UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2021March 31, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-41160
ALLARITY THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 87-2147982 | |||
| (State or Other Jurisdiction Of | ( Identification Number) | Number) |
| 210 Broadway, Suite 201, Cambridge, MA | 02139 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(401) 426-4664
(Registrant’s telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.0001 per share | ALLR | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrantissuer was required to file such reports);, and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ ☒ No ☐☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☒ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 23, 2021,May 27, 2022, the registrant had one share9,283,295 shares of common stock par value $0.001 per share outstanding.
Table of Contents
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EXPLANATORY NOTE
On May 20, 2021, we entered a Plan of Reorganization and Asset Purchase Agreement (the “Recapitalization Share Exchange”), which was amended and restated on September 23, 2021, between us, Allarity Acquisition Subsidiary, our wholly owned Delaware subsidiary (“Acquisition Sub”), and Allarity Therapeutics A/S, an Aktieselskab organized under the laws of Denmark. Our Form S-4 registration statement was effective on November 5, 2021; and the Recapitalization Share Exchange was approved by our shareholders at our Extraordinary General Meeting held on November 22, 2021. The Recapitalization Share Exchange has not yet been completed and is not expected to be completed until on or about December 20, 2021. Pursuant to the terms of the Recapitalization Share Exchange, our Acquisition Sub will acquire substantially all of the assets and liabilities of Allarity Therapeutics A/S in exchange for shares of our common stock pursuant to a Form S-4 registration statement (SEC Reg. No. 333-258968) which was filed with SEC on August 20, 2021, and which became effective on November 5, 2021. Because we were formed as a “business combination related shell company” as defined in SEC Rule 405, and have not had any significant business activity other than activity related to the consummation of the Recapitalization Share Exchange, only the financial statements of our parent Allarity Therapeutics A/S are included in this Form 10-Q. Consequently, as of the date of this report, the financial statements and other financial information, as well as the description of our business reflect the financial statements and other financial information and business operations of our parent Allarity Therapeutics A/S.
Unless the context indicates otherwise, references in this reportQuarterly Report on Form 10-Q to the “Company,” “Allarity,” “we,” “us,” “our” and similar terms refer to Allarity Therapeutics, Inc., Allarity Therapeutics A/S (as predecessor) and its respective consolidated subsidiaries.
Except as otherwise expressly provided herein, the information in this Report does not reflect the consummation of the Recapitalization Share Exchange, which, as discussed above, is anticipated to occur subsequent to the period covered hereunder.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. We make such forward-looking statements pursuant toincludes “forward-looking statements” within the safe harbor provisionsmeaning of Section 27A of the U.S. Private Securities Litigation Reform Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended and other federal securities laws.(the “Exchange Act”). All statements in this report other than statements of historical fact contained in this Quarterly Report on Form 10-Q,are forward-looking statements for purposes of these provisions, including any statements regarding our strategy, future preclinical studies and clinical trials, future financial position, projected costs, prospects,of the Company’s plans and objectives for future operations, the Company’s future financial or economic performance (including known or anticipated trends), and the assumptions underlying or related to the foregoing. Statements that include the use of management, are forward-looking statements. The words “anticipate,” “believe,” “contemplate,” “could,” “estimate,” “expect,” “intend,” “seek,”terminology such as “may,” “might,“will,” “plan,“expects,” “plans,” “anticipates,” “estimates,” “potential,” “predict,” “project,” “target,” “aim,” “should,” ‘will” “would,or “continue,” or the negative of these wordsthereof, or other similar expressionscomparable terminology, are intendedforward-looking statements. These risks and uncertainties include, but are not limited to, identify forward-looking statements, although not all forward-looking statements contain these words.the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K (“Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on May 17, 2022. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties.
The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements related to:
ii
We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions, and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q and in the Risk Factors section of the information statement/prospectus our Form S-4 Registration Statement (“information statement/prospectus”), originally filed with the Securities and Exchange Commission (the “SEC”), on August 20, 2021, and which became effective on November 5, 2021,and have identified other factors such as the impact of the COVID-19 pandemic, the results of our clinical trials, and the impact of competition, that we believe could cause actual results or events to differ materially from the forward-statements that we make. Furthermore, we operate in a competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q.
You should read this Quarterly Report on Form 10-Qthese factors and the documents that we file with the SEC with the understanding that our actual future results may be materially different from what we expect. Theseother cautionary statements made in this report as being applicable to all related forward-looking statements are based on management’s current expectations. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other importantwherever they appear in this report. If one or more of these factors that may causematerialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements to bemay vary materially different from any future results, performance or achievements expressed or implied by thethese forward-looking statements. Factors
Any forward-looking statements contained in this Quarterly Report are only estimates or predictions of future events based on information currently available to our management and management’s current beliefs about the potential outcome of future events. Whether these future events will occur as management anticipates, whether we will achieve our business objectives, and whether our revenues, operating results or financial condition will improve in future periods are subject to numerous risks. There are a number of important factors that maycould cause actual results to differ materially from current expectationsthe results anticipated by these forward-looking statements. These important factors include among other things, those listed elsewherethat we discuss under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and those listed underin other reports filed from time to time with the Risk Factors sectionSEC. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our information statement/prospectus. Youactual results, performance or achievements may access our information statement/prospectus under the investor SEC filings tab of our website at www.allarity.comvary materially from any future results, performance or on the SEC’s website at www.sec.gov. Given these uncertainties, you should not rely onachievements expressed or implied by these forward-looking statements as predictions of future events. Thestatements.
All forward-looking statements containedand descriptions of risks included in this Quarterly Report on Form 10-Qreport are made as of the date hereof based on information available to the Company as of this Quarterly Report,the date hereof, and we do not assume anyexcept as required by applicable law, the Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
In addition, statements that “we believe”otherwise. You should, however, consult the risks and similar statements reflect our beliefs and opinions onother disclosures described in the relevant subject. These statements are based upon information availablereports the Company files from time to us as oftime with the SEC after the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basisreport for such statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevantupdated information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
iiiii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements | ||||||||
ALLARITY THERAPEUTICS A/S (Unaudited) (U.S. dollars in thousands, except for share and per share data and where otherwise noted) | ||||||||
| September 30, 2021 $ | December 31, 2020 $ | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | 5,584 | 298 | ||||||
| Other current assets | 432 | 335 | ||||||
| Prepaid expenses | 125 | 174 | ||||||
| Income tax receivable | 1,494 | 908 | ||||||
| Total current assets | 7,635 | 1,715 | ||||||
| Non-current assets: | ||||||||
| Investment | 491 | 845 | ||||||
| Property, plant and equipment, net | 9 | 21 | ||||||
| Operating lease assets | 108 | 331 | ||||||
| Intangible assets, net | 28,744 | 30,491 | ||||||
| Total assets | 36,987 | 33,403 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Line of credit | — | 84 | ||||||
| Accounts payable | 739 | 2,116 | ||||||
| Accrued liabilities | 2,947 | 1,840 | ||||||
| Income taxes payable | 54 | 57 | ||||||
| Lease liabilities | 98 | 109 | ||||||
| Convertible debt | — | 1,327 | ||||||
| Total current liabilities | 3,838 | 5,533 | ||||||
| Non-current liabilities | ||||||||
| Derivative liabilities | 218 | 149 | ||||||
| Lease liabilities | 35 | 267 | ||||||
| Deferred tax | 128 | 603 | ||||||
| Total liabilities | 4,219 | 6,552 | ||||||
| Stockholders’ equity | ||||||||
| Common stock, par value DKK 0.05; shares issued and outstanding at September 30, 2021 and December 31, 2020 were 403,791,200 and 212,601,044 respectively | 3,157 | 1,624 | ||||||
| Additional paid-in capital | 73,448 | 61,284 | ||||||
| Accumulated other comprehensive income (loss) | (419 | ) | 1,375 | |||||
| Accumulated Deficit | (43,418 | ) | (37,432 | ) | ||||
| Total stockholders’ equity | 32,768 | 26,851 | ||||||
| Total liabilities & stockholders’ equity | 36,987 | 33,403 | ||||||
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ALLARITY THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except for share and per share data)
| March 31, 2022 $ | December 31, 2021 $ | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | 14,544 | 19,555 | ||||||
| Other current assets | 147 | 625 | ||||||
| Prepaid expenses | 1,249 | 36 | ||||||
| Tax credit receivable | 1,271 | 838 | ||||||
| Total current assets | 17,211 | 21,054 | ||||||
| Non-current assets: | ||||||||
| Investment in Lantern Pharma Inc. stock | 314 | 350 | ||||||
| Property, plant and equipment, net | 6 | 8 | ||||||
| Operating lease right of use assets | 65 | 86 | ||||||
| Intangible assets, net | 13,694 | 28,135 | ||||||
| Total assets | 31,290 | 49,633 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | 5,799 | 698 | ||||||
| Accrued liabilities | 1,342 | 8,590 | ||||||
| Income taxes payable | 52 | 60 | ||||||
| Operating lease liabilities, current | 82 | 98 | ||||||
| Derivative liabilities | 3,171 | — | ||||||
| Warrant liability | 2,265 | 11,273 | ||||||
| Total current liabilities | 12,711 | 20,719 | ||||||
| Non-current liabilities | ||||||||
| Convertible promissory note and accrued interest, net | 1,005 | 979 | ||||||
| Operating lease liabilities, net of current portion | — | 9 | ||||||
| Deferred tax | 700 | 1,961 | ||||||
| Derivative liabilities | — | 7,181 | ||||||
| Total liabilities | 14,416 | 30,849 | ||||||
| Commitments and contingencies (Note 20) | ||||||||
| Redeemable convertible preferred stock | ||||||||
| Series A Convertible Preferred stock $0.0001 par value (500,000 shares authorized) 17,827 and 19,800 issued and outstanding at March 31, 2022 and December 31, 2021 respectively | 2,142 | 632 | ||||||
| Stockholders’ equity | ||||||||
| Common stock, $.0001 par value (30,000,000 shares authorized) shares issued and outstanding at March 31, 2022 and December 31, 2021 were 8,842,290 and 8,096,014 respectively | 885 | 810 | ||||||
| Additional paid-in capital | 84,233 | 84,434 | ||||||
| Accumulated other comprehensive (loss) | (814 | ) | (600 | ) | ||||
| Accumulated deficit | (69,572 | ) | (66,492 | ) | ||||
| Total stockholders’ equity | 14,732 | 18,152 | ||||||
| Total liabilities, redeemable convertible preferred stock & stockholders’ equity | 31,290 | 49,633 | ||||||
See accompanying notes to condensed consolidated financial statements.
ALLARITY THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(U.S. dollars in thousands, except for share and per share data)
| Three months ended March 31, | ||||||||
| 2022$ | 2021$ | |||||||
| Operating expenses: | ||||||||
| Research and development | 1,289 | 1,251 | ||||||
| Impairment of intangible assets | 14,007 | — | ||||||
| General and administrative | 3,013 | 1,211 | ||||||
| Total operating expenses | 18,309 | 2,462 | ||||||
| Loss from operations | (18,309 | ) | (2,462 | ) | ||||
| Other income (expenses) | ||||||||
| Gain on the sale of IP | 1,780 | — | ||||||
| Interest expense | (39 | ) | (79 | ) | ||||
| Finance expense | — | (87 | ) | |||||
| Loss on investment | (36 | ) | (113 | ) | ||||
| Foreign exchange losses | (269 | ) | (39 | ) | ||||
| Change in fair value adjustment of derivative and warrant liabilities | 12,566 | 45 | ||||||
| Loss on extinguishment of convertible debt | — | (116 | ) | |||||
| Change in fair value of convertible debt | — | (201 | ) | |||||
| Net other income (loss) | 14,002 | (590 | ) | |||||
| Net loss for the period before tax benefit (expense) | (4,307 | ) | (3,052 | ) | ||||
| Income tax benefit (expense) | 1,227 | (33 | ) | |||||
| Net loss | (3,080 | ) | (3,085 | ) | ||||
| Deemed dividend of 8% on Preferred stock | (1,572 | ) | — | |||||
| Net Loss Attributable to common stockholders | (4,652 | ) | (3,085 | ) | ||||
| Basic and diluted net loss per common stock | (0.56 | ) | (0.68 | ) | ||||
| Weighted-average number of common stock outstanding, basic and diluted | 8,288,371 | 4,533,430 | ||||||
| Other comprehensive loss, net of tax: | ||||||||
| Net loss | (3,080 | ) | (3,085 | ) | ||||
| Change in cumulative translation adjustment | (214 | ) | (459 | ) | ||||
| Change in fair value attributable to instrument specific credit risk | — | (6 | ) | |||||
| Comprehensive loss attributable to common stockholders | (3,294 | ) | (3,550 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
ALLARITY THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY
For the Three months ended March 31, 2022 and 2021
(Unaudited)
(U.S. dollars in thousands, except for share data)
| Series A Convertible Preferred Stock | Common Stock | Additional Paid in | Accumulated Other Comprehensive | (Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Value, net $ | Number | Value $ | Capital $ | (Loss) Income $ | Deficit) $ | Equity $ | |||||||||||||||||||||||||
| Balance, December 31, 2020 | — | — | 4,252,021 | 426 | 62,482 | 1,375 | (39,844 | ) | 24,439 | |||||||||||||||||||||||
| Debt conversion | 528,810 | 53 | 2,331 | — | — | 2,384 | ||||||||||||||||||||||||||
| Stock based compensation | — | — | — | — | 195 | — | — | 195 | ||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | — | (459 | ) | — | (459 | ) | ||||||||||||||||||||||
| Fair value of instrument specific Credit risk | — | — | — | — | — | (6 | ) | — | (6 | ) | ||||||||||||||||||||||
| Loss for the period | — | — | — | — | — | — | (3,085 | ) | (3,085 | ) | ||||||||||||||||||||||
| Balance, March 31, 2021 | 4,780,831 | 479 | 65,008 | 910 | (42,929 | ) | 23,468 | |||||||||||||||||||||||||
| Series A Convertible Preferred Stock | Common Stock | Additional Paid in | Accumulated Other Comprehensive | (Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Value, net $ | Number | Value $ | Capital $ | (Loss) Income $ | Deficit) $ | Equity $ | |||||||||||||||||||||||||
| Balance, December 31, 2021 | 19,800 | 632 | 8,096,014 | 810 | 84,434 | (600 | ) | (66,492 | ) | 18,152 | ||||||||||||||||||||||
| Conversion of preferred stock into common stock, net | (1,973 | ) | (62 | ) | 746,276 | 75 | 306 | — | — | 381 | ||||||||||||||||||||||
| Deemed dividend of 8% on preferred stock | — | 1,572 | — | — | (1,572 | ) | — | — | (1,572 | ) | ||||||||||||||||||||||
| Stock based compensation | — | — | — | — | 1,065 | — | — | 1,065 | ||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | — | (214 | ) | — | (214 | ) | ||||||||||||||||||||||
| Loss for the period | — | — | — | — | — | — | (3,080 | ) | (3,080 | ) | ||||||||||||||||||||||
| Balance, March 31, 2022 | 17,827 | 2,142 | 8,842,290 | 885 | 84,233 | (814 | ) | (69,572 | ) | 14,732 | ||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| ALLARITY THERAPEUTICS A/S CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME AND (LOSS) (Unaudited) (U.S. dollars in thousands, except for share and per share data and where otherwise noted) | ||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2021 $ | 2020 $ | 2021 $ | 2020 $ | |||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Research and development | 1,574 | 1,012 | 5,329 | 3,233 | ||||||||||||
| General and administrative | 2,619 | 953 | 6,140 | 3,245 | ||||||||||||
| Proceeds from sale of IP | (1,000 | ) | — | (1,000 | ) | — | ||||||||||
| Total operating costs and expenses | 3,193 | 1,965 | 10,469 | 6,478 | ||||||||||||
| Loss from operations | (3,193 | ) | (1,965 | ) | (10,469 | ) | (6,478 | ) | ||||||||
| Other (income) expenses | ||||||||||||||||
| Interest (income) | (28 | ) | (221 | ) | — | — | ||||||||||
| Interest expense | — | — | 481 | 115 | ||||||||||||
| Loss (gain) on investment | 137 | (243 | ) | 317 | (654 | ) | ||||||||||
| Foreign exchange losses (gains), net | (51 | ) | (32 | ) | 29 | (118 | ) | |||||||||
| Fair value adjustment of derivative liabilities | (4,517 | ) | 104 | (4,547 | ) | (957 | ) | |||||||||
| Change in fair value of convertible debt | — | 78 | 298 | 553 | ||||||||||||
| Net other (income) expenses | (4,459 | ) | (314 | ) | (3,422 | ) | (1,061 | ) | ||||||||
| Net (loss) income for the period before tax benefit | 1,266 | (1,651 | ) | (7,047 | ) | (5,417 | ) | |||||||||
| Income tax benefit | 406 | 691 | 1,061 | 1,520 | ||||||||||||
| Net (loss) income | 1,672 | (960 | ) | (5,986 | ) | (3,897 | ) | |||||||||
| Net loss attributable to non-controlling interests | — | — | — | (15 | ) | |||||||||||
| Net (loss) income attributable to Allarity A/S common stockholders | 1,672 | (960 | ) | (5,986 | ) | (3,882 | ) | |||||||||
| Basic and diluted net income (loss) per common share | $ | 0.00 | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | |||||
| Weighted-average number of common shares outstanding, basic | 387,652,549 | 186,230,830 | 288,984,065 | 150,650,949 | ||||||||||||
| Weighted-average number of common shares outstanding, diluted | 397,201,067 | 194,948,069 | 299,740,036 | 159,368,188 | ||||||||||||
| Net loss | ||||||||||||||||
| Other comprehensive income (loss), net of tax: | 1,672 | (960 | ) | (5,986 | ) | (3,897 | ) | |||||||||
| Change in cumulative translation adjustment | (939 | ) | 1,130 | (1,785 | ) | 1,212 | ||||||||||
| Change in fair value attributable to instrument specific credit risk | — | — | (9 | ) | 6 | |||||||||||
| Total comprehensive gain (loss) | 733 | 170 | (7,780 | ) | (2,679 | ) | ||||||||||
| Less comprehensive gain (loss) attributable to non-controlling interests | — | — | — | (15 | ) | |||||||||||
| Comprehensive income (loss) attributable to Allarity A/S common stockholders | 733 | 170 | (7,780 | ) | (2,664 | ) | ||||||||||
See accompanying notes to condensed consolidated financial statements.
