# Lite Strategy, Inc.: Form 10-Q for the period ended Dec 31, 2023 - Company: [Lite Strategy, Inc.](/companies/lits.md) (CIK 1262104) - Form: 10-Q - Filed: 2024-02-13 - Accepted by EDGAR: Feb 13, 2024, 17:00 ET - Period: 2023-12-31 - Accession: 0000950170-24-014640 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1262104/000095017024014640/meip-20231231.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1262104/000095017024014640/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2023-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2023-10-01 to 2023-12-31 | $0 | us-gaap:Revenues | | Revenue | 6 months, 2023-07-01 to 2023-12-31 | $65.3m | us-gaap:Revenues | | Research and development | 3 months, 2023-10-01 to 2023-12-31 | $3.9m | us-gaap:ResearchAndDevelopmentExpense | | Research and development | 6 months, 2023-07-01 to 2023-12-31 | $7.4m | us-gaap:ResearchAndDevelopmentExpense | | Operating income | 3 months, 2023-10-01 to 2023-12-31 | −$11.9m | us-gaap:OperatingIncomeLoss | | Operating income | 6 months, 2023-07-01 to 2023-12-31 | $43.4m | us-gaap:OperatingIncomeLoss | | Net income | 3 months, 2023-10-01 to 2023-12-31 | −$11.1m | us-gaap:NetIncomeLoss | | Net income | 6 months, 2023-07-01 to 2023-12-31 | $45.3m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2023-10-01 to 2023-12-31 | −$1.66 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 6 months, 2023-07-01 to 2023-12-31 | $6.80 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2023-10-01 to 2023-12-31 | −$1.66 | us-gaap:EarningsPerShareBasic | | Basic EPS | 6 months, 2023-07-01 to 2023-12-31 | $6.80 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2023-10-01 to 2023-12-31 | 6,663,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 6 months, 2023-07-01 to 2023-12-31 | 6,663,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 6 months, 2023-07-01 to 2023-12-31 | −$29.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Dividends paid | 6 months, 2023-07-01 to 2023-12-31 | $11.7m | us-gaap:PaymentsOfDividends | | Cash and equivalents | at 2023-12-31 | $5.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2023-12-31 | $66.2m | us-gaap:AssetsCurrent | | Total assets | at 2023-12-31 | $78.5m | us-gaap:Assets | | Current liabilities | at 2023-12-31 | $8.0m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2023-12-31 | $19.1m | us-gaap:Liabilities | | Shareholders' equity | at 2023-12-31 | $59.5m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 56,142 characters. This Quarterly Report on Form 10-Q (Quarterly Report) 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 other than statements of historical facts contained in this Quarterly Report, including statements regarding the future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words believe, may, will, estimate, continue, anticipate, intend, should, plan, expect, and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including, without limitation, those described in Risk Factors in our 2023 Annual Report on Form 10-K (2023 Annual Report), as filed with the Securities and Exchange Commission on September 26, 2023. Set forth below is a summary of the principal risks we face: ### Summary Risk Factors Our business is subject to numerous risks and uncertainties that you should consider before investing in our common stock. Set forth below is a summary of the principal risks we face: - We are subject to risks relating to general economic conditions, including financial market volatility and disruption, elevated levels of inflation, and uncertain economic conditions in the United States and abroad; - We will need substantial additional funds to progress the clinical trial programs for our drug candidates, to commercialize our drug candidates and to develop new compounds. The actual amount of funds we will need will be determined by a number of factors, some of which are beyond our control; - We may be required to seek additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties at terms which maybe unfavorable to us; - We are a clinical-stage pharmaceutical company focused on developing potential new therapies for cancer and are likely to incur operating losses for the foreseeable future; - The results of pre-clinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidates may not have favorable results in later studies or trials; - Changes in drug candidate manufacturing or formulation may result in additional costs or delay; - If third parties with whom we collaborate on the development and commercialization of our drug candidates do not satisfy their obligations, do not otherwise pursue development or commercialization of our drug candidates or if they terminate their agreements with us, we may not be able to develop or commercialize our drug candidates; - We are subject to significant obligations to Presage in connection with our license of voruciclib, and we may become subject to significant obligations in connection with future licenses we obtain, which could adversely affect the overall profitability of any products we may seek to commercialize, and such licenses of drug candidates, the development and commercialization for which we are solely responsible, may never become profitable; - Our business strategy may include entry into additional collaborative or license agreements. We may not be able to enter into collaborative or license agreements or may not be able to negotiate commercially acceptable terms for these agreements; - Final approval by regulatory authorities of our drug candidates for commercial use may be delayed, limited or prevented, for reasons which may or may not be directly related to our drug candidates, and any of which would adversely affect our ability to generate operating revenues; - The FDA may determine that our drug candidates have undesirable risk-benefit profiles with respect to its evaluations of efficacy and/or side effects that could delay or prevent regulatory approval or commercialization; - If we experience delays or difficulties in the enrollment of patients in clinical trials, our completion of clinical trials and receipt of necessary regulatory approvals could be delayed or prevented; - Changes in funding for the FDA and other government agencies or future government shutdowns could cause delays in the submission and regulatory review of marketing applications, which could negatively impact our business or prospects; - Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products internationally; - Any designation granted by the FDA for any of our product candidates may not lead to a faster development or regulatory review or approval process, and does not increase the likelihood that our product candidates will receive marketing approval. We may also not be able to obtain or maintain any such designation; - Any orphan drug designations we receive may not confer marketing exclusivity or other benefits; - Even if we or our licensees receive regulatory approval to commercialize our drug candidates, our ability to generate revenues from any resulting products will be subject to a variety of risks, many of which are out of our control; - If any products we develop