Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Overview
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto, which are included in Part II, Item 8 of this Report.
We have identified the specific processes and resources required to achieve the near and medium-term objectives of our business plan, including personnel, facilities, equipment, research and testing materials including antibodies and clinical samples, and the protection of intellectual property. To date, operations have proceeded satisfactorily in relation to our business plan. However, it is possible that some resources will not readily become available in a suitable form or on a timely basis or at an acceptable cost. It is also possible that the results of some processes may not be as expected, and that modifications of procedures and materials may be required. Such events could result in delays to the achievement of the near and medium-term objectives of our business plan, in particular the progression of clinical validation studies and regulatory approval processes for the purpose of bringing products to the IVD market.
Our future as an operating business will depend on our ability to obtain sufficient capital contributions, financing and/or generate revenues as may be required to sustain our operations. Management plans to address the above as needed by: (a) securing additional grant funds; (b) obtaining additional equity or debt financing; (c) granting licenses to third parties in exchange for specified up-front and/or back end payments; and (d) developing and commercializing our products on an accelerated timeline. Management continues to exercise tight cost controls to conserve cash.
Our ability to continue as a going concern is dependent upon our accomplishment of the plans described in the preceding paragraph and eventually to attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. If we are unable to obtain adequate capital, we could be forced to cease operations.
Developments—COVID-19 Pandemic
On March 11, 2020, the World Health Organization designated the outbreak of a novel strain of coronavirus known as COVID-19 as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including but not limited to implementing shelter-in-place orders and significant restrictions on travel, as well as restrictions and guidelines that prohibit many employees from going to work. Uncertainty with respect to the economic effects of the pandemic has introduced significant volatility in the financial markets.
During the year ended December 31, 2020, we implemented contingency planning to protect the health and well-being of our employees, with the majority of our employees now working remotely where possible. We have implemented travel restrictions as well as protocols limiting visitor access to our facilities, and we are following social distancing practices. We did not observe significant impacts on our business or results of operations for the year ended December 31, 2020, due to the COVID-19 pandemic or the mitigation actions taken to slow its spread. To the extent the pandemic worsens, we cannot predict the effects it may have on our business, in particular with respect to demand for our services, our strategy, and our prospects, or the impact on our financial results.
Liquidity and Capital Resources
We have financed our operations since inception primarily through private placements and public offerings of our common stock. As of December 31, 2020, we had cash and cash equivalents of approximately $19.4 million.
Net cash used in operating activities was $16.5 million and $12.7 million for the years ended December 31, 2020 and December 31, 2019, respectively. The increase in cash used in operating activities during 2020 was primarily due to increased research and development activities together with increased personnel expenses.
Net cash used in investing activities was $1.6 million and $0.5 million for the years ended December 31, 2020 and December 31, 2019, respectively. The increase in cash used in investing activities during 2020 was primarily a result of increased purchases of laboratory equipment for our manufacturing facility in Belgium.
Net cash provided by financing activities was $20.6 million and $16.9 million for the years ended December 31, 2020 and December 31, 2019, respectively. The increase in cash provided by financing activities during 2020 was primarily due to more capital raised from equity financing.
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The following table summarizes our approximate contractual payments due by year as of December 31, 2020.
Approximate Payments (Including Interest) Due by Years
Total
2021
2022 - 2025
2026 +
Description
$
$
$
$
Financing lease liabilities
760,073
76,183
264,620
419,270
Operating lease liabilities and short-term lease
367,267
209,570
157,697
-
Grants repayable
328,821
69,218
156,030
103,573
Long-term debt
3,919,701
991,070
2,198,823
729,808
Collaborative agreements obligations
1,607,786
1,467,700
140,086
-
Total
6,983,648
2,813,741
2,917,256
1,252,651
We intend to use our cash reserves to predominantly fund further research and development activities. We do not have any substantial source of revenues and expect to rely on additional future financing, through the sale of equity or debt securities, or the sale of licensing rights, to provide sufficient funding to execute our strategic plan. There is no assurance that we will be successful in raising further funds.
In the event additional financing is delayed, we will prioritize the maintenance of our research and development personnel and facilities, primarily in Belgium, and the maintenance of our patent rights. In such instance, the completion of clinical validation studies and regulatory approval processes for the purpose of bringing products to the IVD market would be delayed. In the event of an ongoing lack of financing, it may be necessary to discontinue operations, which will adversely affect the value of our common stock.
We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive activities. For these reasons, our auditors included in their report on our audited financial statements for the fiscal year ended December 31, 2020 an explanatory paragraph regarding factors that raise substantial doubt that we will be able to continue as a going concern.
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Results of Operations
Comparison of the Years Ended December 31, 2020 and December 31, 2019
The following table sets forth our results of operations for the years ended on December 31, 2020 and December 31, 2019, respectively (expressed in United Stated Dollars, except outstanding share numbers and percentages).
Increase
Percentage Increase
2020
2019
(Decrease)
(Decrease)
$
$
$
%
Service
-
16,204
(16,204)
(100%)
Royalty
2,112
892
1,220
>100%
Product
11,321
-
11,321
>100%
Total Revenues
13,433
17,096
(3,663)
(21%)
Research and development
14,533,862
10,363,253
4,170,609
40%
General and administrative
5,654,018
4,731,054
922,964
20%
Sales and marketing
1,073,368
965,713
107,655
11%
Total Operating Expenses
21,261,248
16,060,020
5,201,228
32%
Grant income
635,513
155,031
480,482
>100%
Gain on disposal of fixed assets
293,312
-
293,312
>100%
Interest income
49,495
112,367
(62,872)
(56%)
Interest expense
(129,799)
(126,572)
3,227
3%
Other expenses
-
(196,957)
(196,957)
(>100%)
Total Other Income (Expenses)
848,521
(56,131)
904,652
(>100%)
Net Loss
(20,399,294)
(16,099,055)
4,300,239
27%
Revenues
Our operations are still predominantly in the research and development stage and we had minimal revenues of $13,433 and $17,096 during the years ended December 31, 2020 and December 31, 2019, respectively.
