Volitionrx Ltd: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of our financial condition and results of operations should be read together with our Unaudited Condensed Consolidated Financial Statements and the related notes included elsewhere in this Report and our Annual Report. This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the section entitled “Risk Factors” in this Report and in our Annual Report, as well as our other public filings with the SEC. Please refer to the section of this Report entitled “Cautionary Note Regarding Forward-Looking Statements” for additional information.

Company Overview

Volition is a multi-national epigenetics company focused on advancing the science of epigenetics and exploiting these advances in human health with the ambition of saving and improving lives through the earlier detection of and improvement in monitoring the progress of life-altering diseases. This has been our mission since our founding, and it is coming to fruition at the very heart of epigenetics.

Through its subsidiaries, Volition is developing and commercializing simple, easy to use, cost-effective blood tests to help diagnose and monitor a range of life-altering diseases, including some cancers and diseases associated with NETosis, such as sepsis. Early diagnosis and monitoring have the potential to not only prolong the life of patients, but also improve their quality of life.

Cancer is associated with a loss of normal chromosomal epigenetic regulation and Volition is working to detect these epigenetic changes in chromosome fragments which circulate in the blood. The most common of these are nucleosomes and we investigate these through our Nucleosomics™ technology platform Nu.Q®. We also investigate epigenetic changes in transcription factor binding, in particular CCCTC-binding factor (“CTCF”), and on October 21, 2023, published our first data relating to this novel detection method.

We have five key pillars of focus, to commercialize in different areas.

• Cancer - detecting and monitoring human cancer through both our Nu.Q® and CTCF technologies.
• Nu.Q® Vet - cost-effective, easy-to-use cancer screening blood test for dogs and other animals.
• Nu.Q® NETs - monitoring the immune system to save lives in both humans and animals.
• Nu.Q® Capture - capturing and concentrating samples for more accurate diagnosis.
• Nu.Q® Discover - a complete solution to profiling nucleosomes.

Our research, product development and manufacturing activities are centered in Belgium, with innovation and U.S. regulatory operations in California, and additional offices in Nevada, London, and Singapore, where we focus on bringing our diagnostic and disease monitoring products to market.

Commercialization Strategy

We are guided by three underlying principles to our commercialization strategy – ensuring our products:

• Result in low capital expenditures for licensors and end users and low operating expenses for Volition,
• Are affordable, and
• Are accessible worldwide.

We believe, given the global prevalence of cancer and diseases associated with NETosis, and the low-cost, accessible and routine nature of our tests, they could be used throughout the world.

We aim to remain an intellectual property (“IP”) powerhouse in the epigenetic space and plan to monetize our IP and technologies through licensing, development, commercialization and distribution contracts with companies that have established distribution networks and expertise on a worldwide or regional basis, in both human and animal care across platforms (centralized labs and point-of-care).

38

Table of Contents

To this end, on March 28, 2022, Volition entered into a master license and product supply agreement with Heska Corporation (“Heska”), a leading global provider of advanced veterinary diagnostics. In exchange for granting Heska exclusive worldwide rights to sell our Nu.Q® Vet Cancer Test at the point of care for companion animals, Volition received a $10.0 million upfront payment upon signing and is eligible to receive up to an additional $18.0 million based upon the achievement of certain near and mid-term milestones. In addition, Volition has granted Heska non-exclusive rights to sell the Nu.Q® Vet Cancer Test in kit format for companion animals through Heska’s network of central reference laboratories. In February 2023, Heska commenced pre-orders of the Nu.Q® Canine Cancer Screen and Monitor Test for veterinarians in Heska’s network at the point of care.

We also entered into a licensing and supply agreement with IDEXX Laboratories, Inc. (“IDEXX”), a global leader in pet healthcare innovation, in October 2022. This contract provides worldwide customer reach through IDEXX’s global reference laboratory network as we continue to commercialize our transformational Nu.Q® technology within the companion animal healthcare sector and capitalize on the significant opportunities available. IDEXX launched the IDEXX Nu.Q® Canine Cancer Screen in the United States in January 2023.

