or restrictions on our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable or acceptable to us. If we are unable to obtain adequate financing when needed or on terms favorable or acceptable to us, we may be forced to delay, reduce the scope of our business activities. Our future capital requirements will depend on many factors, including: ● the costs of future commercialization activities, including product manufacturing, marketing, sales, royalties, and distribution, for Proclarix and ENTADFI (if we decide to resume its commercialization), and other products for which we may receive marketing approval; ● the timing, scope, progress, results and costs of research and development, testing, screening, manufacturing, preclinical and non-clinical studies and clinical trials; ● the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform field efficacy studies, require more studies than those that we currently expect or change their requirements regarding the data required to support a marketing application; ● our ability to maintain existing, and establish new, strategic collaborations, licensing or other arrangements and the financial terms of any such agreements, including the timing and amount of any future milestone, royalty or other payments due under any such agreement; ● any product liability or other lawsuits related to our products; ● the expenses needed to attract, hire and retain skilled personnel; ● the revenue, if any, received from commercial sales of Proclarix or ENTADFI (if we decide to resume its commercialization), or other products for which we may have received or will receive marketing approval; ● the costs to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing our patents or other intellectual property rights; and ● the costs of operating as a public company. 105 Cash Flows The following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2023 Year Ended December 31, 2022 Net cash used in operating activities $ (13,581,018 ) $ (8,675,534 ) Net cash used in investing activities (8,649,035 ) (32,665 ) Net cash provided by financing activities 1,035,060 32,532,384 Effect of exchange rate changes on cash (3,331 ) - Net increase (decrease) in cash $ (21,198,324 ) $ 23,824,185 Cash Flows from Operating Activities Net cash used in operating activities for the year ended December 31, 2023 was $13.6 million, which primarily resulted from a net loss of $37.4 million. This was offset by impairment losses of $19.3 million related to the ENTADFI assets and the WraSer APA, the fair value of the subscription liability agreement of $0.7 million, non-cash interest expense of $0.7 million, a loss on the extinguishment of a note payable of $0.5 million, noncash stock-based compensation expense of $0.3 million, a $0.3 million loss on impairment of long-lived assets, other non-cash items of $0.4 million, and a net change in our operating assets and liabilities of $1.6 million. Net cash used in operating activities for the year ended December 31, 2022, was $8.7 million, which primarily resulted from a net loss of $13.4 million, which was partially offset by noncash stock-based compensation of approximately $2.0 million, the fair value of restricted common stock that was issued of approximately $0.3 million, and a net change in our operating assets and liabilities of $2.4 million. Cash Flows from Investing Activities Net cash used in investing activities for the year ended December 31, 2023 was approximately $8.6 million, of which approximately $6.1 million was used for the acquisition of ENTADFI, $3.5 million was used for the deposit in connection with the potential WraSer APA, and $0.1 million is the net change in the receivable from related parties and purchases of long-lived assets. This was offset by approximately $1.1 million in cash acquired in connection with the acquisition of Proteomedix. Net cash used in investing activities for the year ended December 31, 2022, was approximately $33,000, which resulted from purchases of property and equipment and the net change in the receivable from related parties. Cash Flows from Financing Activities Net cash provided by financing activities for the year ended December 31, 2023 was approximately $1.0 million, and resulted from net proceeds from the exercise of preferred investment options in connection with the warrant inducement transaction of $2.3 million offset by $1.0 million in principal payments on a note payable, $59,000 in purchases of treasury shares, and $205,000 of payment in deferred offering costs. Net cash provided by financing activities for the year ended December 31, 2022, was approximately $32.5 million, and resulted primarily from the close of our IPO and the Private Placements, which resulted in net proceeds of approximately $33.1 million, offset by approximately $0.6 million in treasury share repurchases. Legal Contingencies From time to time, we may become involved in legal proceedings arising from the ordinary course of business. We record a liability for such matters when it is probable that future losses will be incurred and that such losses can be reasonably estimated. 106 Off-Balance Sheet Arrangements During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined in the rules and regulations of the SEC. Recent Accounting Pronouncements Not Yet Adopted See Note 3 to our consolidated financial statements included elsewhere in this Report for more information. Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 3 to our consolidated financial statements included elsewhere in this Report, we believe the following accounting policies and estimates to be most critical to the judgments and estimates used in the preparation of our consolidated financial statements. Acquisitions The Company evaluates acquisitions to first determine whether a set of assets acquired constitutes a business and should be accounted for as a business combination. If the assets acquired are not a business, the transaction is accounted as an asset acquisition in accordance with Accounting Standards Codification (“ASC”) 805-50, Asset Acquisitions (“ASC 805-50”), which requires the acquiring entity to recognize assets acquired and liabilities assumed based on the cost to the acquiring entity on a relative fair value basis, except for non-qualifying assets including financial assets such as inventory. Further, the cost of the acquisition includes the fair value of consideration transferred and direct transaction costs attributable to the acquisition. Goodwill is not recognized in an asset acquisition and any excess consideration transferred over the fair value of the net assets acquired is allocated to the identifiable assets based on relative fair values. Contingent consideration payments in asset acquisitions are recognized when the contingency is determined to be probable and reasonably estimable. If the assets acquired are a business, the Company accounts for the transaction as a business combination. Business combinations are accounted for by using the acquisition method of accounting. Under the acquisition method, assets acquired, and liabilities assumed are recorded at their respective fair values. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Acquisition related expenses are expensed as incurred, and are included in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to impairment tests on an annual basis, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is allocated to the reporting unit from which it was created. A reporting unit is an operating segment or sub-segment to which goodwill is assigned when initially recorded. The Company tests indefinite lived intangible assets for impairment, on an annual basis in the fourth quarter, or more frequently if an event occurs or circumstances indicate that the indefinite lived assets may be impaired. The Company may perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If the Company determines this is the case, the Company then performs further quantitative analysis to identify and measure the amount of goodwill impairment loss to be recognized, if any. To perform its quantitative test, the Company compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of its net assets, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than the carrying value, the Company measures the amount of impairment loss, if any, as the excess of the carrying value over the fair value of the reporting unit. The Company did not test its goodwill or indefinite lived assets for impairment during the year ended December 31, 2023, given that the acquisition date occurred after the annual testing date, and given that there were no impairment indicators from the date of acquisition through the end of the reporting period. The Company has determined that no impairment of its goodwill or indefinite lived intangible assets occurred as of December 31, 2023. 