Operating Expenses
Total operating expenses increased to $21.3 million from $16.1 million for the years ended December 31, 2020 and December 31, 2019, respectively, as a result of the factors described below.
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Research and Development Expenses
Research and development expenses increased to $14.5 million from $10.4 million for the years ended December 31, 2020 and December 31, 2019, respectively. The increase in overall research and development expenditures during 2020 was primarily related to higher antibody, sample, laboratory, personnel expenses and employee acquisition costs relating to Volition Germany.
2020
2019
Change
$
$
$
Personnel expenses
5,171,967
3,833,289
1,338,678
Stock based compensation
340,075
410,178
(70,103)
Direct research and development expenses
6,384,169
4,619,515
1,764,654
Other research and development
1,784,111
809,585
974,526
Depreciation and amortization
853,540
690,686
162,854
Total research and development expenses
14,533,862
10,363,253
4,170,609
General and Administrative Expenses
General and administrative expenses increased to $5.7 million from $4.7 million for the years ended December 31, 2020 and December 31, 2019, respectively. The increase in overall general and administrative expenditures during 2020 was primarily due to higher legal fees in connection with our capital raises and increased premiums for director and officer liability insurance.
2020
2019
Change
$
$
$
Personnel expenses
2,135,578
2,185,349
(49,771)
Stock-based compensation
887,181
868,762
18,419
Legal and professional fees
1,611,495
1,180,876
430,619
Other general and administrative
831,931
284,341
547,590
Depreciation and amortization
187,833
211,726
(23,893)
Total general and administrative expenses
5,654,018
4,731,054
922,964
Sales and Marketing Expenses
Sales and marketing expenses increased to $1.1 million from $1.0 million for the years ended December 31, 2020 and December 31, 2019, respectively. The increase in overall sales and marketing expenditures was primarily due to increased direct marketing and professional fees partially offset by lower personnel expenses.
2020
2019
Change
$
$
$
Personnel expenses
545,842
586,207
(40,365)
Stock-based compensation
164,236
188,173
(23,937)
Direct marketing and professional fees
363,290
191,333
171,957
Total sales and marketing expenses
1,073,368
965,713
107,655
Other Expenses
For the year ended December 31, 2020, other income increased to $848,521 compared to other expenses of $56,131 for the year ended December 31, 2019. This increase in other income was primarily due to grant income received and the gain on disposal of fixed assets from the sale of equipment during the year.
Net Loss
For the year ended December 31, 2020, the Company’s net loss was $20.4 million, an increase of approximately $4.3 million, in comparison to a net loss of $16.1 million for the year ended December 31, 2019. The change was a result of the factors described above.
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Going Concern
We have not attained profitable operations and are dependent upon obtaining external financing to continue to pursue our operational and strategic plans. For these reasons, management has determined that there is substantial doubt that the business will be able to continue as a going concern without further financing.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Future Equity or Debt Financings
We may seek to obtain additional capital through the sale of debt or equity securities if we deem it desirable or necessary. These sales may include the sale of equity securities from time to time through our “at the market offering program” with Cantor Fitzgerald & Co. and Oppenheimer & Co. Inc. under the Equity Distribution Agreement dated November 10, 2020 (see Note 7 of the Notes to the consolidated financial statements). However, we may be unable to obtain such additional capital when needed, or on terms favorable to us or our stockholders, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through the issuance of debt securities, the terms of such securities may place restrictions on our ability to operate our business.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, applied on a consistent basis. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies that we use to prepare our consolidated financial statements. A complete summary of these policies is included in the notes to our consolidated financial statements.
We consider the following accounting policies to be critical:
Stock-Based Compensation
The Company records stock-based compensation in accordance with ASC 718, “ Compensation – Stock Compensation”. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized over the employee’s requisite service period, which is generally the vesting period. The fair value of our stock options and warrants is estimated using a Black-Scholes option valuation model. Restricted stock units are valued based on the closing stock price on the date of grant (see Note 8 of the Notes to the consolidated financial statements).
Impairment of Long-Lived Assets
In accordance with ASC 360, “Property Plant and Equipment” , the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. Impairment losses of $nil and $nil were recognized during the years ended December 31, 2020 and December 31, 2019, respectively.
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Foreign Currency Translation
The Company has functional currencies in Euros, United States Dollars and British Pounds Sterling and its reporting currency is the United States Dollar. Management has adopted ASC 830-20, “ Foreign Currency Matters – Foreign Currency Transactions. ” All assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. For revenues and expenses, the weighted average exchange rate for the period is used. Gains and losses arising on translation of foreign currency denominated transactions are included in Other Comprehensive Income.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company also regularly evaluates estimates and assumptions related to deferred income tax asset valuation allowances, useful lives of property and equipment and intangible assets, borrowing rate used in operating lease right-of-use asset and liability valuations, impairment analysis of intangible assets and valuations of stock-based compensation.
The Company bases its estimates and assumptions on current facts, historical experiences, information from third party professionals and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations could be affected.
Recently Issued Accounting Pronouncements
The Company has implemented all applicable new accounting pronouncements that are in effect. The Company does not believe that there are any other applicable new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company and are not required to disclose this information.
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