Allarity Therapeutics, Inc 10-Q for FY2022 Q3
Allarity Therapeutics, Inc. (ALLR)
About this 10-Q
Allarity Therapeutics, Inc filed this 10-Q on November 14, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net loss
- $5.04M
- compared with a net loss of $1.35M a year earlier
- Diluted EPS
- -$0.68
- compared with -$0.17 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the Quarterly Period Ended
Commission File Number:
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction Of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 14, 2022, the registrant had
Table of Contents
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Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “Allarity,” “we,” “us,” “our” and similar terms refer to Allarity Therapeutics, Inc., Allarity Therapeutics A/S (as predecessor) and its respective consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this report other than statements of historical fact are forward-looking statements for purposes of these provisions, including any statements of the Company’s plans and objectives for future operations, the Company’s future financial or economic performance (including known or anticipated trends), and the assumptions underlying or related to the foregoing. Statements that include the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” or “continue,” or the negative thereof, or other comparable terminology, are forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K (“Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on May 17, 2022. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. You should read these factors and the other cautionary statements made in this report as being applicable to all related forward-looking statements wherever they appear in this report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements.
Any forward-looking statements contained in this Quarterly Report are only estimates or predictions of future events based on information currently available to our management and management’s current beliefs about the potential outcome of future events. Whether these future events will occur as management anticipates, whether we will achieve our business objectives, and whether our revenues, operating results or financial condition will improve in future periods are subject to numerous risks. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss under the heading “Risk Factors” in this Quarterly Report and in other reports filed from time to time with the SEC. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements.
All forward-looking statements and descriptions of risks included in this report are made as of the date hereof based on information available to the Company as of the date hereof, and except as required by applicable law, the Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult the risks and other disclosures described in the reports the Company files from time to time with the SEC after the date of this report for updated information.
ii
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ALLARITY THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except for share and per share data)
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Other current assets | ||||||||
| Prepaid expenses | ||||||||
| Tax credit receivable | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Investment in Lantern Pharma Inc. stock | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right of use assets | ||||||||
| Intangible assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Income taxes payable | ||||||||
| Operating lease liabilities, current | ||||||||
| Derivative liabilities | ||||||||
| Warrant liability | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Convertible promissory note and accrued interest, net | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Deferred tax | ||||||||
| Derivative liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 19) | ||||||||
| Redeemable convertible preferred stock | ||||||||
| Series A Convertible Preferred stock $ | ||||||||
| Stockholders’ equity | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities, redeemable convertible preferred stock and stockholders’ equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
1
ALLARITY THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(U.S. dollars in thousands, except for share and per share data)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| Impairment of intangible assets | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Income from sale of IP | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Finance expense | ( | ) | ||||||||||||||
| Loss on investment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign exchange gains (losses) | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in fair value adjustment of derivative and warrant liabilities | ||||||||||||||||
| Penalty on Series A Preferred stock liability | ( | ) | ||||||||||||||
| Loss on extinguishment of convertible debt | ( | ) | ||||||||||||||
| Change in fair value of convertible debt | ( | ) | ||||||||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Net loss for the period before tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Deemed dividend of | ( | ) | ||||||||||||||
| Cash obligations on converted Series A Preferred stock | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Other comprehensive loss, net of tax: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Change in cumulative translation adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value attributable to instrument specific credit risk | ( | ) | ||||||||||||||
| Comprehensive loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to condensed consolidated financial statements.
2
ALLARITY THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(Unaudited)
(U.S. dollars in thousands, except for share data)
| Series
A Convertible Preferred Stock | Common Stock | Additional Paid in | Obligation to Issue | Accumulated Other Comprehensive | (Accumulated | Total Stockholder’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Income | Deficit) | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Debt conversion | ||||||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Fair value of instrument specific Credit risk | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | ( | ) | ||||||||||||||||||||||||||||||||||
| Debt conversion | — | |||||||||||||||||||||||||||||||||||
| Units issued for cash | — | |||||||||||||||||||||||||||||||||||
| Warrants exercised for cash | — | — | ||||||||||||||||||||||||||||||||||
| Fair value of investor warrants (TO3) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Share issuance costs | — | — | ( | ) | ||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Fair value of instrument specific credit risk | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | ( | ) | ||||||||||||||||||||||||||||||||||
| Shares issued for cash on exercise of warrants | — | |||||||||||||||||||||||||||||||||||
| Units issued for share issuance costs | — | ( | ) | |||||||||||||||||||||||||||||||||
| Share issuance costs | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Stock based compensation | — | |||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
3
ALLARITY THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(Unaudited)
(U.S. dollars in thousands, except for share data)
| Series A Convertible Preferred Stock | Common Stock | Additional Paid in | Accumulated Other Comprehensive | (Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income | Deficit) | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Conversion of preferred stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Floor price liability | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Reclassification of derivative liabilities related to converted preferred stock | — | — | ||||||||||||||||||||||||||||||
| Deemed dividend of 8% on preferred stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Conversion of preferred stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Floor price liability | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Reclassification of derivative liabilities related to converted preferred stock | — | — | ||||||||||||||||||||||||||||||
| Stock based compensation, net | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Conversion of preferred stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Floor price liability | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Reclassification of derivative liabilities related to converted preferred stock | — | — | ||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
ALLARITY THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
| Nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Proceeds from sale of IP | ( | ) | ( | ) | ||||
| Penalty on Series A Preferred stock liability | ||||||||
| Depreciation and amortization | ||||||||
| Intangible asset impairment | ||||||||
| Stock-based compensation | ||||||||
| Unrealized foreign exchange loss | ||||||||
| Non-cash finance expense | ||||||||
| Non-cash interest | ||||||||
| Loss on investment | ||||||||
| Change in fair value adjustment of convertible debt | ||||||||
| Loss on extinguishment of convertible debt | ||||||||
| Change in fair value adjustment of warrant and derivative liabilities | ( | ) | ( | ) | ||||
| Deferred income taxes | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Other current assets | ( | ) | ||||||
| Tax credit receivable | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities | ( | ) | ||||||
| Income taxes payable | ||||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from sale of IP | ||||||||
| Net cash provided by investing activities | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Line of credit | ( | ) | ||||||
| Cash paid in connection with conversion of Series A Preferred Stock | ( | ) | ||||||
| Penalty on Series A preferred stock liability | ( | ) | ||||||
| Proceeds from common share issuance | ||||||||
| Proceeds from exercised warrants | ||||||||
| Common share issuance costs | ( | ) | ||||||
| Proceeds from convertible loan | ||||||||
| Loan proceeds | ||||||||
| Repayment of loan | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental information | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Offset of payable against receivable from sale of IP | $ | $ | ||||||
| Conversion of Series A Convertible Preferred stock to equity | $ | $ | ||||||
| Deemed | $ | $ | ||||||
| Conversion of convertible debt to common shares | $ | $ | ||||||
| Conversion of investor warrants | $ | $ | ||||||
| Conversion of derivative liability to equity | $ | $ | ||||||
| Non-cash share issuance costs | $ | $ | ||||||
| Common shares issued to settle accounts payable | $ | $ | ||||||
| Right of use asset modification | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(U.S. dollars in thousands, except for share and per share data and where otherwise noted)
| 1. | Organization, Principal Activities, and Basis of Presentation |
Allarity Therapeutics, Inc. and Subsidiaries (the “Company”) is a clinical stage pharmaceutical company that develops drugs for the personalized treatment of cancer using drug specific companion diagnostics (cDx) generated by its proprietary drug response predictor technology, DRP®. Additionally, the Company, through its Danish subsidiary, Allarity Therapeutics Europe ApS (previously Oncology Venture Product Development ApS), specializes in the research and development of anti-cancer drugs.
The Company’s principal operations are located at Venlighedsvej 1, 2970 Horsholm, Denmark. The Company’s United States operations are located at 210 Broadway #201, Cambridge, MA 012139, United States of America.
| (a) | Liquidity and Going Concern |
The accompanying consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The accompanying financial statements do not reflect any adjustments relating to the recoverability and reclassifications of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.
Pursuant to the requirements
of Accounting Standard Codification (ASC) 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt
about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been
fully implemented as of the date of these financial statements, and (1) is probable that the plan will be effectively implemented
within
Since inception, the Company has devoted substantially all its efforts to business planning, research and development, clinical expenses, recruiting management and technical staff, and securing funding via collaborations. The Company has historically funded its operations with proceeds received from its collaboration arrangements, sale of equity capital and proceeds from sales of convertible notes.
The Company has incurred
significant losses and has an accumulated deficit of $
Management’s plans to mitigate the conditions or events that raise substantial doubt include additional funding through public equity, private equity, debt financing, collaboration partnerships, or other sources. There are no assurances, however, that the Company will be successful in raising additional working capital, or if it is able to raise additional working capital, it may be unable to do so on commercially favorable terms. The Company’s failure to raise capital or enter into other such arrangements if and when needed would have a negative impact on its business, results of operations and financial condition and its ability to develop its product candidates.
6
Although management continues to pursue its funding plans, there is no assurance that the Company will be successful in obtaining sufficient funding to fund continuing operations on terms acceptable to the Company, if at all. Accordingly, based upon cash on hand at the issuance date of these financial statements the Company does not have sufficient funds to finance its operations for at least twelve months from the issuance date and therefore has concluded that substantial doubt exists about the Company’s ability to continue as a going concern.
| (b) | Basis of Presentation |
The accompanying unaudited condensed interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) as established by the Financial Accounting Standards Board (the “FASB”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”).
The accompanying unaudited condensed interim consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated balance sheet, results of operations and comprehensive loss, statements of changes in redeemable convertible preferred stock and stockholders’ equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the three and nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the current year ending December 31, 2022. The financial data presented herein should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the years ended December 31, 2021, and 2020 thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 17, 2022.
The preparation of these unaudited condensed interim 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 as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The results of operations and cash flows for the interim periods included in these condensed consolidated financial statements are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
These condensed consolidated financial statements and notes do not include all disclosures required by U.S. GAAP and should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2021, and the notes.
| (c) | Principles of Consolidation |
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries:
| Name | Country of Incorporation | |
| Allarity Acquisition Subsidiary Inc. | United States | |
| Allarity Therapeutics Europe ApS (formerly Oncology Venture Product Development ApS) | Denmark | |
| Allarity Therapeutics Denmark ApS (formerly OV-SPV2 ApS) | Denmark | |
| MPI Inc. | United States | |
| Oncology Venture US Inc. | United States |
All intercompany transactions and balances have been eliminated upon consolidation.