| ALLARITY THERAPEUTICS A/S CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Three and Nine months Ended September 30, 2021 and 2020 (Unaudited) (U.S. dollars in thousands, except for share and per share data and where otherwise noted) | ||||||||||||||||||||||||||||||||||||
| For the Three months ended | Common Shares | Additional Paid-in | Obligation to Issue | Accumulated Other Comprehensive | Retained Earnings (Accumulated | Stockholders’ | Non- Controlling Interest (net of | |||||||||||||||||||||||||||||
| March 31, 2020, June 30, 2020 and September 30, 2020 | Number | Value $ | Capital $ | Shares $ | Loss $ | Deficit) $ | Equity $ | OCI) $ | Total $ | |||||||||||||||||||||||||||
| Balance at December 31, 2019 | 121,336,079 | 924 | 50,623 | — | (1,086 | ) | (32,374 | ) | 18,087 | 2,816 | 20,903 | |||||||||||||||||||||||||
| Settlement of Financing Facility | 9,330,000 | 67 | 2,437 | — | — | — | 2,504 | — | 2,504 | |||||||||||||||||||||||||||
| Share issuance costs | — | — | (105 | ) | — | — | — | (105 | ) | — | (105 | ) | ||||||||||||||||||||||||
| Share based compensation | — | — | 188 | — | — | — | 188 | — | 188 | |||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | (229 | ) | — | (229 | ) | — | (229 | ) | ||||||||||||||||||||||||
| Net loss for the period | — | — | — | — | — | (974 | ) | (974 | ) | (1 | ) | (975 | ) | |||||||||||||||||||||||
| Balance at March 31, 2020 | 130,666,079 | 991 | 53,143 | — | (1,315 | ) | (33,348 | ) | 19,471 | 2,815 | 22,286 | |||||||||||||||||||||||||
| Debt conversion | 12,638,305 | 95 | 1,826 | — | — | — | 1,921 | — | 1,921 | |||||||||||||||||||||||||||
| Acquisition of NCI | 25,936,599 | 196 | 1,907 | — | — | — | 2,103 | (2,103 | ) | — | ||||||||||||||||||||||||||
| Share issuance costs | — | — | (79 | ) | — | — | — | (79 | ) | — | (79 | ) | ||||||||||||||||||||||||
| Share based compensation | — | — | 204 | — | — | — | 204 | — | 204 | |||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | 311 | — | 311 | 60 | 371 | |||||||||||||||||||||||||||
| Fair value of instrument specific credit risk | — | — | — | — | 6 | — | 6 | — | 6 | |||||||||||||||||||||||||||
| Net loss for the period | — | — | — | — | — | (1,948 | ) | (1,948 | ) | (14 | ) | (1,962 | ) | |||||||||||||||||||||||
| Balance at June 30, 2020 | 169,240,983 | 1,282 | 57,001 | — | (998 | ) | (35,296 | ) | 21,989 | 758 | 22,747 | |||||||||||||||||||||||||
| Debt conversion | 11,669,340 | 92 | 1,493 | — | — | — | 1,585 | — | 1,585 | |||||||||||||||||||||||||||
| Acquisition of NCI | 12,383,770 | 93 | 665 | — | — | — | 758 | (758 | ) | — | ||||||||||||||||||||||||||
| Share issuance costs | — | — | (75 | ) | — | — | — | (75 | ) | — | (75 | ) | ||||||||||||||||||||||||
| Share based compensation | — | — | 236 | — | — | — | 236 | — | 236 | |||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | 1,130 | — | 1,130 | — | 1,130 | |||||||||||||||||||||||||||
| Net loss for the period | — | — | — | — | — | (960 | ) | (960 | ) | — | (960 | ) | ||||||||||||||||||||||||
| Balance at September 30, 2020 | 193,294,093 | 1,467 | 59,320 | — | 132 | (36,256 | ) | 24,663 | — | 24,663 | ||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| ALLARITY THERAPEUTICS A/S CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Three and Nine months Ended September 30, 2021 and 2020 (Unaudited) (U.S. dollars in thousands, except for share and per share data and where otherwise noted) | ||||||||||||||||||||||||||||||||||||
| For the Three Months Ended | Common Shares | Additional Paid-in | Obligation to Issue | Accumulated Other Comprehensive | Retained Earnings (Accumulated | Stockholders’ | Non- Controlling Interest (net of | |||||||||||||||||||||||||||||
| March 31, 2021 , June 30, 2021 and September 30, 2021 | Number | Value $ | Capital $ | Shares $ | Loss $ | Deficit) $ | Equity $ | OCI) $ | Total $ | |||||||||||||||||||||||||||
| Balance at December 31, 2020 | 212,601,044 | 1,624 | 61,284 | — | 1,375 | (37,432 | ) | 26,851 | — | 26,851 | ||||||||||||||||||||||||||
| Debt conversion | 26,440,475 | 215 | 2,169 | — | — | — | 2,384 | — | 2,384 | |||||||||||||||||||||||||||
| Share based compensation | — | — | 195 | — | — | — | 195 | — | 195 | |||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | (542 | ) | — | (542 | ) | — | (542 | ) | ||||||||||||||||||||||||
| Fair value of instrument specific credit risk | — | — | — | — | (6 | ) | — | (6 | ) | — | (6 | ) | ||||||||||||||||||||||||
| Net loss for the period | — | — | — | — | — | (2,965 | ) | (2,965 | ) | — | (2,965 | ) | ||||||||||||||||||||||||
| Balance at March 31, 2021 | 239,041,519 | 1,839 | 63,648 | — | 827 | (40,397 | ) | 25,917 | — | 25,917 | ||||||||||||||||||||||||||
| Debt conversion | 4,969,135 | 40 | 456 | — | — | — | 496 | — | 496 | |||||||||||||||||||||||||||
| Units issued for cash | 121,162,817 | 972 | 11,153 | — | — | — | 12,125 | — | 12,125 | |||||||||||||||||||||||||||
| Fair value of investor warrants | — | — | (5,151 | ) | — | — | — | (5,151 | ) | — | (5,151 | ) | ||||||||||||||||||||||||
| Share issuance costs | — | — | (2,606 | ) | 2,606 | — | — | — | — | — | ||||||||||||||||||||||||||
| Share based compensation | — | — | 433 | — | — | — | 433 | — | 433 | |||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | (304 | ) | — | (304 | ) | — | (304 | ) | ||||||||||||||||||||||||
| Fair value of instrument specific credit risk | — | — | — | — | (3 | ) | — | (3 | ) | — | (3 | ) | ||||||||||||||||||||||||
| Net loss for the period | — | — | — | — | — | (4,693 | ) | (4,693 | ) | — | (4,693 | ) | ||||||||||||||||||||||||
| Balance at June 30, 2021 | 365,173,471 | 2,851 | 67,933 | 2,606 | 520 | (45,090 | ) | 28,820 | — | 28,820 | ||||||||||||||||||||||||||
| Shares issued for cash on exercise of warrants | 14,505,206 | 114 | 3,132 | — | — | — | 3,246 | — | 3,246 | |||||||||||||||||||||||||||
| Units issued for share issuance costs | 24,112,523 | 192 | 2,192 | (2,384 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
| Share issuance costs | — | — | (386 | ) | (222 | ) | — | — | (608 | ) | — | (608 | ) | |||||||||||||||||||||||
| Share based compensation | — | — | 577 | — | — | — | 577 | — | 577 | |||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | (939 | ) | — | (939 | ) | — | (939 | ) | ||||||||||||||||||||||||
| Net income (loss) for the period | — | — | — | — | — | 1,672 | 1,672 | — | 1,672 | |||||||||||||||||||||||||||
Balance at September 30, 2021 | 403,791,200 | 3,157 | 73,448 | — | (419 | ) | (43,418 | ) | 32,768 | — | 32,768 | |||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| ALLARITY THERAPEUTICS A/S CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (U.S. dollars in thousands, except for share and per share data and where otherwise noted) | ||||||||
| Nine months ended September 30, | ||||||||
| 2021 $ | 2020 $ | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss for the period | (5,986 | ) | (3,897 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 90 | 110 | ||||||
| Share-based compensation | 1,205 | 628 | ||||||
| Non-cash lease expense | 87 | 30 | ||||||
| Non-cash interest | 391 | 115 | ||||||
| Loss (gain) on investment | 317 | (654 | ) | |||||
| Foreign currency loss (gain), net | 29 | (118 | ) | |||||
| Fair value adjustment of convertible debt | 298 | 553 | ||||||
| Fair value adjustment of derivative liabilities | (4,547 | ) | (957 | ) | ||||
| Deferred income taxes | (475 | ) | (948 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | — | 95 | ||||||
| Other current assets | (97 | ) | 623 | |||||
| Income taxes | (589 | ) | 211 | |||||
| Prepaid expenses | 49 | (168 | ) | |||||
| Accounts payable | (1,377 | ) | (395 | ) | ||||
| Accrued liabilities | 1,107 | 6 | ||||||
| Operating lease liability | (243 | ) | (46 | ) | ||||
| Net cash used in operating activities | (9,741 | ) | (4,812 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Bank debt | (84 | ) | 110 | |||||
| Proceeds from share issuance | 14,874 | 2,908 | ||||||
| Share issuance costs | (620 | ) | (156 | ) | ||||
| Proceeds from convertible loan | 1,200 | 1,007 | ||||||
| Loan proceeds | 2,945 | — | ||||||
| Repayment of loan (Note 9) | (2,934 | ) | (536 | ) | ||||
| Net cash provided by financing activities | 15,381 | 3,333 | ||||||
| Net increase (decrease) in cash | 5,640 | (1,479 | ) | |||||
| Effect of exchange rate changes on cash | (354 | ) | (15 | ) | ||||
| Cash, beginning of period | 298 | 1,524 | ||||||
| Cash, end of period | 5,584 | 30 | ||||||
| Supplemental information | ||||||||
| Cash paid for income taxes | 49 | 20 | ||||||
| Cash paid for interest | 471 | 78 | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Conversion of convertible debt to equity | 2,825 | 2,499 | ||||||
| Conversion of debt to equity | 55 | — | ||||||
| Conversion of derivative liability to equity | 483 | 1,412 | ||||||
| Non-cash share issuance costs | 2,531 | 103 | ||||||
See accompanying notes to condensed consolidated financial statements.
ALLARITY THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
| Three months ended March 31, | ||||||||
| 2022$ | 2021$ | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss for the period | (3,080 | ) | (3,085 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Gain on the sale of IP | (1,780 | ) | — | |||||
| Depreciation and amortization | 23 | 56 | ||||||
| Intangible asset impairment | 14,007 | — | ||||||
| Stock-based compensation | 1,065 | 195 | ||||||
| Unrealized foreign exchange loss | 255 | 39 | ||||||
| Non-cash finance expense | — | 87 | ||||||
| Non-cash interest | 26 | 24 | ||||||
| Loss on investment | 36 | 113 | ||||||
| Change in fair value adjustment of convertible debt | — | 201 | ||||||
| Loss on extinguishment of convertible debt | — | 116 | ||||||
| Change in fair value adjustment of warrant and derivative liabilities | (12,566 | ) | (45 | ) | ||||
| Deferred income taxes | (1,227 | ) | 33 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Other current assets | 470 | (95 | ) | |||||
| Tax credit receivable | (455 | ) | (403 | ) | ||||
| Prepaid expenses | (1,227 | ) | 155 | |||||
| Accounts payable | 5,036 | 108 | ||||||
| Accrued liabilities | (6,308 | ) | (32 | ) | ||||
| Income taxes payable | (7 | ) | — | |||||
| Operating lease liability | (23 | ) | (34 | ) | ||||
| Net cash used in operating activities | (5,755 | ) | (2,567 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from the sale of IP | 809 | — | ||||||
| Net cash provided by investing activities | 809 | — | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Line of credit | — | 35 | ||||||
| Proceeds from convertible loan | — | 1,140 | ||||||
| Loan proceeds | — | 1,150 | ||||||
| Net cash provided by financing activities | — | 2,325 | ||||||
| Net decrease in cash | (4,946 | ) | (242 | ) | ||||
| Effect of exchange rate changes on cash | (65 | ) | 49 | |||||
| Cash, beginning of period | 19,555 | 298 | ||||||
| Cash, end of period | 14,544 | 105 | ||||||
| Supplemental information | ||||||||
| Cash paid for income taxes | 1 | — | ||||||
| Cash paid for interest | 13 | 55 | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Offset of payable against receivable from sale of IP | 971 | — | ||||||
| Conversion of Series A Convertible Preferred stock to equity, net | 381 | — | ||||||
| Accrued liability on Series A Preferred shares | 134 | — | ||||||
| Deemed 8% dividend on Series A Preferred shares | 1,572 | — | ||||||
| Conversion of convertible debt to equity | — | 2,329 | ||||||
| Shares issued to settle accounts payable | — | 55 | ||||||
| Right of use asset modification | — | 145 | ||||||
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2022 and March 31, 2021
(UNAUDITED)
(U.S. dollars in thousands, except for share and per share data and where otherwise noted)
1. NatureOrganization, Principal Activities, and Basis of Business and Summary of Significant Accounting PoliciesPresentation
(a) OrganizationAllarity Therapeutics, Inc. and Subsidiaries (the “Company”) is a clinical stage pharmaceutical company that develops drugs for the personalized treatment of cancer using drug specific companion diagnostics (cDx) generated by its proprietary drug response predictor technology, DRP®. Additionally, the Company, through its Danish subsidiary, Allarity Denmark (previously Oncology Venture ApS), specializes in the research and development of anti-cancer drugs.
Allarity Therapeutics A/S (the “Company”) is a limited liability company domiciled in Denmark. The Company was incorporated under the laws of Denmark on 9 September 2004. The Company’s principal operations are located at Venlighedsvej 1, 2970 Horsholm, Denmark. The Company’s United States operations are located at 210 Broadway #201, Cambridge, MA 012139, United States of America.
(b) Principal Activities
Allarity Therapeutics A/S develops drugs for the personalized treatment of cancer using drug specific companion diagnostics (cDx) generated by its proprietary drug response predictor technology, DRP®. The Company is a merged company (the “Merger”) between two prior affiliated companies, the drug development company Oncology Venture Sweden AB and the predictive diagnostic development company Medical Prognosis Institute A/S. Pursuant to the Merger, effective 21 August 2018 the Company obtained control of 100% shares and voting interests of Oncology Venture Sweden AB, a company based in Sweden, listed on Spotlight, Stockholm, Sweden and specializing in the research and development of anti-cancer drugs via its wholly owned Danish subsidiary, Oncology Venture ApS. The Merger was accounted for as a business combination with the Company being the acquirer and all assets acquired and liabilities assumed were recognized at fair value.