become subject to unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, our ability to successfully commercialize our products will be impaired; - Our drug candidates are subject to ongoing government regulation both before and after regulatory approval; - We may not be able to establish the contractual arrangements necessary to develop, market and distribute our drug candidates; - Our commercial opportunity will be reduced or eliminated if competitors develop and market products that are more effective, have fewer side effects or are less expensive than our drug candidates; - Our product candidates may face competition sooner than anticipated; - We rely on third parties to conduct our clinical trials and pre-clinical studies. If those parties do not successfully carry out their contractual duties or meet expected deadlines, our drug candidates may not advance in a timely manner or at all; - We will depend on third party suppliers and contract manufacturers for the manufacturing of our drug candidates and have no direct control over the cost and timing of manufacturing our drug candidates. Increases in the cost of manufacturing our drug candidates or delays in manufacturing would increase our costs of conducting clinical trials and could adversely affect our future profitability; - We rely on acquisitions or licenses from third parties to expand our pipeline of drug candidates; - Our commercial success is dependent, in part, on obtaining and maintaining patent protection and preserving trade secrets, which cannot be guaranteed; - Claims by other companies that we infringe on their proprietary technology may result in liability for damages or stop our development and commercialization efforts; - We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property; - We may be subject to substantial costs stemming from our defense against third party intellectual property infringement claims; - We face a risk of product liability claims and claims may exceed our insurance limits; - Our employees, independent contractors, consultants, commercial partners, principal investigators, or clinical contract research organizations (CROs) may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business; - Our business and operations would suffer in the event of system failures; - Our efforts will be seriously jeopardized if we are unable to retain and attract key employees; - Negative U.S. and global economic conditions may pose challenges to our business strategy, which relies on funding from the financial markets or collaborators, including financial and other impacts of macroeconomic and geopolitical trends and events, including the conflicts in Ukraine and between Israel and Hamas and related regional and global ramifications; - Laws, rules and regulations relating to public companies may be costly and impact our ability to attract and retain directors and executive officers; - Security breaches, cyber attacks and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer; - If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could harm our business; - We or the third parties upon whom we depend may be adversely affected by natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster; - Limitations on the tax deductibility of net operating losses could adversely affect our business and financial condition; - Our business could be negatively impacted as a result of actions by activist investors; - The trading price of the shares of our common stock has been and may continue to be highly volatile and could decline in value and we may incur significant costs from class action litigation; - Future sales of our common stock, including common stock issued upon exercise of outstanding warrants or options, may depress the market price of our common stock and cause stockholders to experience dilution; - We will have broad discretion over the use of the net proceeds from any exercise of outstanding warrants and options; - We are authorized to issue blank check preferred stock, which could adversely affect the holders of our common stock; - Anti-takeover provisions contained in our amended and restated certificate of incorporation and sixth amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt; - Our sixth amended and restated bylaws require, to the fullest extent permitted by law, that derivative actions brought in our name, actions against our directors, officers, other employees or stockholders for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel, which may have the effect of discouraging lawsuits against our directors, officers, other employees or stockholders; and - Our executive officers and directors may sell shares of their stock, and these sales could adversely affect our stock price. These risks are not exhaustive. Other sections of this report and our other filings with the Securities and Exchange Commission (SEC) include additional factors which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Past performance may not be an indicator of future results. The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in the condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report and the audited financial statements and notes thereto included in our 2023 Annual Report, as filed with the SEC. Operating results are not necessarily indicative of results that may occur in future periods. ### Overview MEI Pharma, Inc. (Nasdaq: MEIP) is a clinical-stage pharmaceutical company committed to developing novel and differentiated cancer therapies. We build our pipeline by acquiring promising cancer agents and creating value in programs through clinical development, strategic partnerships, and out-licensing or commercialization, as appropriate. Our approach to oncology drug development is to evaluate our drug candidates in combinations with standard-of-care therapies to overcome known resistance mechanisms and address clear medical needs to provide improved patient benefit. The drug candidate pipeline includes voruciclib, an oral cyclin-dependent kinase 9 (CDK9) inhibitor, and ME-344, an intravenous small molecule inhibitor of mitochondrial oxidative phosphorylation (OXPHOS). Our common stock is listed on the Nasdaq Capital Market under the symbol MEIP. We believe our cash is sufficient to fund operations for at least 12 months and through the reporting of clinical data readouts from the ongoing voruciclib Phase 1 and ME-344 Phase 1b clinical programs. On October 31, 2023, we announced entry into a Cooperation Agreement (Cooperation Agreement) with Anson Funds (Anson) and Cable Car Capital (Cable Car) which contains the following key terms: - Capital Return to Stockholders: Payment of a dividend to stockholders in the amount of $1.75 per share of common stock to all stockholders, which was issued on December 6, 2023. Additionally, a second return of capital of not to exceed $9.33 million (the Potential Second Return of Capital) could be issued if authorized by the board of directors (Board) should our ongoing ME-344 phase 1b trial fail to meet certain endpoints or our Board determines not to proceed with a second cohort. The Potential Second Return of Capital may take