Allarity Therapeutics, Inc.: Form 10-Q for the period ended Jun 30, 2022

You should read the following discussion and analysis of our financial condition and plan of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from the plans, intentions, expectations and other forward-looking statements included in the discussion below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those factors discussed in the section titled “Risk Factors” of our Annual Report on Form 10-K, filed with the SEC on May 17, 2022.

Overview

We are a biopharmaceutical company focused on discovering and developing highly targeted anti-cancer drug candidates. Using its Drug Response Predictor (DRP®) platform, the Company identifies the value in drug assets that have otherwise been discontinued by identifying patient populations where these drugs are active. The Company’s three lead drug candidates are: the tyrosine kinase inhibitor (TKI) dovitinib, the poly-ADP-ribose polymerase (PARP) inhibitor stenoparib, and the microtubule inhibitor agent IXEMPRA.

Recent Business Developments

On August 2, 2022, the Company announced that its Board of Directors (the “Board”) has mandated a refocus of the Company’s oncology pipeline strategy away from development of monotherapies towards development of more promising and clinically relevant combination therapies.

Following a lengthy and in-depth analysis of current pipeline opportunities, clinical/commercial/ regulatory risks, development costs and timelines, expected availability of funding, and in consultation with our senior management, its Scientific Advisory Board (SAB), and external experts, the Board concluded that refocusing the Company’s pipeline to development of combination therapies will accomplish the following:

• Align with the ongoing shift in cancer therapy standard-of-care away from monotherapies toward combination therapies, which are increasingly driving market opportunities, and which have shown dramatic increases in patient benefit.
• Strengthen the Company’s ability to attract additional funding from institutional life science investors, which is necessary to support the Company’s clinical development activities and future success.
• Significantly broaden the Company’s possibilities for future commercial partnering with larger pharmaceutical companies to maximize the value of its pipeline assets and DRP® platform technology.
• Improve the likelihood of clinical and commercial success of the Company’s pipeline assets.

The Board’s decision also considers feedback that the Company received from the U.S. Food and Drug Administration (FDA). We submitted an NDA with the FDA on December 21, 2021, for the third line treatment of metastatic renal cell carcinoma (mRCC or kidney cancer) in patients selected by our Dovitinib-DRP® companion diagnostic. Prior to submission of the NDA, we submitted a Pre-Market Approval (PMA) application to the FDA for approval of our dovitinib-specific DRP® companion diagnostic for use to select and treat patients likely to respond to dovitinib. On February 15, 2022, we received Refusal to File (RTF) letters for both our dovitinib NDA and our DRP®-Dovitinib companion diagnostic PMA. The FDA has asserted that neither our NDA or PMA meets the regulatory requirements to warrant a complete agency review. The primary grounds of rejection asserted by the FDA relates to our use of prior Phase 3 clinical trial data, generated by Novartis in a “superiority” endpoint study against sorafenib (Bayer), to support a “non-inferiority” endpoint in connection with the DRP®-Dovitinib companion diagnostic. Based upon the reasons given in the RTF letters and a subsequent Type C meeting with the FDA on May 31, 2022, we anticipate that the FDA will require a prospective Phase 3 clinical trial as well as additional dose optimization studies before regulatory approval of Dovitinib as a monotherapy and its companion diagnostic Dovitinib-DRP for the treatment of third-line mRCC can be obtained. While we have decided that the costs, risks and potential benefits of conducting these studies for dovitinib as a monotherapy for mRCC are no longer the best path toward commercial success, we continue to evaluate other potential Phase 1b/2 clinical trials for dovitinib combined with other approved drugs in the mRCC space and in other indications. For example, we anticipate commencing a stenoparib in combination with dovitinib Phase 1b/2 clinical trial for second-line or later treatment of metastatic ovarian cancer. Our decision to advance dovitinib as a combination therapy and not as a monotherapy is based on our belief that both the science and the market for oncology therapies has shifted towards combination therapies and away from monotherapies for multiple indications of cancer