Allarity Therapeutics A/S (Nasdaq First North Growth Market Stockholm: ALLR) develops drugs for the personalized treatment of cancer using drug-specific companion diagnostics (cDx) generated by its proprietary drug response predictor technology, DRP®.
(c)(a) Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The accompanying financial statements do not reflect any adjustments relating to the recoverability and reclassifications of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.
Pursuant to the requirements of Accounting Standard Codification (ASC) 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date of these financial statements, and (1) is probable that the plan will be effectively implemented within one year after the date the financial statements are issued, and (2) it is probable that the plan, when implemented, will mitigate the relevant condition or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financials are issued. Certain elements of the Company’s operating plan to alleviate the conditions that raise substantial doubt are outside of the Company’s control and cannot be included in management’s evaluation under the requirements of Accounting Standard Codification (ASC) 205-40.
Since inception, the Company has devoted substantially all of its efforts to business planning, research and development, clinical expenses, recruiting management and technical staff, and securing funding via collaborations. The Company has historically funded its operations with proceeds received from its collaboration arrangements, sale of equity capital and proceeds from sales of convertible notes.
The Company has incurred significant losses and has an accumulated deficit of $43.4$69.6 million as of September 30, 2021.March 31, 2022. As of the date of these financial statementsMay 27, 2022, our cash is insufficient to fund our current operating plan and planned capital expenditures for at least 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 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.
The Company has entered into a Securities Purchase Agreement with 3i, LP, a Delaware limited partnership that provides for a $20 million equity investment in the Company. Please refer to the subsequent event disclosures in note 18 for further information.
Although management continues to pursue its funding plans, there is no assurance that the Company will be successful in obtaining sufficient funding to fund continuing operations on terms acceptable to the Company, if at all. Further, at the date of this filing the above noted 3i $20 million equity investment cannot be asserted as probable and is subject to close of the transaction. Accordingly, based upon cash on hand at the issuance date of these financial statements the Company does not have sufficient funds to finance its operations for at least twelve months from the issuance date and therefore has concluded that substantial doubt exists about the Company’s ability to continue as a going concern.
(d)(b) Basis of Presentation
The accompanying unaudited condensed interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States generally accepted accounting principlesof America (“U.S. GAAP” or “GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”).
The accompanying interim financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020, and related interim information contained within the notes to the financial statements, are unaudited. In management’s opinion, the unaudited condensed interim consolidated financial statements have been prepared oncontain all normal and recurring adjustments necessary to state fairly the same basisconsolidated balance sheet, results of operations and comprehensive loss, statements of changes in redeemable convertible preferred stock and stockholders’ equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the Company’sthree months ended March 31, 2022, are not necessarily indicative of the results that may be expected for the current year ending December 31, 2022. The financial data presented herein should be read in conjunction with the audited consolidated financial statements and include all adjustments (including normal recurring adjustments) necessaryaccompanying notes as of and for a fair statementthe years ended December 31, 2021, and 2020 thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 17, 2022.
The preparation of these unaudited condensed interim consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements.statements, and the reported amounts of revenues and expenses during the reporting periods. The results of operations and cash flows for the interim periods included in these condensed balance sheet at December 31, 2020, was derived from audited annualconsolidated financial statements but doesare not contain allnecessarily indicative of the footnoteresults to be expected for any future period or the entire fiscal year.
These condensed consolidated financial statements and notes do not include all disclosures from the annual financial statements. These interim financial statementsrequired by U.S. GAAP and should be read in conjunction with the Company’s audited consolidated financial statements as of and accompanying notes included in its Form S-4 for the year ended December 31, 2020 filed on August 20, 2021, and as amended. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results expected for the full fiscal year or any interim period.notes.
(f)(c) Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries:
| Name | Country of Incorporation | |
| Allarity Acquisition Subsidiary Inc. | United States | |
| Allarity Therapeutics Europe ApS (formerly Oncology Venture Product Development | Denmark | |
| Allarity Therapeutics Denmark ApS (formerly OV-SPV2 | Denmark | |
| MPI Inc. | United States | |
| Oncology Venture US Inc. | United States | |
All intercompany transactions and balances, including unrealized profits from intercompany sales, have been eliminated upon consolidation.
(g)(d) 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.
The extent of the impact and effects of the coronavirus (COVID-19) on the operation and financial performance of the Company’s business will depend on future developments, including the duration and spread of the outbreak and varying virus mutations, related travel advisories and restrictions, the recovery time of disrupted research services, the consequential staff shortages, and research and development delays, or the uncertainty with respect to the accessibility of additional liquidity or capital markets, all of which are highly uncertain and cannot be predicted. If the Company’s operations are impacted by the outbreak for an extended period, the Company’s results of operations or liquidity may be materially adversely affected.
(e) 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 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 the impact now.
2. Summary of Significant Accounting Policies
(a) Use of Estimates and Assumptions
The preparation of financial statements in conformity with 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting years. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the fair value of the Series A preferred shares, warrants, convertible loan,debt, and the accrual for research and development expenses, revenue recognition, fair values of acquired intangible assets and impairment review of those assets, the useful life of property, plant and equipment, share based compensation expense, provisions for contingencies and litigation, and income tax uncertainties and valuation allowances. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. Estimates are periodically reviewed in light ofconsidering reasonable changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known and if material, their effects are disclosed in the notes to the condensed consolidated financial statements. Actual results could differ from those estimates or assumptions.
(h) Computation of Earnings (Loss) per Share
The Company computes net (loss) income per share in accordance with ASC Topic 260, “Earnings Per Share” (“ASC 260”)(b) Foreign currency and related guidance, which requires two calculations of net (loss) income attributable to the Company’s shareholders per share to be disclosed: basic and diluted. Basic loss per share is derived by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as warrants, and convertible debt, which would result in the issuance of incremental shares of common stock unless such effect is anti-dilutive. In calculating the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remained the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation.
(i) Conversion of foreign currenciescurrency translation
The functional currency is the currency of the primary economic environment in which an entity’s operations are conducted. The Company and its subsidiaries operate mainly in Denmark and the United States. The functional currencies of the Company’s subsidiaries are their local currency.
The Company’s reporting currency is the U.SU.S. dollar. The Company translates the assets and liabilities of its Denmark subsidiaries into the U.S. dollar at the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at the average exchange rate in effect during each monthly period. Unrealized translation gains and losses are recorded as a cumulative translation adjustment, which is included in the condensed consolidated statements of shareholders’changes in redeemable convertible preferred stock and stockholders’ equity as a component of accumulated other comprehensive (loss) income..
Monetary assets and liabilities denominated in currencies other than the functional currency are re-measuredremeasured into the functional currency at rates of exchange prevailing at the balance sheet dates. Non-monetary assets and liabilities denominated in foreign currencies are re-measured into the functional currency at the exchange rates prevailing at the date of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net profit or loss for the respective periods.
Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the local currencytranslations are included in other comprehensive income (loss) in the consolidated statements of operations and comprehensive loss as incurred.incurred
(c) Concentrations of credit risk and of significant suppliers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash. The Company maintains its cash in financial institutions in amounts that could exceed government-insured limits. The Company does not believe it is subject to additional credit risks beyond those normally associated with commercial banking relationships. The Company has not experienced losses on its cash accounts and management believes, based upon the quality of the financial institutions, that the credit risk regarding these deposits is not significant. The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply its requirements for supplies and raw materials related to these programs. These programs could be adversely affected by a significant interruption in these manufacturing services or the availability of raw materials.
(j)(d) Cash
Cash consists primarily of highly liquid investments with original maturities of three months or less at date of purchase to be cash equivalents. The Company had no cash equivalents or restricted cash on March 31, 2022, and December 31, 2021.
(e) Impairment of long-lived assets
Long-lived assets consist of property, plant and equipment, and intangible assets. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. An impairment loss would be recognized as a loss from operations when estimated undiscounted future cash flows expected to result from the use of an asset group or the estimated return on investment are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flow or return on investment calculations.
(f) Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss)loss includes allnet loss as well as other changes in stockholders’ equity except(deficit) that result from transactions and economic events other than those resulting from investments by ownerswith shareholders. The Company records unrealized gains and distributionslosses related to owners, including accumulated foreign currency translation and changes in instrument specific credit risk.risk as components of other accumulated comprehensive loss in the Condensed Consolidated Statements of Operations and Comprehensive Loss. During the three months ended September 30,March 31, 2022, and March 31, 2021, and 2020 the Company recorded accumulated foreign currency translation losses of ($939)214) and gains of $1,130 respectively. During the nine months ended September 30, 2021 and 2020 the Company recorded accumulated foreign currency translation losses of ($1,785) and gains of $1,212459) respectively; and instrument specific credit risk losses of ($9)$0 and gains of $6($6) respectively. These amounts have been recorded as a separate component of stockholders’ equity (deficit).
(k)(g) Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential loss range is probable and reasonably estimable under the provisions of the authoritative guidelines that address accounting for contingencies. The Company expenses costs as incurred in relation to such legal proceedings as general and administrative expense within the condensed consolidated statements of operations and comprehensive loss.
(l)(h) JOBS Act accounting election
The Company is an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies; however, the Company may adopt new or revised accounting standards early if the standard allows for early adoption.
(m)(i) Recently Issued Accounting Pronouncementsadopted accounting pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification.
The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined not to be applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations.
Adopted
In December 2019, the FASB issued ASU 2019-12, “Income Taxes — Simplifying the Accounting for Income Taxes”. The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles as well as clarifying and amending existing guidance to improve consistent application. The amendments to this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company has adopted this standard on a prospective basis with no significant impact upon its consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. ASU No. 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU No. 2020-06 is effective for public companies for annual periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2020, and interim periods within those fiscal years. The Company has early adopted this standard as of January 1, 2021 on a modified retrospective basis with no significant impact on its consolidated financial statements.
Not Yet Adopted
In May 2021, the FASB issued ASU No. 2021-04 — Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options — to clarify the accounting by issuers for modifications or exchanges of equity-classified warrants.written call options. The framework applies to freestanding written call options, such as warrants, that were and remain equity classified by the issuer after the modification and are not in the scope of another Codification Topic. The framework applies regardless of whether the modification is through an amendment to the existing terms or issuance of a replacement warrant. The effect of the modification of the warrant is measured as the difference in its fair value immediately before and after the modification. The effect is recognized in the same manner as if cash had been paid as consideration. Additionally, other modifications may need to be accounted for as a cost to the issuing entity based on the substance of the transaction. The UpdateCompany is required to apply the amendments within this ASU prospectively to modifications or exchanges occurring on or after the effective date of the amendment. The Company adopted this ASU on January 1, 2022, with no significant impact on its condensed consolidated financial statements and related disclosures.
In November 2021, the FASB issued ASU 2021-10 — Government Assistance — Disclosures by Business Entities about Government Assistance — to require disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about (1) the types of transactions, (2) the accounting for the transactions, and (3) the effect of the transactions on an entity’s financial statements. The ASU is effective prospectively or retrospectively for fiscal yearsannual periods beginning after December 15, 2021, including interim periods therein, with early adoption permitted. The Company is currently evaluating theadopted this ASU on January 1, 2022, with no significant impact of this standard on its condensed consolidated financial statements and related disclosures.
(j) Recently Issued Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. All other ASUs issued through the date of these financial statements were assessed and determined not to be applicable or are expected to have minimal impact on the Company’s condensed consolidated financial position and results of operations.
2.3. Other Current Assets
The Company’s other current assets are comprised of the following:
| September 30, 2021 $ | December 31, 2020 $ | |||||||
| Deposits | 54 | 68 | ||||||
| Grant receivable | — | 50 | ||||||
| Salary deposit | 65 | 51 | ||||||
| Value added tax (“VAT”) receivable | 312 | 166 | ||||||
| Other | 1 | — | ||||||
| Net other current assets | 432 | 335 | ||||||
3. Prepaid Expenses
| September 30, 2021 $ | December 31, 2020 $ | |||||||
| Prepaid insurance | 15 | 152 | ||||||
| Other prepayments | 110 | 22 | ||||||
| 125 | 174 | |||||||
| March 31, 2022 $ | December 31, 2021 $ | |||||||
| Deposits | 57 | 53 | ||||||
| Salary deposit | 64 | 65 | ||||||
| Value added tax (“VAT”) receivable | 26 | 507 | ||||||
| Net other current assets | 147 | 625 | ||||||
4. Prepaid Expenses
| March 31, 2022 $ | December 31, 2021 $ | |||||||
| Prepaid insurance | 1,227 | 14 | ||||||
| Other prepayments | 22 | 22 | ||||||
| 1,249 | 36 | |||||||
5. Investment
The Company owns 43,898 common shares in Lantern Pharma Inc. (NasdaqCM) (“Lantern” or “Lantern shares”) as a resultbecause of a prior license agreement made with Lantern Pharma in 2017. During June 2020 Lantern Pharma became publicly listed. As at September 30, 2021March 31, 2022 the fair market value of the shares was $491. Accordingly, for$314. In the three months ended September 30,March 31, 2022, and March 31, 2021 the Company has recognized a finance loss on theits shares in Lantern sharesPharma of $137$36 and a foreign exchange loss of $13 (2020: finance gain of $243 and foreign exchange gain of $28. For the nine months ended September 30, 2021 the Company has recognized a finance loss on the Lantern shares of $317 and a $37 foreign exchange loss (2020: finance gain of $654 and foreign exchange gain of $36.$113 respectively.
| March 31, | December 31, | |||||||
| 2022 $ | 2021 $ | |||||||
| Opening balance | 350 | 845 | ||||||
| Loss recognition | (36 | ) | (495 | ) | ||||
| Ending balance | 314 | 350 | ||||||
5.6. Property, plant and equipment, net
Property, plant and equipment, net consisted of the following (in thousands):
| September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | |||||||||||||
| Laboratory equipment | 338 | 338 | 329 | 336 | ||||||||||||
| Less: accumulated depreciation | (329 | ) | (317 | ) | (323 | ) | (328 | ) | ||||||||
| 9 | 21 | 6 | 8 | |||||||||||||
Depreciation expense for property, plant and equipment and right of use assets for the three months ended September 30,March 31, 2022, and March 31, 2021 was $23 and 2020 was $22 and $38 respectively; and for the nine months ended September 30, 2021 and 2020 was $90 and $110 and$56 respectively.
6.7. Intangible assets
Intangible assets, net of accumulated amortization, impairment charges and adjustments are summarized as follows:
| As of September 30, 2021 | As of December 31, 2020 | |||||||||||||||||||||||
| Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | |||||||||||||||||||
| IPR&D Assets | $ | 38,876 | $ | (10,132 | ) | $ | 28,744 | $ | 38,876 | $ | (8,399 | ) | $ | 30,477 | ||||||||||
| Acquired patents | 99 | (99 | ) | — | 99 | (85 | ) | 14 | ||||||||||||||||
| Total intangible assets | $ | 38,975 | $ | (10,231 | ) | $ | 28,744 | $ | 38,975 | $ | (8,484 | ) | $ | 30,491 | ||||||||||
| As of March 31, 2022 | ||||||||||||||||
| Cost | Accumulated Impairment | Accumulated Amortization | Net | |||||||||||||
| IPR&D Assets | $ | 35,151 | $ | (21,457 | ) | — | $ | 13,694 | ||||||||
| Acquired patents | 78 | — | (78 | ) | — | |||||||||||
| Total intangible assets | $ | 35,229 | $ | (21,457 | ) | (78 | ) | $ | 13,694 | |||||||
| As of December 31, 2021 | ||||||||||||||||
| Cost | Accumulated Impairment | Accumulated Amortization | Net | |||||||||||||
| IPR&D Assets | $ | 35,896 | $ | (7,761 | ) | — | $ | 28,135 | ||||||||
| Acquired patents | 78 | — | (78 | ) | — | |||||||||||
| Total intangible assets | $ | 35,974 | $ | (7,761 | ) | (78 | ) | $ | 28,135 | |||||||
The
As a result of both the Company’s IPR&DFebruary 15, 2022, receipt of a Refusal to File (“RTF”) from the U.S. Food and Drug Administration regarding the Company’s new drug application (“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 have been classified as indefinite-lived intangible assets.utilizing a discounted cash flow model with a weighted average cost of capital (“WACC”) of 16%, and recognized an impairment charge of $14,007 during the three month period ended March 31, 2022. Individually material development projects in progress are as follows:
| September 30, 2021 $ | December 31, 2020 $ | |||||||
| Stenoparib | 25,957 | 27,522 | ||||||
| Dovitinib | 2,787 | 2,955 | ||||||
| 28,744 | 30,477 | |||||||
| March 31, | December 31, | |||||||
| 2022 $ | 2021 $ | |||||||
| Stenoparib | 13,694 | 25,407 | ||||||
| Dovitinib | — | 2,728 | ||||||
| Total | 13,694 | 28,135 | ||||||
Sale of Irofulven
On July 23, 2021, the Company and Lantern Pharma Inc. (“Lantern”) entered into an exclusive agreement under which Lantern will reacquire global rights to Irofulven (“LP-100”) and assume full authority to manage and guide future clinical development and commercialization. The Company received an upfront payment of $1,000 from Lantern. The agreement voids all prior obligations from the original 2015 in-license agreement and provides for additional development and regulatory milestone fees, and tiered royalties on future sales of Irofulven.