107 Intangible assets with finite lives are reported at cost, less accumulated amortization, and are amortized over their estimated useful lives, starting when sales for the related product begin. Amortization is calculated using the straight-line method, and recorded within selling, general, and administrative expenses, or cost of revenue, depending on the nature and use of the asset. During the ordinary course of business, the Company has entered into certain license and asset purchase agreements. Potential milestone payments for development, regulatory, and commercial milestones are recorded when the milestone is probable of achievement. Upon a milestone being achieved, the associated milestone payment is capitalized and amortized over the remaining useful life for approved products, or expensed as research and development expense for milestones relating to products whose FDA approval has not yet been obtained. Impairment of Long-Lived Assets The Company reviews long-lived assets, including intangible assets with finite useful lives, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable (a “triggering event”). Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the long-lived asset in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value. During the fourth quarter of 2023, the Company determined that there were certain triggering events that indicated that the carrying amount of the assets recorded in connection with the ENTADFI acquisition may not be fully recoverable. A related impairment loss of $14.7 million was recorded during the year ended December 31, 2023. The Company also recorded an impairment loss of approximately $267,000 during the year ended December 31, 2023, related to implementation costs incurred under cloud computing hosting arrangements that were capitalized during the year. There were no other impairment losses on long-lived assets for the years ended December 31, 2023 and 2022. Accrued Research and Development Expenses We have entered into various agreements with CMOs and may enter into contracts with CROs in the future. As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel and third parties to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We make estimates of our accrued research and development expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. We accrue for costs related to research and development activities based on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors, including CMOs, that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received. We make significant judgments and estimates in determining accrued research and development liabilities as of each reporting period based on the estimated time period over which services will be performed and the level of effort to be expended. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred. 108 Financial instruments The Company determines the accounting classification of financial instruments that are issued, including its warrants and a subscription agreement, as either liability or equity, by first assessing whether the financial instruments are freestanding financial instruments, and if they meet liability classification in accordance with ASC 480, Distinguishing Liabilities from Equity , (“ASC 480”), and then in accordance with ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”). Under ASC 480-10, financial instruments are considered liability-classified if the instruments are mandatorily redeemable, obligate the issuer to settle the instruments or the underlying shares by paying cash or other assets, or must or may require settlement by issuing a variable number of shares. If the instruments do not meet liability classification under ASC 480, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the financial instruments do not require liability classification under ASC 815-40, in order to conclude equity classification, the Company assesses whether the instruments are indexed to the Company’s common stock and whether the instruments are classified as equity under ASC 815-40 or other applicable GAAP. After all relevant assessments are made, the Company concludes whether the instruments are classified as liability or equity. Liability-classified instruments are required to be accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss. Equity-classified instruments are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date. Preferred Stock The Company applies the guidance enumerated in ASC 480, when determining the classification and measurement of preferred stock. Preferred stock subject to mandatory redemption, if any, is classified as a liability and is measured at fair value. The Company classifies conditionally redeemable preferred stock, which includes preferred stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred stock in stockholders’ equity. Stock-Based Compensation The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. Stock-based awards to employees with graded-vesting schedules are recognized, using the accelerated attribution method, on a straight-line basis over the requisite service period for each separately vesting portion of the award. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Expected Term — The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term. The simplified method is used as the Company has insufficient historical information to provide a basis for an estimate of the expected term. Expected Volatility — Volatility is a measure of the amount by which the Company’s share price has historically fluctuated or is expected to fluctuate (i.e., expected volatility) during a period. Due to the lack of an adequate history of a public market for the trading of the Company’s common stock and a lack of adequate company-specific historical and implied volatility data, the Company computes stock price volatility over expected terms based on comparable companies’ historical common stock trading prices. For these analyses, the Company has selected companies with comparable characteristics, including enterprise value, risk profiles, and position within the industry. 109 Common Stock Fair Value — The fair value of the common stock underlying the Company’s stock options is based on the closing price of the Company’s common stock, as reported by the Nasdaq Capital Market, on the grant date of the award. Risk-Free Interest Rate — The Company bases the risk-free interest rate on the implied yield available on U.S. Treasury securities with a remaining term commensurate with the estimated expected term. Expected Dividend — The Company has never declared or paid any cash dividends on its shares of common stock and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models. The Company recognizes forfeitures of equity awards as they occur. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item. JOBS Act Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period. For as long as we remain an “emerging growth company” under the recently enacted JOBS Act, we will, among other things: ● be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act, which requires that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting; ● be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act and instead provide a reduced level of disclosure concerning executive compensation; and ● be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements. Although we are still evaluating the JOBS Act, we currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company,” including the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be materially and adversely affected. 110 Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, we are not required to provide the information required by this item.