NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(U.S. dollars in thousands, except
for share and per share data and where otherwise noted)
1. Organization, Principal Activities, and
Basis of Presentation
Allarity 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 Therapeutics Europe ApS (previously Oncology Venture Product Development
ApS), specializes in the research and development of anti-cancer drugs.
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.
(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 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 $74.7 million as of June 30, 2022. Our current cash position is insufficient
to fund our current operating plan and planned capital expenditures for the next 12 months. These conditions give rise to a substantial
doubt over the Company’s ability to continue as a going concern.
Management’s plans
to mitigate the conditions or events that raise substantial doubt include additional funding through public equity, private equity, debt
financing, collaboration partnerships, or other sources. There are no assurances, however, that the Company will be successful in raising
additional working capital, or if it is able to raise additional working capital, it may be unable to do so on commercially favorable
terms. The Company’s failure to raise capital or enter into other such arrangements 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.
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. 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.
(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 of America (“U.S. GAAP” or “GAAP”) as established by the Financial Accounting Standards
Board (the “FASB”) for interim financial information and the rules and regulations of the Securities and Exchange Commission
(the “SEC”).
The accompanying unaudited
condensed interim consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated
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 three and six months ended June 30, 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 accompanying notes as of and for the 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, 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 consolidated financial statements are not necessarily indicative of the results to be expected for any future period or the
entire fiscal year.
These condensed consolidated
financial statements and notes do not include all disclosures required by U.S. GAAP and should be read in conjunction with the Company’s
audited consolidated financial statements as of and for the year ended December 31, 2021, and the notes.
(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 ApS) |
|
Denmark |
Allarity Therapeutics Denmark
ApS (formerly OV-SPV2 ApS) |
|
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.
(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.
(f) Reclassification
Certain amounts in prior
periods financial statements have been reclassified to conform to current period presentation.
2. Restatement of Previously Issued Financial Statements
The Company has restated
its financial statements as of and for the three- and six-month periods ended June 30, 2021 to correct the following errors:
(a) At the time of issuance
of the TO3 Warrants on June 24, 2021, a Black-Scholes model was used, and a value of $5,151 was calculated using the following factors:
share price $5.5; exercise price $10.05; historical and expected volatility 104.20%; option life 24 months, expected dividends 0%; and
risk-free interest rate (0.52)% however certain market conditions were not considered. After the issuance of the Company’s June
30, 2021, unaudited, condensed consolidated financial statements, management corrected its valuation method to incorporate Monte Carlo
simulations under different market conditions, as scheduled below, resulting in a probability weighted value of the TO3 warrants of $2,000
and $2,100 at June 24, 2021 and June 30, 2021 respectively. And warrants exercised on September 13, 2021, were re-valued at $206
using a Black-Scholes model with the assumptions noted below.
| |
June 24, 2021 | | |
June 30, 2021 | | |
September 13, 2021 | |
Exercise price | |
$ | 10.05 | | |
$ | 9.95 | | |
$ | 9.86 | |
Stock price | |
$ | 5.50 | | |
$ | 6.3 | | |
$ | 10.61 | |
Risk-free interest | |
| (0.55 | )% | |
| (0.56 | )% | |
| (0.50 | )% |
Expected dividend yield | |
| 0 | % | |
| 0 | % | |
| 0 | % |
Contractual life (in years) | |
| 2.0 | | |
| 1.8 | | |
| 0.1 | |
Expected volatility | |
| 104 | % | |
| 98 | % | |
| 104 | % |
The restatement relates
to the accounting for the derivative liability, a correction to allocate $393 of offering costs from equity to finance expense,
and a reduction in value of the exercised warrants from $483 to $206. Based upon the above, values attributed to the derivative liability,
the change in value of the derivative liability, interest costs, and foreign exchange have been adjusted in the following tables for
each of the periods presented below:
(b) The Company identified
a convertible promissory note that was previously unrecorded. The Company assumed this promissory note as part of the 2018 acquisition
of Oncology Venture Product Development ApS (the “2018 Merger”). This promissory note (the “Note”) should have
been recorded at fair value at the date of acquisition and accreted over time to its face value. To correct this error, the Company has
made adjustments before tax to: 1) record an $880 adjustment to the January 1, 2021 opening balance of accumulated losses on the statement
of equity to reflect the fair value of the Note at December 31, 2019 of $699 and accrued interest of $181 as reflected in i. below, 2)
record the amortized cost of the Note of $928 as a non-current liability as of June 30, 2021, and 3) record the interest and accretion
for the three months ended June 30, 2021 $24; and by $48 for the six months ended June 30, 2021. The restatement tax effect
of the Note is included in (c) below.
(c) The Company identified
an error in the valuation allowance relating to its deferred tax assets as of June 30, 2021, and the income tax provision for the
periods ended June 30, 2021. In determining the valuation allowance in the previously issued financial statements, the Company assumed
a reversal time frame for its most significant deferred tax liability related to IPR&D that was inconsistent with the classification
of the IPR&D as indefinite-lived intangible assets. Consequently, an additional valuation allowance is necessary as of June 30, 2021.
To correct this error, the Company made adjustments to (1) increase the January 1, 2021 deferred tax liability and deficit by $1,532;
(2) increase the deferred tax liability as of June 30, 2021 by $288; (3) increase income tax receivable by $93; and (4) reduce the tax
benefit for the three months ended June 30, 2021 by $403 and by $718 for the six months ended June 30, 2021 in the consolidated
statement of operations and comprehensive loss.
(d) The Company corrected
certain classification matters related to the presentation of extinguishment of debt, and the allocation of stock-based compensation expense
and certain legal between research and development and general and administrative costs. In addition, the tax credit of $219 for the three
months ended June 30, 2021; and $438 for the six months ended June 30, 2021, was presented as a tax benefit in the income tax
provision line. However, since it is not dependent on the generation of taxable income the presentation has been corrected to reflect
the tax credit as a reduction of research and development expenses in the same amounts in the statement of operations.