If all milestones are achieved, then we will be entitled to receive up to $16 million in milestone payments under the Asset Purchase Agreement. In addition to the milestone payments, Lantern Pharma has agreed to pay us royalties in the low mid-digits based on annual incremental net sales of product derived from Irofulven, on a country-by-country basis, in an amount equal to percentages of annual sales based on a tiered progression.
7.8. Accrued liabilities
The Company’s accrued liabilities are comprised of the following:
| September 30, 2021 $ | December 31, 2020 $ | |||||||
| Development cost liability | 1,123 | 1,191 | ||||||
| Accrued audit and legal | 411 | 84 | ||||||
| Share capital cost accrual | 557 | — | ||||||
| Payroll accruals | 337 | 316 | ||||||
| Accrued Director fees | 100 | 119 | ||||||
| Accrued liabilities | 419 | 130 | ||||||
| 2,947 | 1,840 | |||||||
8. Line of credit
Effective July 1, 2016 the Company established a line of credit with Nordea Bank in the amount of $84 bearing interest at 8.75%. The Company’s assets, up to an amount of $84 have been provided as security against the line of credit. As at September 30, 2021 the Company’s bank debt was zero (December 31, 2020 – $84).
| March 31, | December 31, | |||||||
| 2022 $ | 2021 $ | |||||||
| Development cost liability | 359 | 6,750 | ||||||
| Payroll accruals | 290 | 1,088 | ||||||
| Accrued Board member fees | 68 | 54 | ||||||
| Accrued audit and legal | 298 | 316 | ||||||
| Accrued liability on Series A Preferred Stock | 134 | — | ||||||
| Other | 193 | 382 | ||||||
| 1,342 | 8,590 | |||||||
9. Loan
2021 Loan
Effective March 22, 2021, the Company received a loan facility of up to $2.9 million$2,900 (SEK 25 million), net of a 3% loan origination fee of $87 (SEK 750 thousand), recorded as finance costs in the condensed consolidated statement of operations and comprehensive loss; bearing interest at 3% per month, and due on June 23, 2021. During the three month period ended March 31, 2021 the Company received $1,150 pursuant to the terms of the loan.
In exchange for the loan, the Company committed to complete a rights offering and issue common shares.
The rights offering was completed before June 23, 2021, and as described in these financial statements. As of June 23, 2021, the loan balance of $2,817$2,934 and interest of $284$204 were paid to the lender.
10. Convertible promissory note, net
2019 LoanOn April 12, 2022, Allarity Therapeutics Denmark ApS (“Allarity Denmark,” or “OV-SPV2”), a subsidiary of Allarity Therapeutics Europe ApS (“Allarity Europe”), which is a wholly-owned subsidiary of Allarity Therapeutics, Inc., re-issued a Convertible Promissory Note (the “Promissory Note”) to Novartis Pharma AG, a company organized under the laws of Switzerland (“Novartis,” and together with Allarity Europe, the “License Parties”) in the principal amount of $1,000. The Promissory Note was re-issued pursuant to the First Amendment to License Agreement, with an effective date of March 30, 2022 (the “First Amendment”), entered into by and between the License Parties, which amended the License Agreement dated April 6, 2018 (the “Original Agreement”) previously entered into by the License Parties relating to the Compound (as defined in the Original Agreement). The First Amendment amends and restates Section 11.7 of the Original Agreement to add the revised Note to the list of enforceable claims in the second paragraph of Section 11.7 making the revised Note enforceable under New York law as a legal obligation of Allarity Denmark (f/k/a OV-SPV2 ApS). All other provisions of the Original Agreement and Promissory Note were unchanged and remain in full force and effect.
Prior to the 2018 Merger, on April 6, 2018 (“Effective Date”), Allarity Europe and Novartis entered a license agreement whereby Novartis granted to Allarity Europe (a) an exclusive, royalty-bearing, sublicensable, assignable license under the Licensed Data (as defined in the License Agreement) and Product-Specific Patents (as defined in the License Agreement) and (b) a non-exclusive, royalty-bearing, sublicensable, assignable license under the Platform Patents (as defined in the License Agreement), in the case of (a) and (b) solely to develop and otherwise commercialize the Licensed Product (as defined in the License Agreement) in any and all field related to therapeutic and/or diagnostic uses related to cancer in humans worldwide and to manufacture the compound TKI258 (a.k.a. Dovitinib) for use in a Licensed Product as of the Effective Date.
Effective September 24, 2019 the Company received a loan of $512 bearing interest at 3% per month and due on November 30, 2019. The lender agreed to extend the due dateIn consideration of the loanlicenses and rights granted, Allarity Europe paid Novartis a one-time, non-refundable, non-creditable upfront payment consisting of $1,000 (“Upfront Payment”) and issued to Novartis a Promissory Note with no penaltyan initial principal balance equal to $1,000, which Allarity Europe caused its affiliate, OV-SPV2, to issue to Novartis. In accordance with the terms of the Promissory Note, all payments shall be applied first to accrued interest, and thereafter to principal. The outstanding principal amount of the Note, plus any accrued interest thereon, shall be due and payable on the earlier to occur of: (i) the seventh (7th) anniversary of April 6, 2018; and (ii) an event of default (the “Maturity Date”).
The Promissory Note pays simple interest on the outstanding principal amount from the date until payment in full, which interest shall be payable at the rate of five percent (5%) per annum. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The entire outstanding principal balance of the loan, includingPromissory Note and all accrued interest shall be fully due and payable on the Maturity Date. The Promissory Note is convertible upon an initial public offering (“IPO”) of $62 was paid asOV-SPV2 and allows Novartis a one-time right to exchange the Convertible Promissory Note for such number of January 7, 2020. The loan agreement includedequity securities of OV-SPV2 equal to three percent (3%) of OV-SPV2’ outstanding equity securities, calculated on a fully diluted as-converted to common stock basis, held by all holders of equity securities of OV-SPV2 immediately prior to the Company’s commitment to carry out a common share subscription which was cancelled upon repaymentclosing of the loan on January 7, 2020.IPO.
As the Promissory Note was assumed in connection with the 2018 Merger, the Company recognized the Promissory Note and related accrued interest at its fair value. The Company utilized a third-party valuation specialist to estimate the fair value of the Promissory Note and related accrued interest. Based on the specialist’s valuation, the Company recognized the Promissory Note and related accrued interest at its estimated fair value, based upon an equivalent market interest rate of 12.875%, of approximately $787 on December 31, 2019, and recognized interest expense of $93 and $99 in the years ended December 31, 2020 and December 31, 2021 respectively and a corresponding increase in liability, resulting in a net liability of $979 and $880 at each of December 31, 2021 and December 31, 2020 respectively. The Company will measure the Note at amortized cost in subsequent reporting periods.
The Company evaluated the Promissory Note under ASC 480 and ASC 815 and the identified embedded features inclusive of: (1) conversion upon an IPO; (2) mandatory redemption upon a change of control; and (3) mandatory redemption in the event of default; to determine if bifurcation is required pursuant to ASC 815-15-25-1. The Promissory Note is a freestanding instrument that is convertible into shares of the OV-SPV2 ApS’ common (or preferred, as the case may be) equity. The Promissory Note was not issued in conjunction with any other instrument meaning that the Promissory Note meets the definition of a freestanding instrument. Since the conversion feature meets the definition of a derivative it was evaluated for bifurcation and management determined the conversion feature requires bifurcation but because the value is not material the conversion feature has not been bifurcated at this time. The Company will continue to monitor for changes in specific facts and circumstances which may impact the conclusions reached herein.
During the three-month periods ended March 31, 2022, and March 31, 2021, the Company recorded $26 and $24 respectively to interest expense and increased the convertible promissory note liability by the same amount. The roll forward of the Promissory Notes as of March 31, 2022, and December 31, 2021, is as follows:
| March 31, 2022 $ | December 31, 2021 $ | |||||||
| Convertible promissory note | 1,000 | 1,000 | ||||||
| Less debt discount, opening | (215 | ) | (263 | ) | ||||
| Plus, accretion of debt discount, interest expense | 13 | 48 | ||||||
| Convertible promissory note, net of discount | 798 | 785 | ||||||
| Interest accretion, opening | 194 | 143 | ||||||
| Interest accretion, expense | 13 | 51 | ||||||
| Ending balance | 1,005 | 979 | ||||||
10.11. Convertible debt
On March 31, March 2020 the Company entered into an agreement to issue up to $10,100 (SEK 100,000) (the “Commitment”) to be funded in tranches (“Tranches”) of ten non-interest-bearing notes (“Notes”) convertible into new shares of the Company, each with a value of $1,010 (SEK 10,000); 95% of each Tranche is received in cash, net of a 5% fee, and the conversion price of the Notes is 95% of the lowest closing volume weighted average price as reported by Bloomberg (“VWAP”).
The Company accounted for the Notes issued under the FVO election whereby the financial instrument is initially measured at its issue-date estimated fair value and subsequently re-measured at estimated fair value on a recurring basis at each reporting date. The estimated fair value adjustment is presented as a single line item within other income (expense) in the accompanying condensed consolidated statements of operations under the caption “change in fair value of convertible notes and derivative liabilities.debt”.
WeThe Company determined the fair value of the Notes using a discounted cash flow valuation technique with a weighted average cost of capitalWACC of 15%. The Company estimates the change in fair value attributable to the instrument specific credit risk of the Notes at 1% under the fair value option and accordingly has recognized a loss of $Nil and $9$6 in other comprehensive income during the three and nine month periodsthree-month period ended September 30, 2021 (2020: $Nil).
Finance costs of $Nil related to the Notes have been recognized in the Company’s statement of operations for the three months ended September 30, 2021 and $298 for the nine months ended September 30, 2021 (three months and nine months ended September 30, 2020 – $475).March 31, 2021.
The roll forward of the Notes as of September 30,March 31, 2021, and December 31, 2020 is as follows:
| September 30, 2021 $ | December 31, 2020 $ | |||||||
| Opening fair value | 1,327 | — | ||||||
| Convertible debt issued in the period | 1,200 | 4,670 | ||||||
| Change in fair value (loss) reported in statement operations | 298 | (681 | ) | |||||
| Conversion of notes to common shares | (2,825 | ) | (2,662 | ) | ||||
| Ending fair value balance | — | 1,327 | ||||||
| March 31, 2021 $ | ||||
| Opening fair value | 1,327 | |||
| Convertible debt issued in the period | 1,140 | |||
| Change in fair value (loss) reported in statement operations | 201 | |||
| Foreign exchange | 59 | |||
| Conversion of notes to common stock | (2,329 | ) | ||
| Ending fair value balance at March 31, 2021 | 398 | |||
An effective interest rate determines the fair value of the Notes. The notes are unlisted and therefore, they are categorized as Level 3 in accordance with ASC 820, “Fair Value Measurements and Disclosures.” The notes were fully converted to shares during the period ended June 30, 2021. The estimated fair
12. Series A Preferred Stock and Common Stock Purchase Warrants
| (a) | Series A Preferred Stock Terms |
On May 20, 2021, we entered into a Securities Purchase Agreement (the “SPA”) with 3i, LP, a Delaware limited partnership (“3i”) for the purchase and sale of 20,000 shares of our Series A Convertible Preferred Stock (the “Preferred Shares”) for $1,000 per share for an aggregate purchase price of $20 million (the “PIPE Investment”) with accompanying common stock purchase warrants (the “3i Warrants”). On December 8, 2021, the Board adopted resolutions to create a series of twenty thousand (20,000) shares of preferred stock, par value $0.0001, designated as “Series A Convertible Preferred Stock.” On December 14, 2021, we filed a Certificate of Designations (the “COD”) setting forth the rights, preferences, privileges and restrictions for 20,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”). On December 20, 2021, we issued 20,000 shares of Preferred Stock at $1,000 per share and a common stock purchase warrant to purchase 2,018,958 shares of common stock at an initial exercise price of $9.9061 to 3i, LP for an aggregate purchase price of $20 million.
Except to the extent that the holders of at least a majority of the neet carrying amountoutstanding Series A Preferred Stock (the “Required Holders”) expressly consent to the creation of liability componentParity Stock (as defined below) or Senior Preferred Stock (as defined below), all shares of capital stock are junior in rank to all Series A Preferred Stock with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the NotesCompany (such junior stock is referred to herein collectively as “Junior Stock”). The rights of all such shares of capital stock of the Company will be subject to the rights, powers, preferences and privileges of the Series A Preferred Stock. Without limiting any other provision of this COD, without the prior express consent of the Required Holders, voting separate as a single class, the Company will not hereafter authorize or issue any additional or other shares of capital stock that is (i) of senior rank to the Series A Preferred Stock in respect of the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company (collectively, the “Senior Preferred Stock”), (ii) of pari passu rank to the Series A Preferred Stock in respect of the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company (collectively, the “Parity Stock”) or (iii) any Junior Stock having a maturity date or any other date requiring redemption or repayment of such shares of Junior Stock that is prior to the first anniversary of the December 20, 2021. In the event of the merger or consolidation of the Company with or into another corporation, the Series A Preferred Stock will maintain their relative rights, powers, designations, privileges and preferences provided for herein and no such merger or consolidation will result inconsistent therewith.
The Series A Preferred Stock has a liquidation preference equal to an amount per Series A Preferred Stock equal to the sum of (i) the Black Scholes Value (as defined in the Warrants, which was sold concurrent with the Series A Preferred Stock) with respect to the outstanding portion of all Warrants held by such holder (without regard to any limitations on the exercise thereof) as of September 30, 2021the date of such event and December 31, 2020 was $Nil(ii) the greater of (A) 125% of the Conversion Amount of such Series A Preferred Stock on the date of such payment and $1,327 respectively.(B) the amount per share such holder would receive if such holder converted such Series A Preferred Stock into common stock immediately prior to the date of such payment, and will be entitled to convert into shares of common stock at an initial fixed conversion price of $9.9061 per share, subject to a beneficial ownership limitation of 4.99% which can be adjusted to a beneficial ownership limitation of 9.99% upon sixty-one (61) days’ prior written notice.
11. Derivative LiabilitiesUnder the terms of the COD, the initial fixed conversion price of the Series A Preferred Stock is $9.9061, subject to adjustment. In the event that (i) the average of the VWAP of the Company’s shares for each of the five (5) trading days immediately preceding the date of delivery is less than the fixed conversion price of $9.9061 (a “Price Failure”), or (ii) the sum of (x) the aggregate daily dollar trading volume (as reported on Bloomberg) of our common stock on Nasdaq during the ten (10) trading day period ending on the trading day immediately preceding such date of determination, divided by (y) ten (10), is less than $1,500,000 (a (“Volume Maximum Failure”), each share of Series A Preferred Stock is entitled to convert at a price equal to 90% of the sum of the two (2) lowest VWAPs during the ten (10) trading day period immediately preceding the date of delivery divided by two (2) (the “90% Conversion Price”), but not less than the Floor Price (as defined in the COD), or, at the time of such Price Failure or Volume Maximum Failure, the sum of the average daily U.S. Dollar volume for our common stock during the ten (10) days previous to conversion divided by ten (10) is less than $2 million then each share of Series A Preferred Stock is entitled to convert at the lower of the fixed conversion price or a price equal to 80% of the sum of the two (2) lowest VWAPs during the ten (10) trading day period immediately preceding delivery divided by two (2) (the “80% Conversion Price”), but not less than the Floor Price (such 80% Conversion Price or 90% Conversion Price, as the case may be, the “Alternate Conversion Price”). In addition, the COD provides for an adjustment to the conversion price and exercise of the Warrant in the event of a “new issuance” of our common stock, or common stock equivalents, at a price less than the applicable conversion price of the Series A Preferred Stock or exercise price of the Warrant. The adjustment is a “full ratchet” adjustment in the conversion price of the Series A Preferred Stock equal to the lower of the new issuance price or the then existing conversion price of the Series A Preferred Stock with few exceptions. Furthermore, if we fail to maintain an adequate number of authorized and unissued shares of our common stock in reserve and we are unable to deliver shares or our common stock upon conversion of the Preferred Stock, we may be required to redeem the shares we were unable to deliver at a price equal to the highest closing price of our common stock during the time between the failure to deliver shares of our common stock and the redemption date.
