VOLITIONRX LTD 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements in Part II within this Report. This discussion includes an analysis of our financial condition and results of operations for the years ended December 31, 2021 and 2020 and year-over-year comparisons between those periods. Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. For additional information, refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Report. Company Overview Volition is a multi-national epigenetics company that applies its Nucleosomics™ platform through its subsidiaries to develop simple, easy to use, cost-effective blood tests to help diagnose and monitor a range of life-altering diseases including certain cancers and diseases associated with NETosis such as sepsis and COVID-19. Our mission is to save lives and improve outcomes for millions of people and animals worldwide. Early diagnosis and monitoring have the potential to not only prolong the life of patients, but also to improve their quality of life. Our tests are based on the science of Nucleosomics™, which is the practice of identifying and measuring nucleosomes in the bloodstream or other bodily fluid - an indication that disease is present. We are primarily focused on human diagnostics and monitoring but also have a subsidiary focused on animal diagnostics and monitoring. We have five key pillars of focus: Nu.Q ® , Nu.Q ® NETs, Nu.Q ® Capture, Nu.Q ® Discover and Nu.Q ® Vet, all of which use the same proprietary Nu.Q ® platform to commercialize in different areas. Our research and development activities are centered in Belgium, with an innovation laboratory in California, and additional offices in Texas, London, and Singapore, we focus on bringing our diagnostic and disease monitoring products to market. 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 Throughout 2020 and 2021, in response to the COVID-19 pandemic we implemented contingency planning to protect the health and well-being of our employees, with the majority of our employees 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. As a result of the COVID-19 pandemic, we have experienced and may continue to experience disruptions that could impact our clinical trials, including: · delays in enrolling patients in clinical trials; · delays in sample collection; and · diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as clinical trial sites and hospital staff supporting the conduct of our clinical trials. 30 Table of Contents The extent to which the COVID-19 pandemic will impact our business, financial condition, and results of operations in the future is highly uncertain and will be affected by a number of factors. These include the duration and extent of the COVID-19 pandemic, the development of new variants of the COVID-19 virus that may be more contagious or virulent than previous versions, the scope of mandated or recommended containment and mitigation measures, the effect of government stabilization and recovery efforts, and the success of vaccine distribution programs. 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, 2021, we had cash and cash equivalents of approximately $20.6 million. Net cash used in operating activities was $20.9 million and $16.5 million for the years ended December 31, 2021 and December 31, 2020, respectively. The increase in cash used in operating activities during 2021 when compared to 2020 was primarily due to increased payroll costs reflecting growth in staff numbers, higher legal and professional fees in relation to a registered public offering and an increase in marketing expenses. Net cash used in investing activities was $1.0 million and $1.6 million for the years ended December 31, 2021 and December 31, 2020, respectively. The decrease in cash used in investing activities during 2021 was primarily due to a reduction in purchases of laboratory equipment as compared to 2020. Net cash provided by financing activities after associated costs was $22.9 million and $20.6 million for the years ended December 31, 2021 and December 31, 2020, respectively. The increase in cash provided by financing activities for the 2021, when compared to 2020 was primarily due to $18.9 million in net cash received from the issuance of shares of common stock in a registered public offering in February 2021, $1.2 million in cash received from the issuance of shares of common stock pursuant to the 2018 Equity Distribution Agreement, $2.7 million in cash received from the issuance of shares of common stock pursuant to the 2020 Equity Distribution Agreement and $0.7 million in cash received from the issuance of shares of common stock pursuant to the 2021 Equity Distribution Agreement compared to $12.7 million in net cash received from the issuance of shares of common stock in a registered public offering in May 2020 and $6.5 million in cash received from the issuance of shares of common stock pursuant to the 2018 Equity Distribution Agreement. For additional information on the “at the market offering program,” refer to Note 7, Common Stock – Equity Distribution Agreements, of the Notes to consolidated financial statements. The following table summarizes our approximate contractual payments due by year as of December 31, 2021. Approximate Payments (Including Interest) Due by Year Total 2022 2023 - 2026 2027 + Description $ $ $ $ Financing lease liabilities 636,265 62,620 244,762 328,883 Operating lease liabilities and short term lease 438,452 216,850 221,602 - Grants repayable 296,321 44,289 108,156 143,876 Long-term debt 3,433,450 926,743 1,893,175 613,532 Collaborative agreements obligations 813,501 813,501 - - Total 5,617,989 2,064,003 2,467,695 1,086,291 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 or distribution 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, 2021, an explanatory paragraph regarding factors that raise substantial doubt that we will be able to continue as a going concern. 