7
| (d) | Risks and Uncertainties |
The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel and collaboration partners, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations, and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. Even if the Company’s research and development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
The extent of the impact and effects of the coronavirus (COVID-19) on the operation and financial performance of the Company’s business will depend on future developments, including the duration and spread of the outbreak and varying virus mutations, related travel advisories and restrictions, the recovery time of disrupted research services, the consequential staff shortages, and research and development delays, or the uncertainty with respect to the accessibility of additional liquidity or capital markets, all of which are highly uncertain and cannot be predicted. If the Company’s operations are impacted by the outbreak for an extended period, the Company’s results of operations or liquidity may be materially adversely affected.
| (e) | Impact of the Russia-Ukraine War |
There have been immense flows of refugees to Europe and Denmark is ready to facilitate and to accept refugees from the Ukraine. It is far too early to estimate how many migrants Denmark will facilitate, but immigration officials have begun preparing to accept Ukrainian refugees. Being a North Atlantic Treaty Organization (NATO) member, Denmark will strengthen its own national preparedness as well as that of the NATO defense alliance. The Ukraine crisis has not yet had an impact on our results of operations however we expect it may have an impact on the costs of materials we purchase for our laboratory operations in Denmark but, we cannot predict the impact now.
| (f) | Reclassification |
Certain amounts in prior periods financial statements have been reclassified to conform to current period presentation.
| 2. | Summary of Significant Accounting Policies |
| (a) | Use of Estimates and Assumptions |
The preparation of financial statements in conformity with 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting years. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the fair value of the Series A preferred shares, warrants, convertible debt, and the accrual for research and development expenses, fair values of acquired intangible assets and impairment review of those assets, share based compensation expense, and income tax uncertainties and valuation allowances. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. Estimates are periodically reviewed considering reasonable changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known and if material, their effects are disclosed in the notes to the condensed consolidated financial statements. Actual results could differ from those estimates or assumptions.
8
| (b) | Foreign currency and currency translation |
The functional currency is the currency of the primary economic environment in which an entity’s operations are conducted. The Company and its subsidiaries operate mainly in Denmark and the United States. The functional currencies of the Company’s subsidiaries are their local currency.
The Company’s reporting currency is the U.S. dollar. The Company translates the assets and liabilities of its Denmark subsidiaries into the U.S. dollar at the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at the average exchange rate in effect during each monthly period. Unrealized translation gains and losses are recorded as a cumulative translation adjustment, which is included in the condensed consolidated statements of changes in redeemable convertible preferred stock and stockholders’ equity as a component of accumulated other comprehensive (loss).
| (c) | Concentrations of credit risk and of significant suppliers |
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash. The Company maintains its cash in financial institutions in amounts that could exceed government-insured limits. The Company does not believe it is subject to additional credit risks beyond those normally associated with commercial banking relationships. The Company has not experienced losses on its cash accounts and management believes, based upon the quality of the financial institutions, that the credit risk regarding these deposits is not significant. The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply its requirements for supplies and raw materials related to these programs. These programs could be adversely affected by a significant interruption in these manufacturing services or the availability of raw materials.
| (d) | Cash |
Cash consists primarily of highly liquid investments with original maturities of three months or less at date of purchase to be cash equivalents. The Company had no cash equivalents or restricted cash on September 30, 2022 and December 31, 2021.
| (e) | Impairment of long-lived assets |
Long-lived assets consist of property, plant and equipment, and intangible assets. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. An impairment loss would be recognized as a loss from operations when estimated undiscounted future cash flows expected to result from the use of an asset group or the estimated return on investment are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flow or return on investment calculations.
9
| (f) | Accumulated other comprehensive loss |
Accumulated other comprehensive
loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events
other than those with stockholders. The Company records unrealized gains and losses related to foreign currency translation and instrument
specific credit risk as components of other accumulated comprehensive loss in the Condensed Consolidated Statements of Operations and
Comprehensive Loss. During the three months ended September 30, 2022 and 2021, the Company recorded accumulated foreign currency translation
losses of ($
| (g) | Contingencies |
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. At each reporting date, the Company evaluates whether a potential loss amount or a potential loss range is probable and reasonably estimable under the provisions of the authoritative guidelines that address accounting for contingencies. The Company expenses costs as incurred in relation to such legal proceedings as general and administrative expense within the condensed consolidated statements of operations and comprehensive loss.
| (h) | JOBS Act accounting election |
The Company is an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies; however, the Company may adopt new or revised accounting standards early if the standard allows for early adoption.
| (i) | Recently adopted accounting pronouncements |
In May 2021, the FASB issued ASU No. 2021-04 — Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options — to clarify the accounting by issuers for modifications or exchanges of equity-classified written call options. The framework applies to freestanding written call options, such as warrants, that were and remain equity classified by the issuer after the modification and are not in the scope of another Codification Topic. The framework applies regardless of whether the modification is through an amendment to the existing terms or issuance of a replacement warrant. The effect of the modification of the warrant is measured as the difference in its fair value immediately before and after the modification. The effect is recognized in the same manner as if cash had been paid as consideration. Additionally, other modifications may need to be accounted for as a cost to the issuing entity based on the substance of the transaction. The Company is required to apply the amendments within this ASU prospectively to modifications or exchanges occurring on or after the effective date of the amendment. The Company adopted this ASU on January 1, 2022, with no significant impact on its condensed consolidated financial statements and related disclosures.
In November 2021, the FASB issued ASU 2021-10 — Government Assistance — Disclosures by Business Entities about Government Assistance — to require disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about (1) the types of transactions, (2) the accounting for the transactions, and (3) the effect of the transactions on an entity’s financial statements. The ASU is effective prospectively or retrospectively for annual periods beginning after December 15, 2021, with early adoption permitted. The Company adopted this ASU on January 1, 2022, with no significant impact on its condensed consolidated financial statements and related disclosures.
10
| (j) | Recently Issued Accounting Pronouncements |
Changes to GAAP are established the FASB in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. All other ASUs issued through the date of these financial statements were assessed and determined not to be applicable or are expected to have minimal impact on the Company’s condensed consolidated financial position and results of operations.
| 3. | Other Current Assets |
The Company’s other current assets are comprised of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Deposits | $ | $ | ||||||
| Salary deposit | ||||||||
| Value added tax (“VAT”) receivable | ||||||||
| Other | ||||||||
| Net other current assets | $ | $ | ||||||
| 4. | Prepaid Expenses |
| September 30, 2022 | December 31, 2021 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Other prepayments | ||||||||
| $ | $ | |||||||
| 5. | Investment |
The Company owned
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Opening balance | $ | $ | ||||||
| Less receipt of sale proceeds, net | ( | ) | ||||||
| Loss recognition | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
11
| 6. | Property, plant and equipment, net |
Property, plant and equipment, net consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Laboratory equipment | $ | $ | ||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation expense for
property, plant and equipment and right of use assets for the nine months ended September 30, 2022, and September 30, 2021
was $
| 7. | Intangible assets |
Intangible assets, net of accumulated amortization, impairment charges and adjustments are summarized as follows:
| IPR&D Assets | ||||
| Opening balance, December 31, 2021 | $ | |||
| Impairment recognized during the period | ( | ) | ||
| Foreign translation adjustment | ( | ) | ||
| Ending balance, September 30, 2022 | $ | |||
| IPR&D Assets | Acquired Patents | |||||||
| Opening balance, December 31, 2020 | $ | $ | ||||||
| Impairment recognized during the year | ( | ) | ||||||
| Accumulated amortization | ( | ) | ||||||
| Ending balance, December 31, 2021 | $ | $ | ||||||
As a result of both the Company’s
February 15, 2022, receipt of a Refusal to File (“RTF”) from the U.S. Food and Drug Administration regarding the Company’s
new drug application (“NDA”) for Dovitinib, and the current depressed state of the Company’s stock price, the Company
performed an impairment assessment on its individual intangible assets during the period ended March 31, 2022 utilizing a discounted cash
flow model with a weighted average cost of capital (“WACC”) of
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Stenoparib | $ | $ | ||||||
| Dovitinib | ||||||||
| Total | $ | $ | ||||||
| 8. | Accrued liabilities |
The Company’s accrued liabilities are comprised of the following:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| 3i LP floor price liability | $ | $ | ||||||
| Milestone liabilities | ||||||||
| Consultants | ||||||||
| Development cost liability | ||||||||
| Payroll accruals | ||||||||
| Accrued Board member fees | ||||||||
| Accrued audit and legal | ||||||||
| Other | ||||||||
| $ | $ | |||||||
12
9. Convertible promissory note
On April 12, 2022, Allarity
Therapeutics Denmark ApS (formerly OV-SPV2 ApS) (“Allarity Denmark” or “OV-SPV2 ApS”), a subsidiary of Allarity
Therapeutics Europe ApS (“Allarity Europe”), which is a wholly-owned subsidiary of Allarity Therapeutics, Inc., re-issued
a Convertible Promissory Note (the “Promissory Note”) to Novartis Pharma AG, a company organized under the laws of Switzerland
(“Novartis,” and together with Allarity Europe, the “License Parties”) in the principal amount of $
In consideration of the licenses
and rights granted, Allarity Europe paid Novartis a one-time, non-refundable, non-creditable upfront payment consisting of $
The Promissory Note pays
simple interest on the outstanding principal amount from the date until payment in full, which interest shall be payable at the rate of
five percent (
As the Promissory Note was
assumed in connection with the 2018 Merger, the Company recognized the Promissory Note and related accrued interest at its fair value,
based upon an equivalent market interest rate of
The Company evaluated the Promissory Note under ASC 480 and ASC 815 and the identified embedded features inclusive of: (1) conversion upon an IPO; (2) mandatory redemption upon a change of control; and (3) mandatory redemption in the event of default; to determine if bifurcation is required pursuant to ASC 815-15-25-1. The Promissory Note is a freestanding instrument that is convertible into shares of the OV-SPV2 ApS’ common (or preferred, as the case may be) equity. The Promissory Note was not issued in conjunction with any other instrument meaning that the Promissory Note meets the definition of a freestanding instrument. Since the conversion feature meets the definition of a derivative it was evaluated for bifurcation and management determined the conversion feature requires bifurcation but because the value is not material the conversion feature has not been bifurcated at this time. The Company will continue to monitor for changes in specific facts and circumstances which may impact the conclusions reached herein.