(e) The Company has corrected
its cash flow statement for the six-month period ended June 30, 2021, to adjust for the corrections discussed in paragraph (a) –
(d) and to align the translation method with its December 31, 2021, financial statements resulting in total net adjustments of ($187)
to operating cash flows; ($27) to financing cash flows; and $214 to foreign exchange effect on cash.
Opening accumulated deficit
as of January 1, 2021 was corrected as follows:
Total accumulated deficit, as previously reported at January 1, 2021 | |
$ | (37,432 | ) |
Convertible promissory note and accrued interest, net | |
| (880 | ) |
Deferred tax valuation allowance | |
| (1,532 | ) |
Total accumulated deficit, as restated at January 1, 2021 | |
$ | (39,844 | ) |
|
|
Impact of correction of errors
quarter ended |
|
June 30, 2021 |
|
As previously
reported |
|
|
Adjustments |
|
|
As restated |
|
|
|
|
|
|
|
|
|
|
|
Income tax receivable |
|
$ |
1,253 |
|
|
$ |
93 |
|
|
$ |
1,346 |
|
Other assets |
|
|
37,527 |
|
|
|
— |
|
|
|
37,527 |
|
Total assets |
|
$ |
38,780 |
|
|
$ |
93 |
|
|
$ |
38,873 |
|
Total current liabilities |
|
$ |
4,335 |
|
|
$ |
— |
|
|
$ |
4,335 |
|
Convertible promissory note, net of unamortized discount |
|
|
— |
|
|
|
928 |
|
|
|
928 |
|
Deferred tax |
|
|
293 |
|
|
|
1,820 |
|
|
|
2,113 |
|
Derivative and warrant liabilities |
|
|
5,270 |
|
|
|
(3,051 |
) |
|
|
2,219 |
|
Non-current operating lease liabilities |
|
|
62 |
|
|
|
— |
|
|
|
62 |
|
Total liabilities |
|
|
9,960 |
|
|
|
(303 |
) |
|
|
9,657 |
|
Common stock |
|
|
732 |
|
|
|
(731 |
) |
|
|
1 |
|
Additional paid-in capital |
|
|
70,274 |
|
|
|
4,275 |
|
|
|
74,549 |
|
Obligation to issue shares |
|
|
2,384 |
|
|
|
— |
|
|
|
2,384 |
|
Accumulated other comprehensive income |
|
|
520 |
|
|
|
87 |
|
|
|
607 |
|
Accumulated deficit |
|
|
(45,090 |
) |
|
|
(3,235 |
) |
|
|
(48,325 |
) |
Total stockholders’ equity |
|
|
28,820 |
|
|
|
396 |
|
|
|
29,216 |
|
Total liabilities and stockholders’ equity |
|
$ |
38,780 |
|
|
$ |
93 |
|
|
$ |
38,873 |
|
|
ii. |
Statements of operations |
|
|
Impact of correction of errors - quarter |
|
Three months ended June 30, 2021 |
|
As previously reported |
|
|
Adjustments |
|
|
As restated |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
Research and development |
|
|
|
|
|
|
|
|
|
Tax credit |
|
$ |
— |
|
|
$ |
(219 |
) |
|
$ |
(219 |
) |
Staffing expenses |
|
|
248 |
|
|
|
147 |
|
|
|
395 |
|
Other research and development costs |
|
|
1,850 |
|
|
|
253 |
|
|
|
2,103 |
|
Total research and development |
|
|
2,098 |
|
|
|
181 |
|
|
|
2,279 |
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
Audit and legal |
|
|
1,429 |
|
|
|
(253 |
) |
|
|
1,176 |
|
Staffing expenses |
|
|
911 |
|
|
|
(147 |
) |
|
|
764 |
|
Other general and administrative costs |
|
|
157 |
|
|
|
— |
|
|
|
157 |
|
Total general and administrative |
|
|
2,497 |
|
|
|
(400 |
) |
|
|
2,097 |
|
Total operating expenses |
|
|
4,595 |
|
|
|
(219 |
) |
|
|
4,376 |
|
Loss from operations |
|
|
(4,595 |
) |
|
|
219 |
|
|
|
(4,376 |
) |
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
Finance expense |
|
|
— |
|
|
|
(393 |
) |
|
|
(393 |
) |
Interest expense |
|
|
(382 |
) |
|
|
216 |
|
|
|
(166 |
) |
Change in fair value adjustment of warrant and derivative liabilities |
|
|
75 |
|
|
|
(100 |
) |
|
|
(25 |
) |
Foreign exchange gain (loss) |
|
|
1 |
|
|
|
(42 |
) |
|
|
(41 |
) |
Change in fair value of convertible debt |
|
|
(98 |
) |
|
|
(175 |
) |
|
|
(273 |
) |
Loss on extinguishment of convertible debt |
|
|
— |
|
|
|
(25 |
) |
|
|
(25 |
) |
Loss on investment |
|
|
(67 |
) |
|
|
— |
|
|
|
(67 |
) |
Other expense, net |
|
|
(471 |
) |
|
|
(519 |
) |
|
|
(990 |
) |
Net loss before income tax benefit (expense) |
|
|
(5,066 |
) |
|
|
(300 |
) |
|
|
(5,366 |
) |
Income tax benefit (expense) |
|
|
373 |
|
|
|
(403 |
) |
|
|
(30 |
) |
Net loss |
|
$ |
(4,693 |
) |
|
$ |
(703 |
) |
|
$ |
(5,396 |
) |
Basic and Diluted Net Loss per Share |
|
$ |
(0.94 |
) |
|
$ |
(0.14 |
) |
|
$ |
(1.08 |
) |
Weighted Average Shares Outstanding – Basic and Diluted |
|
|
5,017,183 |
|
|
|
5,017,583 |
|
|
|
5,017,583 |
|
|
|
Impact of correction of errors – year to date |
|
Six months ended June 30, 2021 |
|
As
previously reported |
|
|
Adjustments |
|
|
As restated |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
Research and development |
|
|
|
|
|
|
|
|
|
Tax credit |
|
$ |
— |
|
|
$ |
(438 |
) |
|
$ |
(438 |
) |
Staffing expenses |
|
|
496 |
|
|
|
214 |
|
|
|
710 |
|
Other research and development costs |
|
|