As part of its new strategic pipeline focus, and subject to financing, the Company 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 License Agreement

On September 27, 2022, we entered into a Second Amendment to License Agreement (the “Second Amendment”) with Novartis Pharma AG, a company organized under the laws of Switzerland, which amended the terms of the License Agreement dated April 6, 2018 (the “Original Agreement”), as amended by that certain First Amendment to License Agreement effective as of March 30, 2022 (“Amendment” and together with the Original Agreement, the “Agreement”) and that certain Promissory Note dated April 6, 2018, which was re-issued by Allarity Therapeutics Denmark ApS, a subsidiary of Allarity Europe, in favor of Novartis on March 30, 2022, to modify the terms and timing of the Outstanding Milestone Payment (as defined in the Second Amendment). The Second Amendment increase the amount of the total milestone payment by $500,000. 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 Retainer Fee

From July to September 2022, the Board increased the fixed number of authorized directors on the Board to seven (7). To fill the vacancies, the Board appointed Messrs. James G. Cullem as Class III director, Thomas Jensen as Class I director, Dr. Roth as Class II director, and Mr. McLaughlin as Class II director.

Messrs. Cullem and Jensen are executive officers of the Company. In addition to serving as a director of the Company, Mr. Cullem will continue to serve as the Company’s Chief Executive Officer and Chief Business Officer. In addition, Mr. Jensen will continue to serve as the Company’s Senior Vice President, Investor Relations.

In connection with the appointment of Dr. Roth and Mr. McLaughlin as independent directors of the Company, each will receive an annual retainer fee of $50, payable in cash, and if appointed to a committee of the Board, the respective director will be eligible to receive $7.5 for serving as a member of the Audit Committee, $4 for serving as a member of the Nominating and Corporate Governance Committee and $5 for serving as a member of the Compensation Committee. In addition, the Board granted each independent director options to purchase 23,000 shares of common stock at an exercise price of $1.28 and $1.10 per share, subject to vesting of 1/36 per month over thirty-six (36) months following the grant date. The expiration date for the options is five (5) years from date of grant.

In addition, effective July 7, 2022, upon recommendation of the Compensation Committee, the Board approved an increase in the annual retainer fee for independent directors to $50.

Change in Management

In June 2022, the Company effected a change in management. Effective as of June 29, 2022, Steve Carchedi resigned from all positions in the Company, including his role of Chief Executive Officer and as a director of the Company. In addition, effective as of June 27, 2022, Jens Knudsen resigned from all positions in the Company, including his role of Chief Financial Officer of the Company. Pursuant to the terms set forth in their respective separation agreements with the Company, the Company agreed to provide Mr. Carchedi and Mr. Knudsen with certain payments and benefits comprising of: (i) continued payments of his base salary for a certain time period and (ii) COBRA coverage for a certain number of months (“Severance Benefits”). In exchange for the Severance Benefits, among other things, Messrs. Carchedi, and Knudsen each individually agreed to a release of claims in favor of the Company and to certain restrictive covenant obligations, and also reaffirmed his commitment to comply with their respective existing restrictive covenant obligations.

With the departure of Mr. Carchedi, the Board of Directors of the Company (the “Board”) appointed James Mr. Cullem as the interim Chief Executive Officer of the Company effective as of June 29, 2022. Accordingly, Mr. Cullem assumed the role as the interim Chief Executive Officer and continues his role as the Chief Business Officer. In addition, with the departure of Mr. Knudsen, the Board appointed Joan Brown, the Company’s current Director of Financial Reporting, as the interim Chief Financial Officer of the Company effective as of June 29, 2022. In addition to Ms. Brown’s role as Chief Financial Officer, she continues her role as Director of Financial Reporting.

Risks and Uncertainties

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel and collaboration partners, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations, and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. Even if the Company’s research and development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

Impacts of COVID-19 on our Business — Update

In March 2020, the World Health Organization declared COVID-19 a global pandemic. COVID-19 has had an impact on our operations as it caused some unexpected delays in our clinical program activities as clinical trials were delayed. Management is unable to estimate the future financial effects, if any, to our business as a result of COVID-19 because of the high level of uncertainties and unpredictable outcomes of this disease.