13
During the nine-month
periods ended September 30, 2022 and 2021, the Company recorded $
| September 30, 2022 | December 31, 2021 | |||||||
| Convertible promissory note | $ | $ | ||||||
| Less debt discount, opening | ( | ) | ( | ) | ||||
| Plus, accretion of debt discount, interest expense | ||||||||
| Convertible promissory note, net of discount | ||||||||
| Interest accretion, opening | ||||||||
| Interest accretion, expense | ||||||||
| Ending balance | $ | $ | ||||||
| 10. | Convertible debt |
On March 31, 2020 the Company
entered into an agreement to issue up to $
The Company determined the
fair value of the Notes using a discounted cash flow valuation technique with a WACC of
The roll forward of the Notes for the period ended September 30, 2021, is as follows:
| September 30, 2021 | ||||
| Opening fair value | $ | |||
| Convertible debt issued in the period | ||||
| Change in fair value reported in statement operations | ||||
| Foreign exchange | ( | ) | ||
| Conversion of notes to common stock | ( | ) | ||
| Ending fair value balance at September 30, 2021 | $ | |||
An effective interest rate determines the fair value of the Notes. The notes are unlisted and therefore, they are categorized as Level 3 in accordance with ASC 820, “Fair Value Measurements and Disclosures.” The Notes were fully converted to shares during the period ended September 30, 2021.
| 11. | Series A Preferred Stock and Common Stock Purchase Warrants |
(a) Series A Preferred Stock Terms
On May 20, 2021, we entered
into a Securities Purchase Agreement (the “SPA”) with 3i, LP, a Delaware limited partnership (“3i”) for the purchase
and sale of
14
All shares of capital stock are junior in rank to all Series A Preferred Stock with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company.
The Series A Preferred Stock has a liquidation preference equal to an amount per Series A Preferred Stock equal to the sum of (i) the Black Scholes Value (as defined in the Warrants, which was sold concurrent with the Series A Preferred Stock) with respect to the outstanding portion of all Warrants held by such holder (without regard to any limitations on the exercise thereof) as of the date of such event and (ii) the greater of (A) 125% of the Conversion Amount of such Series A Preferred Stock on the date of such payment and (B) the amount per share such holder would receive if such holder converted such Series A Preferred Stock into common stock immediately prior to the date of such payment, and will be entitled to convert into shares of common stock at an initial fixed conversion price of $9.9061 per share, subject to a beneficial ownership limitation of 4.99% which can be adjusted to a beneficial ownership limitation of 9.99% upon sixty-one (61) days’ prior written notice.
Under the terms of the COD, the initial fixed conversion price of the Series A Preferred Stock is $9.9061, subject to adjustment. In the event that (i) the average of the VWAP of the Company’s shares for each of the five (5) trading days immediately preceding the date of delivery is less than the fixed conversion price of $9.9061 (a “Price Failure”), or (ii) the sum of (x) the aggregate daily dollar trading volume (as reported on Bloomberg) of our common stock on Nasdaq during the ten (10) trading day period ending on the trading day immediately preceding such date of determination, divided by (y) ten (10), is less than $1,500 (a “Volume Maximum Failure”), each share of Series A Preferred Stock is entitled to convert at a price equal to 90% of the sum of the two (2) lowest VWAPs during the ten (10) trading day period immediately preceding the date of delivery divided by two (2) (the “90% Conversion Price”), but not less than the Floor Price (as defined in the COD), or, at the time of such Price Failure or Volume Maximum Failure, the sum of the average daily U.S. Dollar volume for our common stock during the ten (10) days previous to conversion divided by ten (10) is less than $2 million then each share of Series A Preferred Stock is entitled to convert at the lower of the fixed conversion price or a price equal to 80% of the sum of the two (2) lowest VWAPs during the ten (10) trading day period immediately preceding delivery divided by two (2) (the “80% Conversion Price”), but not less than the Floor Price (such 80% Conversion Price or 90% Conversion Price, as the case may be, the “Alternate Conversion Price”).
In addition, the COD and the Warrant provides for an adjustment to the conversion price and exercise of the Warrant in the event of a “new issuance” of our common stock, or common stock equivalents, at a price less than the applicable conversion price of the Series A Preferred Stock or exercise price of the Warrant. The adjustment is a “full ratchet” adjustment in the conversion price of the Series A Preferred Stock and the exercise price of the Warrant equal to the lower of the new issuance price or the then existing conversion price of the Series A Preferred Stock or exercise price of Warrant, with few exceptions. Furthermore, if we fail to maintain an adequate number of authorized and unissued shares of our common stock in reserve and we are unable to deliver shares or our common stock upon conversion of the Preferred Stock, we may be required to redeem the shares we were unable to deliver at a price equal to the highest closing price of our common stock during the time between the failure to deliver shares of our common stock and the redemption date.
If certain defined “triggering
events” defined in the COD occur, such as a breach of the Registration Rights Agreement (specifically the Company’s Form S-1
as filed on SEC Edgar on September 13, 2021 and subsequently amended), suspension of trading, or our failure to convert the Series A Preferred
Stock into common stock when a conversion right is exercised, failure to issue our common stock when the Warrant is exercised, failure
to declare and pay to any holder any dividend on any dividend date, or upon a “bankruptcy triggering event” (as defined in
the COD), then we may be required to redeem the Series A Preferred Stock for cash in the amount of up to a minimum of
In the event that the Company
experiences a “Change of Control” (as defined in the COD), the Company may also be required to redeem the Preferred Shares
for cash at a minimum of
Holders of Series A Preferred Stock will have no voting rights, except as required by law and as expressly provided in the COD.
15
(b) Series A Preferred Stock Triggering Event
As more
1. An 18% per annum dividend will start to accrue on the stated value of all outstanding Preferred Shares and will continue to accrue until the Triggering Event has been cured. The accrued dividend is added to the stated value prior to the Dividend Payment Date and paid in cash on the first trading day of the Company’s next fiscal quarter. A “Late Charge” in the amount of 18% per annum will accrue on any amounts due to be paid to holders of the Preferred Shares if not paid when due, including payments that may be owed under Section (e) of the Registration Rights Agreement (“RRA”).
2. A “Triggering Event Redemption Right” will commence and remain open for a period of 20 trading days from the later of the date the Triggering Event is cured or the receipt by 3i of the Triggering Event Notice. Under the Triggering Event Redemption Right, if elected by the holder of the Preferred Shares, the Company would be obligated to redeem all or a portion of the Preferred Shares for a minimum of 125% of the stated value of the Preferred Shares. Concurrently, under the provisions of the PIPE Warrant, if elected by 3i, the Company would be obligated to redeem the PIPE Warrant for the Black Sholes Triggering Event Value as defined in the warrant agreement.
3. A “Registration Delay Payment” will accrue on April 22, 2022 (the expiration of the Allowable Grace Period under the RRA) in the amount of 2% of 3i’s “Purchase Price” as defined in the Securities Purchase Agreement which is approximately 2% of $20 million, or $400 and will continue to accrue at 2% every 30 days thereafter. Additionally, a late charge of 2% per month will accrue on any payments that are not paid when due. The Registration Delay Payments will stop accruing when the post-effective amendment is declared effective by the SEC at which time the registration statement and its prospectus will again be available for the resale of common stock.
On May 4, 2022, the Company
and 3i entered into a Forbearance Agreement and Waiver, dated April 27, 2022, wherein 3i confirmed that no Triggering Event as defined
under the COD has occurred prior to April 27, 2022, that a Triggering Event under Section 5(a)(ii) will and has occurred on April 29,
2022, and that in consideration for the Registration Delay Payments the Company is obligated to pay under the RRA, and additional amounts
the Company is obligated to pay under the COD and 3i’s legal fees incurred in the preparation of the Forbearance Agreement and Waiver
in the aggregate of $
On June 6, 2022, we entered
into that certain First Amendment to the Forbearance Agreement and Waiver with 3i, (the “Amendment”) to extend the forbearance
period date under subsection 5 of Section 2 of the Forbearance Agreement and Waiver dated April 27, 2022 (the “Original Agreement”)
from June 4, 2022, to June 20, 2022. In addition, the parties agreed that the forbearance period of September 20, 2022 may
also be extended for an additional fifteen (15) days to July 5, 2022, provided that, on June 20, 2022 the Company will remove the restrictive
legend on
16
The Original Agreement was entered into by the Company and 3i because of a delay under the Registration Rights Agreement dated May 20, 2021. Under the Original Agreement, in exchange for certain consideration, 3i agreed to forbear exercising any rights or remedies that it may have had under the COD in connection with certain Triggering Events (as described therein) until the earlier to occur of (i) the date immediately prior to the date of occurrence of a Bankruptcy Triggering Event, (ii) the date of occurrence of any other Triggering Event under Section 5(a) of the COD (excluding any Triggering Event arising solely as a result of Section 5(a)(ii) of the COD and Section 4(c)(ii) of the Warrant), (iii) the time of any breach by the Company under the Forbearance Agreement and Waiver, (iv) the Resale Availability Date as defined therein and (v) June 4, 2022 (such period, the “Original Forbearance Period”). As a result of the Amendment, the June 4, 2022, date has been amended to June 20, 2022, with the option to extend to July 5, 2022, subject to the Legend Removal.
(c) 3i Warrant Terms
Concurrently with the issuance
of our Preferred Stock, the Company issued warrants to purchase
| (ii) | The exercise of the 3i Warrants are subject to a beneficial ownership limitation of 4.99% which can be adjusted to a beneficial ownership limitation of 9.99% upon sixty-one (61) days’ prior written notice; |
| (iii) | The exercise price and the number of 3i Warrant shares issuable upon the exercise of the 3i Warrants are subject to adjustment; |
| (iv) | In the event of either the Company consolidating or merging with or into another entity (the “Fundamental Transaction”), the sale or assignment of substantially all of the Company’s subsidiaries, or a Triggering Event (as defined in the COD), the holder is entitled to require the Company to pay the holder an amount in cash equal to the Black-Scholes value of the 3i Warrants on or prior to the later of the second trading after the date of request for payment and the date of consummation of the Fundamental Transaction; or at any time after occurrence of the Triggering Event. |
(d) Accounting
| i. | Series A Convertible Preferred Stock |
The Company evaluated the Series A Convertible Preferred Stock redemption feature and recorded it in mezzanine given the cash redemption right that is within the holder’s control. The Company recognizes changes in redemption value when redemption becomes probable to occur.
The embedded conversion feature related to the convertible derivative liability has been recorded on the balance sheet as a current liability at its fair market value utilizing an appropriate valuation model considering all relevant assumptions current at the date of issuance and at each reporting period as described in Note 11(e).
| ii. | 3i Warrants |
The 3i Warrants were identified as a freestanding financial instrument and meet the criteria for derivative liability classification, initially measured at fair value. Subsequent changes in fair value are recognized through earnings for as long as the contracts continue to be classified as a liability. The measurement of fair value is determined utilizing an appropriate valuation model considering all relevant assumptions current at the date of issuance and at each reporting period (i.e., share price, exercise price, term, volatility, risk-free rate and expected dividend rate).