3,259 |
|
|
|
— |
|
|
|
3,259 |
|
Total research and development |
|
|
3,755 |
|
|
|
(224 |
) |
|
|
3,531 |
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
Staffing expenses |
|
|
1,584 |
|
|
|
(214 |
) |
|
|
1,370 |
|
Other general and administrative expenses |
|
|
1,937 |
|
|
|
— |
|
|
|
1,937 |
|
Total general and administrative expenses |
|
|
3,521 |
|
|
|
(214 |
) |
|
|
3,307 |
|
Loss from operations |
|
|
(7,276 |
) |
|
|
438 |
|
|
|
(6,838 |
) |
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
Finance expense |
|
|
— |
|
|
|
(480 |
) |
|
|
(480 |
) |
Interest expense |
|
|
(509 |
) |
|
|
264 |
|
|
|
(245 |
) |
Change in fair value adjustment of warrant and derivative liabilities |
|
|
30 |
|
|
|
(10 |
) |
|
|
20 |
|
Loss on extinguishment of convertible debt |
|
|
— |
|
|
|
(141 |
) |
|
|
(141 |
) |
Change in fair value of convertible debt |
|
|
(298 |
) |
|
|
(176 |
) |
|
|
(474 |
) |
Others |
|
|
(260 |
) |
|
|
— |
|
|
|
(260 |
) |
Other (expense, net) |
|
|
(1,037 |
) |
|
|
(543 |
) |
|
|
(1,580 |
) |
Net (loss) before income tax |
|
|
(8,313 |
) |
|
|
(105 |
) |
|
|
(8,418 |
) |
Income tax benefit (expense) |
|
|
655 |
|
|
|
(718 |
) |
|
|
(63 |
) |
Net loss |
|
$ |
(7,658 |
) |
|
$ |
(823 |
) |
|
$ |
(8,481 |
) |
Basic and Diluted Net Loss per Share |
|
$ |
(1.60 |
) |
|
$ |
(0.18 |
) |
|
$ |
(1.78 |
) |
Weighted Average Shares Outstanding - Basic and Diluted |
|
|
4,776,643 |
|
|
|
4,776,643 |
|
|
|
4,776,643 |
|
iii. Statement of Cash Flows
|
|
Impact of correction of errors –
Six months ended
June 30, 2021 |
|
|
|
As previously
reported |
|
|
Adjustments |
|
|
As
restated |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(7,658 |
) |
|
$ |
(823 |
) |
|
$ |
(8,481 |
) |
Items not affecting cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
(310 |
) |
|
|
288 |
|
|
|
(22 |
) |
Change in fair value adjustment of warrant and derivative liabilities |
|
|
(30 |
) |
|
|
10 |
|
|
|
(20 |
) |
Foreign currency loss (gain) |
|
|
(4 |
) |
|
|
84 |
|
|
|
80 |
|
Loss on extinguishment of convertible debt |
|
|
— |
|
|
|
141 |
|
|
|
141 |
|
Fair value adjustment of convertible debt |
|
|
383 |
|
|
|
91 |
|
|
|
474 |
|
Depreciation and amortization |
|
|
18 |
|
|
|
35 |
|
|
|
53 |
|
Non-cash lease expense |
|
|
58 |
|
|
|
(58 |
) |
|
|
— |
|
Non-cash finance expense |
|
|
— |
|
|
|
480 |
|
|
|
480 |
|
Non-cash interest |
|
|
451 |
|
|
|
(403 |
) |
|
|
48 |
|
Loss on investment |
|
|
180 |
|
|
|
— |
|
|
|
180 |
|
Stock based compensation |
|
|
628 |
|
|
|
— |
|
|
|
628 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
(230 |
) |
|
|
(81 |
) |
|
|
(311 |
) |
Tax credit receivable |
|
|
(345 |
) |
|
|
(129 |
) |
|
|
(474 |
) |
Prepaid expenses |
|
|
93 |
|
|
|
63 |
|
|
|
156 |
|
Accounts payable |
|
|
152 |
|
|
|
70 |
|
|
|
222 |
|
Accrued liabilities |
|
|
15 |
|
|
|
61 |
|
|
|
76 |
|
Income taxes payable |
|
|
— |
|
|
|
(1 |
) |
|
|
(1 |
) |
Operating lease liability |
|
|
(47 |
) |
|
|
(15 |
) |
|
|
(62 |
) |
Net cash used in operating activities |
|
|
(6,646 |
) |
|
|
(187 |
) |
|
|
(6,833 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit |
|
|
(23 |
) |
|
|
— |
|
|
|
(23 |
) |
Proceeds from common share issuance |
|
|
12,125 |
|
|
|
(16 |
) |
|
|
12,109 |
|
Proceeds from exercised warrants |
|
|
— |
|
|
|
16 |
|
|
|
16 |
|
Share issuance costs |
|
|
(250 |
) |
|
|
129 |
|
|
|
(121 |
) |
Proceeds from convertible loan |
|
|
1,200 |
|
|
|
(60 |
) |
|
|
1,140 |
|
Loan proceeds |
|
|
2,945 |
|
|
|
(87 |
) |
|
|
2,858 |
|
Repayment of loan |
|
|
(2,935 |
) |
|
|
(9 |
) |
|
|
(2,944 |
) |
Net cash provided by financing activities |
|
|
13,062 |
|
|
|
(27 |
) |
|
|
13,035 |
|
Net increase in cash |
|
|
6,416 |
|
|
|
(214 |
) |
|
|
6,202 |
|
Foreign exchange effect on cash |
|
|
(116 |
) |
|
|
214 |
|
|
|
98 |
|
Cash beginning of period |
|
|
298 |
|
|
|
— |
|
|
|
298 |
|
Cash end of period |
|
$ |
6,598 |
|
|
$ |
— |
|
|
$ |
6,598 |
|
3. 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 debt, and
the accrual for research and development expenses, fair values of acquired intangible assets and impairment review of those assets, share
based compensation expense, 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 considering 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.
(b) Foreign currency and currency 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.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 changes in redeemable convertible preferred stock and stockholders’ equity as a component
of accumulated other comprehensive (loss).