the form of a dividend or tender offer and is subject to Board approval as well as modification associated with applicable requirements under Delaware law, as detailed in the Cooperation Agreement. - Director Resignations: Three of our former directors resigned from the Board concurrently with the execution of the Cooperation Agreement and did not seek reelection at the 2024 Annual Meeting of Stockholders (2024 Annual Meeting). - Stockholder Designees Added to the Board: The appointment of two directors designated by Anson and Cable Car, with an additional director appointment mutually agreed upon by us and Anson and Cable Car. These appointments were effective immediately and the new directors were nominated for election by us and elected at the fiscal 2024 Annual Meeting to serve for a three-year term. - Formation of a Capital Allocation Committee: The formation of a Capital Allocation Committee, comprising five directors including the three new directors. The Capital Allocation Committee will advise the Board on the strategic allocation of capital to support (i) the development of our drug candidate programs and (ii) other value creation or preservation measures, with a view toward maximizing stockholder value. As part of the Cooperation Agreement, Anson and Cable Car withdrew their consent solicitation and agreed to abide by customary standstill provisions. Additionally, we reimbursed Anson and Cable Car’s fees and expenses related to their engagement with us as of the date of the Cooperation Agreement, in the amount of $1.1 million. ### Clinical Development Programs Our clinical-stage drug candidate pipeline includes voruciclib, an oral CDK9 inhibitor, and ME-344, an intravenous small molecule mitochondrial inhibitor targeting OXHPHOS in the mitochondria. #### Voruciclib: Potent Orally Administered CDK9 Inhibitor in Phase 1 Studies Voruciclib is a potent and selective orally administered CDK9 inhibitor. Voruciclib is being studied in a Phase 1 trial evaluating dose and schedule in patients with acute myeloid leukemia (AML) and B-cell malignancies as a single-agent, and in combination with the B-cell lymphoma 2 (BCL2) inhibitor venetoclax (marketed as Venclexta®) in patients with AML. Voruciclib is also being evaluated in pre-clinical studies to explore potential activity in various solid tumor cancers including in combination with therapies that target the RAS signaling pathway, such as KRAS inhibitors. Voruciclib Scientific Overview: Cell Cycle Signaling CDK9 has important functions in cell cycle regulation, including the modulation of two therapeutic targets in cancer: - CDK9 is a transcriptional regulator of the myeloid leukemia cell differentiation protein (MCL1), a member of the family of anti-apoptotic proteins which, when elevated, may prevent the cell from undergoing cell death and result in poor prognosis in cancer. Inhibition of CDK9 blocks the production of MCL1, which is also an established resistance mechanism to the BCL2 inhibitor venetoclax. - CDK9 is a transcriptional regulator of the MYC proto-oncogene protein (MYC) which regulates cell proliferation and growth. Up regulation of MYC is implicated in many human cancers and is frequently associated with poor prognosis and unfavorable patient survival. CDK9, in addition to being a transcription factor for MYC, also decreases phosphorylation of MYC protein that is implicated in stabilizing MYC in KRAS mutant cancers. Directly inhibiting MCL1 and MYC has historically been difficult, but CDK9 is a promising approach to indirectly target these oncogenes. #### Voruciclib: Inhibition of MCL1 CDK9 is a known transcriptional regulator of MCL1. Over expression of MCL1 is frequently observed in many tumor types and is closely associated with tumorigenesis, poor prognosis and drug resistance. In AML, MCL1 is upregulated in about half of patients with relapsed and refractory (R/R) disease and is associated with poor prognosis in these patients. Also important, high levels of MCL1 expression are associated with resistance to venetoclax. In pre-clinical studies, voruciclib shows dose-dependent suppression of MCL1; in December 2017, a study of voruciclib published in the journal Nature Scientific Reports reported that the combination of voruciclib plus the BCL-2 inhibitor venetoclax was capable of inhibiting two master regulators of cell survival, MCL-1 and BCL-2, and achieved synergistic antitumor effect in an aggressive subset of DLBCL cells. In a peer reviewed manuscript published in 2020, it was reported that the inhibition of CDK9 by voruciclib synergistically enhances cell death induced by the BCL-2 inhibitor venetoclax in preclinical models of AML. The data demonstrated that voruciclib synergizes with venetoclax to induce programmed cell death, or apoptosis, in both AML cell lines and primary patient samples. It was also demonstrated that voruciclib downregulates MCL1, which is relevant for the synergy between voruciclib and venetoclax, and further that voruciclib downregulates MYC, which also contributes to the synergies with venetoclax. The research suggests that voruciclib is potentially an attractive therapeutic agent for treating cancers in combination with venetoclax or other BCL-2 inhibitors, to address potential resistance associated with MCL1, and is supportive of our ongoing clinical evaluation of voruciclib in B-cell malignancies and AML. #### Voruciclib: Inhibition of MYC Many cancers are associated with over expression of MYC, a transcription factor regulating cell proliferation and growth. CDK9 is a known regulator of MYC transcription and a modulator of MYC protein phosphorylation. Data reported at the American Association for Cancer Research (AACR) Annual Meeting 2021 in preclinical models demonstrated that voruciclib: - Results in a rapid decrease in the phosphorylation of proteins that promote MYC transcription; - Rapidly decreases phosphorylation of MYC protein on Ser62, a site implicated in stabilizing MYC in KRAS mutant cancers; - Possesses single agent activity against multiple KRAS mutant cancer cell lines both in vitro and in vivo; and - Synergistically inhibits KRAS G12C mutant cancer cell lines in combination with KRAS G12C inhibitors, both in vitro and in vivo. The research presented suggests that voruciclib could be an attractive therapeutic agent for both hematological cancers, as well as solid tumors, dependent on the activity of MYC. #### Clinical Programs We are evaluating patients with hematological malignancies in a Phase 1 clinical trial evaluating the dose and schedule of voruciclib monotherapy and in combination with venetoclax. The trial started with the evaluation of dose and schedule of voruciclib as a monotherapy in patients with relapsed and refractory B-cell malignancies and AML after failure of prior standard therapies to determine the safety, preliminary efficacy and maximum tolerated dose. After completing the monotherapy dose escalation stage of the study, we are now evaluating the dose and schedule of voruciclib in combination with venetoclax, a BCL-2 inhibitor, initially in patients with R/R AML. The primary goal of the Phase 1 study is to