(e) Series A Preferred Stock Conversions
Between January 1, 2022,
and September 30, 2022, a total of
17
Because the latest eight conversions in the nine-month period ended September 30, 2022, were completed at less than the agreed floor price, we recorded a floor price liability and recognized a corresponding reduction of additional paid in capital, as follows:
| i. | During the six months ended June 30, 2022, $ |
| ii. | During the three months ended September 30, 2022, $ |
Additionally, because the Company’s average daily dollar volume of stock trading was less than $2.5 million during a ten-day period in January 2022, the Company has recorded a one-time deemed dividend of 8% in the amount of $1,572 on preferred stock converted between February 1, 2022 and March 31, 2022 and the balance of Series A Preferred Stock outstanding as at March 31, 2022 as an increase to the value of the Series A Preferred Stock and a reduction of additional paid in capital. In addition, under the terms of the Registration Rights Agreement (“RRA”), during the nine-month period ended September 30, 2022, the Company has also paid 3i an additional $800 in Registration Delay Payments.
The following inputs were used for the Series A Preferred Stock conversions recorded in the nine-month period ended September 30, 2022 and the fair value of the Series A Preferred Derivative liability determined at September 30, 2022 and December 31, 2021:
| January 1, 2022 – September 30, 2022 | December 31, 2021 | |||||||
| Initial exercise price | $ | $ | ||||||
| Stock price on valuation date | $ | $ | ||||||
| Risk-free rate | % | % | ||||||
| Time to exercise (years) | ||||||||
| Equity volatility | % | % | ||||||
| Probability of volume failure | % | % | ||||||
| Rounded 10-day average daily volume (in 1,000’s) | $ | $ | ||||||
On September 30, 2022, the
Company utilized the reset strike options Type 2 model by Espen Garder Haug and Black-Scholes Merton models to estimate the fair value
of the 3i Warrants to be approximately $
| September 30, 2022 | December 31, 2021 | |||||||
| Initial exercise price | $ | $ | ||||||
| Stock price on valuation date | $ | $ | ||||||
| Risk-free rate | % | % | ||||||
| Expected life of the 3i Warrant to convert (years) | ||||||||
| Rounded annual volatility | % | % | ||||||
| Timing of liquidity event | ||||||||
| Expected probability of event | % | % | ||||||
18
The accounting for the Series A Convertible Preferred Stock and 3i Warrants is illustrated in the tables below:
| Consolidated Balance Sheets | Consolidated Statement of Operations & Comprehensive Loss | |||||||||||||||||||||||
| Warrant liability | Series A Preferred Derivative Liability | Series A Convertible Preferred Stock – Mezzanine | Additional paid-in capital | Finance Costs | Fair value adjustment to derivative and warrant liabilities | |||||||||||||||||||
| Subscription proceeds received on December 20, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Costs allocated and expensed | ( | ) | ||||||||||||||||||||||
| December 21, 2021 conversion of 200 Series A Preferred Stock | ( | ) | ( | ) | ||||||||||||||||||||
| Fair value adjustment at December 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | ||||||||||||||||
| Consolidated Balance Sheets | ||||||||||||||||||||||||
| Warrant liability | Series A Preferred Derivative Liability | Series A Convertible Preferred Stock – Mezzanine Equity | Additional paid-in capital | Accrued Liabilities | Consolidated Statement of Operations & Comprehensive Loss Fair value adjustment to derivative and warrant liabilities | |||||||||||||||||||
| Balances, December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | ||||||||||||||||
| Conversion of 1,973 shares of Series A Preferred Stock | ( | ) | ( | ) | ||||||||||||||||||||
| Floor price adjustment on conversion of 1,973 shares of Series A Preferred stock | ( | ) | ||||||||||||||||||||||
| 8% deemed dividend on Preferred Stock | ( | ) | ||||||||||||||||||||||
| Fair value adjustment | ( | ) | ( | ) | — | — | — | |||||||||||||||||
| Balances, March 31, 2022 | ( | ) | ||||||||||||||||||||||
| Conversion of 809 shares of Series A Preferred Stock | ( | ) | ( | ) | ||||||||||||||||||||
| Floor price adjustment on conversion of 809 shares of Series A Preferred Stock | ( | ) | ||||||||||||||||||||||
| Cash payment of accrued liabilities | ( | ) | ||||||||||||||||||||||
| Fair value adjustment | ( | ) | ( | ) | — | — | — | |||||||||||||||||
| Balances, June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| Conversion of 1,792 shares of Series A Preferred Stock | ( | ) | ( | ) | ||||||||||||||||||||
| Floor price adjustment on conversion of 1,792 shares of Series A Preferred Stock | ( | ) | ||||||||||||||||||||||
| Fair value adjustment | ( | ) | — | — | — | |||||||||||||||||||
| Balances, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
19
| 12. | Derivative Liabilities |
(a) Series A Preferred Stock Conversion Feature
The derivative scope exception under ASC 815 is not met because a settlement contingency is not indexed to the Company’s stock. Therefore, the redemption feature (derivative liability) has been bifurcated from the Series A Preferred Stock and recorded as a derivative liability. The derivative value of the Series A Preferred Stock Redemption Feature (the “Redemption Feature”) is the difference between the fair value of the Series A Preferred Stock with the Redemption Feature and the Series A Preferred Stock without the Redemption Feature. The Series A Preferred Stock Redemption Feature has been valued with a Monte Carlo Simulation model, using the inputs as described in Note 12(e).
(b) Investor Warrants
In connection with subscriptions
of Offer Units in the rights issue carried out in September 2021,
At September 30, 2021
total investor warrants outstanding of
(c) Valuation of Derivative Liabilities
The derivative liabilities are measured at fair value at each reporting period and the reconciliation of changes in fair value during the nine-month periods ended September 30, 2022, and 2021 are presented in the following tables:
| 3i Fund Series A Conversion Feature | Settlement Warrants | TO2 Warrants |
TO3 Warrants | |||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2021 | September 30, 2021 | |||||||||||||
| Balance beginning of period | $ | $ | | $ | | $ | ||||||||||
| Issued during the period | ||||||||||||||||
| Change in fair value | ( | ) | ( | ) | ( | ) | ||||||||||
| Translation effect | ( | ) | ( | ) | ||||||||||||
| Amount transferred to Equity | ( | ) | ( | ) | ||||||||||||
Balance end of period | $ | $ | $ | $ | ||||||||||||
| Fair value Series A Preferred share / Warrant issuable at end of period | $ | $ | $ | $ | ||||||||||||
The assumptions for estimating the fair value of the 3i Fund Series A Conversion Feature are disclosed in Note 11(e).
20
The fair value of the Company’s derivative warrant liabilities as at September 30, 2021 were estimated using the Black-Scholes option pricing model for the Settlement Warrants and TO3 Warrants, based on the following assumptions:
| Warrants issued February 2020 | ||||
| Settlement Warrants | ||||
| September 30, 2021 | ||||
| Exercise price | $ | |||
| Share price | $ | |||
| Risk-free interest | ( | )% | ||
| Expected dividend yield | ( | )% | ||
| Contractual life (years) | ||||
| Expected volatility | % | |||
The Company measured its derivative warrant liabilities on a recurring basis using level 3 inputs.
| 13. | Stockholders’ Equity |
During the three months ended
September 30, 2022, the Company issued
During the three months ended September 30, 2021, the Company issued:
| ii. | Units consisting of 482,250 common shares and 482,250 common share purchase warrants valued at $2,384 upon the issuance of Units on July 14, 2021, to the financial advisors of the May 14, 2021, rights issue. The attached warrants are exercisable for $10 each with an original expiration date of April 15, 2023, subsequently amended to September 13, 2021 (Note 11(a)). |
During the nine months ended
September 30, 2022, the Company issued
During the nine months ended September 30, 2021, the Company issued:
| iv. | Units consisting of 2,417,824 common shares valued at $12,125 upon the issuance of 2,417,824 units of one common share and one share purchase warrant for $10.0 per unit, and 482,250 common shares and 482,250 common share purchase warrants valued at $2,384 in consideration for services. The attached warrants are exercisable for $10 each with an original expiration date of September 13, 2023, subsequently amended to September 13, 2021 (Note 11(a)); and |
| v. | 628,192 common shares valued at $2,880 upon conversion of debt. |
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| 14. | Stock-based payments |
During the three months ended
September 30, 2022, the total stock-based payment expense recorded in the condensed consolidated statement of operations and comprehensive
loss was $
During the nine months ended
September 30, 2022, total stock-based expenses recognized in the condensed consolidated statement of operations and comprehensive loss
were $
| Options Outstanding | ||||||||||||
| Number of Shares | Weighted Average Exercise Price Share | Weighted Average Life (in years) | ||||||||||
| Outstanding December 31, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited | ( | ) | ||||||||||
| Outstanding as of September 30, 2022 | $ | |||||||||||
| Options exercisable at September 30, 2022 | $ | |||||||||||
The fair value of stock options granted in the period ended September 30, 2022 were estimated using the Black-Scholes option pricing model, based on the following assumptions:
| September 30, 2021 | ||||
| Exercise price | $ | |||
| Share price | $ | |||
| Risk-free interest | % | |||
| Expected dividend yield | ( | )% | ||
| Contractual life (years) | ||||
| Expected volatility | % | |||
During the nine-month period
ended September 30, 2021, a total of
| 15. | Segments |
The Company is domiciled
in the United States of America and its operations are in Denmark and operates as
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| 16. | Loss per share of common stock |
Basic loss per share is derived by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as warrants and stock options, which would result in the issuance of incremental shares of common stock unless such effect is anti-dilutive. In calculating the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remained the same for both calculations because when a net loss exists, dilutive shares are not included in the calculation. Potentially dilutive securities outstanding, as determined by the latest applicable conversion price, that have been excluded from diluted loss per share due to being anti-dilutive include the following:
Three- and Nine-month ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Warrants and stock options | ||||||||
| Series A Convertible Preferred stock | ||||||||
| 17. | Financial Instruments |
The following tables present information about the Company’s financial instruments measured at fair value on a recurring basis and indicate the level of the fair value hierarchy used to determine such fair values:
| Fair Value Measurements as of September 30, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant liability | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Series A Convertible Preferred Stock Conversion Feature | ( | ) | ( | ) | ||||||||||||
| $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Fair Value Measurements as of December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Investment | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant liability | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Series A Convertible Preferred Stock Conversion Feature | ( | ) | ( | ) | ||||||||||||
| $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using terms in the notes that are subject to volatility and market price of the underlying common stock of the Company.