Monetary assets and liabilities
denominated in currencies other than the functional currency are remeasured 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 loss for the respective periods. Adjustments that arise from exchange rate translations are included
in other comprehensive income (loss) in the consolidated statements of operations and comprehensive loss as 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.
(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 June 30, 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 (loss)
Accumulated other comprehensive
loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events
other than those with stockholders. The Company records unrealized gains and losses related to foreign currency translation and instrument
specific credit risk as components of other accumulated comprehensive loss in the Condensed Consolidated Statements of Operations and
Comprehensive Loss. During the three months ended June 30, 2022, and June 30, 2021, the Company recorded accumulated foreign currency
translation losses of ($414) and ($300) respectively; and instrument specific credit risk losses of $0 and ($3) respectively. During the
six months ended June 30, 2022, and June 30, 2021, the Company recorded accumulated foreign currency translation losses of ($628) and
($759) respectively; and instrument specific credit risk losses of $0 and ($9) respectively.
(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 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.
(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.
(i) Recently adopted accounting pronouncements
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 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 Company 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 annual periods beginning
after December 15, 2021, with early adoption permitted. The Company adopted this ASU on January 1, 2022, with no significant impact on
its condensed consolidated financial statements and related disclosures.
(j) Recently Issued Accounting Pronouncements
Changes to GAAP are established
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.
4. Other Current Assets
The Company’s other
current assets are comprised of the following:
| |
June 30, 2022 | | |
December 31, 2021 | |
Deposits | |
$ | 51 | | |
$ | 53 | |
Salary deposit | |
| 83 | | |
| 65 | |
Value added tax (“VAT”) receivable | |
| 101 | | |
| 507 | |
Net other current assets | |
$ | 235 | | |
$ | 625 | |
5. Prepaid Expenses
| |
June 30, 2022 | | |
December 31, 2021 | |
Prepaid insurance | |
$ | 818 | | |
$ | 14 | |
Other prepayments | |
| 58 | | |
| 22 | |
| |
$ | 876 | | |
$ | 36 | |
6. Investment
The Company owns 43,898 common
shares in Lantern Pharma Inc. (“Lantern Pharma”) because of a prior license agreement made with Lantern Pharma in 2017. During
June 2020 Lantern Pharma became publicly listed. As at June 30, 2022 the fair value of the shares was $254. In the six months
ended June 30, 2022, and June 30, 2021, the Company recognized a loss on its shares in Lantern Pharma of $96 (including foreign exchange
loss of $26) and $180 respectively. During July 2022, the Company sold its 43,898 common shares in Lantern Pharma in exchange for net
proceeds of $182 and recognized a loss of $72.
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Opening balance | |
$ | 350 | | |
$ | 845 | |
Loss recognition | |
| (96 | ) | |
| (495 | ) |
Ending balance | |
$ | 254 | | |
$ | 350 | |
7. Property, plant and equipment, net
Property, plant and equipment,
net consisted of the following:
| |
June 30, 2022 | | |
December 31, 2021 | |
Laboratory equipment | |
$ | 329 | | |
$ | 336 | |
Less: accumulated depreciation | |
| (324 | ) | |
| (328 | ) |
| |
$ | 5 | | |
$ | 8 | |
Depreciation expense for property,
plant and equipment and right of use assets for the six months ended June 30, 2022 and June 30, 2021 was $47 and $53 respectively.
8. Intangible assets
Intangible assets, net of
accumulated amortization, impairment charges and adjustments are summarized as follows:
| |
IPR&D Assets | |
Opening balance, December 31, 2021 | |
$ | 28,135 | |
Impairment recognized during the period | |
| (14,007 | ) |
Foreign translation adjustment | |
| (1,317 | ) |
Ending balance, June 30, 2022 | |
$ | 12,811 | |
| |
IPR&D Assets | | |
Acquired Patents | |
Opening balance, December 31, 2020 | |
$ | 35,896 | | |
$ | 78 | |
Impairment recognized during the year | |
| (7,761 | ) | |
| — | |
Accumulated amortization | |
| — | | |
| (78 | ) |
Ending balance, December 31, 2021 | |
$ | 28,135 | | |
$ | — | |
As a result of both the Company’s
February 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 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 six month period ended June 30,
2022. Individually material development projects in progress are as follows:
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Stenoparib | |
$ | 12,811 | | |
$ | 25,407 | |
Dovitinib | |
| — | | |
| 2,728 | |
Total | |
$ | 12,811 | | |
$ | 28,135 | |
9. Accrued liabilities
The Company’s accrued
liabilities are comprised of the following:
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Development cost liability | |
$ | 54 | | |
$ | 6,750 | |
Payroll accruals | |
| 776 | | |
| 1,088 | |
Accrued Board member fees | |
| 74 | | |
| 54 | |
Accrued audit and legal | |
| 199 | | |
| 316 | |
Other | |
| 326 | | |
| 382 | |
| |
$ | 1,429 | | |
$ | 8,590 | |
10. Loan
2021 Loan
Effective March 22, 2021, the Company received a loan facility of up
to $2,900, net of a 3% loan origination fee of $87, 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 six-month period ended June 30, 2021 the Company
received $2,858 pursuant to the terms of the loan.
In exchange for the loan,
the Company committed to complete a rights offering and issued common shares. The rights offering was completed before June 23, 2021,
and as of June 30, 2021, the loan balance of $2,944 and interest of $204 were paid to the lender.
11. Convertible promissory note, net
On April 12, 2022, Allarity Therapeutics Denmark ApS (formerly OV-SPV2
ApS) (“Allarity Denmark” or “OV-SPV2 ApS”), 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. All other provisions of the Original
Agreement and Promissory Note were unchanged and remain in full force and effect.