assess the safety, and possible synergies, of voruciclib administered in combination with venetoclax. Clinical data is expected to be reported from the dose escalation portion of the ongoing Phase 1 clinical trial evaluating voruciclib plus venetoclax in patients with R/R AML in the first calendar quarter of 2024. As we reported in a poster presented at the American Society of Hematology (ASH) Annual Meeting in December 2023, the voruciclib monotherapy dose escalation/expansion stage of the study enrolled a total of 40 patients and is complete. The majority of patients (n=21) had AML and the remaining patients (n=19) had B-cell malignancies. Of the 40 patients enrolled, the first 16 were dosed daily continuously at 50 and 100 mg and the following 24 patients were dosed on an intermittent schedule (14 consecutive days on therapy in a 28-day cycle) at 100, 150 and 200 mg. All patients were heavily pre-treated with a median of three prior therapies (range 1-9), and five patients had prior hematopoietic stem cell transplant. Voruciclib at doses up to 200 mg administered on 14 consecutive days in a 28-day cycle (Cohort 2) was well tolerated with no dose limiting toxicities (DLT) reported. The most common adverse events (≥20% of patients) were diarrhea, nausea, anemia and fatigue. The large majority of adverse events were Grade 1-2; of note, the only Grade 3-4 adverse events in Cohort 2 were diarrhea (n=1) and anemia (n=5). Pharmacokinetics were dose proportional and a mean half-life of approximately 24 hours supports once daily dosing. On the intermittent dosing schedule selected for further development, no DLTs were observed, there were no Grade 3 or higher drug related toxicities, and dose escalation was stopped at 200 mg before reaching the maximum tolerated dose because plasma concentrations reached levels considered sufficient for target inhibition. In the 21 patients enrolled with AML, one patient at 100 mg achieved a morphologic leukemia-free state and nine patients had disease stabilization, which lasted at least three months in two patients. In the 19 patients enrolled with B-cell malignancies, four patients had stable disease with a decrease in tumor size. Initial results from correlative studies assessing myeloid leukemia cell differentiation protein (Mcl-1) and RNA Pol II phosphorylation on Ser2 (RNA Pol II p-S2) demonstrated reduction in expression consistent with the anticipated on-target pharmacodynamic effect of voruciclib on Mcl-1 and RNA Pol II p-S2. As further presented in the ASH 2023 poster, the second stage of the study evaluating the combination of voruciclib and venetoclax in patients with R/R AML is ongoing. All patients were heavily pre-treated with a median of three prior therapies including venetoclax. Voruciclib at doses up to 300 mg on the intermittent schedule have been administered in combination with venetoclax in patients with relapsed or refractory AML. No DLTs have been reported and no evidence of overlapping toxicity has been observed to date. Voruciclib doses from 50 mg to 200 mg administered in combination with venetoclax, as reported in the ASH 2023 poster, demonstrated anti-tumor activity as evidenced by objective responses and reductions in transfusions, with multiple patients continuing on therapy for ≥ four months. Voruciclib was also previously evaluated in more than 70 patients with solid tumors in multiple Phase 1 studies. The totality of the clinical data, along with data from pre-clinical studies, suggests voruciclib’s ability to inhibit its molecular target at a projected dose as low as 150 mg daily. In one clinical study, voruciclib was evaluated in combination with vemurafenib (marketed as Zelboraf®) in nine patients with BRAF mutated advanced/ inoperable malignant melanoma. All three BRAF/MEK naive patients achieved a response: two partial responses and one complete response. In this study voruciclib was dosed at 150 mg daily plus vemurafenib 720 mg or 960 mg twice daily in 28-day cycles. The most common adverse events were fatigue, constipation, diarrhea, arthralgia and headache. One instance of grade 3 fatigue was dose limiting and no serious adverse events related to voruciclib were reported. Other clinical studies evaluated voruciclib at doses up to 850 mg in patients with solid tumors, demonstrating additional evidence of potential biologic activity and an adverse event profile generally consistent with other drugs in its class. #### ME-344: Clinical-stage Mitochondrial Inhibitor with Combinatorial Potential ME-344 is a novel drug candidate that inhibits mitochondrial OXPHOS, a fundamental metabolic pathway involved in the production of adenosine triphosphate (ATP) in the mitochondria. ATP provides energy to drive many metabolic cell processes, including division, proliferation, and growth. By disrupting the production of ATP, ME-344 has been shown to induce cancer cell death in nonclinical models and was associated with antitumor activity in clinical studies. Currently, we are evaluating ME-344 in combination with bevacizumab (AVASTIN®) in patients with metastatic colorectal cancer. #### ME-344 Scientific Overview: Cancer Metabolism Energy supplied in the form of ATP fuels tumor metabolism supporting cell division and growth. Accordingly, tumor cells often display a high metabolic rate to support tumor cell survival and proliferation. This heightened metabolism requires a continual supply of energy in the form of ATP. Anti-angiogenics, such as the vascular endothelial growth factor (VEGF) inhibitor bevacizumab, have the potential to normalize vasculature and decrease reliance on glycolysis for ATP. The resulting reduction in glycolysis may trigger an increased dependence on mitochondrial ATP production for energy to support continued tumor proliferation. In such cases of tumor plasticity, the combination of ME-344 and bevacizumab may induce metabolic synthetic lethality, providing a novel therapeutic strategy. Specifically, leveraging the ability of antiangiogenics like bevacizumab to reduce glycolysis and force tumor cells to switch to mitochondrial respiration via OXPHOS, which is inhibited by ME-344, may reduce access to ATP needed for cell division and growth in tumors. We obtained initial clinical validation of this approach in a completed investigator-initiated, multi-center, randomized, controlled, window of opportunity clinical trial evaluating ME-344 in combination with bevacizumab that enrolled a total of 42 patients with human epidermal growth factor receptor 2 (HER2) negative breast cancer. An earlier Phase 1 clinical study evaluating ME-344 as a single-agent in patients with refractory solid tumors also demonstrated anti-tumor activity, further validating the potential of mitochondrial inhibition as a promising therapeutic modality. We are currently evaluating the combination of ME-344 and bevacizumab in patients with metastatic colorectal cancer in an ongoing Phase 1b study. #### Clinical Program ME-344 has been evaluated pre-clinically and clinically as a single agent and in combination with anti-angiogenics such as bevacizumab. When evaluated as a single agent, ME-344 demonstrated