The Company used the reset
strike options Type 2 model by Espen Garder Haug and Black-Scholes Merton models to measure the fair value of the warrant liability at
$
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| 18. | Income Taxes |
The effective tax rate for
the three and nine-month periods ended September 30, 2022 and 2021, was impacted by unbenefited losses. Specifically, the impairment charge
of approximately $
| 19. | Commitments and Contingencies |
(a) Second Amendment to License Agreement with Novartis
On September 27, 2022, Allarity
Therapeutics Europe Aps (“Allarity Europe”), a wholly-owned subsidiary of the Company, entered
into a Second Amendment to License Agreement (the “Second Amendment”) with Novartis Pharma AG, a company organized under the
laws of Switzerland (“Novartis”), which amended the terms of the License Agreement dated April 6, 2018 (the “Original
Agreement”), as amended by that certain First Amendment to License Agreement effective as of March 30, 2022 (“Amendment”
and together with the Original Agreement, the “Agreement”) and that certain Promissory Note dated April 6, 2018, which was
re-issued by Allarity Therapeutics Denmark ApS, a subsidiary of Allarity Europe, in favor of Novartis on March 30, 2022, to modify
the terms and timing of the Outstanding Milestone Payment (as defined in the Second Amendment), including an increase in such milestone
payment by $
Under Clause 7.2 of the Original Agreement, the Company agreed to pay Novartis a milestone payment in one lump sum (“Third Milestone Payment”) upon submission of the first NDA with the FDA for a Licensed Product in the United States (the “Third Milestone”). The Second Amendment restructured the terms of the Third Milestone Payment to an installment plan (with the final installment due in 2023), allowing the Company more time to make the Third Milestone Payment.
In addition, the Second Amendment
amended (1) Clause 1.1 of the Agreement to include the definitions of Financing Transaction, Phase 1 Clinical Trial and Phase 1b/2 Clinical
Trial, (2) Clause 2.1 of the Agreement to clarify that the Company would not be permitted to sublicense any rights granted to the Company
prior to completion of a Phase II Clinical Trial without the prior written consent of Novartis, and (3) Clause 7.3 to provide for the
acceleration of certain milestone payments in the event the Company enters into a Financing Transaction (as defined in the Second Amendment).
If all milestones under the Second Amendment are achieved, the Company may be obligated to pay Novartis
up to a maximum of $
(b) Third Amendment to Stenoparib Exclusive License Agreement with Eisai Inc.
Effective July 12, 2022 the Company’s July 6, 2017 Exclusive License Agreement with Eisai Inc. (as amended December 11, 2020 and August 3, 2021) (the “Third Amendment”), the terms of the original exclusive license were further amended in order to (1) further postpone the due date of the Extension Payment and extend the deadline for the Company’s successful completion of its first Phase 1b or Phase 2 clinical trial for Stenoparib (the “Product”) beyond December 31, 2022; and (2) amend terms related to Eisai’s right of termination of development.
In consideration of the extended timeframe, and the Company not achieving the minimum patient enrollment, by July 1, 2022, set out in the Second Amendment, the Company is obligated to pay Eisai an extension payment as follows:
| (i) | $100 within ten (10) days of the execution of the Third Amendment (paid during the period ended September 30, 2022); and |
| (ii) | $900 on or before April 1, 2023 (accrued at September 30, 2022). |
Once the extension payment is paid in full, the Company shall have until April 1, 2024, to complete enrollment in a further Phase 1b or Phase 2 Clinical Trial of the Product. If the Company has not achieved successful completion of a further Phase 1b or Phase 2 Clinical Trial of the Product prior to April 1, 2024, Eisai may terminate this Agreement in its entirety, in its sole discretion on at least one hundred and twenty (120) days prior written notice.
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(c) Development costs
Under the terms of the June
2020 Sublicense agreement (the “2022 Sublicense Agreement”) between the Company and Smerud Medical Research International
AS (Norway) (“Smerud”), the Company is liable for development costs incurred by Smerud in the approximate amount of $
A Letter Agreement between Chosa Oncology Ltd. (England), Chosa ApS (Denmark) (collectively “Chosa”), Smerud Medical Research International AS (Norway) (“Smerud”), and Allarity Therapeutics, Inc. (US) which references the following agreements:
| a. | The 2022 Amended and Restated License Agreement between LiPlasome Pharma Aps (Denmark) (“LiPlasome”), Chosa, and the Company’s subsidiary Allarity Therapeutics ApS, which amended the original February 15, 2016 LiPlasome License Agreement (as amended January 27, 2021), whereby Chosa replaced the Company as licensee of LiPlasome in exchange for Smerud’s cancellation of the Company’s $ |
| b. | The LiPlacis Support Agreement between Allarity Therapeutics Europe, Smerud, Chosa and LiPlasome. Terms of the Support Agreement provide that each of Smerud and the Company agreed that the 2022 Sublicense Agreement is terminated in its entirety. |
(d) Oncoheroes
Effective January 2, 2022, the Company entered into an Exclusive License Agreement with Oncoheroes Biosciences Inc. (the “Oncoheroes Agreement”) to grant Oncoheroes an exclusive royalty-bearing global license to both dovitinib and stenoparib in pediatric cancers. Oncoheroes will take responsibility for pediatric cancer clinical development activities for both clinical-stage therapeutics. Allarity will support Oncoheroes’ pediatric clinical trials by providing clinical-grade drug inventory at cost and by facilitating DRP® companion diagnostic screening of pediatric patients for each drug. Under the licenses, Oncoheroes will receive commercialization rights for pediatric cancers, subject to the Company’s first buy-back option for each program, and the Company will receive an upfront license fee and regulatory milestones for each program, specifically one for dovitinib and one for stenoparib, as follows:
| ii. | two milestone payments of $1,000 each due and payable upon receipt of regulatory approval of a product in the United States, and of a product in Europe, respectively. |
Pursuant to the Oncoheroes Agreement Allarity is also entitled to tiered royalties on aggregate net product sales (“Sales”) of between 7% and 12% on net sales of products as follows: 7% on Sales less than $100 million; 10% on Sales of greater than $100 million and less than $200 million; and 12% on Sales greater than $200 million.
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(e) Lantern Pharma, Inc. – Irofulven Agreement
On July 23, 2021, we entered
into an Asset Purchase Agreement with Lantern Pharma, Inc. relating to our inventory of Irofulven active pharmaceutical ingredients, our
clinical research data relating to Irofulven developed by us during the drug development program under the May 2015 Drug License and Development
Agreement for Irofulven and terminated our obligation to further advance the development of Irofulven under the May 2015 agreement. Under
the Asset Purchase Agreement, Lantern Pharma agreed to pay us $
| (i) | when the inventory of Irofulven API is recertified with a longer shelf life; |
| (ii) | upon the initiation of treatment of the first patient in an investigator-led “compassionate use” ERCC2/3 mutation subgroup study using Irofulven in certain agreed upon investigators; |
| (iii) | upon the initiation of treatment of the first patient within twenty-four months after the closing of the transaction in any human clinical trial of Irofulven initiated by Lantern Pharma; and | |
| (iv) | upon the initiation of treatment of the second patient within an agreed upon time period after the closing of the transaction in any human clinical trial of Irofulven initiated by Lantern Pharma. |
Effective March 18, 2022,
pursuant to clause (i) the inventory was recertified with a longer shelf life and as of September 30, 2022, we received $
| 20. | Subsequent Events |
i. Stock Option Grant
On September 23, 2022, Mr. Jerry McLaughlin was appointed as an independent director of the Company. As compensation for Mr. McLaughlin’s services as an independent director, Mr. McLaughlin receives an annual retainer fee of $50, payable in cash, and if appointed to a committee of the Board, he will be eligible to receive $7.5 for serving as a member of the Audit Committee and $5 for serving as a member of the Compensation Committee. In connection with Mr. McLaughlin’s appointment, on October 1, 2022, the Board granted him options to purchase 23,000 shares of common stock at an exercise price of $1.10 per share (which was the closing price on September 30, 2022), subject to vesting of 1/36 per month over thirty-six (36) months following October 1, 2022. The expiration date for the options is five (5) years from date of grant.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and plan of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from the plans, intentions, expectations and other forward-looking statements included in the discussion below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those factors discussed in the section titled “Risk Factors” of our Annual Report on Form 10-K, filed with the SEC on May 17, 2022.
Overview
We are a biopharmaceutical company focused on discovering and developing highly targeted anti-cancer drug candidates. Using its Drug Response Predictor (DRP®) platform, the Company identifies the value in drug assets that have otherwise been discontinued by identifying patient populations where these drugs are active. The Company’s three lead drug candidates are: the tyrosine kinase inhibitor (TKI) dovitinib, the poly-ADP-ribose polymerase (PARP) inhibitor stenoparib, and the microtubule inhibitor agent IXEMPRA.
Recent Business Developments
On August 2, 2022, the Company announced that its Board of Directors (the “Board”) has mandated a refocus of the Company’s oncology pipeline strategy away from development of monotherapies towards development of more promising and clinically relevant combination therapies.