Further, we engaged DNAtech, Portugal, and, through our agreement with Heska, Scil Lab Europe, to launch the Nu.Q® Vet Cancer Test to customers in Europe commencing in November 2022. Subsequent to the quarter ended, September 30, 2023, we have launched the Nu.Q® Vet Cancer Test in the UK through two distributors, VPG (Veterinary Pathology Group) and Nationwide.

Following the roll-out of our Nu.Q® Vet Cancer Test and Nu.Q® Discover, the next series of products we anticipate launching are as follows:

• a canine cancer monitoring claim;
• NETosis related screening and monitoring tests for use in human sepsis, and coagulation; and
• cancer tests for humans.

Our Nucleosomics™ technology is transferable to multiple platforms including ELISA 96-well plates and, bead-based chemiluminescent and we are currently working on transferring our technology to the widely-utilized homogeneous immunoassay platform and several point of care platforms to enable rapid turnaround of results in–clinic and in the doctor’s office.

Additionally, we are working on complete nucleosome analysis with our Nu.Q® Capture technology. The goal of this project is to investigate ways to specifically target circulating tumor DNA (“ctDNA”). The ability to enrich ctDNA will allow us to use mass spectrometry to analyze histone and DNA modifications, and to sequence DNA present around nucleosomes.

The use of Nu.Q® Capture technology in the field of transcription factors has led to the successful isolation of tumor derived transcription factor-DNA complexes from blood samples obtained from cancer patients. Subsequent to the quarter end September 30, 2023, at the European Society for Medical Oncology conference in Madrid, Spain in October 2023, we demonstrated what we believe to be an entirely new method for the early detection of cancer. We believe that this novel CTCF-ChIP/qPCR method developed by Volition shows enormous promise for the accurate, rapid, low-cost detection of early-stage cancer.

Liquidity and Capital Resources

We have financed our operations since inception primarily through private placements and public offerings of our common stock. As of September 30, 2023, we had cash and cash equivalents of approximately $10.8 million.

Net cash used in operating activities was $24.5 million for the nine months ended September 30, 2023 and $9.5 million for the nine months ended September 30, 2022. The increase in cash used in operating activities for the period ended September 30, 2023 when compared to same period in 2022 was primarily due to a $10.0 million payment received pursuant to our license and supply agreement with Heska in the period ended September 30, 2022 and increased spending on clinical trials activities in 2023 in furtherance of our commercialization strategy.

Net cash used in investing activities was $0.8 million and $1.0 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The decrease was primarily due to lower purchases of laboratory equipment.

Net cash provided by financing activities was $25.2 million for the nine months ended September 30, 2023 and net cash provided by financing activities was $6.0 million for the comparable period ended September 30, 2022. The increase in cash provided by financing activities for the period ended September 30, 2023 when compared to same period in 2022 was due to $17.6 million in net cash received from the issuance of shares of common stock in a registered public offering in June 2023, $8.0 million in net cash received from the issuance of shares of common stock in a registered public offering in February 2023 and $0.7 million in net cash received from the issuance of shares of common stock under our “at-the-market” facilities during the period ended September 30, 2023.

39

Table of Contents

The following table summarizes our approximate contractual payments due by year as of September 30, 2023.

Approximate Payments (Including Interest) Due by Year

We intend to use our cash reserves to fund further research and development activities and launch new products. We do not currently have sufficient revenues to cover our annual expenses, including our contractual obligations, and expect to rely on financing our operations in future periods, mainly through the sale of equity or debt securities, and licensing rights, to provide sufficient funding to execute our strategic plan. However, there can be no assurance that we will be successful in raising additional funds, or that we will be able to do so on terms that are satisfactory to us.

In the event of an ongoing lack of financing, it may be necessary to discontinue operations, which will adversely affect the value of our common stock.

We have not attained profitable operations on an ongoing basis and are dependent upon obtaining financing to pursue any extensive activities. For these reasons, our auditors stated in their report on our audited financial statements for the fiscal year ended December 31, 2022 an explanatory paragraph regarding factors that raise substantial doubt that we will be able to continue as a going concern.

40

Table of Contents

Results of Operations

Comparison of the Three Months Ended September 30, 2023 and September 30, 2022

The following table sets forth our results of operations for the three months ended September 30, 2023 and September 30, 2022.