31 Table of Contents Results of Operations Comparison of the Years Ended December 31, 2021 and December 31, 2020 The following table sets forth our results of operations for the years ended on December 31, 2021, and December 31, 2020, respectively (expressed in United Stated Dollars, except outstanding share numbers and percentages). Increase Percentage Increase 2021 2020 (Decrease) (Decrease) $ $ $ % Royalty - 2,112 (2,112 ) >100 % Product 90,035 11,321 78,714 >100 % Total Revenues 90,035 13,433 76,602 >100 % Research and development 15,541,889 14,533,862 1,008,027 7 % General and administrative 8,751,392 5,654,018 3,097,374 55 % Sales and marketing 4,129,833 1,073,368 3,056,465 >100 % Total Operating Expenses 28,423,114 21,261,248 7,161,866 34 % Grant income 1,522,533 635,513 887,020 >100 % (Loss)/Gain on disposal of fixed assets (26,166 ) 293,312 319,478 <100 % Interest income 2,734 49,495 (46,761 ) (94 %) Interest expense (155,803 ) (129,799 ) 26,004 20 % Total Other Income (Expenses) 1,343,298 848,521 494,777 58 % Net Loss (26,989,781 ) (20,399,294 ) 6,590,487 32 % Revenues Our operations are still predominantly in the research and development stage and we had minimal revenues of $90,035 and $13,433 during the years ended December 31, 2021 and December 31, 2020, respectively. The main source of revenues during the year ended December 31, 2021 was direct sales of the Nu.Q® Vet Cancer Screening Test via the Gastrointestinal Laboratory at Texas A&M University. Operating Expenses Total operating expenses increased to $28.4 million from $21.3 million for the years ended December 31, 2021 and December 31, 2020, respectively, as a result of the factors described below. 32 Table of Contents Research and Development Expenses Research and development expenses increased to $15.5 million from $14.5 million for the years ended December 31, 2021 and December 31, 2020 respectively. The increase in overall research and development expenditures during 2021 was primarily related to higher personnel expenses and stock-based compensation partially offset by lower research collaboration and antibody costs together with increased laboratory costs. FTE personnel numbers within this division increased by ten to fifty seven during 2021 compared to the prior year period. 2021 2020 Change $ $ $ Personnel expenses 6,405,197 5,171,967 1,233,230 Stock based compensation 1,361,989 340,075 1,021,914 Direct research and development expenses 5,517,082 6,384,169 (867,087 ) Other research and development 1,288,467 1,784,111 (495,644 ) Depreciation and amortization 969,154 853,540 115,614 Total research and development expenses 15,541,889 14,533,862 1,008,027 General and Administrative Expenses General and administrative expenses increased to $8.8 million from $5.7 million for the years ended December 31, 2021 and December 31, 2020, respectively. The increase in overall general and administrative expenditures during 2021 was primarily due to higher personnel expenses, stock-based compensation, director and officer liability insurance and legal fees in connection with our capital raises. The FTE personnel number within this division increased by three to thirteen in 2021 compared to the prior year period. 2021 2020 Change $ $ $ Personnel expenses 2,723,604 2,135,578 588,026 Stock-based compensation 2,984,253 887,181 2,097,072 Legal and professional fees 1,766,377 1,611,495 154,882 Other general and administrative 1,148,133 831,931 316,202 Depreciation and amortization 129,025 187,833 (58,808 ) Total general and administrative expenses 8,751,392 5,654,018 3,097,374 Sales and Marketing Expenses Sales and marketing expenses increased to $4.1 million from $1.1 million for the years ended December 31, 2021 and December 31, 2020, respectively. The increase in overall sales and marketing expenditures was primarily due to increased personnel expenses, stock-based compensation and direct marketing expenses. The FTE personnel number within this division increased by ten to thirteen in 2021 compared to the prior year period. 2021 2020 Change $ $ $ Personnel expenses 2,354,732 545,842 1,808,890 Stock-based compensation 774,404 164,236 610,168 Direct marketing and professional fees 1,000,697 363,290 637,407 Total sales and marketing expenses 4,129,833 1,073,368 3,056,465 33 Table of Contents Other Income (Expenses) For the year ended December 31, 2021, other income increased to approximately $1.3 million compared to other income of approximately $0.8 million for the year ended December 31, 2020. This increase in other income was primarily due to grant income received of approximately $1.5 million during 2021. Net Loss For the year ended December 31, 2021, the Company’s net loss was $27.0 million, an increase of approximately $6.6 million, in comparison to a net loss of $20.4 million for the year ended December 31, 2020. The change was a result of the factors described above. 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 and Co. Inc. under the 2021 Equity Distribution Agreement (see Note 7, Common Stock – Equity Distribution Agreements, of the Notes to 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 and Estimates Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles, (“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 also regularly evaluate 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. We base our 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. Actual results may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations could be affected. 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 have determined that for the periods reported in this Report the following accounting policies are critical in understanding our financial condition and results of operations: 34 Table of Contents 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, refer to Note 8 of the consolidated financial statements for further details. 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, 2021 and December 31, 2020, respectively. Foreign Currency Translation The Company has functional currencies in Euros, U.S. Dollars and British Pounds Sterling and its reporting currency is the U.S. 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. 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. 35 Table of Contents