We are continuing to evaluate the impact of COVID-19 pandemic on our business and are taking proactive measures to protect the health and safety of our employees, as well as to maintain business continuity. Based on guidance issued by federal, state, and local authorities, we transitioned to a remote work model for our employees, effective March 16, 2020. During the recent months restrictions due to COVID-19 have lifted significantly and as a result, our Danish employees have returned to work. Our North American employees are continuing to work remotely. We will continue to closely monitor and seek to comply with guidance from governmental authorities and adjust our activities as appropriate.

The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trial, healthcare systems or the global economy. However, these effects could harm our operations, and we will continue to monitor the COVID-19 situation closely.

Impact of the Russia-Ukraine War

There have been immense flows of refugees to Europe and Denmark is ready to facilitate and to accept refugees from the Ukraine. It is far too early to estimate how many migrants Denmark will facilitate, but immigration officials have begun preparing to accept Ukrainian refugees. Being a North Atlantic Treaty Organization (NATO) member, Denmark will strengthen its own national preparedness as well as that of the NATO defense alliance. The Ukraine crisis has become a new a destabilizing factor in the Danish and global economy. It dampens growth and increases inflation at a time when inflation and capacity utilization is already high. While the Danish economy is generally robust and able to handle new challenges, and it is expected to enter a pause in growth. However, there are risks of a fall in activity in the Danish economy in general. To date the war has not yet had an impact on our results of operations however we expect it may have an impact on the costs of materials we purchase for our laboratory operations in Denmark but, we cannot predict or quantify the impact now.

Financial Operations Overview

Since our inception in September of 2004, we have focused substantially all our resources on conducting research and development activities, including drug discovery and preclinical studies, establishing, and maintaining our intellectual property portfolio, the manufacturing of clinical and research material, hiring personnel, raising capital and providing general and administrative support for these operations. In recent years, we have recorded very limited revenue from collaboration activities, or any other sources. We have funded our operations to date primarily from convertible notes and the issuance and sale of our securities.

We have incurred net losses in each year since inception. Our net losses were $8.2 million and $8.5 million for 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;
• continue research activities for the discovery of new drug candidates; and
• manufacture supplies for our preclinical studies and clinical trials.

Components of Operating Expenses

Research and Development Expenses

Research and development expenses include:

• expenses incurred under agreements with third-party contract organizations, and consultants;
• costs related to production of drug substance, including fees paid to contract manufacturers;
• laboratory and vendor expenses related to the execution of preclinical trials; and
• employee-related expenses, which include salaries, benefits and stock-based compensation.

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We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks and estimates of services performed using information and data provided to us by our vendors and third-party service providers. Non-refundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and accounted for as prepaid expenses. The prepayments are then expensed as the related goods are delivered and as services are performed.

To date, most of these expenses have been incurred to advance our lead drug candidates, dovitinib, stenoparib, and IXEMPRA®.

We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our drug candidates, as our drug candidates advance into later stages of development, and as we continue to conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our drug candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our drug candidates.

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.

Results of Operations for the Three and Six Months Ended June 30, 2022, and June 30, 2021 (unaudited)

The following table summarizes our results of operations for the three and six months ended June 30, 2022, and 2021:

(In thousands)

(In thousands)

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Research and Development Expenses

We currently do not track our research and development costs by product candidate. A breakdown by nature of type of expense for the three and six months ended June 30, 2022, and 2021 is provided below.