In consideration of the licenses
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 an 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 Promissory 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 Promissory 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 OV-SPV2 and allows Novartis a one-time right to
exchange the Promissory Note for such number of equity 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 closing of the 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 Promissory
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 six-month periods
ended June 30, 2022, and June 30, 2021, the Company recorded $52 and $48 respectively to interest expense and increased the
convertible promissory note liability by the same amount. The roll forward of the Promissory Notes as of June 30, 2022, and December 31,
2021, is as follows:
| |
June 30, 2022 | | |
December 31, 2021 | |
Convertible promissory note | |
$ | 1,000 | | |
$ | 1,000 | |
Less debt discount, opening | |
| (215 | ) | |
| (263 | ) |
Plus, accretion of debt discount, interest expense | |
| 27 | | |
| 48 | |
Convertible promissory note, net of discount | |
| 812 | | |
| 785 | |
Interest accretion, opening | |
| 194 | | |
| 143 | |
Interest accretion, expense | |
| 25 | | |
| 51 | |
Ending balance | |
$ | 1,031 | | |
$ | 979 | |
12. Convertible debt
On March 31, 2020 the Company entered into an agreement to issue up
to $10,100 (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; 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 debt”.
The Company determined the
fair value of the Notes using a discounted cash flow valuation technique with a WACC 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 $9 in other comprehensive income during the six-month period ended June 30, 2021.
The roll forward of the Notes
for the period ended June 30, 2021, is as follows:
| |
June 30, 2021 | |
Opening fair value | |
$ | 1,327 | |
Convertible debt issued in the period | |
| 1,140 | |
Change in fair value reported in statement operations | |
| 474 | |
Foreign exchange | |
| (116 | ) |
Conversion of notes to common stock | |
| (2,825 | ) |
Ending fair value balance at June 30, 2021 | |
$ | — | |
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.
13. 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 for an aggregate purchase price of $20 million.
Except to the extent that the
holders of at least a majority of the outstanding Series A Preferred Stock (the “Required Holders”) expressly consent to the
creation of Parity 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 Company (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 the 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 the date of such event and (ii) the greater of (A)
125% of the Conversion Amount of such Series A Preferred Stock on the date of such payment and (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.
Under 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 (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 and the
Warrant 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 and the exercise price of the Warrant equal to the lower of the new issuance price or the then existing conversion price of the
Series A Preferred Stock or exercise price of Warrant, 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.
If certain defined “triggering
events” defined in the COD occur, such as a breach of the Registration 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 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 Series 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 a timely basis, we could be liable to pay
and 18% per annum dividend. On April 29, 2022, the Company experienced a triggering event as defined in the COD.
In the event that the Company
experiences a “Change of Control” (as defined in the COD), the Company may also be required to redeem the Preferred Shares
for cash at a minimum of 125% of their Conversion Amount.
Holders of Series A Preferred
Stock will have no voting rights, except as required by law and as expressly provided in the COD.
(b) Series A Preferred
Stock 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 COD, which would have
resulted in the following unless 3i, agreed to forebear and/or waive its rights under the COD:
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 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 Warrant, 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’s
“Purchase Price” as defined in the Securities Purchase Agreement which is approximately 2% of $20 million, or $400
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 4, 2022, the Company
and 3i entered into a Forbearance Agreement and Waiver, dated April 27, 2022, wherein 3i confirmed that no Triggering Event as defined
under the COD has occurred prior to April 27, 2022, that a Triggering 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’s legal fees incurred in the preparation of the Forbearance Agreement and Waiver
in the aggregate of $539 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 has agreed to
forbear exercising any rights or remedies that it may have under the COD that arises as a result of a Triggering Event under Section 5(a)(ii)
of the COD and Section 4(c)(ii) of the PIPE Warrant until the earlier to occur of (i) the date immediately prior to the 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 obligations under Forbearance
Agreement and Waiver, effective as of the Trading Day immediately following the date the Company cures the Triggering Event under Section
5(a)(ii) of the COD, 3i 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.
On June 6, 2022, we entered into
that certain First Amendment to the Forbearance Agreement and Waiver with 3i, (the “Amendment”) to extend the forbearance
period date under subsection 5 of Section 2 of the Forbearance Agreement and Waiver dated April 27, 2022 (the “Original Agreement”)
from June 4, 2022 to June 20, 2022. In addition, the parties agreed that the forbearance period of June 20, 2022 may also be
extended for an additional fifteen (15) days to July 5, 2022, provided that, on June 20, 2022 the Company will remove the restrictive
legend on 441,005 shares of common stock of the Company issued in connection with the conversion of certain shares of Series A Preferred
Stock (“Conversion Shares”) by 3i pursuant to the conversion notice dated May 2, 2022, and 3i is able to sell the Conversion
Shares free of restrictions (including volume restrictions) pursuant to SEC Rule 144(b)(1)(i) (the “Legend Removal”).
The
Original Agreement was entered into by the Company and 3i as a result of a delay under the Registration Rights Agreement dated May 20,
2021. Under the Original Agreement, in exchange for certain consideration, 3i agreed to forbear exercising any rights or remedies that
it may have had under the COD in connection with certain Triggering Events (as described therein) until the earlier to occur of (i) the
date immediately prior to the 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 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 “Original Forbearance Period”). As a result of the Amendment,
the June 4, 2022, date has been amended to June 20, 2022, with the option to extend to July 5, 2022 subject to the Legend Removal.
(c) 3i Warrant Terms
Concurrently with the issuance
of our Preferred Stock, the Company issued warrants to purchase 2,018,958 shares of the Company’s common stock at an exercise price
of $9.9061 per share, subject to adjustments (“3i Warrants”). The material terms of the 3i Warrants are as follows:
| (i) | The
warrants have and term of three years and expire on December 20, 2024; |
|
(ii) |
The exercise of the 3i 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 3i 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 reducing the exercise price for the Company to any amount and
for any period deemed appropriate by the board of directors of the Company with the prior written consent of the Required Holders. |
|
(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. |
(d) Accounting
|
i. |
Series A Convertible Preferred Stock |
The Company evaluated the Series A Convertible Preferred Stock redemption
feature and recorded it in mezzanine given the cash redemption right that is within the holder’s control.
Generally, 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 has the option to either accrete changes in the redemption value over the
period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the
earliest redemption date of the instrument or to recognize changes in the redemption value immediately as they occur and adjust the carrying amount
of the 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.
The embedded conversion feature related to the convertible derivative
liability has been recorded on the balance sheet as a current liability at its fair market value utilizing an appropriate valuation model
considering all relevant assumptions current at the date of issuance and at each reporting period as described in Note 13(e).