Following a lengthy and in-depth analysis of current pipeline opportunities, clinical/commercial/ regulatory risks, development costs and timelines, expected availability of funding, and in consultation with our senior management, its Scientific Advisory Board (SAB), and external experts, the Board concluded that refocusing the Company’s pipeline to development of combination therapies will accomplish the following:
| ● | Align with the ongoing shift in cancer therapy standard-of-care away from monotherapies toward combination therapies, which are increasingly driving market opportunities, and which have shown dramatic increases in patient benefit. |
| ● | Strengthen the Company’s ability to attract additional funding from institutional life science investors, which is necessary to support the Company’s clinical development activities and future success. |
| ● | Significantly broaden the Company’s possibilities for future commercial partnering with larger pharmaceutical companies to maximize the value of its pipeline assets and DRP® platform technology. |
| ● | Improve the likelihood of clinical and commercial success of the Company’s pipeline assets. |
27
The Board’s decision also considers feedback that the Company received from the U.S. Food and Drug Administration (FDA). We submitted an NDA with the FDA on December 21, 2021, for the third line treatment of metastatic renal cell carcinoma (mRCC or kidney cancer) in patients selected by our Dovitinib-DRP® companion diagnostic. Prior to submission of the NDA, we submitted a Pre-Market Approval (PMA) application to the FDA for approval of our dovitinib-specific DRP® companion diagnostic for use to select and treat patients likely to respond to dovitinib. On February 15, 2022, we received Refusal to File (RTF) letters for both our dovitinib NDA and our DRP®-Dovitinib companion diagnostic PMA. The FDA has asserted that neither our NDA or PMA meets the regulatory requirements to warrant a complete agency review. The primary grounds of rejection asserted by the FDA relates to our use of prior Phase 3 clinical trial data, generated by Novartis in a “superiority” endpoint study against sorafenib (Bayer), to support a “non-inferiority” endpoint in connection with the DRP®-Dovitinib companion diagnostic. Based upon the reasons given in the RTF letters and a subsequent Type C meeting with the FDA on May 31, 2022, we anticipate that the FDA will require a prospective Phase 3 clinical trial as well as additional dose optimization studies before regulatory approval of Dovitinib as a monotherapy and its companion diagnostic Dovitinib-DRP for the treatment of third-line mRCC can be obtained. While we have decided that the costs, risks and potential benefits of conducting these studies for dovitinib as a monotherapy for mRCC are no longer the best path toward commercial success, we continue to evaluate other potential Phase 1b/2 clinical trials for dovitinib combined with other approved drugs in the mRCC space and in other indications. For example, we anticipate commencing a stenoparib in combination with dovitinib Phase 1b/2 clinical trial for second-line or later treatment of metastatic ovarian cancer. Our decision to advance dovitinib as a combination therapy and not as a monotherapy is based on our belief that both the science and the market for oncology therapies has shifted towards combination therapies and away from monotherapies for multiple indications of cancer
As part of its new strategic pipeline focus, and subject to financing, the Company previously announced that it expected to initiate enrollment in a Phase 1b/2 study of its PARP inhibitor, stenoparib, in combination with its pan-TKI, dovitinib, for the second-line or later treatment of metastatic ovarian cancer by or before Q4 2022. However, on November 7, 2022, the Company announced that it has decided to delay the enrollment of patients in the Phase 1b/2 study until the Company has raised additional capital. The Company is currently in discussions with the holder of its Series A Preferred Shares regarding a potential bridge loan to extend the Company’s cash runway beyond December 31, 2022, in order to provide the Company with more time to complete the process of amending its certificate of incorporation increasing its authorized share capital in order to facilitate additional capital investments. No assurances can be given that the discussions will be successful or that the Company will be able to raise additional capital on favorable terms, or at all. Assuming the Company raises additional capital, the Company plans to have trial sites in both the U.S. and Europe. The Company is currently evaluating other potential Phase 1b/2 studies for either stenoparib or dovitinib combined with another oncology therapeutic, including the mRCC space. The Company’s ongoing Phase 2 studies of stenoparib, as monotherapy for ovarian cancer, and IXEMPRA®, as monotherapy for metastatic breast cancer, will continue through their interim data readouts, now anticipated in Q2 2023, subject to funding. All pipeline development activities will continue to utilize drug-specific DRP® companion diagnostics to guide patient selection and treatment.
Second Amendment to License Agreement
On September 27, 2022, we entered into a Second Amendment to License Agreement (the “Second Amendment”) with Novartis Pharma AG, a company organized under the laws of Switzerland, which amended the terms of the License Agreement dated April 6, 2018 (the “Original Agreement”), as amended by that certain First Amendment to License Agreement effective as of March 30, 2022 (“Amendment” and together with the Original Agreement, the “Agreement”) and that certain Promissory Note dated April 6, 2018, which was re-issued by Allarity Therapeutics Denmark ApS, a subsidiary of Allarity Europe, in favor of Novartis on March 30, 2022, to modify the terms and timing of the Outstanding Milestone Payment (as defined in the Second Amendment). The Second Amendment increase the amount of the total milestone payment by $500. The Second Amendment became effective upon receipt by Novartis of the first portion of the Outstanding Milestone Payment, which was made on or about September 28, 2022.
Under Clause 7.2 of the Original Agreement, the Company agreed to pay Novartis a milestone payment in one lump sum (“Third Milestone Payment”) upon submission of the first NDA with the FDA for a Licensed Product in the United States (the “Third Milestone”). The Second Amendment restructured the terms of the Third Milestone Payment to an installment plan (with the final installment due in 2023), allowing the Company more time to make the Third Milestone Payment. In addition, the Second Amendment amended (1) Clause 1.1 of the Agreement to include the definitions of Financing Transaction, Phase 1 Clinical Trial and Phase 1b/2 Clinical Trial, (2) Clause 2.1 of the Agreement to clarify that the Company would not be permitted to sublicense any rights granted to the Company prior to completion of a Phase II Clinical Trial without the prior written consent of Novartis, and (3) Clause 7.3 to provide for the acceleration of certain milestone payments in the event the Company enters into a Financing Transaction (as defined in the Second Amendment). If all milestones under the Second Amendment are achieved, the Company may be obligated to pay Novartis up to a maximum of $26.5 million.
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Change in Board of Directors and Annual Retainer Fee
From July to September 2022, the Board increased the fixed number of authorized directors on the Board to seven (7). To fill the vacancies, the Board appointed Messrs. James G. Cullem as Class III director, Thomas Jensen as Class I director, Dr. Roth as Class II director, and Mr. McLaughlin as Class II director.
Messrs. Cullem and Jensen are executive officers of the Company. In addition to serving as a director of the Company, Mr. Cullem will continue to serve as the Company’s Chief Executive Officer and Chief Business Officer. In addition, Mr. Jensen will continue to serve as the Company’s Senior Vice President, Investor Relations.
In connection with the appointment of Dr. Roth and Mr. McLaughlin as independent directors of the Company, each will receive an annual retainer fee of $50, payable in cash, and if appointed to a committee of the Board, the respective director will be eligible to receive $7.5 for serving as a member of the Audit Committee, $4 for serving as a member of the Nominating and Corporate Governance Committee and $5 for serving as a member of the Compensation Committee. In addition, the Board granted each independent director options to purchase 23,000 shares of common stock at an exercise price of $1.28 and $1.10 per share, subject to vesting of 1/36 per month over thirty-six (36) months following the grant date. The expiration date for the options is five (5) years from date of grant.
In addition, effective July 7, 2022, upon recommendation of the Compensation Committee, the Board approved an increase in the annual retainer fee for independent directors to $50.
Change in Management
In June 2022, the Company effected a change in management. Effective as of June 29, 2022, Steve Carchedi resigned from all positions in the Company, including his role of Chief Executive Officer and as a director of the Company. In addition, effective as of June 27, 2022, Jens Knudsen resigned from all positions in the Company, including his role of Chief Financial Officer of the Company. Pursuant to the terms set forth in their respective separation agreements with the Company, the Company agreed to provide Mr. Carchedi and Mr. Knudsen with certain payments and benefits comprising of: (i) continued payments of his base salary for a certain time period and (ii) COBRA coverage for a certain number of months (“Severance Benefits”). In exchange for the Severance Benefits, among other things, Messrs. Carchedi, and Knudsen each individually agreed to a release of claims in favor of the Company and to certain restrictive covenant obligations, and also reaffirmed his commitment to comply with their respective existing restrictive covenant obligations.
With the departure of Mr. Carchedi, the Board of Directors of the Company (the “Board”) appointed James Mr. Cullem as the interim Chief Executive Officer of the Company effective as of June 29, 2022. Accordingly, Mr. Cullem assumed the role as the interim Chief Executive Officer and continues his role as the Chief Business Officer. In addition, with the departure of Mr. Knudsen, the Board appointed Joan Brown, the Company’s current Director of Financial Reporting, as the interim Chief Financial Officer of the Company effective as of June 29, 2022. In addition to Ms. Brown’s role as Chief Financial Officer, she continues her role as Director of Financial Reporting.
Risks and Uncertainties
The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel and collaboration partners, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations, and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. Even if the Company’s research and development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
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Impacts of COVID-19 on our Business — Update
In March 2020, the World Health Organization declared COVID-19 a global pandemic. COVID-19 has had an impact on our operations as it caused some unexpected delays in our clinical program activities as clinical trials were delayed. Management is unable to estimate the future financial effects, if any, to our business as a result of COVID-19 because of the high level of uncertainties and unpredictable outcomes of this disease.
We are continuing to evaluate the impact of COVID-19 pandemic on our business and are taking proactive measures to protect the health and safety of our employees, as well as to maintain business continuity. Based on guidance issued by federal, state, and local authorities, we transitioned to a remote work model for our employees, effective March 16, 2020. During the recent months restrictions due to COVID-19 have lifted significantly and as a result, our Danish employees have returned to work. Our North American employees are continuing to work remotely. We will continue to closely monitor and seek to comply with guidance from governmental authorities and adjust our activities as appropriate.
The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trial, healthcare systems or the global economy. However, these effects could harm our operations, and we will continue to monitor the COVID-19 situation closely.
Impact of the Russia-Ukraine War
There have been immense flows of refugees to Europe and Denmark is ready to facilitate and to accept refugees from the Ukraine. It is far too early to estimate how many migrants Denmark will facilitate, but immigration officials have begun preparing to accept Ukrainian refugees. Being a North Atlantic Treaty Organization (NATO) member, Denmark will strengthen its own national preparedness as well as that of the NATO defense alliance. The Ukraine crisis has become a new a destabilizing factor in the Danish and global economy. It dampens growth and increases inflation at a time when inflation and capacity utilization is already high. While the Danish economy is generally robust and able to handle new challenges, and it is expected to enter a pause in growth. However, there are risks of a fall in activity in the Danish economy in general. To date the war has not yet had an impact on our results of operations however we expect it may have an impact on the costs of materials we purchase for our laboratory operations in Denmark but, we cannot predict or quantify the impact now.
Financial Operations Overview
Since our inception in September of 2004, we have focused substantially all our resources on conducting research and development activities, including drug discovery and preclinical studies, establishing, and maintaining our intellectual property portfolio, the manufacturing of clinical and research material, hiring personnel, raising capital and providing general and administrative support for these operations. In recent years, we have recorded very limited revenue from collaboration activities, or any other sources. We have funded our operations to date primarily from convertible notes and the issuance and sale of our securities.