(In thousands)

(In thousands)

For the three months ended June 30, 2022 and, June 30, 2021 (Restated)

The decrease of $583 in research and development expenses was primarily because of a $96 increase in research and development expenses and a $179 increase in staffing, offset by decreases of $83 in tax credits and decreases of $729 in manufacturing and supplies costs, $141 in contractor costs, $22 in patent costs, $14 in amortization and $35 in 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 six-months ended June 30, 2022 and June 30, 2021 (Restated)

The decrease of $546 in research and development expenses was primarily because of a $473 increase in staffing and a $20 increase in contractors, offset by an increase in tax credits of $152 and decreases of $157 in research study expenses, $6 in patent costs, $30 in amortization, and $62 in 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 Administration regarding 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 million during the six months ended June 30, 2022.

General and Administrative Expenses

For the three months ended June 30, 2022 and June 30, 2021 (Restated)

General and administrative expenses increased by $1,049 for 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.

For the six months ended June 30, 2022 and June 30, 2021 (Restated)

General and administrative expenses increased by $2.9 million for 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 (Expenses), Net

For the three months ended June 30, 2022 and June 30, 2021 (Restated)

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 $874 fair value adjustment to derivative and warrant liabilities and $5 of interest income. In the three months ended June 30, 2021, other income (expense) of ($1.0) million consisted 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 six-months ended June 30, 2022 and June 30, 2021 (Restated)

Other income (expense) of $13.7 million recognized in the six months ended June 30, 2022, consisted primarily of a $13.4 million fair value adjustment to derivative and warrant liabilities, income of $1.8 million from the gain on sale of IP, and interest income of $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) million consisted 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 $20 fair value adjustment of derivative liability.

Changes in fair value of our derivative liabilities and convertible debt are measured using level 3 inputs as described in our condensed consolidated financial statements.

Income Taxes

For the three month periods ended June 30, 2022 and June 30, 2021 (Restated)

Income tax recovery (expense) was ($4) for the three months ended June 30, 2022 versus ($30) for the three months ended June 30, 2021.

For the six-month periods ended June 30, 2022 and June 30, 2021 (Restated)

Income tax recovery (expense) was $1.2 million for 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 million was primarily because the March31, 2022, impairment charge of approximately $14 million resulted in a tax benefit of $1.2 million for the six months ended June 30, 2022.

Liquidity, Capital Resources and Plan of Operations

Since our inception our operations have been financed primarily by the sale of convertible promissory notes and the sale and issuance of our securities As of June 30, 2022, we had $7.7 million in cash, and an accumulated deficit of $74.7 million.

Our primary use of cash is to fund operating expenses, which consist of research and development as well as regulatory expenses related to our therapeutic drug candidate, dovitinib, and clinical programs for stenoparib and IXEMPRA®, and to a lesser extent, general and administrative expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

As of June 30, 2022, the Company’s cash deposits of $7.7 million were 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.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

(In thousands)

Operating Activities

For the six months ended June 30, 2022, net cash used in operating activities was approximately $10.0 million compared to approximately $6.8 million for the six months ended June 30, 2021. The approximate $3.2 million increase in net cash used in operating activities was primarily the result of an increase of $2.0 million in non-cash adjustments and a net reduction in operating assets and liabilities of approximately $1.5 million, offset by a $300 thousand decrease in loss for the six-month period ended June 30, 2022.

Investing Activities

For the six months ended June 30, 2022, net cash provided by investing activities was approximately $809 compared to $0 for the six months ended June 30, 2021. The increase in net cash provided by investing activities was primarily due to proceeds from the sale of IP during the six months ended June 30, 2022.

Financing Activities

In the six months ended June 30, 2022, we incurred a $2.3 million financing cost as a result of a $1.5 million floor price adjustment on converted Series A Preferred Stock. We also paid an $800 Registration Delay Penalty on our Series A Preferred stock.

In the six months ended June 30, 2021, we received $13.0 million from financing activities inclusive of $12.1 million from the issuance of common stock and $1.1 million in proceeds from convertible debt and we paid $121 in share issuance costs. We also received and repaid a $2.9 million loan.

Operating Capital and Capital Expenditure Requirements

We believe that our existing cash and cash equivalents as of October 7, 2022, and our anticipated expenditures and commitments for the next twelve months including contractual obligations for milestone payments, will not enable us to fund our operating expenses and capital expenditure requirements for at least twelve (12) months from the date of this report. Our estimate as to how long we expect our cash to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based upon our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022, and June 30, 2021, and our audited consolidated financial statements for the years ended December 31, 2021, and December 31, 2020, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

Our significant accounting policies are described in the notes to our consolidated financial statements for the years ended December 31, 2021, and December 31, 2020, included in our Form 10-K for the year ended December 31, 2021, filed on May 17, 2022, and there have been no significant changes to our significant accounting policies during the six months ended June 30, 2022. These unaudited interim condensed financial statements should be read in conjunction with the Company’s audited financial statements and accompanying notes.

Recently Issued Accounting Pronouncements

See the sections titled “Recently adopted accounting pronouncements” in Note 2*(dd)* and “Recently issued accounting pronouncements not yet adopted” in Note 2*(ee)* to the Company’s consolidated financial statements for the year ended December 31, 2021, and December 31, 2020, respectively, appearing in the Company’s 10-K filed with the SEC on May 17, 2022; and in Notes 3(i) and 3(j) to the Company’s unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022 and June 30, 2021.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15I and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, because (i) of the material weaknesses identified in our internal controls over financial reporting; and (ii) we were required to restate our financial statements for the year ended December 31, 2020, and quarterly period ended September 30, 2021, which delayed the filing of or required an amendment to our SEC reports, our disclosure controls, and procedures, as defined above, were not effective.

As a newly reporting company under the Exchange Act, we are not required to evaluate the effectiveness of our internal controls over financial reporting until the end of the fiscal year after we file our first annual report on Form 10-K, which will occur on December 31, 2022. However, in connection with the audit of our financial statements for the years ended December 31, 2021 and 2020, we identified material weaknesses in our internal controls over financial reporting because we did not have a formal process for period end financial closing and reporting, we historically had insufficient resources to conduct an effective monitoring and oversight function independent from our operations and we lack accounting resources and personnel to properly account for accounting transactions such as the issuance of warrants with a derivative liability component. In particular, the material weaknesses identified were:

• a lack of accounting resources required to fulfill US GAAP and SEC reporting requirements;
• a lack of comprehensive US GAAP accounting policies and financial reporting procedures and personnel;
• a lack of adequate procedures and controls to appropriately account for accounting transactions including liability and the valuation allowance on the deferred tax asset relating to the net operating losses; and
• a lack of segregation of duties given the size of our finance and accounting team.

We have implemented and are continuing to implement various measures to address the material weaknesses identified; these measures include:

• The hiring of an Interim Chief Financial Officer and Director of Financial Reporting, a CPA (Illinois) who is experienced with public company reporting and is conversant in US GAAP and SEC accounting issues. With this hire we are addressing our ongoing development of our comprehensive US GAAP accounting policies, financial reporting procedures and internal controls over financial reporting;
• retaining consulting services to assist with the accounting treatment of complex financial instruments and tax; and
• engaged an independent US GAAP consulting firm.

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A significant deficiency is a control deficiency, or a combination of control deficiencies, that adversely affects our ability to initiate, authorize, record, process, or report external financial data reliably in accordance with US GAAP such that there is more than a remote likelihood that a misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected by our employees.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected by our employees. In response, we have begun the process of evaluating our internal control over financial reporting and to address the material weaknesses identified.

We intend to continue to take steps to remediate the material weaknesses described above and further evolve our accounting processes, controls, and reviews. We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address any other matters we identify or are brought to our attention.

We believe we are making progress toward achieving the effectiveness of our internal controls and disclosure controls. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the material weaknesses in our internal controls over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weaknesses in our internal controls over financial reporting, which may necessitate further action.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting other than as described above.

An investment in our common stock involves a high degree of risk. You should carefully consider the risks set forth in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on May 17, 2022, before making an investment decision. If any of the risks occur, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should read the section captioned “Forward Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this report.