The 3i Warrants were identified as a freestanding financial instrument
and meet the criteria for derivative liability classification, initially measured at fair 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).
(e) Series A Preferred Stock Conversions
Between January 1, 2022, and June 30, 2022, a total of 2,782 Series
A Preferred shares were converted into 1,187,281 shares of our common stock, thereby reducing outstanding Series A Preferred shares at
June 30, 2022 to 17,018. The fair value of the derivative liability associated with the Series A Preferred Stock converted during
the six month period ended June 30, 2022, as determined by Monte Carlo simulations, was $613. Because the latest four conversions
in the six-month period ended June 30, 2022, were completed at less than the agreed floor price, we recorded a floor price liability of
$1,511 and recognized a $1,511 reduction of additional paid in capital. The liability was paid in cash prior to June 30, 2022.
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 Series A Preferred
Stock outstanding as at March 31, 2022 as an increase to the value of the Series A Preferred Stock and a reduction of additional paid
in capital. In addition, under the terms of the Registration Rights Agreement (“RRA”), during the period ended June 30, 2022,
the Company has also paid 3i an additional $800 in Registration Delay Payments.
The following inputs were
used for the Series A Preferred Stock conversions recorded in the six month period ended June 30, 2022 and the fair value of the Series
A Preferred Derivative liability determined at June 30, 2022 and December 31, 2021:
| |
January 1, 2022
– June 30, 2022 | | |
December 31, 2021 | |
Initial exercise price | |
$ | 9.05 - $9.91 | | |
$ | 9.91 | |
Stock price on valuation date | |
$ | 1.32 - $10.75 | | |
$ | 10.37 | |
Risk-free rate | |
| 1.03% - 2.95 | % | |
| 0.96 | % |
Time to exercise (years) | |
| 2.47 - 2.96 | | |
| 2.97 | |
Equity volatility | |
| 70%
- 105 | % | |
| 70 | % |
Probability of volume failure | |
| 93%
- 99 | % | |
| 92 | % |
Rounded 10-day average daily volume (in 1,000’s) | |
$ | 297 - $873 | | |
$ | 908 | |
On June 30, 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
3i Warrants to be approximately $1,519. On December 31, 2021, the Company utilized Monte Carlo simulations models to estimate the
fair value of the 3i Warrants to be approximately $11,273. The 3i Warrants were valued at June 30, 2022, and December 31, 2021, using
the following inputs:
| |
June 30, 2022 | | |
December 31,
2021 | |
Initial exercise price | |
$ | 9.91 | | |
$ | 9.91 | |
Stock price on valuation date | |
$ | 1.32 | | |
$ | 10.50 | |
Risk-free rate | |
| 2.91 | % | |
| 0.91 | % |
Expected life of the 3i Warrant to convert (years) | |
| 2.48 | | |
| 3.0 | |
Rounded annual volatility | |
| 120 | % | |
| 73 | % |
Timing of liquidity event | |
| February 15, 2023 | | |
| Q3 2022 – Q2 2023 | |
Expected probability of event | |
| 90 | % | |
| 90 | % |
The accounting for the Series
A Convertible Preferred Stock and 3i Warrants is illustrated in the tables below:
| |
Consolidated Balance Sheets | | |
Consolidated Statement of Operations & Comprehensive Loss | |
| |
Warrant liability | | |
Series A Preferred Derivative Liability | | |
Series A Convertible Preferred Stock – Mezzanine | | |
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 and expensed | |
| | | |
| — | | |
| (680 | ) | |
| | | |
| 877 | | |
| — | |
December 21, 2021 conversion of 200 Series A Preferred Stock | |
| — | | |
| (74 | ) | |
| (6 | ) | |
| 80 | | |
| — | | |
| — | |
Fair value adjustment at December 31, 2021 | |
| — | | |
| (154 | ) | |
| — | | |
| — | | |
| — | | |
| (154 | ) |
Balance, December 31, 2021 | |
$ | 11,273 | | |
$ | 7,181 | | |
$ | 632 | | |
$ | 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 | | |
Additional paid-in capital | | |
Accrued Liabilities | | |
Fair value adjustment to derivative and warrant liabilities | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balances, December 31, 2021 | |
$ | 11,273 | | |
$ | 7,181 | | |
$ | 632 | | |
$ | 80 | | |
$ | — | | |
$ | — | |
Conversion of 1,973 shares of Series A Preferred Stock | |
| — | | |
| (452 | ) | |
| (62 | ) | |
| 514 | | |
| — | | |
| — | |
Floor price adjustment on conversion of 1,973 shares of Series A Preferred
stock | |
| — | | |
| — | | |
| — | | |
| (133 | ) | |
| 133 | | |
| — | |
8% deemed dividend on Preferred Stock | |
| — | | |
| — | | |
| 1,572 | | |
| (1,572 | ) | |
| — | | |
| — | |
Fair value adjustment | |
| (9,008 | ) | |
| (3,558 | ) | |
| — | | |
| — | | |
| — | | |
| 12,566 | |
Balances, March 31, 2022 | |
| 2,265 | | |
| 3,171 | | |
| 2,142 | | |
| (1,111 | ) | |
| 133 | | |
| 12,566 | |
Conversion of 809 shares of Series A Preferred Stock | |
| — | | |
| (161 | ) | |
| (26 | ) | |
| 187 | | |
| — | | |
| — | |
Floor price adjustment on conversion of 809 shares of Series A Preferred
Stock | |
| — | | |
| — | | |
| — | | |
| (1,377 | ) | |
| 1,377 | | |
| — | |
Cash payment of accrued liabilities | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,511 | ) | |
| — | |
Fair value adjustment | |
| (746 | ) | |
| (128 | ) | |
| — | | |
| — | | |
| — | | |
| 874 | |
Balances, June 30, 2022 | |
$ | 1,519 | | |
$ | 2,882 | | |
$ | 2,116 | | |
$ | (2,301 | ) | |
$ | (1 | ) | |
$ | 13,440 | |
14. 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 13(e).