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We have incurred net losses in each year since inception. Our net losses were $9.0 million and $9.8 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, we had an accumulated deficit of $79.7 million. Substantially all our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses over at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities, as we:
| ● | advance drug candidates through clinical trials; | |
| ● | pursue regulatory approval of drug candidates; |
| ● | operate as a public company; | |
| ● | continue our preclinical programs and clinical development efforts; | |
| ● | continue research activities for the discovery of new drug candidates; and | |
| ● | manufacture supplies for our preclinical studies and clinical trials. |
Components of Operating Expenses
Research and Development Expenses
Research and development expenses include:
| ● | expenses incurred under agreements with third-party contract organizations, and consultants; | |
| ● | costs related to production of drug substance, including fees paid to contract manufacturers; | |
| ● | laboratory and vendor expenses related to the execution of preclinical trials; and | |
| ● | employee-related expenses, which include salaries, benefits and stock-based compensation. |
We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks and estimates of services performed using information and data provided to us by our vendors and third-party service providers. Non-refundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and accounted for as prepaid expenses. The prepayments are then expensed as the related goods are delivered and as services are performed.
To date, most of these expenses have been incurred to advance our lead drug candidates, dovitinib, stenoparib, and IXEMPRA®.
We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our drug candidates, as our drug candidates advance into later stages of development, and as we continue to conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our drug candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our drug candidates.
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General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, facilities costs, depreciation and amortization expenses and professional services expenses, including legal, human resources, audit, and accounting services. Personnel-related costs consist of salaries, benefits, and stock-based compensation. Facilities costs consist of rent and maintenance of facilities. We expect our general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to advance our drug candidates and because of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, Nasdaq Stock Market, additional insurance expenses, investor relations activities and other administrative and professional services.
Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021
The following table summarizes our results of operations for the three and nine months ended September 30, 2022 and 2021:
| For the three months ended September 30, | Increase/ | For the nine months ended September 30, | Increase/ | |||||||||||||||||||||
| 2022 | 2021 | (Decrease) | 2022 | 2021 | (Decrease) | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Research and development | $ | 3,004 | $ | 1,355 | $ | 1,649 | $ | 5,989 | $ | 4,674 | $ | 1,315 | ||||||||||||
| Impairment of intangible assets | — | — | — | 14,007 | — | 14,007 | ||||||||||||||||||
| General and administrative | 1,558 | 2,619 | (1,061 | ) | 7,717 | 6,140 | 1,577 | |||||||||||||||||
| Total operating expenses | 4,562 | 3,974 | 588 | 27,713 | 10,814 | 16,899 | ||||||||||||||||||
| Loss from operations: | $ | (4,562 | ) | $ | (3,974 | ) | $ | 588 | $ | (27,713 | ) | $ | (10,814 | ) | $ | 16,899 | ||||||||
Research and Development Expenses
We currently do not track our research and development costs by product candidate. A breakdown by nature of type of expense for the three and nine months ended September 30, 2022 and 2021 is provided below.
| For the three months ended September 30, | Increase/ | For the nine months ended September 30, | Increase/ | |||||||||||||||||||||
| 2022 | 2021 | (Decrease) | 2022 | 2021 | (Decrease) | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
| Research study expenses | $ | 464 | 528 | $ | (64 | ) | $ | 1,504 | $ | 1,725 | $ | (221 | ) | |||||||||||
| Milestone payments | 1,400 | — | 1,400 | 1,400 | — | 1,400 | ||||||||||||||||||
| Tax credit | (133 | ) | (219 | ) | 86 | (723 | ) | (656 | ) | (67 | ) | |||||||||||||
| Manufacturing & supplies | 151 | 95 | 56 | 312 | 888 | (576 | ) | |||||||||||||||||
| Contractors | 410 | 555 | (145 | ) | 1,509 | 1,634 | (125 | ) | ||||||||||||||||
| Patents | 191 | 177 | 14 | 252 | 244 | 8 | ||||||||||||||||||
| Staffing | 500 | 189 | 311 | 1,683 | 685 | 998 | ||||||||||||||||||
| Amortization | 20 | 21 | (1 | ) | 58 | 89 | (31 | ) | ||||||||||||||||
| Other | 1 | 8 | (7 | ) | (6 | ) | 64 | (70 | ) | |||||||||||||||
| $ | 3,004 | $ | 1,355 | $ | 1,649 | $ | 5,989 | $ | 4,674 | $ | 1,315 | |||||||||||||
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For the three months ended September 30, 2022 and 2021
The increase of $1,649 in research and development expenses was primarily because of increases of $1,400 in milestone payments, $311 in staffing costs, $56 in manufacturing and supplies and $14 in patents offset by decreases of $145 in contractors and consultants, $64 in research study costs, $7 in other research and development costs and $1 in amortization, offset by. Also, tax credit recoveries were reduced by $86. Milestone payments increased because of commitments to Eisai and Novartis Staffing costs increased primarily because of increased stock option costs.
For the nine-months ended September 30, 2022 and 2021
The increase of $1,315 in research and development expenses was primarily because of increases of $1,400 in milestone payments, $998 in staffing costs and $8 increase in patent costs, offset by $500 decreases of $576 in manufacturing and supplies, $221 in research study costs, $125 in contractors and consultants, $70 in other research and development, and $31 in amortization. Milestone payments increased because of commitments to Eisai and Novartis. Tax credit recoveries increased by $67. Staffing costs increased primarily because of severance and stock option costs.
Impairment of Intangible Assets
As a result of both the Company’s February 15, 2022, receipt of a Refusal to File (“RTF”) from the U.S. Food and Drug Administration regarding the Company’s new drug application (“NDA”) for Dovitinib, and the current depressed state of the Company’s stock price, the Company performed an impairment assessment on its individual intangible assets during the period ended March 31, 2022 utilizing a discounted cash flow model with a weighted average cost of capital (“WACC”) of 16%, and recognized an impairment charge of $14,007 during the three month period ended March 31, 2022. The Company has further assessed the fair value of its intangible assets at June 30, 2022 and September 30, 2022 and determined that no further impairment is warranted as of those dates. Individual material development projects in progress are as follows:
General and Administrative Expenses
For the three months ended September 30, 2022 and 2021
General and administrative expenses decreased by $1,061 for the three months ended September 30, 2022, compared to September 30, 2021. The decrease was primarily because of decreases of $628 in staffing, $870 in audit and legal, $21 in listings, and $11 in communications, offset by a $407 increase in insurance and $62 in other administrative expenses. Staffing costs decreased primarily because of decreased stock option expense.
For the nine-months ended September 30, 2022 and 2021
General and administrative expenses increased by $1,577 for the nine months ended September 30, 2022, compared to September 30, 2021. The increase was primarily because of increases of $1,167 in insurance, $387 in audit and legal, $300 in financial consulting, $54 in listings, $37 in other administrative, and $14 in communications, offset by decreases of $356 in staffing and $26 in premises. Insurance costs increased because of D&O insurance costs. Staffing costs decreased primarily because of reduced stock option expense.
Other Income (Expenses), Net
For the three months ended September 30, 2022 and 2021
Other income (expense) of ($470) recognized in the three months ended September 30, 2022, consisted primarily of ($406) in foreign exchange losses, ($45) loss on our investment, and ($35) in interest expenses, offset by an $2 fair value adjustment to derivative and warrant liabilities and $14 of interest income. In the three months ended September 30, 2021, other income (expense) of $2.7 million consisted of income from the sale of IP of $1 million, fair value adjustment of derivative liabilities of $1.8 million, interest income of $28 and foreign exchange gains of $9, offset by Loss on investment of $137 and interest expense of $27.
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For the nine-months ended September 30, 2022 and 2021
Other income (expense) of $13.3 million recognized in the nine months ended September 30, 2022, consisted primarily of a $13.4 million fair value adjustment to derivative and warrant liabilities, income of $1.8 million from the gain on sale of IP, and interest income of $19, offset by ($944) in foreign exchange losses, ($800) registration delay penalty on our Series A Preferred stock, ($107) in interest expenses, and ($115) loss on investment. In the nine months ended September 30, 2021, other income (expense) of $1.1 million consisted of income from the sale of IP of $1 million and fair value adjustment of derivative liabilities of $1.7 million, offset by change in fair value of convertible debt of ($474), finance expenses of ($393), loss on investment of ($317), interest expense of ($238), loss on extinguishment of convertible debt of ($141), and foreign exchange losses of ($71).
Changes in fair value of our derivative liabilities and convertible debt are measured using level 3 inputs as described in our condensed consolidated financial statements.
Income Taxes
For the three-month periods ended September 30, 2022 and 2021
Income tax recovery (expense) was ($5) for the three months ended September 30, 2022, versus ($35) for the three months ended September 30, 2021.
For the nine-month periods ended September 30, 2022 and 2021
Income tax recovery (expense) was $1.2 million for the nine months ended September 30, 2022, versus ($98) for the nine months ended September 30, 2021. The increase in income tax recovery of $1.3 million was primarily because the March 31, 2022, impairment charge of approximately $14 million resulted in a tax benefit of $1.2 million for the nine months ended September 30, 2022.
Liquidity, Capital Resources and Plan of Operations
Since our inception our operations have been financed primarily by the sale of convertible promissory notes and the sale and issuance of our securities. As of September 30, 2022, we had $3.9 million in cash, and an accumulated deficit of $79.7 million.
Our primary use of cash is to fund operating expenses, which consist of research and development as well as regulatory expenses related to our therapeutic drug candidate, dovitinib, and clinical programs for stenoparib and IXEMPRA®, and to a lesser extent, general and administrative expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
As of September 30, 2022, the Company’s cash deposits of $3.9 million were determined to be insufficient to fund its current operating plan and planned capital expenditures beyond the year ending December 31, 2022. These conditions give rise to substantial doubt over the Company’s ability to continue as a going concern.
The Company is currently in discussions with the holder of its Series A Preferred Shares regarding a potential bridge loan to extend the Company’s cash runway beyond December 31, 2022, in order to provide the Company with more time to complete the process of amending its certificate of incorporation increasing its authorized share capital in order to facilitate additional capital investments. No assurances can be given that the discussions will be successful or that the Company will be able to raise additional capital on favorable terms, or at all. The Company’s failure to raise capital or enter into other such arrangements when needed would have a negative impact on its business, results of operations and financial condition and its ability to maintain current operations and develop its product candidates which in turn may force the Company to seek protection under the U.S. bankruptcy laws. The Company is actively exploring raising capital through equity and debt financings which may require collateralizing debt financing with the assets of the Company.
We expect to incur substantial expenses in the foreseeable future for the development and potential commercialization of our drug candidates and ongoing internal research and development programs. At this time, we cannot reasonably estimate the nature, timing, or aggregate amount of costs for our development, potential commercialization, and internal research and development programs. However, to complete our current and future preclinical studies and clinical trials, and to complete the process of obtaining regulatory approval for our drug candidates, as well as to build the sales, marketing, and distribution infrastructure that we believe will be necessary to commercialize our drug candidates, if approved, we may require substantial additional funding in the future.