Revenues

Our operations are transitioning from a research and development focused stage to a commercialization stage. Revenues during the three-months ended September 30, 2023 were $165,211 compared with $32,714 for the three-months ended September 30, 2022. The main source of revenue during the three months ended September 30, 2023 was product revenues from sales of the Nu.Q® Vet Cancer Test and services revenues from our Nu.Q® Discover offering. The primary source of revenue during the three-months ended September 30, 2022 was product revenues from sales of the Nu.Q® Vet Cancer Test and H3.1 kits under the Volition Nu.Q® Discover offering.

Operating Expenses

Total operating expenses increased to $8.8 million for the three months ended September 30, 2023 from $8.0 million for the three months ended September 30, 2022, as a result of the factors described below.

41

Table of Contents

Research and Development Expenses

Research and development expenses increased to $4.7 million from $4.0 million for the three-months ended September 30, 2023, and September 30, 2022 respectively. This increase was primarily related to increased direct research and development expenses as a result of the clinical trials with DXOCRO, and higher personnel expenses. The number of full-time equivalent (“FTE”) personnel we employed in this division increased by 7 to 71 compared to the prior year period.

General and Administrative Expenses

General and administrative expenses increased to $2.6 million from $2.5 million for the three-months ended September 30, 2023, and September 30, 2022, respectively. This increase was primarily due to higher personnel costs and legal and professional fees. The FTE personnel number within this division decreased by 1 to 22 compared to the prior year period.

Sales and Marketing Expenses

Sales and marketing expenses increased to $1.6 million from $1.5 million for the three-months ended September 30, 2023, and September 30, 2022, respectively. This increase was primarily due to higher personnel expenses partly offset by a reduction in stock-based compensation and direct marketing and professional fees during the period. The FTE personnel number within this division increased by 1 to 21 compared to the prior year period.

42

Table of Contents

Other Income (Expense)

For the three months ended September 30, 2023, the Company’s other income was $199,867 compared to other income of $180,685 for the three months ended September 30, 2022. These prior year amounts primarily consisted of grant income. The increase in other income was due to the change in fair value of the warrant liability partly offset by reduced grant income earned during the period.

Net Loss

For the three months ended September 30, 2023, the Company’s net loss was approximately $8.5 million in comparison to a net loss of $7.8 million for the three months ended September 30, 2022. The change was primarily a result of increased clinical trial and personnel costs.

Comparison of the Nine Months Ended September 30, 2023 and September 30, 2022

The following table sets forth our results of operations for the nine months ended September 30, 2023 and September 30, 2022:

Revenues

Our operations are still transitioning from a research and development stage to a commercialization stage. Revenues during the nine-months ended September 30, 2023 were $531,329, compared with $186,677 for the nine-months ended September 30, 2022. The main source of revenues during the nine-months ended September 30, 2023 was product sales of the Nu.Q® Vet Cancer Test and services revenue from our Nu.Q® Discover offering. The primary source of revenue during the nine-months ended September 30, 2022 was product sales of the Nu.Q® Vet Cancer Test and services revenue from our Nu.Q® Discover offering.

Operating Expenses

Total operating expenses increased to $27.8 million from $24.0 million for the nine months ended September 30, 2023 and September 30, 2022, respectively, as a result of the factors described below.

43

Table of Contents

Research and Development Expenses

Research and development expenses increased to $15.0 million for the nine months ended September 30, 2023, from $11.2 million for the nine months ended September 30, 2022. This increase was primarily related to increased direct research and development expenses as a result of the clinical trials with DXOCRO, higher personnel expenses and depreciation. The FTE personnel number increased by 7 to 71 compared to the prior year period.

General and Administrative Expenses

General and administrative expenses decreased to $7.8 million from $7.9 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. This decrease was primarily due to lower stock-based compensation costs, general and administrative costs and depreciation partly offset by higher personnel expenses and legal and professional fees during the period. The FTE personnel number decreased by 1 to 22 compared to the prior year period.

Sales and Marketing Expenses

Sales and marketing expenses remained flat at $4.9 million compared to $4.9 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. Higher personnel expenses were offset by reduced stock-based compensation and direct marketing and professional fees during the period. The FTE personnel number increased by 1 to 21 compared to the prior year period.