(b) Investor Warrants
In connection with subscriptions
of Offer Units in the rights issue carried out in June 2021, 2,417,824 investor warrants (“TO3 warrants”) have been granted
to investors. All Warrants were vested as of their grant date, were exercisable for $10 per share and had an expiration date of April
15, 2023.
At June 30, 2021 total
investor warrants outstanding of 3,504,582 were comprised of: 1,086,758 warrants outstanding exercisable at a weighted average exercise
price of $36.0 per share and 2,417,824 TO3 warrants exercisable for $10.0 per share. No investor warrants were exercised or expired during
the six-month period ended June 30, 2021.
(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 during the six-month periods ended June 30, 2022, and 2021 are presented in the
following tables:
| |
3i Fund Series A Conversion Feature | | |
Settlement Warrants | | |
TO2 Warrants | | |
TO3 Warrants | |
| |
June 30, 2022 | | |
June 30, 2021 | | |
June 30, 2021 | | |
June 30, 2021 | |
Balance beginning of period | |
$ | 7,181 | | |
$ | 102 | | |
$ | 47 | | |
$ | — | |
Issued during the period | |
| — | | |
| — | | |
| — | | |
| 2,000 | |
Change in fair value | |
| (3,686 | ) | |
| 20 | | |
| (46 | ) | |
| 46 | |
Translation effect | |
| | | |
| (3 | ) | |
| (1 | ) | |
| 54 | |
Amount transferred to Equity | |
| (613 | ) | |
| — | | |
| — | | |
| — | |
Balance – end of period | |
$ | 2,882 | | |
$ | 119 | | |
$ | — | | |
$ | 2,100 | |
Fair value Series A Preferred share / Warrant issuable at end of period | |
$ | 169.35 | | |
$ | 1.49 | | |
$ | 0.0 | | |
$ | 0.87 | |
The assumptions for estimating
the fair value of the 3i Fund Series A Conversion Feature are disclosed in Note 13(e).
The fair value of the Company’s
derivative warrant liabilities as at June 30, 2021 were estimated using the Black-Scholes option pricing model for the Settlement Warrants
and TO3 Warrants, based on the following assumptions:
| |
Warrants issued February 2020 | | |
Warrants issued December 2019 | |
| |
Settlement Warrants | | |
T03 Warrants | |
| |
June 30, 2021 | | |
June 30, 2021 | |
Exercise price | |
$ | 1.9 | | |
$ | 10.0 | |
Share price | |
$ | 5.0 | | |
$ | 5.0 | |
Risk-free interest | |
| (0.52 | )% | |
| (0.52 | )% |
Expected dividend yield | |
| (0 | )% | |
| (0 | )% |
Contractual life (years) | |
| 1.67 | | |
| 1.80 | |
Expected volatility | |
| 104.20 | % | |
| 104.20 | % |
The Company measured its derivative
warrant liabilities on a recurring basis using level 3 inputs.
15. Stockholders’ Equity
During the three months ended
June 30, 2022, the Company issued 441,005 shares of common stock valued at $190 gross and ($1,187) net of the $1,377 floor price adjustment
paid in cash upon the conversion of 809 shares of Series A Preferred stock.
During the three months ended
June 30, 2021, the Company issued:
| (a) | Units consisting of 2,417,824 common shares and 2,417,824 common share purchase warrants for $5 per unit;
valued at $12,109 in exchange for $12,109 in cash, pursuant to its June 2021 rights offering. The attached warrants are exercisable for
$10 each with an original expiration date of April 15, 2023, subsequently amended to September 13, 2021; |
| (b) | 5,433 common shares valued at $16 upon the exercise of common
stock purchase warrants; and |
| (c) | 99,383 common shares valued at $496 upon conversion of debt. |
Pursuant to the terms of the
June rights offering the Company also recorded an obligation to issue 482,250 common shares and 482,250 common share purchase units valued
at $2,384 in consideration for services ($1,991 net of $393 in associated costs). The units were issued after June 2021.
During the six months ended
June 30, 2022, the Company issued 1,187,281 shares of common stock valued at $705 gross and ($806) net of the $1,511 floor price adjustment
paid in cash upon the conversion of 2,782 shares of Series A Preferred stock.
During the six months ended
June 30, 2021, the Company issued:
| (a) | Units consisting of 2,417,824 common shares valued at $12,125
upon the issuance of 2,417,824 units of one common share and one share purchase warrant for $10.0 per unit. Terms of the Units and the
obligation to issue shares of $2,384 are as described above in the three months ended June 30, 2021; |
| (b) | 5,433 common shares valued at $16 upon the exercise of options for
common stock; and |
| (c) | 628,193 common shares valued at $2,880 upon conversion of
debt. |
16. Stock-based payments
During the three months ended
June 30, 2022, the total stock-based payment expense recovery recorded in the condensed consolidated statement of operations and comprehensive
loss was $59 (comprised of expenses of $790, net of forfeitures of $848) (2021: expense of $433) of which $39 and $20 are recognized as
staffing expense recoveries in general and administrative and research and development expenses respectively (2021: $285 and $147 as staffing
expenses in general and administrative expenses and research and development expenses respectively). During the six months ended June
30, 2022, total stock-based expenses recognized in the condensed consolidated statement of operations and comprehensive loss were $1,006
(2021: $628) of which $664 and $342 are recognized as staffing expenses in general and administrative and research and development expenses
respectively (2021: $414 and $214 as staffing expenses in general and administrative expenses and research and development expenses respectively).
Total unrecognized compensation
cost of $1,601 for non-vested options at June 30, 2022 is expected to be realized over a period of 2 years. A summary of stock option
activity under the Company’s stock option plans during the six-month period ended June 30, 2022, is presented below:
During the six-month period ended June 30, 2021, a total of 5,433
options were exercised at a weighted exercise price of $2.6 per option and their intrinsic value was $8,868; and no options were granted,
expired, or cancelled.
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 long-term assets in geographical areas other than Denmark.
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:
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:
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 three- and six-month periods ended June 30, 2022, or June 30, 2021. Methods
used to estimate the fair values of our financial instruments, not disclosed elsewhere in these financial statements, are as follows:
When 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 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.
