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
SECon 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
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 the standard of care away from cancer therapy
Monotherapies to combination therapies, which are increasingly being promoted
market opportunities and which have shown a dramatic increase in patient numbers
? Strengthening the company’s ability to attract additional funds
institutional life science investors in support of the
the clinical development activities and the future success of the company.
? Significantly expand the company’s opportunities for future commercial activities
Partnering with larger pharmaceutical companies to maximize value
Pipeline assets and DRP® platform technology.
? Improving the Company’s likelihood of clinical and commercial success
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 32
As part of its new strategic pipeline focus, and subject to financing, the Company has announced it expects 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. 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 Q4 2022 and Q1 2023, respectively. All pipeline development activities will continue to utilize drug-specific DRP® companion diagnostics to guide patient selection and treatment.
Second Amendment to the License Agreement
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 $500,000. 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.
Change in Board of Directors and annual 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. Cullemas Class III director, Thomas Jensenas Class I director, Dr. Rothas Class II director, and Mr. McLaughlinas Class II director. Messrs. Cullem and Jensen are executive officers of the Company. In addition to serving as a director of the Company, Mr. Cullemwill continue to serve as the Company's Chief Executive Officer and Chief Business Officer. In addition, Mr. Jensenwill continue to serve as the Company's Senior Vice President, Investor Relations. In connection with the appointment of Dr. Rothand Mr. McLaughlinas 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 $7.5for serving as a member of the Audit Committee, $4for serving as a member of the Nominating and Corporate Governance Committeeand $5for 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 $1.28and $1.10per 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
33 Change in Management
June 2022, the Company effected a change in management. Effective as of June 29, 2022, Steve Carchediresigned 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 Knudsenresigned 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. Carchediand Mr. Knudsenwith 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. Cullemassumed 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'srole 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.
Impact of COVID-19 on our business – update
March 2020, the World Health Organizationdeclared 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. 34
Effects of the Russia-Ukraine War
There have been immense flows of refugees to
Europeand Denmarkis ready to facilitate and to accept refugees from the Ukraine. It is far too early to estimate how many migrants Denmarkwill facilitate, but immigration officials have begun preparing to accept Ukrainian refugees. Being a North Atlantic Treaty Organization(NATO) member, Denmarkwill strengthen its own national preparedness as well as that of the NATOdefense alliance. The Ukrainecrisis 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 Denmarkbut, 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. We have incurred net losses in each year since inception. Our net losses were
$8.2 millionand $8.5 millionfor the six months ended June 30, 2022, and June 30, 2021, respectively. As of June 30, 2022, we had an accumulated deficit of $74.7 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;
? continued research activities to discover new drug candidates; and
? manufacture supplies for our preclinical studies and clinical trials.
Components of operating expenses
research and development costs
Research and development costs include:
? Costs incurred under agreements with third-party contracting organizations,
? Costs related to the manufacture of drug substances, including contract fees
? laboratory and vendor costs associated with conducting pre-clinical studies;
? employee-related expenses, which include salaries, benefits and stock-based compensation. 35
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 related to the further development of 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.
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 as a result 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.
Operating results for the past three and six months
The table below summarizes our operating results for the past three and six months
For the three months ended For the six months ended June 30, Increase/ June 30, Increase/ 2022 2021 (Decrease) 2022 2021 (Decrease) (In thousands) (In thousands) (Restated) (Restated) Operating costs and expenses: Research and development
$ 1,696 $ 2,279 $ (583 ) $ 2,985 $ 3,531 $ (546 )Impairment of intangible assets - - - 14,007 - 14,007 General and administrative 3,146 2,097 1,049 6,159 3,307 2,852 Total operating costs and expenses 4,842 4,376 466 23,151 6,838 16,313 Loss from operations: $ (4,842 ) $ (4,376 ) $ (466 ) $ (23,151 ) $ (6,838 ) $ (16,313 )36
research and development costs
We do not currently track our research and development expenses by product candidate. A breakdown by type of spend for the past three and six months
For the three months ended For the six months ended June 30, Increase/ June 30, Increase/ 2022 2021 (Decrease) 2022 2021 (Decrease) (In thousands) (In thousands) (Restated) (Restated)
Research study expenses $ 535 439
$ 96 $ 1,040 $ 1,197 $ (157 )Tax credit (136 ) (219 ) 83 (590 ) (438 ) (152 ) Manufacturing & supplies (7 ) 722 (729 ) 161 793 (632 ) Contractors 722 863 (141 ) 1,099 1,079 20 Patents (15 ) 7 (22 ) 61 67 (6 ) Staffing 574 394 179 1,183 710 473 Amortization 18 32 (14 ) 38 68 (30 ) Other 5 40 (35 ) (7 ) 55 (62 ) $ 1,696 $ 2,279 $ (583 ) $ 2,985 $ 3,531 $ (546 )
For the past three months
The decrease of
$583in research and development expenses was primarily because of a $96increase in research and development expenses and a $179increase in staffing, offset by decreases of $83in tax credits and decreases of $729in manufacturing and supplies costs, $141in contractor costs, $22in patent costs, $14in amortization and $35in other expenses. Research and development expenses decreased overall because of decreased clinical research activity. Specifically, manufacturing and supplies and contractor costs have decreased since we have decreased our clinical activity to two of our three top priority assets while we prioritize our clinical programs and staffing expenses increased due to accrued severance.