evidence of activity against refractory solid tumors in a Phase 1b trial, and in pre-clinical studies tumor cells treated with ME-344 resulted in a rapid loss of ATP and cancer cell death. In addition to single agent activity, ME-344 has also demonstrated significant potential in combination with anti-angiogenic therapeutics. Pre-clinical studies, have shown that one outcome of anti-angiogenics is a reduced rate of glycolysis in tumors as a mechanism to slow tumor growth. However, when faced with reduced glycolysis and reduced ATP production, tumor metabolism was able to shift to mitochondrial metabolism for energy production to support continued tumor proliferation. In such cases of tumor plasticity in the presence of treatment with anti-angiogenics, contemporaneously targeting the mitochondria as an alternative metabolic source of ATP with ME-344 may open an important therapeutic opportunity. Support for this combinatorial use of ME-344 was first published in the June 2016 edition of Cell Reports; pre-clinical data from a collaboration with the Spanish National Cancer Research Centre in Madrid demonstrated mitochondria-specific effects of ME-344 in cancer cells, including substantially enhanced anti-tumor activity when combined with agents that inhibit the activity of VEGF. These data demonstrating the potential anti-cancer effects of combining ME-344 with a VEGF inhibitor due to an inhibition of both mitochondrial and glycolytic metabolism provided a basis for commencement of an investigator-initiated trial of ME-344 in combination with bevacizumab in HER2 negative breast cancer patients. Results published in the November 2019 issue of Clinical Cancer Research from a multi-center, investigator-initiated, randomized, controlled, clinical trial that evaluated the combination of ME-344 and bevacizumab in 42 women with early HER2-negative breast cancer further support the combinatorial use of ME-344 with anti-angiogenic therapeutics. The primary objective of the trial was to show proof of ME-344 biologic activity as measured by reductions in the nuclear protein Ki67 (expression of which is strongly associated with tumor cell proliferation and growth) from days 0 to 28 compared to the control group who received bevacizumab alone. Secondary objectives included determining whether ME-344 biologic activity correlates with vascular normalization. The data demonstrated significant biologic activity in the ME-344 treatment group: - In ME-344 treated patients, mean absolute Ki67 decreases were 13.3 compared to an increase of 1.1 in the bevacizumab monotherapy group (P=0.01). - In ME-344 treated patients, mean relative Ki67 decreases were 23% compared to an increase of 186% in the bevacizumab monotherapy group (P \< 0.01). - The mean relative Ki67 reduction in patients experiencing vascular normalization in the ME-344 treated patients was 33%, compared to an increase of 11.8% in normalized patients from the bevacizumab monotherapy group (P=0.09). Approximately one-third of patients in each arm had vascular normalization. Treatment was generally well tolerated; three grade 3 adverse events of high blood pressure were reported, two in the ME-344 arm and one in the bevacizumab monotherapy arm. Results from our earlier, first-in-human, single-agent Phase 1 clinical trial of ME-344 in patients with refractory solid tumors were published in the April 1, 2015 edition of Cancer. The results indicated that eight of 21 evaluable patients (38%) treated with ME-344 achieved stable disease or better, including five who experienced progression-free survival that was at least twice the duration of their last prior treatment before entry into the trial. In addition, one of these patients, a heavily pre-treated patient with small cell lung cancer, achieved a confirmed partial response and remained on study for two years. ME-344 was generally well tolerated at doses equal to or less than 10 mg/kg delivered on a weekly schedule for extended durations. Treatment-related adverse events included nausea, dizziness and fatigue. Dose-limiting toxicities were observed at both the 15 mg/kg and 20 mg/kg dose levels, consisting primarily of grade 3 peripheral neuropathy. We are advancing ME-344 in combination with the anti-angiogenic antibody bevacizumab in a Phase 1b study evaluating patients with relapsed colorectal cancer. The study is enrolling patients with progressive disease after failure of standard therapies with patients treated until disease progression or intolerance. The primary objective is progression free survival. Secondary endpoints include overall response rate, duration of response, overall survival and safety. Safety and efficacy data from the first cohort of approximately 20 patients in the ongoing ME-344 Phase 1b study is expected to be reported in the first half of calendar 2024. Additionally, ME-344 may also have clinical potential against hematological malignancies. At the AACR Annual Meeting 2022, a poster presentation reported results from preclinical studies exploring the ability of ME-344 to enhance the activity of venetoclax against AML. Data from the in vitro and in vivo preclinical studies evaluating the combination of ME-344 with venetoclax in standard-of-care-resistant AML cell lines and relapsed or refractory AML patient samples suggest that ME-344, both alone and in combination with venetoclax, inhibits purine biosynthesis, suppresses oxidative phosphorylation, induces apoptosis and decreases MCL-1, which together target metabolic vulnerabilities of AML cells. The data demonstrated that ME-344 and venetoclax prolong survival in MV4-11 and MV4-11/AraC-R-derived xenograft AML models. The poster concluded that ME-344 enhances venetoclax activity against AML cells including resistant AML. #### Zandelisib: PI3Kδ Inhibitor Overview Zandelisib is an oral, once-daily, selective PI3Kδ inhibitor that we were jointly developing with KKC under a global license, development and commercialization agreement entered into in April 2020. In March 2022, we and KKC reported the outcome of an end of Phase 2 meeting with the FDA wherein the agency discouraged a filing based on data from a single-arm Phase 2 TIDAL trial. At this meeting, the FDA stated that data generated from single arm studies such as the Phase 2 TIDAL trial are insufficient to adequately assess the risk/benefit of PI3Kδ inhibitors evaluating indolent non-Hodgkin lymphoma. At that time, the FDA emphasized that the company continue efforts with the ongoing randomized Phase 3 COASTAL trial evaluating patients with relapsed or refractory follicular or marginal zone lymphomas. Subsequently, at an April 2022 meeting of the FDA Oncology Drugs Advisory Committee, the committee voted that future approvals of PI3Kδ inhibitors for hematologic malignancies should be supported by randomized data. In November 2022, we and KKC met with the FDA in a follow-up meeting to the March 2022 end of Phase 2 meeting. At this meeting, the FDA provided further guidance regarding the design and statistical analysis for the Phase 3 COASTAL trial. Following the November meeting, the companies jointly concluded that a clinical trial consistent