Other Income (Expense)

For the nine months ended September 30, 2023, the Company’s other income was $369,747 compared to other income of $507,127 for the nine months ended September 30, 2022. These amounts primarily consisted of grant income. The decrease in other income was mainly due a reduction in grant income earned in the period.

44

Table of Contents

Net Loss

For the nine months ended September 30, 2023, the Company’s net loss was approximately $26.9 million in comparison to a net loss of $23.3 million for the nine months ended September 30, 2022. The change was primarily a result of increased clinical trial and personnel costs.

Going Concern

We have not attained profitable operations and are dependent upon obtaining external financing to continue to pursue our operational and strategic plans. For these reasons, management has determined that there is substantial doubt that the business will be able to continue as a going concern without further financing.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

Future Financings

We may seek to obtain additional capital through the sale of debt or equity securities, if we deem it desirable or necessary. These sales may include the sale of equity securities from time to time through our “at the market offering program” with Jefferies LLC under the Equity Distribution Agreement dated May 20, 2022 (see Note 6, Common Stock, of the notes to the interim consolidated financial statements). However, we may be unable to obtain such additional capital when needed, or on terms favorable to us or our stockholders, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through the issuance of debt securities, the terms of such securities may place restrictions on our ability to operate our business.

Critical Accounting Policies and Estimates

Our interim condensed consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, applied on a consistent basis. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We also regularly evaluate estimates and assumptions related to deferred income tax asset valuation allowances, useful lives of property and equipment and intangible assets, borrowing rate used in operating lease right-of-use asset and liability valuations, impairment analysis of intangible assets and valuations of stock-based compensation.

We base our estimates and assumptions on current facts, historical experiences, information from third party professionals and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from our estimates. To the extent there are differences between the estimates and the actual results, future results of operations could be materially affected.

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A summary of these policies is included in the notes to our financial statements.

Recently Issued Accounting Pronouncements

The Company has implemented all applicable new accounting pronouncements that are in effect. The Company does not believe that there are any other applicable new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

45

Table of Contents

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed 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 our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our Principal Executive and Principal Financial Officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management carried out an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded, as they previously concluded as of December 31, 2022, that our disclosure controls and procedures were not effective as of September 30, 2023, because of material weaknesses in our internal control over financial reporting, as referenced below and described in detail in our Annual Report.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

During the year ended December 31, 2022, our management, with oversight from our audit committee, implemented the following remediation steps to address and mitigate the underlying deficiencies which gave rise to the material weaknesses and to improve our internal control over financial reporting:

• hired specialists in human resources and information technology to recommend and implement relevant policies and processes that will strengthen the control environment;
• changed organizational reporting lines and reallocated certain responsibilities to improve segregation of duties around payroll;
• engaged additional resources to help us assess, document, design and implement control activities related to internal control over financial reporting; and
• implemented additional review procedures at each month end close.

During 2023, we intend to take additional measures to strengthen certain processes we have identified which we believe once implemented in conjunction with the completed actions above will mitigate and remedy this weakness.

We also intend to take additional steps to continue to strengthen the control environment. Such measures include but may not be limited to:

• hiring additional finance resources:
• strengthening our internal processes and reviews, including formal documentation thereof; and
• preparation of risk-control matrices to identify key risks and develop and document policies to mitigate those risks.

As we continue to evaluate and test the remediation plan outlined above, we may also identify additional measures to address the material weaknesses or modify certain of the remediation procedures described above. We also may implement additional changes to our internal control over financial reporting as may be appropriate in the course of remediating the material weakness. Management, with the oversight of our audit committee, will continue to take steps necessary to remedy the material weakness to reinforce the overall design and capability of our control environment.

46

Table of Contents

Changes in Internal Control over Financial Reporting

Except for the ongoing remediation of the material weaknesses in internal controls over financial reporting noted above, no changes in our internal control over financial reporting were made during the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the Effectiveness of Disclosure Controls and Internal Controls

Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of 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 the 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 control.

The design of any system of controls is also 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 our stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

47

Table of Contents

There have been no material changes in our assessment of risk factors affecting our business since those presented in Part I, Item 1A of our Annual Report.