(a) Investor Warrants
The exercise price of our investor warrants described below is denominatedIf certain defined “triggering events” defined in SEK; however, the functional currencyCOD occur, such as a breach of the CompanyRegistration Rights Agreement (specifically the Company’s Form S-1 as filed on SEC Edgar on September 13, 2021 and subsequently amended), suspension of trading, or our failure to convert the Series A Preferred Stock into common stock when a conversion right is DKK. Consequently,exercised, failure to issue our common stock when the Warrant is exercised, failure to declare and pay to any holder any dividend on any dividend date, or upon a “bankruptcy triggering event” (as defined in the COD), then we may be required to redeem the Series A Preferred Stock for cash in the amount of up to a minimum of 125% of their Conversion Amount (as defined in the COD). In addition, if thirty (30) days after our common stock commences trading on the Nasdaq Stock Market the sum of the average daily dollar volume for the ten (10) days previous to conversion divided by ten (10) is less than $2.5 million, then the Series A Preferred Stock will be entitled to a one-time dividend equal to an 8% increase in the stated value of the proceedsSeries A Preferred Stock, or an $80 dollar increase per share in stated value, resulting in a stated value of $1,080 (one thousand and eighty dollars) per Series A Preferred Stock. Additionally, if any of the triggering events are not addressed on exercise is not fixeda timely basis, we could be liable to pay and will vary based on foreign exchange rate movements. The investor warrants when issued other than18% per annum dividend. On April 29, 2022, the Company experienced a triggering event as compensation for goods and services are therefore a derivative for accounting purposes and are required to be recognized as a derivative liability and measured at fair value at each reporting period. Any changes in fair value from period to period are recorded as non-cash gain or lossdefined in the consolidated statements of comprehensive loss. Upon exercise, the holders will pay the Company the respective exercise price for each investor warrant exercised in exchange for one common share of the Company and the fair value at the date of exercise and the associated non-cash liability will be reclassified to share capital. The non-cash liability associated with any investor warrants that expire unexercised will be recorded as a gain in the consolidated statements of comprehensive loss. There are no circumstances in which the Company would be required to pay any cash upon exercise or expiry of the investor warrants.COD.
In connection with subscriptionsthe event that the Company experiences a “Change of Offer UnitsControl” (as defined in the rights issue carried out April/May 2019, 20,166,221 investor warrants (“TO1 warrants”) have been granted to investors. All Warrants were vested as per the grant date. A warrant gives the right, during a fixed period to subscribe for nominal $0.01 (DKK 0.05) common share inCOD), the Company may also be required to redeem the Preferred Shares for cash at $0.9 (SEK 7.5) (the “Exercise Price”), converted into DKK using the official exchange rate between DKK and SEK on the exercise day. All TO1 warrants expired unexercised in the period ended December 31, 2020.a minimum of 125% of their Conversion Amount.
In connection with subscriptionsHolders of Offer UnitsSeries A Preferred Stock will have no voting rights, except as required by law and as expressly provided in the rights issue carried out October — December 2019, 50,341,080 investor warrants (“TO2 warrants”) have been granted to investors. All Warrants were vested as per the grant date. A warrant gives the right, during a fixed period to subscribe for nominal $0.01 (DKK 0.05) common share in the Company $0.69 (SEK 6,0) (the “Exercise Price”), converted into DKK using the official exchange rate between DKK and SEK on the exercise day. Each warrant carries the right to subscribe for one common share. The final exercise period for the warrants of series TO 2 took place from September 1 up to and including September 15, 2021. Any TO 2 warrants unexercised after September 13, 2021, expired without compensation or payment of any kind to the warrant holders. During the three month period ended September 30, 2021 a total of 8,820 warrants of series TO 2 were exercised for subscription of 8,820 shares for total proceeds of $6.COD.
In connection with subscriptions of Offer Units in the rights issue carried out in June 2021, 121,162,817 investor warrants (“TO3 warrants”) have been granted to investors. All Warrants were vested as per the grant date. In accordance with the terms of the Company’s outstanding TO 3 Warrants, exercisable for $0.20 (SEK 1.7) per share, the Company’s Board of Directors can determine an extraordinary and final exercise window of 10 trading days in which warrants shall be exercised provided, however, that the price of the Company’s shares increases to SEK 2.0 or more calculated as average volume weighted price (VWAP) over 10 trading days. On August 26, 2021, the Board of Directors set an extraordinary and final exercise period for the Company’s TO 3 Warrants, starting on August 30, 2021, and ending on September 13, 2021. Any TO 3 warrants unexercised after September 13, 2021, expired without compensation or payment of any kind to the warrant holders. During the three month period ended September 30, 2021, 13,719,266 warrants of series TO 3 were exercised for total proceeds of $2,679.(b) 3i Warrant Terms
The table below summarizesConcurrently with the numberissuance of investorour Preferred Stock, the Company issued warrants that were outstanding, their weighted averageto purchase 2,018,958 shares of the Company’s common stock at an exercise price of $9.9061 per share, subject to adjustments (“WAEP”3i Warrants”). The material terms of the 3i Warrants are as at September 30, 2021 and December 31, 2020, as well as the movements during the respective periods:follows:
| Nine months ended September 30, 2021 | Year ended December 31, 2020 | |||||||||||||||
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||
| Outstanding, opening | 54,337,944 | $ | 0.71 | 70,507,301 | $ | 0.69 | ||||||||||
| Granted | 120,891,157 | 0.19 | 3,996,864 | $ | 0.36 | |||||||||||
| Exercised | (13,728,086 | ) | 0.19 | — | — | |||||||||||
| Expired | (157,504,151 | ) | 0.33 | (20,166,221 | ) | $ | 0.82 | |||||||||
| Outstanding, ending | 3,996,864 | $ | 0.38 | 54,337,944 | $ | 0.71 | ||||||||||
| Exercisable, ending | 3,996,864 | $ | 0.38 | 54,337,944 | $ | 0.71 | ||||||||||
| (i) | The warrants have and term of three years and expire on December 20, 2024; |
| (ii) | The exercise of the warrants are subject to a beneficial ownership limitation of 4.99% which can be adjusted to a beneficial ownership limitation of 9.99% upon sixty-one (61) days’ prior written notice; |
| (iii) | The exercise price and the number of 3i Warrant shares issuable upon the exercise of the 3i Warrants are subject to adjustment, as follows: |
| o | In the event of a stock dividend, stock split or stock combination recapitalization or other similar transaction involving the Company’s common stock the exercise price will be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event; |
| o | If the Company sells or issues any shares of common stock, options, or convertible securities at an exercise price less than a price equal to the Warrant exercise price in effect immediately prior to such sale (a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the exercise price then in effect shall be reduced to an amount equal to the new issuance price; |
| o | Simultaneously with any adjustment to the exercise price, the number of 3i Warrant shares that may be purchased upon exercise of the 3i Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable hereunder for the adjusted number of 3i Warrant shares shall be the same as the aggregate exercise price in effect immediately prior to such adjustment (without regard to any limitations on exercise) and; |
| o | Voluntary adjustment for the Company to any amount and for any period deemed appropriate by the board of directors of the Company. |
| (iv) | In the event of either the Company consolidating or merging with or into another entity (the “Fundamental Transaction”), the sale or assignment of substantially all of the Company’s subsidiaries, or a Triggering Event (as defined in the COD), the holder is entitled to require the Company to pay the holder an amount in cash equal to the Black-Scholes value of the 3i Warrants on or prior to the later of the second trading after the date of request for payment and the date of consummation of the Fundamental Transaction; or at any time after the occurrence of the Triggering Event. |
(b) Financing Facility(c) Accounting
| i. | Series A Convertible Preferred Stock |
The Company evaluated the Series A Convertible Preferred Stock under ASC 480-10 to determine whether it represents an obligation that would require the Company to classify the instrument as a liability and determined that the Series A Convertible Preferred Stock is not a liability pursuant to ASC 480-10. Management then evaluated the instrument pursuant to ASC 815 and determined that because the holders of the Series A Convertible Preferred Stock may be entitled to receive cash, the Series A Convertible Preferred stock should be recorded as mezzanine equity given the cash redemption right that is within the holder’s control.
Effective November 29, 2018Generally, preferred stock that are currently redeemable should be adjusted to their redemption amount at each balance sheet date. If it is probable that the equity instrument will become redeemable, the Company established a convertible debt facility (the “Facility”) for fundinghas the option to either accrete changes in the redemption value over the period from the date of upissuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to SEK 200 million to be funded in up to 20 tranches of SEK 10 million each over a 24 month term and bearing interest at 2% per annum. Fivethe earliest redemption date of the tranches were receivable underinstrument or to recognize changes in the Facility atredemption value immediately as they occur and adjust the discretion of the investor and the Facility was convertible into shares and warrants at 50% of the nominalcarrying amount of the notes.instrument to equal the redemption value at the end of each reporting period. The Company recognizes changes in redemption value when redemption becomes probable to occur.
| ii. | 3i Warrants |
The 3i Warrants were identified as a freestanding financial instrument and are within the scope of ASC 480-10. Liability-classified contracts are initially measured at fair value (or allocated value). Subsequent changes in fair value are recognized through earnings for as long as the contracts continue to be classified as a liability. The measurement of fair value is determined utilizing an appropriate valuation model considering all relevant assumptions current at the date of issuance and at each reporting period (i.e., share price, exercise price, term, volatility, risk-free rate and expected dividend rate).
Management further evaluated the financial instrument and all identified features pursuant to ASC 815 and concluded the Warrants would be classified as a liability and subsequently measured at fair value in future reporting periods. Accordingly, a residual fair value method has been applied with respect to the allocation of proceeds between the Preferred Stock and the Warrants.
Between January 1, 2022, and March 31, 2022, a total of 1,973 Series A Preferred shares were converted into 746,276 shares of our common stock, thereby reducing outstanding Series A Preferred shares at March 31, 2022 to 17,827. The fair value of the derivative liability associated with the Series A Preferred Stock converted during the three month period ended March 31, 2022, as determined by Monte Carlo simulations, was $452. Because the latest three conversions in March 2022 were completed at less than the agreed floor price, we recorded a floor price liability of $134 within accrued liabilities and recognized a $134 reduction of additional paid in capital. Additionally, because the Company’s average daily dollar volume of stock trading was less than $2.5 million during a ten-day period in January 2022, the Company has recorded a one-time deemed dividend of 8% in the amount of $1,572 on preferred stock converted between February 1, 2022 and March 31, 2022 and the balance of preferred stock outstanding as at March 31, 2022 as an increase to the value of the convertible preferred stock and a reduction of additional paid in capital.
The following inputs were used for the Series A Preferred Stock conversions recorded in the three month period ended March 31, 2022 and the fair value of the Series A Preferred Derivative liability determined at March 31, 2022 and December 31, 2021:
| January 1, 2022 – March 31, 2022 | December 31, 2021 | |||||||
| Initial exercise price | $ | 9.90 | $ | 9.91 | ||||
| Stock price on valuation date | $1.93 - $10.75 | $ | 10.37 | |||||
| Risk-free rate | 1.03% - 2.40% | 0.96 | % | |||||
| Time to exercise (years) | 2.72 – 2.96 | 2.97 | ||||||
| Equity volatility | 70%- 90% | 70 | % | |||||
| Probability of volume failure | 93% - 99 % | 92 | % | |||||
| Rounded 10 day average daily volume (in 1,000’s) | 332 - 873 | 908 | ||||||
On March 31, 2022, the Company utilized the reset strike options Type 2 model by Espen Garder Haug and Black-Scholes Merton models to estimate the fair value of the Warrants to be approximately $2,265. On December 31, 2021, the Company utilized Monte Carlo simulations models to estimate the fair value of the Warrants to be approximately $11,273. The Warrants were valued at March 31, 2022, and December 31, 2021, using the following inputs:
| March 31, 2022 | December 31, 2021 | |||||||
| Initial exercise price | $ | 9.91 | $ | 9.91 | ||||
| Stock price on valuation date | $ | 2.04 | $ | 10.50 | ||||
| Risk-free rate | 2.40 | % | 0.91 | % | ||||
| Expected life of the Warrant to convert (years) | 2.73 | 3.0 | ||||||
| Rounded annual volatility | 110 | % | 73 | % | ||||
| Timing of liquidity event | Q4 2022 – Q1 2023 | Q3 2022 – Q2 2023 | ||||||
| Expected probability of event | 90 | % | 90 | % | ||||
The accounting for the Series A Convertible Preferred Stock and Warrants is illustrated in the table below:
| Consolidated Balance Sheets | Consolidated Statement of Operations & Comprehensive Loss | |||||||||||||||||||||||||||
| Warrant liability | Series A Preferred Derivative Liability | Series A Convertible Preferred Stock – Mezzanine Equity |
Common | Additional paid-in capital | Finance Costs | Fair value adjustment to derivative and warrant liabilities | ||||||||||||||||||||||
| Subscription proceeds received on December 20, 2021 | $ | 11,273 | $ | 7,409 | $ | 1,318 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Costs allocated | (877 | ) | — | (679 | ) | — | — | — | ||||||||||||||||||||
| Costs expensed | 877 | — | — | — | — | 877 | — | |||||||||||||||||||||
| December 21, 2021 conversion of 200 Series A Preferred Stock | — | (74 | ) | (7 | ) | 2 | 80 | — | — | |||||||||||||||||||
| Fair value adjustment at December 31, 2021 | — | (154 | ) | — | — | — | — | (154 | ) | |||||||||||||||||||
| Balances at December 31, 2021 | $ | 11,273 | $ | 7,181 | $ | 632 | $ | 2 | $ | 80 | $ | 877 | $ | (154 | ) | |||||||||||||
| Consolidated Balance Sheets | Consolidated Statement of Operations & Comprehensive Loss | |||||||||||||||||||||||||||
| Warrant liability | Series A Preferred Derivative Liability | Series A Convertible Preferred Stock – Mezzanine Equity | Common Stock | Additional paid-in capital | Accrued Liabilities | Fair value adjustment to derivative and warrant liabilities | ||||||||||||||||||||||
| Balances at December 31, 2021 | $ | 11,273 | $ | 7,181 | $ | 632 | $ | 2 | $ | 80 | $ | — | $ | — | ||||||||||||||
| Conversion of 1,973 Series A Preferred Stock, net | — | (452 | ) | (62 | ) | 75 | 306 | 134 | — | |||||||||||||||||||
| 8% deemed dividend on Preferred Stock | — | — | 1,572 | — | (1,572 | ) | — | — | ||||||||||||||||||||
| Fair value adjustment at March 31, 2022 | (9,008 | ) | (3,558 | ) | — | — | — | — | 12,566 | |||||||||||||||||||
| $ | 2,265 | $ | 3,171 | $ | 2,142 | $ | 77 | $ | (1,186 | ) | $ | 134 | $ | 12,566 | ||||||||||||||
13. Derivative Liabilities
(a) Series A Preferred Stock Conversion Feature
The derivative scope exception under ASC 815 is not met because a settlement contingency is not indexed to the Company’s stock. Therefore, the redemption feature (derivative liability) has been bifurcated from the Series A Preferred Stock and recorded as a derivative liability. The derivative value of the Series A Preferred Stock Redemption Feature (the “Redemption Feature”) is the difference between the fair value of the Series A Preferred Stock with the Redemption Feature and the Series A Preferred Stock without the Redemption Feature. The Series A Preferred Stock Redemption Feature has been valued with a Monte Carlo Simulation model, using the inputs as described in Note 12(c) ii.
(b) Investor Warrants
The Company has evaluateddid not issue any investor warrants during the terms of the Financing Facility in accordance with ASC 815-40-15three-month period ended March 31, 2022, and ASC 815-40-25 and determined that the instrument is a derivative. Accordingly, the accounting treatment is the same as that described in Note 12(a) above.no investor warrants were outstanding.
On June 3, 2019At March 31, 2021 the Company settled onehad a total of the five tranches and in February 2020 the balance of the committed tranches were settled by receipt of $1 million (SEK 10,5 million) from the investor in cash, in exchange for a subscription of 9,330,000 common shares in the Company (Settlement Shares) valued at $2.5 million and the issuance of 3,996,8641,086,759 investor warrants outstanding and exercisable at ana weighted average exercise price of $0.38 each (Settlement Warrants) valued at $0.6 million as of$36.0 per share. No investor warrants were granted, exercised, or expired during the February 23, 2020 grant date.three-month period ended March 31, 2021.
All Settlement Warrants immediately vested on the grant date. A warrant gives the right, during a fixed period to subscribe for nominal $0.01 (DKK 0.05) common share in the Company at $0.4 (SEK 3,3) (the “Exercise Price”), converted into DKK using the official exchange closing rate between DKK and SEK on the last business day prior to the exercise. Each warrant carries the right to subscribe for one common share over 36 months.
As at September 30, 2021, the weighted average contractual life of all of the investor warrants described in this Note 11 (a) and (b) is 1.40 years. The weighted average exercise price for the warrants as at the end of September 30, 2021, is $0.38 each.
(c) Valuation of Derivative Liabilities
The derivative liabilities are measured at fair value at each reporting period and the reconciliation of changes in fair value is presented in the following tables:
| T01 Warrants | T02 Warrants | T03 Warrants | ||||||||||||||||||||||
| Financing Facility* | Warrants issued May 2019 | Warrants issued December 2019 | Warrants issued June 2021 | |||||||||||||||||||||
| September 30, 2021 $ | December 31, 2020 $ | December 31, 2020 $ | September 30, 2021 $ | December 31, 2020 $ | September 30, 2021 $ | |||||||||||||||||||
| Balance beginning | 102 | 2,138 | 14 | 47 | 1,641 | — | ||||||||||||||||||
| Issued during the period | — | — | — | — | — | 5,151 | ||||||||||||||||||
| Change in fair value | 124 | (524 | ) | (14 | ) | (45 | ) | (1,594 | ) | (4,626 | ) | |||||||||||||
| Amount transferred to Equity | — | (1,412 | ) | — | — | — | (483 | ) | ||||||||||||||||
| Translation effect | (8 | ) | (100 | ) | — | (2 | ) | — | (42 | ) | ||||||||||||||
| Balance – end of period | 218 | 102 | — | — | 47 | — | ||||||||||||||||||
| Fair value per warrant issuable at period end | 0.03 | 0.026 | — | — | 0.0009 | — | ||||||||||||||||||
The fair value of the Company’s derivative warrant liabilities were estimated using the Black-Scholes option pricing model and based on the following assumptions:
| Warrants issued February 2020 | ||||||||
| Settlement Warrants for the termination of Financing Facility | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Exercise price | $ | 0.38 – (SEK3.3 | ) | $ | 0.40 – (SEK3.3 | ) | ||
| Share price | $ | 0.20 – (SEK1.7 | ) | $ | 0.10 – (SEK0.80 | ) | ||
| Risk-free interest | (0.52 | )% | (0.41 | )% | ||||
| Expected dividend yield | (0 | )% | (0 | )% | ||||
| Contractual life (years) | 1.40 | 2.17 | ||||||
| Expected volatility | 104.20 | % | 106.50 | % | ||||
The Company measured its derivative warrant liabilities on a recurring basis using level 3 inputs (see Note 17).
| 3i Fund Series A Redemption Feature | Settlement Warrants | TO2 Warrants | ||||||||||
| March 31, 2022 $ | March 31, 2021 $ | March 31, 2021 $ | ||||||||||
| Balance beginning | 7,181 | 102 | 47 | |||||||||
| Issued during the period | — | — | — | |||||||||
| Change in fair value | (3,558 | ) | (7 | ) | (38 | ) | ||||||
| Translation effect | — | — | — | |||||||||
| Amount transferred to Equity | (452 | ) | — | — | ||||||||
| Balance – end of period | 3,171 | 95 | 9 | |||||||||
| Fair value per warrant / Series A Preferred share issuable at period end | 177.88 | 0.02 | 0.0 | |||||||||
12.14. Stockholders’ Equity
(a) Share Issuances
On September 30, 2021During the share capital consists of 403,791,200 commonthree months ended March 31, 2022, the Company issued 746,276 shares of par value $0.01 (DKK 0.05) each (December 31, 2020: 212,601,044common stock valued at $381, net of the $134 floor price adjustment payable (see Note 12 (c), upon the conversion of 1,973 shares of par value $0.01 (DKK 0.05 each)). The shares are fully paid in. The shares are not divided into classes, and no shares enjoy special rights.Series A Preferred.
During the three months ended September 30,March 31, 2021, the Company issued:issued 528,810 common shares valued at $2,384 on conversion of debt.
During the nine months ended September 30, 2021 the Company issued:
During the three months ended September 30, 2020 the Company issued:
During the nine months ended September 30, 2020 the Company issued:
13. Share-based15. Stock-based payments
Share based paymentsDuring the three months ended March 31, 2022, the total stock-based payment expenses recorded in the legal formcondensed consolidated statement of operations and comprehensive loss were $1,065 (2021: $195) of which $703 and $362 are recognized as general and administrative and research and development expenses respectively (2021: $129 as general and administrative and $66 as research and development expenses respectively). Total compensation cost of $3,380 for non-vested warrants have been grantedas at March 31, 2022 and is expected to membersbe realized over a period of the executive management, members of the board of directors, employees and external consultants.2.3 years.
All share-based payment warrantA summary of stock option activity under the Company’s stock option plans during the three-month period ended March 31, 2022, is presented below:
| Options Outstanding | ||||||||||||
| Number of Shares | Weighted Average Exercise Price Share | Weighted Average Life (in years) | ||||||||||
| Outstanding December 31, 2021 | 1,174,992 | $ | 6.8 | 4.9 | ||||||||
| Granted | — | — | — | |||||||||
| Exercised | — | — | — | |||||||||
| Cancelled or expired | — | — | — | |||||||||
| Outstanding as of March 31, 2022 | 1,174,992 | $ | 6.8 | 4.7 | ||||||||
| Options exercisable at March 31, 2022 | 635,475 | $ | 7.6 | 4.5 | ||||||||
During the three monthsthree-month period ended September 30,March 31, 2021, the total expenses recorded in profit or loss were $577 (2020: $237) and are recognized as general and administrative expenses. During the nine months ended September 30, 2021 expenses of $1,205 (2020: $629) are recognized as general and administrative expenses. Total compensation cost of $119 for non-vested warrants as at September 30, 2021 will be recognized through October 31, 2023.
The table below summarizes the number ofno options that were outstanding, their weighted average exercise price (“WAEP”) as at September 30, 2021 and December 31, 2020, as well as the movements during the periods.
| September 30, 2021 | December 31, 2020 | |||||||||||||||
| Number | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||
| Opening balance | 10,755,971 | $ | 0.20 | 8,717,239 | $ | 0.18 | ||||||||||
| Granted | — | — | 3,389,550 | $ | 0.22 | |||||||||||
| Exercised | (1,048,780 | ) | 0.06 | — | — | |||||||||||
| Forfeited | (2,030,260 | ) | 0.06 | (1,350,818 | ) | $ | 0.26 | |||||||||
| Ending balance outstanding | 7,676,931 | $ | 0.24 | 10,775,971 | $ | 0.20 | ||||||||||
| Ending balance, exercisable | 4,657,456 | $ | 0.23 | 6,008,140 | $ | 0.18 | ||||||||||
No warrants were granted, in the nine month period ended September 30, 2021. The weighted average remaining contractual life for the warrants outstanding as at September 30, 2021 was 7.75 years (December 31, 2020: 9.3 years).exercised, expired, or cancelled.
14.16. Segments
The Company is domiciled in the United States of America and its operations are in Denmark and operates as one operating segment. Our Chief Executive Officer (CEO), as the chief operating decision-maker, manages and allocates resources to the operations of our Company on a total Company basis. Managing and allocating resources on a total company basis enables our CEO to assess the overall level of resources available and how to best deploy these resources across functions, therapeutic areas and research and development projects that are in line with our long-term company-wide strategic goals. Consistent with this decision-making process, our CEO uses consolidated, single-segment financial information for purposes of evaluating performance, forecasting future period financial results, allocating resources, and setting incentive targets. The Company has neither revenues from external customers outside Denmark, nor non-currentlong-term assets in other geographical areas other than Denmark.
17. Loss per share of common stock
Basic loss per share is derived by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as warrants and stock options, which would result in the issuance of incremental shares of common stock unless such effect is anti-dilutive. In calculating the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remained the same for both calculations because when a net loss exists, dilutive shares are not included in the calculation. Potentially dilutive securities outstanding, as determined by the latest applicable conversion price, that have been excluded from diluted loss per share due to being anti-dilutive include the following:
| March 31, | March 31, | |||||||
| 2022 | 2021 | |||||||
| Warrants and stock options | 3,193,950 | 1,301,878 | ||||||
| Series A Convertible Preferred stock | 9,717,929 | — | ||||||
| Convertible debt | — | 114,076 | ||||||
| 12,911,879 | 1,415,954 | |||||||
15. Basic and diluted net loss per share
Basic net income loss per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted net income per share is computed based on the weighted average number of ordinary shares outstanding during the period plus potential shares (deriving from warrants and convertible notes) considered outstanding during the period, in accordance with ASC 260-10 as determined under the treasury stock method.
| Three month period ended September 30, | Nine month period ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | 1,672 | $ | (960 | ) | (5,986 | ) | (3,897 | ) | |||||||
| Denominator: | ||||||||||||||||
| Weighted average common shares outstanding – basic | 387,652,549 | 186,230,830 | 288,984,065 | 150,650,949 | ||||||||||||
| Weighted average common shares outstanding – diluted | 397,201,067 | 194,948,069 | 299,740,036 | 159,368,188 | ||||||||||||
| Net income (loss) per share attributable to common shareholders – basic and diluted | $ | 0.00 | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | |||||
In the three month period ended September 30, 2021 the Company’s diluted weighted shares outstanding includes outstanding warrants however the basic and diluted income per share amounts were the same. In the three month period ended September 30, 2020 and the nine month periods ended September 30, 2021 and 2020, the Company’s unvested restricted shares and restricted share units have been excluded from the computation of basic net loss per share attributable to common shareholders.
The Company’s potentially dilutive securities, which include warrants and shares issuable upon conversion of convertible debt, have been excluded from the computation of diluted net loss per share attributable to common shareholders as the effect would be to reduce the net loss per share attributable to common shareholders. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common shareholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common shareholders for the periods indicated because including them would have had an anti-dilutive effect:
| Three month period ended September 30, | Nine month period ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Warrants | 9,548,518 | 8,717,239 | 10,755,971 | 8,717,239 | ||||||||||||
16.18. Financial Instruments
The following tables present information about the Company’s financial instruments measured at fair value on a recurring basis and indicate the level of the fair value hierarchy used to determine such fair values:
| Fair Value Measurements as of September 30, 2021 Using: | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Investment | $ | 491 | $ | — | $ | — | $ | 491 | ||||||||
| Liabilities: | ||||||||||||||||
| Derivative warrants | $ | — | $ | — | $ | (218 | ) | $ | (218 | ) | ||||||
| $ | — | $ | — | $ | (218 | ) | $ | (218 | ) | |||||||
| Fair Value Measurements as of March 31, 2022 Using: | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Investment | $ | 314 | $ | — | $ | — | $ | 314 | ||||||||
| Liabilities: | ||||||||||||||||
| Warrant liability | $ | — | $ | — | $ | (2,265 | ) | $ | (2,265 | ) | ||||||
| Series A Convertible Preferred Stock Redemption Feature | — | — | (3,171 | ) | (3,171 | ) | ||||||||||
| $ | — | $ | — | $ | (5,436 | ) | $ | (5,436 | ) | |||||||
| Fair Value Measurements as of December 31, 2020 Using: | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Investment | $ | 845 | $ | — | $ | — | $ | 845 | ||||||||
| Liabilities: | ||||||||||||||||
| Convertible debt | $ | — | $ | — | $ | (1,327 | ) | $ | (1,327 | ) | ||||||
| Financing Facility | — | — | (102 | ) | (102 | ) | ||||||||||
| Derivative warrants | — | — | (47 | ) | (47 | ) | ||||||||||
| $ | — | $ | — | $ | (1,476 | ) | $ | (1,476 | ) | |||||||
| Fair Value Measurements as of December 31, 2021 Using: | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Investment | $ | 350 | $ | — | $ | — | $ | 350 | ||||||||
| Liabilities: | ||||||||||||||||
| Warrant liability | $ | — | $ | — | $ | (11,273 | ) | $ | (11,273 | ) | ||||||
| Series A Convertible Preferred Stock Redemption Feature | — | — | (7,181 | ) | (7,181 | ) | ||||||||||
| $ | — | $ | — | $ | (18,454 | ) | $ | (18,454 | ) | |||||||
The following method wasMethods used to estimate the fair values of our financial instruments:instruments, not disclosed elsewhere in these financial statements, are as follows:
The carrying amount of levelWhen available, our marketable securities are valued using quoted prices for identical instruments in active markets. If we are unable to value our marketable securities using quoted prices for identical instruments in active markets, we value our investments using broker reports that utilize quoted market prices for comparable instruments. Accordingly, our investment is considered a Level 1 financial instruments are recorded at fair market value based upon market prices.asset. We have no financial assets or liabilities measured using Level 2 inputs. Financial assets and liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. Level
The Company recognizes its derivative liabilities as level 3 financial assets also include investment securities in 2020 for which there is limitedand values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market activity suchparticipants, it recognizes that the determinationuse of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value requires significant judgment or estimation.at the reporting date. The primary assumptions that would significantly affect the fair values using terms in the notes that are subject to volatility and market price of the underlying common stock of the Company.
The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the date the actual event or change in circumstances that caused the transfer occurs. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. There were no transfers between level 1 or level 2 during the nine monthsthree-month periods ended September 30, 2021 and the year ended DecemberMarch 31, 2020.2022, or March 31, 2021.
The following table provides a reconciliation of the beginning and ending balances of the item measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3):
| Level 3 | September 30, 2021 | December 31, 2020 | ||||||
| Beginning balance | $ | 1,476 | $ | 3,793 | ||||
| Gains included in net loss | — | 845 | ||||||
| Transfers out of level 3 | — | (845 | ) | |||||
| Issuance of convertible debt | 1,200 | 4,670 | ||||||
| Issuance of investor warrants (TO3) | 5,151 | — | ||||||
| 7,827 | 8,463 | |||||||
| Financing Facility: | ||||||||
| Fair value adjustment | 124 | (524 | ) | |||||
| Translation effect | (8 | ) | (100 | ) | ||||
| Converted to equity on settlement | — | (1,412 | ) | |||||
| Fair value adjustments: | ||||||||
| TO1 Warrants | — | (14 | ) | |||||
| TO2 Warrants | (45 | ) | (1,594 | ) | ||||
| TO3 Warrants | (4,524 | ) | — | |||||
| Translation effect (TO2 and TO3 Warrants) | (44 | ) | — | |||||
| Convertible debt | 298 | (681 | ) | |||||
| Converted to equity on settlement: | ||||||||
| Exercise of TO2 and TO3 warrants | (585 | ) | — | |||||
| Debt conversion | (2,825 | ) | (2,662 | ) | ||||
| Ending balance | $ | 218 | $ | 1,476 | ||||
The Company used the reset strike options Type 2 model by Espen Garder Haug and Black-Scholes Merton models to measure the fair value of the warrant liability at $2,265 on March 31, 2022 and Monte Carlo simulations models to measure the fair value at $11,273 on December 31, 2021. The Company used Monte Carlo simulation models to measure the fair value of the Series A convertible preferred stock redemption feature at $3,171 and $7,181 respectively on March 31, 2022 and December 31, 2021, and will subsequently remeasure the fair value at the end of each period and record the change of fair value in the Condensed Consolidated Statements of Operation and Comprehensive Loss during the corresponding period. Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. During the three-month period ended March 31, 2022, the Company’s stock price decreased from initial valuation. As the stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases. Stock price is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments.
17.19. Income Taxes
The effective tax rate for the three-month periods ended March 31, 2022, and March 31, 2021, was impacted by unbenefited losses. Specifically, the March 31, 2022, impairment charge of approximately $14,000 has resulted in a tax benefit of $1,227 in the three months ended March 31, 2022.
20. Commitments and Contingencies
a) Development costs
TheUnder the terms of the June 2020 Out-License agreement, the Company is contingently liable for development costs of Smerud Medical Research International (“Smerud”) in the approximate amount of $1,191$1,264 (one million two hundred and sixty-four thousand) which has been accrued as of September 30,December 31, 2021, and will beis payable only ifas Smerud iswas unable to identify investors to fund development of in licensedin-licensed products from the Company by December 31, 2021;2021.
Subsequent to December 31, 2021, and pursuant to the terms of the March 28, 2022, Amended License Agreement, the $1,309 liability was forgiven in exchange for a payment to LiPlasome. Consequently, as extended from Octoberat March 31, 2022, the Company recognized a gain on sale of IP of $971 thousand and recorded a balance due to LiPlasome of $338 thousand (2,273 thousand DKK) in accrued liabilities, which was paid on April 1, 2021 during2022. However, notwithstanding the period ended September 30, 2021.termination of the out-license agreement, we are currently engaged in discussions with Smerud in connection with the further development of 2X-111.
b) Oncoheroes
Effective January 2, 2022, the Company entered into an Exclusive License Agreement with Oncoheroes Biosciences Inc. (the “Oncoheroes Agreement”) to grant Oncoheroes an exclusive royalty-bearing global license to both dovitinib and stenoparib in pediatric cancers. Oncoheroes will take responsibility for pediatric cancer clinical development activities for both clinical-stage therapeutics. Allarity will support Oncoheroes’ pediatric clinical trials by providing clinical-grade drug inventory at cost and by facilitating DRP® companion diagnostic screening of pediatric patients for each drug. Under the licenses, Oncoheroes will receive commercialization rights for pediatric cancers, subject to the Company’s first buy-back option for each program, and the Company will receive an upfront license fee and regulatory milestones for each program, specifically one for dovitinib and one for stenoparib, as follows:
| i. | a one-time upfront payment of $250 thousand and $100 thousand for stenoparib and dovitinib respectively, within 5 business days after January 2, 2022 ($350 thousand received as of January 11, 2022 and recorded as a gain on sale of IP); and |
| ii. | two milestone payments of $1,000 (one million) each due and payable upon receipt of regulatory approval of a product in the United States, and of a product in Europe, respectively. |
Pursuant to the Oncoheroes Agreement Allarity is also entitled to tiered royalties on aggregate net product sales (“Sales”) of between 7% and 12% on net sales of products as follows: 7% on Sales less than $100 million; 10% on Sales of greater than $100 million and less than $200 million; and 12% on Sales greater than $200 million.
d). Lantern Pharma, Inc. – Irofulven Agreement
On November 10, 2020 the CompanyJuly 23, 2021, we entered into a cost sharing agreementan Asset Purchase Agreement with SmerudLantern Pharma, Inc. relating to our inventory of Irofulven active pharmaceutical ingredients, our clinical research data relating to Irofulven developed by us during the drug development program under the May 2015 Drug License and Development Agreement for Irofulven and terminated our obligation to further advance the development of Ixempra whereby Smerud will be entitledIrofulven under the May 2015 agreement. Under the Asset Purchase Agreement, Lantern Pharma agreed to 7.5% royaltiespay us $1 million on future revenue in exchange for funding halfclosing of the development costs. As of September 30, 2021 Smerud has performed work valued at $139transaction, and is entitled to a very low amount of future royalties.
b) License Agreement with Eisai for Stenoparibadditional amounts:
| (i) | when the inventory of Irofulven API is recertified with a longer shelf life; |
During
| (ii) | upon the initiation of treatment of the first patient in an investigator-led “compassionate use” ERCC2/3 mutation subgroup study using Irofulven in certain agreed upon investigators; |
| (iii) | upon the initiation of treatment of the first patient within twenty-four months after the closing of the transaction in any human clinical trial of Irofulven initiated by Lantern Pharma; and | |
| (iv) | upon the initiation of treatment of the second patient within an agreed upon time period after the closing of the transaction in any human clinical trial of Irofulven initiated by Lantern Pharma. |
Effective March 18, 2022, pursuant to clause (i) the period ended September 30, 2021, the termsinventory was recertified with a longer shelf life and as of our agreement with Eisai have been revised to provide Eisai the right to terminate the agreement if we do not complete a Phase 2 clinical trial before DecemberMarch 31, 2022, unless we elect to payreceived $459 thousand which has been recorded as a very low seven digit extension payment.gain on sale of IP.
18.21. Subsequent Events
For its interim consolidated financial statements as of September 30, 2021March 31, 2022, and for the ninethree months then ended, the Company evaluated subsequent events through the date on which those financial statements were issued.
(a) Plan of Reorganization and US Nasdaq Listing
On April 6, 2021, the Company incorporated Allarity Therapeutics, Inc., a Delaware corporation, (“Allarity Delaware”) as a direct wholly owned subsidiary of the Company for the sole purpose of entering into a Plan of Reorganization and Asset Purchase Agreement with Allarity Delaware in order to reorganize the Company as a holding company listed on the US Nasdaqi. Series A Preferred Stock Market and complete a 50 to 1 share reverse split, resulting in an immediate decrease in the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted net income per share. The reorganization is a common control transaction and there will be no change in control over the assets of the ultimate parent. Consequently, Allarity Delaware will record all assets and liabilities acquired from Allarity Therapeutics A/S at historical cost. The recapitalization share exchange is conditioned upon the approval of the Company’s shareholders and an effective registration statement filed with the US Securities and Exchange Commission. Our Form S-4 registration statement was effective on November 5, 2021; and the recapitalization was approved by our shareholders at our Extraordinary General Meeting held on November 22, 2021.Triggering Event
As more specifically discussed below, a “Triggering Event” under the COD occurred on April 29, 2022, under Section 5(a)(ii) of the date of these financial statements, the Company anticipates that approximately 8,075,824 shares of Delaware common stock will be issuedCOD, which would have resulted in the recapitalization share exchangefollowing unless 3i, LP agreed to forebear and/or waive its rights under the Company’s shareholders.COD:
(b)1. An 18% per annum dividend will start to accrue on the stated value of all outstanding Preferred Shares and will continue to accrue until the Triggering Event has been cured. The accrued dividend is added to the stated value prior to the Dividend Payment Date and paid in cash on the first trading day of the Company’s next fiscal quarter. A “Late Charge” in the amount of 18% per annum will accrue on any amounts due to be paid to holders of the Preferred Shares if not paid when due, including payments that may be owed under Section 2(e) of the Registration Rights Agreement (“RRA”).
2. A “Triggering Event Redemption Right” will commence and remain open for a period of 20 trading days from the later of the date the Triggering Event is cured or the receipt by 3i, LP of the Triggering Event Notice. Under the Triggering Event Redemption Right, if elected by the holder of the Preferred Shares, the Company would be obligated to redeem all or a portion of the Preferred Shares for a minimum of 125% of the stated value of the Preferred Shares. Concurrently, under the provisions of the PIPE InvestmentWarrant, if elected by 3i, the Company would be obligated to redeem the PIPE Warrant for the Black Sholes Triggering Event Value as defined in the warrant agreement.
3. A “Registration Delay Payment” will accrue on April 22, 2022 (the expiration of the Allowable Grace Period under the RRA) in the amount of 2% of 3i, LP’s “Purchase Price” as defined in the Securities Purchase Agreement which is approximately 2% of $20 million, or $400 thousand and will continue to accrue at 2% every 30 days thereafter. Additionally, a late charge of 2% per month will accrue on any payments that are not paid when due. The Registration Delay Payments will stop accruing when the post-effective amendment is declared effective by the SEC at which time the registration statement and its prospectus will again be available for the resale of common stock.
On May 20, 2021,4, 2022, the Company and 3i, LP entered into an Investmenta Forbearance Agreement (the “Investment Agreement”) withand Waiver, dated April 27, 2022, wherein 3i, LP confirmed that no Triggering Event as defined under the COD has occurred prior to April 27, 2022, that a Delaware Limited Partnership (the “Investor”) wherebyTriggering Event under Section 5(a)(ii) will and has occurred on April 29, 2022, and that in consideration for the Registration Delay Payments the Company is obligated to pay under the RRA, and additional amounts the Company is obligated to pay under the COD and 3i, LP’s legal fees incurred in the preparation of the Forbearance Agreement and Waiver in the aggregate of $538,823.00 paid upon execution of the Forbearance Agreement and Waiver, and so long as the Company pays the Registration Delay Payments that become due and payable under the RRA after the execution of the Forbearance Agreement and Waiver, 3i, LP has agreed to issue and sellforbear exercising any rights or remedies that it may have under the Investor 20,000 sharesCOD that arises as a result of Allarity Delaware Series A Convertible Preferred Stock (the “Preferred Stock”) and common stock purchase warrants (the “Warrants”) for an additional $20 million (the “PIPE Investment”). The PIPE Investment is conditioned upon, and will occur simultaneously with, the consummationa Triggering Event under Section 5(a)(ii) of the Recapitalization Share ExchangeCOD and Section 4(c)(ii) of the approvalPIPE Warrant until the earlier to occur of Allarity Delaware’s application(i) the date immediately prior to listthe date of occurrence of a Bankruptcy Triggering Event, (ii) the date of occurrence of any other Triggering Event under Section 5(a) of the COD (excluding any Triggering Event arising solely as a result of Section 5(a)(ii) of the COD and Section 4(c)(ii) of the PIPE Warrant), (iii) the time of any breach by the Company under the Forbearance Agreement and Waiver, (iv) the Resale Availability Date as defined therein and (v) June 4, 2022 (such period, the “Forbearance Period”). Provided that the Company is not in breach of its common stock onobligations under Forbearance Agreement and Waiver, effective as of the US Nasdaq Stock Market.Trading Day immediately following the date the Company cures the Triggering Event under Section 5(a)(ii) of the COD, 3i, LP agrees to waive any rights or remedies that it may have under the COD that arises as a result of a Triggering Event under Section 5(a) of the COD and Section 4(c)(ii) of the PIPE Warrant that may have arisen prior to the date of the Forbearance Agreement and Waiver.
Theii. Series A Preferred Stock may convert over time into at approximately 20% of the Company’s issued and outstanding shares however, conversion of the Preferred Shares and exercise of the Warrants; is limited to 4.99% of the Company’s issued and outstanding shares.Conversions
AsOn May 25, 2022, 3i, LP converted a total of 809 Series A Preferred shares into 441,005 shares of our common stock. Pursuant to the terms of the dateCOD, because the Alternate Conversion Price was below the Floor Price of these financial statements$1.9812, the Company expectsis obligated to pay 3i, LP an Alternate Conversion Floor Amount of $1,377 which has been recorded as a liability and reduction to additional paid in capital as of May 27, 2022. In addition, under the conversion priceterms of the Preferred Stock to be $9.91 per share. However, ifRRA, the volume weighted average price for Allarity Delaware common stock on the US Nasdaq Stock Market falls below the fixed conversion price for the preferred stock, then the preferred stock would be entitled to convert atCompany also paid 3i, LP an alternate conversion price between 80% to 90% of the volume weighted average price at the time of conversion with a similar adjustment for the exercise price for the warrants.
Lastly,additional $400 in the event that the average daily US dollar volume of share of Allarity Delaware common stock traded on the US Nasdaq Stock Market falls below $2.5 million, then holders of the convertible preferred stock will be entitled to a one-time special dividend of 8% of the stated value of the preferred stock ($1.6 million) payable in shares of common stock upon conversion of the convertible preferred stock. The Company is in the process of assessing the accounting treatment of the special dividend.Registration Delay Payments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 Risk Factors section titled “Risk Factors” of our information statement/prospectus which is part of ourAnnual Report on Form S-410-K, filed with the SEC on August 20, 2021 and which became effective on November 5, 2021.May 17, 2022.
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, 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.
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 a modestan 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 threerecent months ended September 30, 2021 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 as a whole.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 — Update
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 of 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 $6$3.1 million and $3.9$3.1 million for the ninethree months ended September 30,March 31, 2022, and March 31, 2021, and 2020, respectively. As of September 30, 2021,March 31, 2022, we had an accumulated deficit of $43.4$69.6 million. Substantially all of 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. |
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, the majoritymost 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 begincontinue 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.
Summary Results of Operations for the Three and Nine Months Ended September 30,March 31, 2022, and March 31, 2021 and September 30, 2020 (unaudited)
The following table summarizes our results of operations for the three and nine months ended September 30, 2021March 31, 2022, and 2020 (in thousands):2021:
| For the three months ended September 30, | Increase/ | For the nine months ended September 30, | Increase/ | For the Three Months Ended March 31, | Increase/ | |||||||||||||||||||||||||||||||
| 2021 | 2020 | (Decrease) | 2021 | 2020 | (Decrease) | 2022 | 2021 | (Decrease) | ||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | (In thousands) | ||||||||||||||||||||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||
| Research and development | 1,574 | 1,012 | 562 | 5,329 | 3,233 | 2,096 | $ | 1,289 | $ | 1,251 | $ | 38 | ||||||||||||||||||||||||
| Impairment of intangible assets | 14,007 | — | 14,007 | |||||||||||||||||||||||||||||||||
| General and administrative | 2,619 | 953 | 1,666 | 6,140 | 3,245 | 2,895 | 3,013 | 1,211 | 1,802 | |||||||||||||||||||||||||||
| Proceeds from sale of IP: | $ | (1,000 | ) | $ | — | $ | 1,000 | (1,000 | ) | $ | — | $ | 1,000 | |||||||||||||||||||||||
| Total operating costs and expenses | 3,193 | 1,965 | 1,228 | 10,469 | 6,478 | 3,991 | ||||||||||||||||||||||||||||||
| Total operating expenses | 18,309 | 2,462 | 15,847 | |||||||||||||||||||||||||||||||||
| Loss from operations: | $ | 3,193 | $ | 1,965 | $ | 1,228 | $ | 10,469 | $ | 6,478 | $ | 3,991 | $ | (18,309 | ) | $ | (2,462 | ) | $ | (15,847 | ) | |||||||||||||||
Other Income
In the three and nine months ended September 30, 2021, other income of $1 million was received in connection with our sale of intangible assets to Lantern Pharma.
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 months ended March 31, 2022, and nine month periods ended September 30, 2021 and September 30, 2020 is provided below.
| For the three months ended September 30, | Increase/ | For the nine months ended September 30, | Increase/ | For the three months ended March 31, | Increase/ | |||||||||||||||||||||||||||||||
| 2021 | 2020 | (Decrease) | 2021 | 2020 | (Decrease) | 2022 | 2021 | (Decrease) | ||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | (In thousands) | ||||||||||||||||||||||||||||||||||
| Research study expenses | $ | 528 | 382 | $ | 146 | $ | 1,725 | $ | 1,630 | $ | 95 | $ | 505 | $ | 769 | $ | (264 | ) | ||||||||||||||||||
| Recovery of R&D costs | — | (8 | ) | 8 | — | (23 | ) | 23 | — | (11 | ) | 11 | ||||||||||||||||||||||||
| Tax credit | (454 | ) | (219 | ) | (235 | ) | ||||||||||||||||||||||||||||||
| Manufacturing & supplies | 95 | 1 | 94 | 888 | 55 | 833 | 168 | 71 | 97 | |||||||||||||||||||||||||||
| Contractors | 555 | 235 | 320 | 1,634 | 542 | 1,092 | 377 | 216 | 161 | |||||||||||||||||||||||||||
| Patents | 177 | 162 | 15 | 244 | 228 | 16 | 76 | 60 | 16 | |||||||||||||||||||||||||||
| Staffing | 189 | 192 | (3 | ) | 685 | 657 | 28 | 609 | 314 | 295 | ||||||||||||||||||||||||||
| Amortization | 21 | 37 | (16 | ) | 89 | 109 | (20 | ) | 20 | 36 | (16 | ) | ||||||||||||||||||||||||
| Other | 9 | 11 | (2 | ) | 63 | 35 | 28 | (12 | ) | 15 | (27 | ) | ||||||||||||||||||||||||
| $ | 1,574 | $ | 1,012 | $ | 562 | $ | 5,329 | $ | 3,233 | $ | 2,096 | $ | 1,289 | $ | 1,251 | $ | 38 | |||||||||||||||||||
For the three month periodmonths ended September 30,March 31, 2022, compared to March 31, 2021 versus September 30, 2020:
The increase of $562$38 thousand in research and development costexpenses was primarily because staffing increased $295 thousand due to an increaseemployee stock-based compensation expenses and contractors increased $161 thousand as the Company prepared for our FDA meeting in May. Manufacturing increased $97 thousand due to ongoing validation of $146our manufacturing of our priority drugs. Recovery of R&D costs decreased by $11 thousand, patent costs increased by $16 thousand, and increased tax credits of $235 thousand offset expenses. This was offset by a decrease of $264 thousand in research study expenses a decreaseas our clinical activity is limited to two of $8 thousand in recovery of R&D costs, an increase of $94 thousand in manufacturing and supplies, an increase of $320 thousand in contractors, an increase in patent expenses of $15 thousand, a decrease of $3 thousand in staffing;our three top priority assets, a decrease of $16 thousand in amortization, and a decrease of $2$27 thousand in other expenses. Overall,
Impairment of Intangible Assets
As a result of both the increase was because activityCompany’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 3three months ended September 30, 2020 was paused or significantly slowed due to Covid-19. Research and development in the 3 months ended September 30, 2021 increased as activity in the clinical trials coming back to a pre-pandemic level. Manufacturing & supplies and contractor costs has increased in preparation of our NDA filing for Dovitinib.March 31, 2022.