with the recent FDA guidance, including modification of the ongoing COASTAL trial, would likely not be feasible to complete within a time period that would support further investment or with sufficient certainty of the regulatory requirements for approval to justify continued global development efforts. As a result, we and KKC jointly decided to discontinue global development of zandelisib for indolent forms of non-Hodgkin lymphoma outside of Japan. The discontinuation of zandelisib development outside of Japan was a business decision based on the most recent regulatory guidance from the FDA and is not related to the zandelisib clinical data generated to date. After making the joint decision to terminate development outside of Japan, we and KKC began closing all ongoing zandelisib clinical studies outside of Japan, including the Phase 3 COASTAL trial, the Phase 2 TIDAL trial, and the Phase 2 CORAL trial. Subsequently, in May 2023, KKC decided to discontinue development of zandelisib in Japan. The discontinuation of zandelisib in Japan was a business decision by KKC based on the most recent regulatory guidance from the Pharmaceuticals and Medical Devices Agency in Japan and was not related to the zandelisib clinical data generated to date. On July 14, 2023, we entered into a Termination Agreement (the Termination Agreement) with KKC to terminate all agreements between the parties and cease further zandelisib clinical development globally. As of December 31, 2023, activities associated with the compassionate use supply were completed. We anticipate completing the wind-down activities associated with the KKC Commercialization Agreement in fiscal year 2024. #### KKC License, Development and Commercialization Agreement In April 2020, we entered into the KKC Commercialization Agreement under which we granted to KKC a co-exclusive, sublicensable, payment-bearing license under certain patents and know-how controlled by us to develop and commercialize zandelisib and any pharmaceutical product containing zandelisib for all human indications in the U.S. (the U.S. License), and an exclusive (subject to certain retained rights to perform obligations under the KKC Commercialization Agreement), sublicensable, payment- bearing, license under certain patents and know-how controlled by us to develop and commercialize zandelisib and any pharmaceutical product containing zandelisib for all human indications in countries outside of the U.S. (the Ex-U.S. and the Ex-U.S. License). Also under the KKC Commercialization Agreement, we were granted a co-exclusive, sublicensable, license under certain patents and know-how controlled by KKC to develop and commercialize zandelisib for all human indications in the U.S., and a co-exclusive, sublicensable, royalty-free, fully paid license under certain patents and know-how controlled by KKC to perform our obligations in the Ex-U.S. and were paid an initial non-refundable payment of $100.0 million. Additionally, in Japan, the KKC Commercialization Agreement included potential regulatory and commercialization milestone payments plus royalties on net sales of zandelisib in Japan, which are tiered beginning in the teens. Prior to the execution of the Termination Agreement on July 14, 2023, KKC was responsible for the development and commercialization of zandelisib in the Ex-U.S. and, subject to certain exceptions, solely responsible for all costs related thereto. We also provided to KKC certain drug supplies necessary for the development and commercialization of zandelisib in the Ex-U.S., with the understanding that KKC would have assumed responsibility for manufacturing for the Ex-U.S. as soon as practicable. As noted above, on July 14, 2023, we entered into a Termination Agreement with KKC to mutually terminate the KKC Commercialization Agreement and all other related agreements between the parties. Pursuant to the Termination Agreement: - we regained full, global rights to develop, manufacture and commercialize zandelisib, subject to KKC's limited rights to use zandelisib for compassionate use (as more specifically defined in the Termination Agreement) in certain expanded access programs for the existing patients who have been enrolled in Japanese clinical trial sponsored by KKC until November 30, 2027, and for which KKC is fully liable; - each party released the other party from any and all claims, demands, etc. arising from the KKC Commercialization Agreement, excluding certain surviving claims; and - we are obligated to deliver a discrete quantity of materials to facilitate KKC's compassionate use activities. As of June 30, 2023, we had $64.9 million of aggregate deferred revenue associated with the KKC Commercialization Agreement, of which $64.5 million was allocated to the U.S. License and $0.3 million was allocated to the Development Services performance obligations which were recognized based on the proportional performance of these development activities through wind-down of the associated trials. As further discussed in *Note 7. License Agreements*, in connection with the execution of the Termination Agreement during the three months ended September 30, 2023, we recognized the $64.5 million of noncash long-term deferred revenue associated with the U.S. License as well as the remaining $0.3 million noncash deferred revenue associated with the completion of the underlying proportional performance activities. As of September 30, 2023, all deferred revenue associated with the KKC Commercialization Agreement had been recognized. ### Results of Operations ### Comparison of Three Months Ended December 31, 2023 and 2022 ***Revenue:*** We recognized no revenue for the three months ended December 31, 2023 compared to $32.7 million for the three months ended December 31, 2022. The decrease in revenue was due to the termination of the KKC Commercialization Agreement in July 2023 and all remaining deferred revenue having been recognized in the three months ended September 30, 2023. ***Research and Development:*** The following is a summary of our research and development expenses to supplement the more detailed discussion below (in thousands). | | For the Three Months Ended December 31, 2023 | 2022 | | --- | ---: | ---: | | zandelisib | $(58) | $8,265 | | voruciclib | 523 | 428 | | ME-344 | 1,385 | 64 | | Other | 2,062 | 6,556 | | Total research and development expenses | $3,912 | $15,313 | Research and development expenses consist primarily of clinical trial costs and includes payments to contract research organizations CROs, pre-clinical study costs, and costs to manufacture our drug candidates for non-clinical and clinical studies. Other research and development expenses consist primarily of salaries and personnel costs, share-based compensation, legal costs, and other costs not allocated to specific drug programs. Costs related to zandelisib decreased $8.3 million primarily due to the discontinuation of the program during fiscal year 2023. Costs related to voruciclib increased $0.1 million mainly due to increased clinical costs in the Phase 1 study. Costs related to ME-344 increased $1.3 million due to increased clinical and