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Contractual Obligations and Commitments
We enter into agreements in the normal course of business with vendors for preclinical studies, clinical trials and other service providers for operating purposes. We have not included these payments in the table of contractual obligations above since these contracts are generally cancellable at any time by us following a certain period after notice and therefore, we believe that our non-cancellable obligations under these agreements are not material.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| (In thousands) | ||||||||
| Net cash flows used in operating activities | $ | (14,371 | ) | $ | (10,567 | ) | ||
| Net cash flows provided by investing activities | 809 | 1,000 | ||||||
| Net cash flows (used in) provided by financing activities | (2,311 | ) | 15,381 | |||||
| Effect of foreign exchange rates on cash | 264 | (528 | ) | |||||
| Net increase (decrease) in cash | $ | (15,609 | ) | $ | 5,286 | |||
Operating Activities
For the nine months ended September 30, 2022, net cash used in operating activities was approximately $14.4 million compared to approximately $10.6 million for the nine months ended September 30, 2021. The approximate $4.1 million increase in net cash used in operating activities was primarily the result of a decreased loss of $2.5 million, and items not affecting cash of approximately $163, offset by changes in operating assets and liabilities of approximately $1.1 million.
Investing Activities
For the nine months ended September 30, 2022, net cash provided by investing activities was approximately $809 compared to $1,000 for the nine months ended September 30, 2021. The decrease in net cash provided by investing activities was primarily due to a decrease in proceeds from the sale of IP during the nine months ended September 30, 2022.
Financing Activities
In the nine months ended September 30, 2022, we incurred $2.3 million cash financing costs as a result of a $1.5 million floor price adjustment on converted Series A Preferred Stock and an $800 Registration Delay Penalty on our Series A Preferred stock. We have also incurred and accrued an additional $2.9 million in unpaid costs due to 3i floor price liability of $1,646 inclusive of interest of $49.
In the nine months ended September 30, 2021, we received $15.4 million from financing activities inclusive of $14.9 million from the issuance of common stock and $1.2 million in proceeds from convertible debt and we paid $620 in share issuance costs. We also received and repaid a $2.9 million loan.
Operating Capital and Capital Expenditure Requirements
We believe that our existing cash and cash equivalents as of November 14, 2022, and our anticipated expenditures and commitments for the next twelve months including contractual obligations for milestone payments, will not enable us to fund our operating expenses and capital expenditure requirements for at least twelve (12) months from the date of this report. Our estimate as to how long we expect our cash to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned.
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based upon our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2022 and 2021, and our audited consolidated financial statements for the years ended December 31, 2021 and 2020, which have been prepared in accordance with 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. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in 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 and conditions.
Our significant accounting policies are described in the notes to our consolidated financial statements for the years ended December 31, 2021, and 2020, included in our Form 10-K for the year ended December 31, 2021, filed on May 17, 2022, and there have been no significant changes to our significant accounting policies during the nine months ended September 30, 2022. These unaudited interim condensed financial statements should be read in conjunction with the Company’s audited financial statements and accompanying notes.
Recently Issued Accounting Pronouncements
See the sections titled “Recently adopted accounting pronouncements” in Note 2(dd) and “Recently issued accounting pronouncements not yet adopted” in Note 2(ee) to the Company’s consolidated financial statements for the year ended December 31, 2021 and 2020, respectively, appearing in the Company’s 10-K filed with the SEC on May 17, 2022; and in Notes 2(i) and 2(j) to the Company’s unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2022 and 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a Smaller Reporting Company, we are exempt from the requirements of Item 3.
Item 4. Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15I and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of September 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, because (i) of the material weaknesses identified in our internal controls over financial reporting; and (ii) we were required to restate our financial statements for the year ended December 31, 2020, and quarterly period ended September 30, 2021, which delayed the filing of or required an amendment to our SEC reports, our disclosure controls, and procedures, as defined above, were not effective.
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As a newly reporting company under the Exchange Act, we are not required to evaluate the effectiveness of our internal controls over financial reporting until the end of the fiscal year after we file our first annual report on Form 10-K, which will occur on December 31, 2022. However, in connection with the audit of our financial statements for the years ended December 31, 2021 and 2020, we identified material weaknesses in our internal controls over financial reporting because we did not have a formal process for period end financial closing and reporting, we historically had insufficient resources to conduct an effective monitoring and oversight function independent from our operations and we lack accounting resources and personnel to properly account for accounting transactions such as the issuance of warrants with a derivative liability component. In particular, the material weaknesses identified were:
| ● | a lack of accounting resources required to fulfill US GAAP and SEC reporting requirements; | |
| ● | a lack of comprehensive US GAAP accounting policies and financial reporting procedures and personnel; | |
| ● | a lack of adequate procedures and controls to appropriately account for accounting transactions including liability and the valuation allowance on the deferred tax asset relating to the net operating losses; and | |
| ● | a lack of segregation of duties given the size of our finance and accounting team. |
We have implemented and are continuing to implement various measures to address the material weaknesses identified; these measures include:
| ● | The hiring of an Interim Chief Financial Officer and Director of Financial Reporting, a CPA (Illinois) who is experienced with public company reporting and is conversant in US GAAP and SEC accounting issues. With this hire we are addressing our ongoing development of our comprehensive US GAAP accounting policies, financial reporting procedures and internal controls over financial reporting; | |
| ● | retaining consulting services to assist with the accounting treatment of complex financial instruments and tax; and | |
| ● | engaged an independent US GAAP consulting firm. |
A significant deficiency is a control deficiency, or a combination of control deficiencies, that adversely affects our ability to initiate, authorize, record, process, or report external financial data reliably in accordance with US GAAP such that there is more than a remote likelihood that a misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected by our employees.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected by our employees. In response, we have begun the process of evaluating our internal control over financial reporting and to address the material weaknesses identified.
We intend to continue to take steps to remediate the material weaknesses described above and further evolve our accounting processes, controls, and reviews. We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address any other matters we identify or are brought to our attention.
We believe we are making progress toward achieving the effectiveness of our internal controls and disclosure controls. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the material weaknesses in our internal controls over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weaknesses in our internal controls over financial reporting, which may necessitate further action.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting other than as described above.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time in the future, we may become involved in litigation or other legal proceedings that arise in the ordinary course of business. We are not currently party to any legal proceedings, and we are not aware of any pending or threatened litigation against us that we believe could have a material adverse effect on our business, operating results, or financial condition. In the event we are subject to a legal proceeding, it could have a material adverse impact on us because of litigation costs and diversion of management resources.
Item 1A. Risk Factors.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks set forth in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on May 17, 2022, before making an investment decision. If any of the risks occur, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should read the section captioned “Forward Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Pursuant to the Securities Purchase Agreement with 3i, a Delaware limited partnership (the “Investor”), we issued 20,000 shares of our Series A Preferred Stock and a warrant to purchase 2,018,958 shares of common stock at an initial exercise price of $9.9061 to the Investor along with a PIPE Warrant, for an aggregate purchase price of $20 million. Simultaneously with the execution of the SPA, we also entered into a Registration Rights Agreement with the Investor wherein we agreed to register a number of shares of our common stock equal to the maximum number of shares of our common stock that could be issued upon conversion of the Series A Preferred Stock using a conversion price equal to 20% of $80,000,000 divided by the number of shares of common stock then outstanding (the “Floor Price”) plus 125% of the shares of common stock issuable upon exercise of the PIPE Warrant.
From January 1, 2022, to September 30, 2022, pursuant to a series of exercise of conversion by the Investor, we issued 2,164,163 shares of Common Stock to the Investor upon the conversion of 5,574 shares of Series A Preferred Stock (“Conversion Shares”). No proceeds were received by the Company upon such conversion. As of September 30, 2022, we had 15,226 shares of Series A Preferred Stock issued and outstanding.
The offers, sales, and issuances of the Conversion Shares, Series A Preferred Stock and PIPE Warrant to the Investor described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. Each of the recipients of securities in these transactions was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits
The following exhibits are filed as part of this Report.
| Exhibit No. | Description | |
| 3.1(a) | Amendment No. 1 to Amended and Restated Bylaws | |
| 10.1(b) | Second Amendment to Development, Option & License Agreement | |
| 10.2†(c) | Second Amendment to License Agreement | |
| 31.1* | Certifications of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act | |
| 31.2* | Certifications of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act | |
| 32.1* | Certifications of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act | |
| 32.2* | Certifications of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act | |
| 101.INS* | Inline XBRL Instance Document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| (a) | Incorporated by reference from Form 8-K filed with the SEC on July 11, 2022 |
| (b) | Incorporated by reference form Form 10-Q for the quarter ended June 30, 2022, filed with the SEC on October 7, 2022. |
| (c) | Incorporated by reference from Form 8-K filed with the SEC on September 30, 2022. |
| † | Certain portions of this exhibit are omitted because they are not material and would likely cause competitive harm to the registrant if disclosed. |
| * | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALLARITY THERAPEUTICS, INC., A Delaware Corporation | |||
| Date: November 14, 2022 | By: | /s/ James G. Cullem | |
| Name: | James G. Cullem | ||
| Title: | Chief Executive Officer (Principal Executive Officer) | ||
| Date: November 14, 2022 | By: | /s/ Joan Brown | |
| Name: | Joan Brown | ||
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James Cullem, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Allarity Therapeutics, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) [Omitted];
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: November 14, 2022 | By: | /s/ James Cullem | |
| Name: | James Cullem | ||
| Title: | Chief Executive Officer and Director (Principal Executive Officer) | ||
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joan Brown, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Allarity Therapeutics, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) [Omitted];
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: November 14, 2022 | By: | /s/ Joan Brown | |
| Name: | Joan Brown | ||
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | ||
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Allarity Therapeutics, Inc. (the “Company”) hereby certifies, to his knowledge, that:
1. The accompanying Quarterly Report on Form 10-Q for the Company for the fiscal quarter ended September 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
| Date: November 14, 2022 | By: | /s/ James Cullem | |
| Name: | James Cullem | ||
| Title: | Chief Executive Officer and Director (Principal Executive Officer) | ||
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Allarity Therapeutics, Inc. (the “Company”) hereby certifies, to her knowledge, that:
1. The accompanying Quarterly Report on Form 10-Q for the Company for the fiscal quarter ended September 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
| Date: November 14, 2022 | By: | /s/ Joan Brown | |
| Name: | Joan Brown | ||
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | ||