Allarity Therapeutics, Inc.: Form 10-Q for the period ended Jun 30, 2024

Forward-Looking Statements

You should read the following discussion and analysis of our financial condition and results of operations together with “Cautionary Note Regarding Forward-Looking Statements” and our condensed consolidated financial statements and related notes included under Item 1 of this Quarterly Report as well as our most recent Annual Report on Form 10-K for the year ended December 31, 2023, as amended, including Part 1, Item 1A “Risk Factors.”

Overview

We are a biopharmaceutical company focused on discovering and developing highly targeted anti-cancer drug candidates. Through the use of its Drug Response Predictor (DRP®) platform, we identify the value in drug assets that have otherwise been discontinued by identifying patient populations where these drugs are active. Our lead drug candidate is: the poly-ADP-ribose polymerase (PARP) inhibitor stenoparib, or Stenoparib.

Recent Developments

Nasdaq Delisting Notifications

On June 18, 2024, the Company received a letter from the Nasdaq Listing Qualifications Staff (the “Staff”) of Nasdaq indicating that the Company has not complied with the Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”) which is the requirement that for 30 consecutive business days the bid price for the Company’s common stock close above the $1 per share minimum bid price requirement for continued inclusion on the Nasdaq Capital Market. On June 27, 2024, the Company was granted a hearing before a Nasdaq Hearings Panel. On July 30, 2024, the Company was attended a hearing before a Nasdaq Hearings Panel and presented its plan for regaining compliance with the Bid Price Rule. Nasdaq has advised the Company to expect to receive a ruling within two weeks of July 30, 2024.

Special Meeting of Stockholders; Share Consolidation

We effected a 1-for-20 share consolidation of our Common Stock on April 9, 2024 (“Share Consolidation”). No fractional shares were issued in connection with the Share Consolidation. If, as a result of the Share Consolidation, a stockholder would otherwise have been entitled to a fractional share, each fractional share was rounded up to the next whole number. The Share Consolidation resulted in a reduction of our outstanding shares of Common Stock on June 30, 2024 from 6,854,604 to 342,774. The par value of our authorized stock remained unchanged at $0.0001.

SEC Investigation

On July 19, 2024, the Company received a “Wells Notice” from the Staff of the SEC relating to the Company’s previously disclosed SEC investigation. The Wells Notice relates to the Company’s disclosures regarding meetings with the United States Food and Drug Administration (the “FDA”) regarding the Company’s NDA for Dovitinib or Dovitinib-DRP, which was submitted to the FDA in 2021. The Company understands that all conduct relating to the SEC Wells Notice occurred during or prior to fiscal year 2022. The Company also understands that three of its former officers received Wells Notices from the SEC relating to the same conduct. A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law. The Wells Notice informed the Company that the SEC Staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company that would allege certain violations of the federal securities laws. The Company is continuing to cooperate with the SEC and maintains that its actions were appropriate, and intends to pursue the Wells Notice process, including submitting a formal response to the SEC.

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.

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 ordinary shares.

We have incurred net losses in each year since inception. Our net losses were $5.0 million and $5.7 million for the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, we had an accumulated deficit of $99.9 million and cash and cash equivalents of $19.2 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.

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Components of Operating Expenses

Research and Development Expenses

Research and development expenses include:

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

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

We expect our research and development expenses on Stenoparib to increase substantially for the foreseeable future as we continue to invest to accelerate Stenoparib in clinical trials designed to attain regulatory approval. Costs related to dovitinib and IXEMPRA will decrease precipitously as these have been deprioritized/ terminated. We expect additional costs in research and development activities 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, additional insurance expenses, investor relations activities and other administrative and professional services.

Results of Operations for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited) (in thousands, except where otherwise noted)

The following table summarizes our results of operations for the three and six months ended June 30, 2024 and 2023:

(In thousands)

(In thousands)

Research and Development Expenses

For the three months ended June 30, 2024, compared to June 30, 2023

The decrease of $47 in research and development expenses was primarily because research study costs increased by $204, and patents costs increased by $27; offset by increased tax credits of $5 and decreases in all other expenses as follows: contractors and consultants by $88, manufacturing and supplies by $82, staffing by $50, amortization by $8, and other expenses by $5. Staffing and contractor costs have decreased because of cost-cutting measures.

For the six months ended June 30, 2024, compared to June 30, 2023

The increase of $696 in research and development expenses was primarily because of increased manufacturing and supplies expenses of $442, research study costs of $317, milestone payments of $100, and patent costs of $37; offset by increased tax credits of $51 and decreases in all other expenses as follows: contractors by $37, staffing by $93, amortization by $16 and other by $3. Manufacturing and supplies expenses have increased because of increased drug manufacturing costs. Staffing and contractor costs have decreased because of cost-cutting measures.

General and Administrative Expenses

For the three months ended June 30, 2024, compared to June 30, 2023

General and administrative expenses decreased by $738 for the three months ended June 30, 2024, compared to June 30, 2023. The decrease was primarily due to increased audit and legal expenses of $327 and other expenses of $33; offset by decreases in financial consulting costs of $356, finance costs of $374, insurance of $188, staffing costs of $140, communication expenses of $40.

For the six months ended June 30, 2024, compared to June 30, 2023

General and administrative expenses decreased by $909 for the six months ended June 30, 2024, compared to June 30, 2023. The decrease was primarily due to decreases of $495 in insurance expenses, $380 in finance expenses, $395 in financial consultant expenses, $67 in communication expenses, $24 in staffing expenses, and $16 in other administrative expenses; offset by an increase of $273 in audit and legal expenses, $201 in tax expense and $14 in premises expenses. Staffing costs have decreased because of cost-cutting measures, and stock-based compensation costs have decreased because of stock option forfeitures of recently resigned employees.

Other Income (Expenses), Net

For the three months ended June 30, 2024, compared to June 30, 2023

Other income (expense) of $1,742 recognized in the three months ended June 30, 2024, consisted primarily of a $2,243 fair value adjustment to derivative liabilities and interest income of $53, offset by interest expenses of ($426), and foreign exchange losses of ($128).

Other income (expense) of $1,776 recognized in the three months ended June 30, 2023, consisted primarily of a $1,941 fair value adjustment to derivative liabilities and interest income of $3, offset by interest expenses of ($142), and foreign exchange losses of ($26).

For the six months ended June 30, 2024, and June 30, 2023

Other income (expense) of $2,135 recognized in the six months ended June 30, 2024, consisted primarily of a $2,662 fair value adjustment to derivative and warrant liabilities, foreign exchange losses of ($52), and interest income of $53, offset by interest expense of ($528).

Other income (expense) of $2,092 recognized in the six months ended June 30, 2023, consisted primarily of a $2,250 fair value adjustment to derivative and warrant liabilities, foreign exchange gains of $69, and interest income of $7, offset by interest expense of ($234).

Liquidity, Capital Resources and Plan of Operations

Since our inception through June 30, 2024, 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, 2024, we had $19.2 million in cash and cash equivalents, and an accumulated deficit of $99.9 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 lead drug candidate and clinical programs for Stenoparib, 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.

On March 21, 2024, the Company commenced an at the market offering of shares of our Common Stock and as of June 30, 2024, had sold 31,891,433 shares of our Common Stock for net proceeds of $27,689. Subsequent to June 30, 2024, an additional 7,340,312 shares of our common stock were sold at the market for net proceeds of $1,404. In light of the Company’s cash position as of the date of this Quarterly Report, the Company has sufficient funds for its current operations and planned capital expenditures. As discussed above the Company intends to seek capital through sale of its securities or other sources. There are no assurances, however, that the Company will be successful in raising additional working capital, or if it is able to raise additional working capital, it may be unable to do so on commercially favorable terms. The Company’s failure to raise capital or enter into other such arrangements if and when needed would have a negative impact on its business, results of operations and financial condition and its ability to develop its product candidates.

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. We currently plan on completing an additional public offering in the near future, however there are no assurances 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 continue its plan of operations.

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 a table of contractual obligations 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, 2024, net cash used in operating activities was approximately $8.7 million compared to approximately $5.7 million for the six months ended June 30, 2023. The $3.0 million increase in net cash used in operating activities was primarily the result of higher non-cash operating expenses of $890 thousand and a decrease in cash provided by non-cash operating assets of $2.8 million, offset by a decreased loss of $660 thousand.

Financing Activities

For the six months ended June 30, 2024, net cash provided by financing activities was approximately $27.7 million compared to approximately $4.0 million provided in the six months ended June 30, 2023.

The increase in net cash provided by investing activities was primarily due to the receipt of $27,689 in net proceeds from the issuance of common stock.

Operating Capital and Capital Expenditure Requirements

We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated expenditures and commitments for the next twelve months. 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 interim consolidated financial statements for the three and six months ended June 30, 2024 and 2023, and our audited consolidated financial statements for the years ended December 31, 2023 and 2022, which have been prepared in accordance with U.S. GAAP. The preparation of these 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 year ended December 31, 2023 included in the Form 10-K, and there have been no significant changes to our significant accounting policies during the six months ended June 30, 2024. These unaudited condensed interim consolidated 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*(cc)* and “Recently issued accounting pronouncements not yet adopted” in Note 2*(x)* to the Company’s consolidated financial statements for the year ended December 31, 2023 and 2022, appearing in the Form 10-K; and in Note 2*(g)* to the Company’s unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 2024 and 2023.

For a discussion of the “Convertible Promissory Note Due to Novartis” refer to Note 5 to the Condensed Consolidated Financial Statements (Unaudited) in Part I, Item 1 of this Quarterly Report.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management and consultants, including our Chief Executive Officer and our Chief Financial Officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2024, as such term is defined in Rules 13a-15I and 15d-15(e) of the Exchange Act. Based upon the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2024.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.