manufacturing costs related to the Phase 1b study. Other research and development costs decreased $4.5 million primarily due to a decrease of $4.0 million in personnel costs resulting from our reductions in workforce including a $0.7 million decrease in one-time employee termination benefits. ***General and Administrative:*** General and administrative expenses decreased by $0.5 million to $8.0 million for the three months ended December 31, 2023 compared to $8.5 million for the three months ended December 31, 2022. The decrease was primarily due to $1.3 million less personnel costs resulting from our reductions in workforce partially offset by a $0.8 million increase in legal fees primarily associated with the Cooperation Agreement. ***Other Income, net:*** Other income, net, decreased by $0.5 million to $0.9 million for the three months ended December 31, 2023 compared to $1.3 million for the three months ended December 31, 2022. We recorded a noncash gain of $0.5 million during the three months ended December 31, 2022, due to a change in the fair value of our warrant liability with no similar gain during the three months ended December 31, 2023, because of the underlying warrants expiring in May 2023. ### Comparison of Six Months Ended December 31, 2023 and 2022 ***Revenue:*** We recognized revenue of $65.3 million for the six months ended December 31, 2023 compared to $41.5 million for the six months ended December 31, 2022. The increase in revenue was primarily due to the recognition of all remaining deferred revenue associated with the KKC Commercialization Agreement that was terminated in July 2023, offset by a decrease in revenue recognized during the six months ended December 31, 2023, related to cost sharing from the KKC Commercialization Agreement. ***Research and Development:*** The following is a summary of our research and development expenses to supplement the more detailed discussion below (in thousands). | | For the Six Months Ended December 31, 2023 | 2022 | | --- | ---: | ---: | | zandelisib | $391 | $19,871 | | voruciclib | 188 | 1,161 | | ME-344 | 2,605 | 849 | | Other | 4,213 | 12,895 | | Total research and development expenses | $7,397 | $34,776 | Research and development expenses consist primarily of clinical trial costs and includes payments to contract research organizations CROs, pre-clinical study costs, and costs to manufacture our drug candidates for non-clinical and clinical studies. Other research and development expenses consist primarily of salaries and personnel costs, share-based compensation, legal costs, and other costs not allocated to specific drug programs. Costs related to zandelisib decreased $19.5 million primarily as a result of the discontinuation of the program during fiscal year 2023 with lower costs in fiscal year 2024 associated with wind-down activities. Costs related to voruciclib decreased $1.0 million mainly due to lower recognized clinical costs in the Phase 1 study. Costs related to ME-344 increased $1.8 million due to higher clinical and manufacturing costs related to the Phase 1b study. Other research and development costs decreased $8.7 million primarily due to a decrease of $7.4 million in personnel costs resulting from our reductions in workforce, including a $0.7 million decrease in one-time employee termination benefits and a $0.8 million decrease in noncash stock-based compensation. ***General and Administrative:*** General and administrative expenses decreased by $1.4 million to $14.5 million for the six months ended December 31, 2023 compared to $16.0 million for the six months ended December 31, 2022. The decrease was primarily due to $2.3 million less personnel costs resulting from our reductions in workforce, $0.4 million less noncash stock-based compensation, and $0.5 million less corporate overhead costs partially offset by a $1.7 million increase in legal fees primarily associated with the Cooperation Agreement. ***Other Income, net:*** Other income, net, decreased by approximately $1.0 million to $2.0 million for the six months ended December 31, 2023 compared to $2.9 million for the six months ended December 31, 2022. We recorded a noncash gain of $1.6 million during the six months ended December 31, 2022, due to a change in the fair value of our warrant liability with no similar gain during the six months ended December 31, 2023, because of the underlying warrants expiring in May 2023. Additionally, we received interest and dividend income of $2.0 million for the six months ended December 31, 2023 compared to $1.3 million for the six months ended December 31, 2022. The increase in interest and dividend income is primarily due to higher yields during the six months ended December 31, 2023 compared to the six months ended December 31, 2022. ### Liquidity and Capital Resources We have accumulated losses of $360.7 million since inception and expect to incur operating losses and generate negative cash flows from operations for the foreseeable future. As of December 31, 2023, we had $59.5 million in cash and cash equivalents, and short-term investments. We believe that these resources will be sufficient to fund our operations for at least 12 months from the issuance of this Quarterly Report. Our current business operations are focused on continuing the clinical development of our drug candidates. Changes to our research and development plans or other changes affecting our operations and operating expenses may affect actual future use of existing cash resources. We cannot determine with certainty costs associated with ongoing and future clinical trials or the regulatory approval process. The duration, costs and timing associated with the development of our product candidates will depend on a variety of factors, including uncertainties associated with the results of our clinical trials. To date, we have obtained cash and funded our operations primarily through equity financings and license agreements. In order to continue the development of our drug candidates, at some point in the future we expect to pursue one or more capital transactions, whether through the sale of equity securities, debt financing, license agreements or entry into strategic partnerships. There can be no assurance that we will be able to continue to raise additional capital in the future. #### Sources and Uses of Our Cash Net cash used in operating activities for the six months ended December 31, 2023 of $29.5 million consisted of our net income of $45.3 million and $2.1 million for noncash items offset by $77.0 million in changes in our operating assets and liabilities primarily due to recognition of $64.9 million in noncash deferred revenue. Net cash used in operating activities for the six months ended December 31, 2022 of $29.1 million consisted of our net loss of $6.4 million and changes in our operating assets and liabilities of $24.3 million partially offset by $1.7 million in noncash items. Net cash provided by investing activities for the six months ended December 31, 2023 was $29.5 million as compared to $24.3 million cash provided by investing activities for the six months ended December 31, 2022. The increase