For the past six months
The decrease of
$546in research and development expenses was primarily because of a $473increase in staffing and a $20increase in contractors, offset by an increase in tax credits of $152and decreases of $157in research study expenses, $6in patent costs, $30in amortization, and $62in other expenses. Research and development expenses decreased overall because of decreased clinical activity. Staffing expenses increased primarily due to accrued severance.
Impairment of intangible assets
As a result of both the Company's
February 15, 2022, receipt of a RTF from the U.S. Food and Drug Administrationregarding the Company's NDA for Dovitinib, and the current depressed state of the Company's stock price, the Company has performed an impairment assessment on its individual intangible assets utilizing a discounted cash flow model and recognized an impairment charge of $14.0 millionduring the six months ended June 30, 2022.
General and administrative expenses
For the past three months
General and administrative expenses increased by
$1,049for the three months ended June 30, 2022, compared to June 30, 2021. The increase was primarily due to an increase in audit and legal expenses of $610, insurance expense of $418, consulting expenses of $300, and communications expense of $10, offset by a decrease in premises expense of $30, staffing expenses of $149, listings expenses of $16. and other administrative expenses of $94. Staffing expenses decreased primarily due to decreased stock-based compensation expense as a result of stock option forfeitures, offset by severance accruals. 37
For the past six months
General and administrative expenses increased by
$2.9 millionfor the six months ended June 30, 2022, compared to June 30, 2021. The increase was primarily due to increases in audit and legal expense of $1.3 million, insurance expense of $760, staffing expenses of $486, consulting expenses of $300, listings expenses of $75, and communications expense of $25, offset by a decrease in premises expense of $26, and other administrative expenses of $25. Staffing increased in the six months ended June 30, 2022, primarily because of severance accruals.
Other income (expense), net
For the past three months
Other income (expense) of (
$257) recognized in the three months ended June 30, 2022, consisted primarily of an ( $800) Registration Delay Payment paid to 3i, ( $269) in foreign exchange losses, ( $34) loss on our investment, and ( $33) in interest expenses, offset by an $874fair value adjustment to derivative and warrant liabilities and $5of interest income. In the three months ended June 30, 2021, other income (expense) of ($1.0) millionconsisted primarily of finance expenses of ( $393), change in fair value of convertible debt of ( $273), interest expenses of ( $166), loss on investment of ( $67), foreign exchange losses of ( $41), fair value adjustment of derivative liability of ( $25), and loss on extinguishment of convertible debt of ( $25).
For the past six months
Other income (expense) of
$13.7 millionrecognized in the six months ended June 30, 2022, consisted primarily of a $13.4 millionfair value adjustment to derivative and warrant liabilities, income of $1.8 millionfrom the gain on sale of IP, and interest income of $5, offset by ( $538) in foreign exchange losses, ( $72) in interest expenses, and ( $70) loss on investment. In the six months ended June 30, 2021, other income (expense) of ($1.6) millionconsisted of finance expenses of ( $480), change in fair value of convertible debt of ( $474), interest expenses of ( $245), loss on investment of ( $180), loss on extinguishment of convertible debt of ( $141), foreign exchange losses of ( $80), offset by a $20fair value adjustment of derivative liability.
Changes in the fair value of our derivative liabilities and convertible debt instruments are measured using Level 3 inputs as described in our condensed consolidated financial statements.
For the past three months
Income tax refund (expense) was (
For the six-month periods ended
June 30, 2022and June 30, 2021(Restated) Income tax recovery (expense) was $1.2 millionfor the six months ended June 30, 2022, versus ( $63) for the six months ended June 30, 2021. The increase in income tax recovery of $1.3 millionwas primarily because the March31, 2022, impairment charge of approximately $14 millionresulted in a tax benefit of $1.2 millionfor the six months ended June 30, 2022.
Liquidity, capital resources and operational plan
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
June 30, 2022, we had $7.7 millionin cash, and an accumulated deficit of $74.7 million. 38 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 June 30, 2022, the Company's cash deposits of $7.7 millionwere determined to be insufficient to fund its current operating plan and planned capital expenditures for the next 12 months. These conditions give rise to a substantial doubt over the Company's ability to continue as a going concern. 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 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. 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.
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.
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