Item 7. Management’s Discussion and Analysis
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, 2022 and 2021 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 powered by Nu.Q ® , its proprietary nucleosome quantification platform. Through its subsidiaries, Volition is developing simple, easy to use, cost-effective blood tests to help diagnose and monitor a range of life-altering diseases, including some cancers and diseases associated with NETosis, such as sepsis and COVID-19. Early diagnosis and monitoring have the potential to not only prolong the life of patients, but also improve their quality of life.
The tests are based on the science of Nucleosomics™, which is the practice of identifying and measuring nucleosomes in the bloodstream or other bodily fluids, since changes in these parameters are an indication that disease is present.
We have five key pillars of focus, all of which use the same proprietary Nu.Q ® platform to commercialize in different areas.
·
Nu.Q ® Vet - cost-effective, easy-to-use cancer screening blood test for dogs and other animals.
·
Nu.Q ® NETs - monitoring the immune system to save lives.
·
Nu.Q ® Cancer - detecting cancer early to save lives.
·
Nu.Q ® Capture - capturing and concentrating samples for more accurate diagnosis.
·
Nu.Q ® Discover - a complete solution to profiling nucleosomes.
Our research, product development and manufacturing activities are centered in Belgium, with innovation and U.S. operations in California, and additional offices in Nevada, London, and Singapore, where 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
Due to the continued evolution of the COVID-19 pandemic since March 2020, we cannot precisely determine or quantify the impacts the pandemic will have on our business, financial conditions or results of operations. For example, although we have worked with clinical trial sites impacted by the pandemic to ensure study continuity, we have experienced and may in the future experience disruptions that could impact our clinical trials, including delays in enrolling patients in clinical trials or in sample collection, and diversion of healthcare resources from the conduct of our clinical trials.
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The extent of the impact of the COVID-19 pandemic on our business remains uncertain and subject to change. If there is a subsequent outbreak of COVID-19 in the future, we may experience significant delays in our clinical development timelines, which would adversely affect our business, financial condition, and results of operations.
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, 2022, we had cash and cash equivalents of approximately $10.9 million.
Net cash used in operating activities was $15.3 million and $20.9 million for the years ended December 31, 2022 and December 31, 2021, respectively. The decrease in cash used in operating activities during 2022 when compared to 2021 was primarily due to a $10.0 million payment received pursuant to our master license and product supply agreement with Heska, partly offset by higher payroll costs, and higher amounts paid to suppliers during the period.
Net cash used in investing activities was $1.6 million and $1.0 million for the years ended December 31, 2022 and December 31, 2021, respectively. The increase in cash used in investing activities during 2022 was primarily due to an increase in purchases of laboratory equipment as compared to 2021.
Net cash provided by financing activities after associated costs was $6.9 million and $22.9 million for the years ended December 31, 2022 and December 31, 2021, respectively. The decrease in net cash provided by financing activities for the 2022, when compared to 2021 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, and an aggregate of $4.6 million in cash received from the issuance of shares of common stock under our “at-the-market” facilities during 2021.
This compares with $6.4 million in net cash received from the issuance of approximately 3.5 million shares of common stock in a registered public offering in August 2022 (before deducting offering expenses of $0.2 million paid by the Company), a $1.1 million loan received in August 2022 from Namur Invest Capital Risk ("Namur Invest"), a $0.5 million loan received in December 2022 from Namur Invest, and an aggregate of $0.8 million in cash received from the issuance of shares of common stock under our “at-the-market” facilities during 2022 (before deducting offering expenses of $0.2 million).
For additional information on our “at the market facilities,” 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, 2022.
Approximate Payments (Including Interest) Due by Year
Total
2023
2024 - 2027
2028 +
Description
$
$
$
$
Financing lease liabilities
541,162
57,726
230,902
252,534
Operating lease liabilities and short-term lease
696,702
291,868
404,834
-
Grants repayable
462,302
49,283
149,126
263,893
Long-term debt
4,319,826
1,268,528
2,604,499
446,799
Collaborative agreements obligations
879,805
798,032
81,773
-
Total
6,899,797
2,465,437
3,471,134
963,226
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 year ended December 31, 2022, 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, 2022 and December 31, 2021
The following table sets forth our results of operations for the years ended on December 31, 2022, and December 31, 2021, respectively (expressed in United Stated Dollars, except outstanding share numbers and percentages).
2022
$
2021
$
Increase
(Decrease)
$
Percentage Increase
(Decrease)
$
Royalty
2,911
-
2,911
>100 %
Service
92,488
-
92,488
>100 %
Product
210,993
90,035
120,958
>100 %
Total Revenues
306,392
90,035
216,357
>100 %
Research and development
14,572,532
13,022,411
1,550,121
12 %
General and administrative
10,937,686
11,676,446
(738,760 )
(6 %)
Sales and marketing
6,576,246
3,724,257
2,851,989
77 %
Total Operating Expenses
32,086,464
28,423,114
3,663,350
13 %
Grant income
1,229,425
1,522,533
293,108
(19 %)
Loss on disposal of fixed assets
-
(26,166 )
26,166
<(100 %)
Interest income
125,265
2,734
122,531
>100 %
Interest expense
(173,087 )
(155,803 )
17,284
11 %
Total Other Income (Expenses)
1,181,603
1,343,298
(161,695 )
(12 %)
Net Loss
(30,598,469 )
(26,989,781 )
3,608,688
13 %
Revenues
Our operations are still transitioning from a research and development stage to a commercialization stage. Revenue for the year ended December 31, 2022 was $306,392 compared with $90,035 for the year ended December 31, 2021. The main source of revenues during the year ended December 31, 2022, was product sales of the Nu.Q® Vet Cancer Test and services revenue from our Nu.Q ® Discover offering. The primary source of revenue during the year ended December 31, 2021, was direct sales of the Nu.Q ® Vet Cancer Test through the Gastrointestinal Laboratory at Texas A&M University.
Operating Expenses
Total operating expenses increased to $32.1 million from $28.4 million for the years ended December 31, 2022 and December 31, 2021, respectively, as a result of the factors described below.
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Research and Development Expenses
Research and development expenses increased to $14.6 million from $13.0 million for the years ended December 31, 2022 and December 31, 2021, respectively. The increase in overall research and development expenditures during 2022 was primarily related to higher personnel expenses offset by a reduction in stock-based compensation expenses. FTE personnel numbers within this division increased by six to sixty-three during 2022 compared to the prior year period.
2022
$
2021
$
Change
$
Personnel expenses
7,125,017
5,335,333
1,789,684
Stock based compensation
652,653
1,361,989
(709,336 )
Direct research and development expenses
5,662,957
5,055,411
607,546
Other research and development
292,292
730,491
(438,199 )
Depreciation and amortization
839,613
539,187
300,426
Total research and development expenses
14,572,532
13,022,411
1,550,121
General and Administrative Expenses
General and administrative expenses decreased to $10.9 million from $11.7 million for the years ended December 31, 2022 and December 31, 2021, respectively. The decrease in overall general and administrative expenditures during 2022 was primarily due to lower stock-based compensation in relation to modification of options, offset by higher personnel expenses. The FTE personnel number within this division increased by nine to twenty-two in 2022 compared to the prior year period.
2022
$
2021
$
Change
$
Personnel expenses
5,047,242
3,944,454
1,102,788
Stock-based compensation
1,393,784
2,984,253
(1,590,469 )
Legal and professional fees
2,715,255
2,696,164
19,091
Other general and administrative
1,486,722
1,477,186
9,536
Depreciation and amortization
294,683
574,389
(279,706 )
Total general and administrative expenses
10,937,686
11,676,446
(738,760 )
Sales and Marketing Expenses
Sales and marketing expenses increased to $6.6 million from $3.7 million for the years ended December 31, 2022 and December 31, 2021, 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 six to nineteen in 2022 compared to the prior year period.
2022
$
2021
$
Change
$
Personnel expenses
4,400,092
2,203,745
2,196,347
Stock-based compensation
1,068,222
774,404
293,818
Other Sales & Marketing expenses
1,053,807
746,108
307,699
Depreciation and amortization
54,125
-
54,125
Total sales and marketing expenses
6,576,246
3,724,257
2,851,989
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Other Income (Expenses)
For the year ended December 31, 2022, other income decreased to approximately $1.2 million compared to other income of approximately $1.3 million for the year ended December 31, 2021. This decrease in other income was primarily due to reduced grant income received of approximately $1.2 million during 2022 compared to $1.5 million in 2021.
Net Loss
For the year ended December 31, 2022, the Company’s net loss was $30.6 million, an increase of approximately $3.6 million, in comparison to a net loss of $27.0 million for the year ended December 31, 2021. 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 facility” with Jefferies LLC under an equity distribution agreement dated May 20, 2022 (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:
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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, “Prop erty 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, 2022 and December 31, 2021, 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.
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