was primarily due to timing differences between the purchases of and maturities of short-term investments during the six months ended December 31, 2023 against the comparative period. Net cash used in financing activities during the six months ended December 31, 2023 was $11.7 million due to the payment of dividends agreed to under the Cooperation Agreement. Net cash used in financing activities during the six months ended December 31, 2022 was $40,000 due to the payment of withholding taxes upon the vesting of restricted stock units (RSU) in exchange for common shares surrendered by RSU holders. #### Capital Resource Requirements As previously discussed in the overview section above, we may be required to pay a second return of capital of not to exceed $9.33 million if authorized by our Board as further described in the Cooperation Agreement. In January 2022, we amended our facility lease for an additional 20 months through November 2029. The amended lease agreement also provided for additional lease space that we took control over on July 1, 2022. Under the terms of the lease, we are obligated to make aggregate remaining lease payments as of December 31, 2023 of $15.2 million, excluding common area maintenance and other variable consideration due under the lease agreement. Estimated lease payments for the remainder of our fiscal year ended June 30, 2024 are expected to be $1.2 million, excluding common area maintenance and other variable consideration due under the lease agreement. As of December 31, 2023, we have the following potential purchase obligations for which the timing and/or likelihood of occurrence is unknown; however, if such claims arise in the future, they could have a material effect on our financial position, results of operations, and cash flows. - Under our remaining license agreements, we have payment obligations that are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones and are required to make royalty payments in connection with the sales of products developed under those agreements. For additional details regarding these agreements, see the section titled *Note 8—Other License Agreements* and *Note 6—Commitments and Contingencies* to our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report; - Obligations under contracts that are cancelable without significant penalty; - Purchase orders issued in the ordinary course of business as they represent authorizations to purchase the items rather than binding agreements; and - Contracts in the normal course of business with clinical supply manufacturers and with vendors for preclinical studies, research supplies and other services and products for operating purposes. These contracts are cancelable and generally provide for termination after a notice period. Our future capital requirements will depend on many factors, including: - the scope, progress, results and costs of drug discovery, preclinical development, laboratory testing and clinical trials for our product candidates; - the costs, timing and outcome of regulatory review of our product candidates; - the costs of establishing or contracting for sales, marketing and distribution capabilities if we obtain regulatory approvals to market our product candidates; - the costs of securing and producing drug substance and drug product material for use in preclinical studies, clinical trials and for use as commercial supply; - the costs of securing manufacturing arrangements for development activities and commercial production; - the scope, prioritization and number of our research and development programs; - the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under future collaboration agreements, if any; and - the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims. #### Estimate Considerations Related to Macroeconomic Conditions and other Geopolitical Conditions Due to recent disruptions in access to bank deposits and lending commitments associated with bank failures, macroeconomic and geopolitical conditions, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of its assets or liabilities as of December 31, 2023. While there was no material impact to our condensed consolidated financial statements as of and for the three and six months ended December 31, 2023, these estimates may change, as new events occur and additional information is obtained, which could materially impact our condensed consolidated financial statements in future reporting periods. ### Critical Accounting Policies and Management Estimates We describe our significant accounting policies in *Note 1. The Company and Summary of Significant Accounting Policies*, of the notes to the financial statements included in our 2023 Annual Report. We discuss our critical accounting estimates in *Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations*, in our 2023 Annual Report. There have been no changes in our significant accounting policies or critical accounting estimates since June 30, 2023. ### Recent Accounting Pronouncement See *Note 2. Summary of Significant Accounting Policies* in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report. ## Market risk As filed, 1,305 characters. ### Interest Rate Risk Our exposure to market interest rates relates primarily to the investments of cash balances and short-term investments. We have cash reserves held in U.S. dollars and we place funds on deposit with financial institutions, which are readily available. Our short-term investments consist solely of U.S. government securities with a maturity of three to twelve months. We place our cash deposits with high credit quality financial institutions and by policy limit the amount of credit exposure to any one corporation or bank. These deposits are in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limits. We are adverse to principal loss and we ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. We seek to mitigate default risk by depositing funds with high credit quality financial institutions, by limiting the amount of credit exposure to any one corporation or bank, by purchasing short-term investments consisting of U.S. government securities, and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any such financial institution. We do not consider the effects of interest rate movements to be a material risk to our financial condition. ## Controls and procedures As filed, 2,747 characters. ### (a) Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2023. Based on such evaluation, our CEO and CFO have concluded that, as of December 31, 2023, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission, or SEC’s, rules and forms, and is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. ### Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting (as defined in Rule 13a‑15(f) of the Exchange Act) that occurred during the fiscal quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ### Inherent Limitations of Internal Controls Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Filed Feb 13, 2024. Source: SEC EDGAR, the filing index for accession 0000950170-24-014640. Last ingested by Listed: Oct 26, 2026, 17:45 ET. No prices; not investment advice.