For the nine month period ended September 30, 2021 versus September 30, 2020:
The increase of $2.1 million in research and development cost was due to an increase of $95 thousand in research study expenses, a decrease of $23 thousand in recovery of R&D costs, an increase of $833 thousand in manufacturing and supplies, an increase of $1,092 thousand in contractors; an increase of $16 thousand in patent expenses, an increase of $28 thousand in staffing expenses, a decrease of $20 thousand in amortization, and an increase of $28 thousand in other expenses. Overall, the increase was because activity during the 9 months ended September 30, 2020 was paused or significantly slowed due to Covid-19. Manufacturing & supplies and contractor costs increased in preparation of our NDA filing for Dovitinib.
General and Administrative Expenses
General and administrative expenses increased by $1.67$1.8 million for the three months ended September 30, 2021March 31, 2022, compared to the same period in 2020.March 31, 2021. The increase was primarily due to an increase in professional fees of $1.39 million,$647 thousand, staffing expensesexpense of $481$634 thousand, insurance of $342 thousand, premises of $4 thousand, listings expenses of $9$91 thousand, and premises expenses of $2 thousand; offset by reductions in other administrative expenses of $176 thousand, insurance of $34 thousand and communication expenses of $5 thousand. Professional fees increased as the Company prepared its prospectus to file with the SEC in its effort to move its listing to the US Nasdaq.
General and administrative expenses increased by $2.9 million for the nine months ended September 30, 2021 compared to the same period in 2020. The increase was primarily due to an increase in professional fees of $2.39 million, staffing expense of $682 thousand, insurance of $31 thousand, premises of $17 thousand, listingscommunications expenses of $15 thousand, and communications expenses of $4 thousand, offset by reductions in other administrative expenses of $240$69 thousand. General administrative expenses increased in the nine months ended September 30, 2021 compared to the same period in 2020 primarily for the same reasons as the increase in cost in the three months ended September 30, 2021.
Other Income (Expenses), Net
For the three month periodmonths ended September 30,March 31, 2022, compared to March 31, 2021 versus September 30, 2020:
Other income (expense) of $4.5$14.0 million recognized in the three months ended September 30, 2021March 31, 2022, consisted primarily of a $4.5$12.6 million fair value adjustment to derivative and warrant liabilities $28and income of $1.8 million from the gain on sale of IP, offset by ($269) thousand in net interest income, and $51foreign exchange losses, ($39) thousand in net foreign exchange gains, offset by ainterest expenses, and ($137)36) thousand loss on investment. In
For the three months ended September 30, 2020March 31, 2021, other incomeexpense of $314($590) thousand consisted primarily of net interest incomefinance expenses of $221($87) thousand, gainloss on investment of $243 thousand, and net foreign exchange gains of $32 thousand, offset by a ($104) thousand fair value adjustment on derivative liabilities, and ($78) thousand increase in fair valueextinguishment of convertible debt.
For the nine month period ended September 30, 2021 versus September 30, 2020:
Other income (expense)debt of $3.4 million recognized in the nine months ended September 30, 2021 consisted primarily of a $4.5 million fair value adjustment to derivative liabilities offset by ($481) thousand interest expense, ($317)116) thousand, loss on investment of ($298)113) thousand, increasechange in fair value of convertible debt and netof ($201) thousand, foreign exchange losses of ($29) thousand. In the nine months ended September 30, 2020 other income of $1 million comprised a $95739) thousand, change in fair value adjustment of derivative liabilities, a $654liability of $45 thousand, gain on investment and net foreign exchange gains of $118 thousand, offset by a ($553) increase in fair value of convertible debt and net interest expenseexpenses of ($115)79) thousand.
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.
Liquidity, Capital Resources and Plan of Operations
Since our inception through September 30, 2021,March 31, 2022, our operations have been financed primarily by the sale of convertible promissory notes and the sale and issuance of our ordinary shares. As of September 30, 2021,March 31, 2022, we had $5.6$14.5 million in cash, and investments, and an accumulated deficit of $43.4$69.6 million.
In the nine months ended September 30, 2021 we received $1 million in proceeds from the sale of intangible assets, $14.87 million in gross proceeds from the issuance of shares, and $1.2 million in proceeds from convertible debt. We also received a bridge loan of $2.9 million in the six months ended June 30, 2021 and repaid $2.9 million in June 2021.
In the nine months ended September 30, 2020, we received $1 million in net proceeds from the sale and issuance of convertible notes. We also received $2.9 million in proceeds from share issuance.
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, 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 November 23, 2021,March 31, 2022, the Company’s cash deposits of $3.5$14.5 million were determined to be insufficient to fund its current operating plan and planned capital expenditures for at least the next 12 months. We estimate that as of the date of this filing, our cash reserves are sufficient for approximately 4 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 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.
The Company has also entered into a Securities Purchase Agreement with 3i, LP, a Delaware limited partnership that provides for a $20 million equity investment in the Company. Please refer to the subsequent event disclosures in note 18 for further information.
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, in order 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.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| (In thousands) | Nine months ended September 30, | |||||||
| 2021 | 2020 | |||||||
| Net Cash used in operating activities | $ | (9,741 | ) | $ | (4,812 | ) | ||
| Net Cash provided by financing activities | 15,381 | 3,333 | ||||||
| Net (decrease) increase in cash and cash equivalents | $ | 5,640 | $ | (1,479 | ) | |||
Operating Activities
During the nine months ended September 30, 2021, cash used in operating activities of $9.7 million was attributable to a net loss of $6 million, $475 thousand of deferred income taxes and $2.1 million in net non-cash charges. This was offset by a $1.15 million net change in net operating assets and liabilities. The non-cash charges consisted of stock-based compensation of $1.2 million, non-cash interest of $391 thousand, fair value adjustment to convertible debt of $298 thousand, loss on investment of $317 thousand, depreciation and amortization of $90 thousand, non-cash lease expense of $87 thousand and loss on foreign currency of $29 thousand, offset by a $4.5 million fair value adjustment to derivative liabilities. The change in operating assets and liabilities of $1.15 million was primarily due to a $1.38 million decrease in accounts payable, a $1.1 million increase in accrued liabilities, an increase in income taxes receivable of $589 thousand, a decrease in operating lease liability of $243 thousand, an increase in other current assets of $97 thousand, and a decrease in prepaid expenses of $49 thousand.
During the nine months ended September 30, 2020, cash used in operating activities of $4.8 million was attributable to a net loss of $3.9 million, $948 thousand of deferred income taxes and $328 thousand in net non-cash charges. The non-cash charges consisted of a $654 thousand gain on investment, a $957 thousand fair value adjustment of derivative liabilities, and a net $118 thousand gain on foreign exchange offset by $110 thousand in depreciation and amortization, $628 thousand in stock-based compensation, $30 thousand in non-cash lease expense, $115 thousand in non-cash interest, and $553 thousand increase in fair value to convertible debt. The net change in operating assets and liabilities of $326 thousand was primarily due to a decrease in other current assets of $623 thousand, a decrease in accounts receivable of $95 thousand, a decrease in income taxes receivable of $211 thousand, and an increase of $6 thousand in accrued liabilities, offset by a decrease in accounts payable of $395 thousand, an increase in prepaid expenses of $168 thousand, and a decrease in operating lease liability of $46 thousand.
Financing Activities
During the nine months ended September 30, 2021, cash provided by financing activities of $15.38 million was related to proceeds from share issuance of $14.87 million and convertible loan proceeds of $1.2 million, offset by $620 thousand in share issuance costs and $84 thousand repayment of our line of credit. We also received and repaid $2.9 million in loan funding during the nine months ended September 30, 2021.
During the nine months ended September 30, 2020, cash provided by financing activities of $3.33 million was related to proceeds from share issuance of $2.9 million, convertible loan proceeds of $1 million, and line of credit of $110 thousand, offset by share issuance costs of $156 thousand and $536 thousand for repayment of loan.
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:
| For the three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (In thousands) | ||||||||
| Net cash flows used in operating activities | $ | (5,755 | ) | $ | (2,567 | ) | ||
| Net cash flows provided by investing activities | 809 | — | ||||||
| Net cash flows provided by financing activities | — | 2,325 | ||||||
| Effect of foreign exchange rates on cash | (65 | ) | 49 | |||||
| Net (decrease) in cash | (5,011 | ) | $ | (193 | ) | |||
Operating Activities
For the three months ended March 31, 2022, net cash used in operating activities was approximately $5.8 million compared to approximately $2.6 million for the three months ended March 31, 2021. The $3.2 million increase in net cash used in operating activities was primarily the result of a $5 thousand decrease in loss offset by a net decrease in current assets and liabilities of $2.2 million, and a net decrease in non-cash expenditures of $1.0 million.
Investing Activities
For the three months ended March 31, 2022, net cash provided by investing activities was approximately $809 thousand compared to $0 for the three months ended March 31, 2021. The increase in net cash provided by investing activities was primarily due to proceeds from the sale of IP during the three months ended March 31, 2022.
Financing Activities
In the three months ended March 31, 2022, we did not receive cash from financing activities. In the three months ended March 31, 2021, we received $2.3 million from financing activities inclusive of $35 thousand from a line of credit, $1.1 million from a convertible loan, and $1.2 million from loan proceeds.
Operating Capital and Capital Expenditure Requirements
We believe that the net proceeds from the PIPE Investment, together with our existing cash and cash equivalents as of the date of this 10-Q,May 27, 2022, and our anticipated expenditures and commitments for calendar year 2021 and 2022,the next twelve months, will not enable us to fund our operating expenses and capital expenditure requirements for at least 12twelve months from the date of this information statement/prospectus.report. Our estimate as to how long we expect the net proceeds from the PIPE Investment, together with our existing cash and cash equivalents, 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 months ended March 31, 2022, and nine month periods ended September 30,March 31, 2021, and September 30, 2020, and our audited consolidated financial statements for the years ended December 31, 20202021, and December 31, 2019,2020, 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, 20202021, and December 31, 20192020, included in our Form S-410-K for the year ended December 31, 20202021, filed on August 20, 2021 and as amended,May 17, 2022, and there have been no significant changes to our significant accounting policies during the ninethree months ended September 30, 2021.March 31, 2022. These unaudited interim condensed financial statements should be read in conjunction with the Company’s audited financial statements and accompanying notesnotes.
Recently Issued Accounting Pronouncements
See the sections titled “Recently Issued Accounting Pronouncementsadopted accounting pronouncements” ” in Note 1(m) to the Company’s unaudited interim condensed consolidated financial statements for the three2(dd) and nine month periods ended September 30, 2021 and September 30, 2020 and in “Significant Accounting Policies — AccountingRecently issued accounting pronouncements not yet adopted” in Note 2(ee) to the Company’s consolidated financial statements for the year ended December 31, 20202021, and December 31, 2019,2020, respectively, appearing in the Company’s 2021 Form S-4.10-K filed with the SEC on May 17, 2022; and in Notes 2(i) and 2(j) to the Company’s unaudited condensed consolidated financial statements for the three months ended March 31, 2022 and March 31, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a Smaller Reporting Company, we are exempt from the requirements of Item 3.
Item 4. Controls and Procedures.
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 September 30, 2021.March 31, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) 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 September 30, 2021,March 31, 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 effective. We have limited accounting personnel and other resources with whichrequired to addressevaluate the effectiveness of our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting.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 consolidated financial statements as of and for yearthe years ended December 31, 2021 and 2020, we and our independent registered public accounting firm identified three material weaknesses in our internal controlcontrols over financial reporting.
Thereporting 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 | |
| ● | 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 a chief financial officer that is a CPA in the | |
| ● | The | |
| ● | ||
| ● | engaged independent US GAAP consulting firm. |
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 statementstatements will not be prevented or detected by our employees. In response, we have begun the process of evaluating our internal control over financial reporting although we may not complete our review until December 31, 2022, the date we are required to evaluate our internal controls and procedures as a new reporting company. However, we have taken the actions set forth above to address thesethe material weaknesses.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 controlcontrols 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 controlcontrols 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 March 31, 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.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time in the future, we may become involved in litigation or other legal proceedings that arise in the ordinary course of business. We are not currently party to any legal proceedings, and we are not aware of any pending or threatened litigation against us that we believe could have a material adverse effect on our business, operating results or financial condition. In the event we are subject to a legal proceeding, it could have a material adverse impact on us because of litigation costs and diversion of management resources.
Item 1A. Risk Factors.
TheAn investment in our common stock involves a high degree of risk. You should carefully consider the risks that we believe are material to our investors are discussedset forth in the Company’s registration statementsection captioned “Risk Factors” in our Annual Report on form S-4Form 10-K for the fiscal year ended December 31, 2021, filed on August 20, 2021 under the caption “Risk Factors,” which is on file with the SEC. ExceptSEC 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 set forth herein, there have been no material changes duringwell as the nine months ended November 23, 2021 to our previously reported Risk Factors.significance of such statements in the context of this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Pursuant to the Securities Purchase Agreement with 3i, LP, a Delaware limited partnership (the “Investor”), we issued 20,000 shares of our Series A Preferred Stock and a warrant to purchase 2,018,958 shares of common stock at an initial exercise price of $9.9061 to the Investor along with a PIPE Warrant, for an aggregate purchase price of $20 million. Simultaneously with the execution of the SPA, we also entered into a Registration Rights Agreement with the Investor wherein we agreed to register a number of shares of our common stock equal to the maximum number of shares of our common stock that could be issued upon conversion of the Series A Preferred Stock using a conversion price equal to 20% of $80,000,000 divided by the number of shares of common stock then outstanding (the “Floor Price”) plus 125% of the shares of common stock issuable upon exercise of the PIPE Warrant, or a maximum of 12,618,590 shares of our common stock.
From January 1, 2022, to May 27, 2022, pursuant to a series of exercise of conversion by the Investor, we issued 1,187,281 shares of Common Stock to the Investor upon the conversion of 2,782 shares of Series A Preferred Stock (“Conversion Shares”). No proceeds were received by the Company upon such conversion. As of May 27, 2022, we had 17,018 shares of Series A Preferred Stock issued and outstanding.
NoneThe offers, sales, and issuances of the Conversion Shares, Series A Preferred Stock and PIPE Warrant to the Investor described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. Each of the recipients of securities in these transactions was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
EXHIBIT INDEXThe following exhibits are filed as part of this Report.
| (a) | Incorporated by reference from Form 8-K filed with the SEC on April 18, 2022. |
| (b) | Incorporated by reference from Form 8-K filed with the SEC on May 6, 2022. |
| (c) | Incorporated by reference from Form 10-K filed with the SEC on May 17, 2022. |
| † | Certain portions of this exhibit are omitted because they are not material and would likely cause competitive harm to the registrant if disclosed. |
| * | Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALLARITY THERAPEUTICS, INC., A Delaware Corporation | |||
| Date: | By: | /s/ Steve Carchedi | |
| Name: | Steve | ||
| Title: | Chief Executive Officer (Principal Executive Officer) | ||
| Date: | By: | /s/ Jens | |
| Name: | Jens | ||
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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