The Company recognizes its
derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation
methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions
to determine the fair value of certain financial instruments could result in a different estimate of fair value 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 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
$1,519 on June 30, 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 $2,882 and $7,181
respectively on June 30, 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 six-month period ended June 30, 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.
The effective tax rate for
the three and six-month periods ended June 30, 2022, and June 30, 2021, was impacted by unbenefited losses. Specifically, the impairment
charge of approximately $14,007 recognized in the six months ended June 30, 2022, has resulted in a tax benefit of $1,223 in the
six months ended June 30, 2022.
Under the terms of the June
2020 Sublicense agreement (the “2022 Sublicense Agreement”) between the Company and Smerud Medical Research International
AS (Norway) (“Smerud”), the Company is liable for development costs incurred by Smerud in the approximate amount of $1,264
which has been accrued as of December 31, 2021 and is payable to Smerud. However, effective March 28, 2022, the Company terminated
its LiPlasome rights through the following agreements:
A Letter Agreement between
Chosa Oncology Ltd. (England), Chosa ApS (Denmark) (collectively “Chosa”), Smerud Medical Research International AS (Norway)
(“Smerud”), and Allarity Therapeutics, Inc. (US) which references the following agreements:
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:
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.
On July 23, 2021, we entered
into an Asset Purchase Agreement with Lantern 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 Irofulven under the May 2015 agreement. Under
the Asset Purchase Agreement, Lantern Pharma agreed to pay us $1 million on closing of the transaction, and additional amounts:
Effective March 18, 2022, pursuant to clause (i) the inventory was
recertified with a longer shelf life and as of June 30, 2022, we received $459 which has been recorded in other income as proceeds
on sale of IP.
For its interim consolidated
financial statements as of June 30, 2022, and for the six months then ended, the Company evaluated subsequent events through the date
on which those financial statements were issued.
On September 27, 2022, Allarity
Therapeutics Europe Aps (“Allarity Europe”), a wholly-owned subsidiary of the Company, entered
into a Second Amendment to License Agreement (the “Second Amendment”) with Novartis Pharma AG, a company organized under the
laws of Switzerland (“Novartis”), which amended the terms of the License Agreement dated April 6, 2018 (the “Original
Agreement”), as amended by that certain First Amendment to License Agreement effective as of March 30, 2022 (“Amendment”
and together with the Original Agreement, the “Agreement”) and that certain Promissory Note dated April 6, 2018, which was
re-issued by Allarity Therapeutics Denmark ApS, a subsidiary of Allarity Europe, in favor of Novartis on March 30, 2022, to modify
the terms and timing of the Outstanding Milestone Payment (as defined in the Second Amendment), including an increase in such milestone
payment by $500, in addition to the $5,000 which is included in accounts payable at June 30, 2022. The Second Amendment became effective
upon receipt by Novartis of the first portion of the Outstanding Milestone Payment ($1,000), which was paid on or about September 28,
2022.
Under
Clause 7.2 of the Original Agreement, the Company agreed to pay Novartis a milestone payment in one lump sum (“Third Milestone Payment”)
upon submission of the first NDA with the FDA for a Licensed Product in the United States (the “Third Milestone”). The Second
Amendment restructured the terms of the Third Milestone Payment to an installment plan (with the final installment due in 2023), allowing
the Company more time to make the Third Milestone Payment.
In addition, the Second Amendment amended (1) Clause 1.1 of the Agreement
to include the definitions of Financing Transaction, Phase 1 Clinical Trial and Phase 1b/2 Clinical Trial, (2) Clause 2.1 of the Agreement
to clarify that the Company would not be permitted to sublicense any rights granted to the Company prior to completion of a Phase II Clinical
Trial without the prior written consent of Novartis, and (3) Clause 7.3 to provide for the acceleration of certain milestone payments
in the event the Company enters into a Financing Transaction (as defined in the Second Amendment). If
all milestones under the Second Amendment are achieved, the Company may be obligated to pay Novartis up to a maximum of $26,500.
Subsequent to June 30, 2022,
3i converted a total of 1,792 Series A Preferred shares into 976,862 shares of our common stock. Pursuant to the terms of the COD, because
the Alternate Conversion Price was below the Floor Price of $1.9812, the Company is obligated to pay 3i an Alternate Conversion Floor
Amount of $1,598 which has been recorded as a liability. Additionally, on August 25, 2022, 3i notified the Company of its election
to increase the maximum percentage of common shares beneficially owned after conversion of preferred shares or exercise of warrants from
4.99% to 9.99% pursuant to the Section 4 (d) Limitation on Beneficial Ownership of the COD.
On July 7, 2022, Mr. David
Roth was appointed as an independent director of the Company. As compensation for Dr. Roth’s services as an independent director,
Dr. Roth receives an annual retainer fee of $50 payable in cash, and if appointed to a committee of the Board, he will be eligible to
receive $4 for serving as a member of the Nominating and Corporate Governance Committee and $5 for serving as a member of the Compensation
Committee. In connection with Dr. Roth’s appointment, on July 7, 2022, the Board granted him options to purchase 23,000 shares of
common stock at an exercise price of $1.28 per share, subject to vesting of 1/36 per month over thirty-six (36) months following the grant
date. The expiration date for the options is five (5) years from date of grant.
On September 23, 2022, Mr.
Jerry McLaughlin was appointed as an independent director of the Company. As compensation for Mr. McLaughlin’s services as an independent
director, Mr. McLaughlin receives an annual retainer fee of $50, payable in cash, and if appointed to a committee of the Board, he will
be eligible to receive $7.5 for serving as a member of the Audit Committee and $5 for serving as a member of the Compensation Committee.
In connection with Mr. McLaughlin’s appointment, on October 1, 2022, the Board granted him options to purchase 23,000 shares of
common stock at an exercise price of $1.10 per share (which was the closing price on September 30, 2022), subject to vesting of 1/36 per
month over thirty-six (36) months following October 1, 2022. The expiration date for the options is five (5) years from date of grant.
During July 2022 the Company
sold its 43,898 common shares in Lantern Pharma in exchange for net proceeds of $182 and recognized a loss of $72.
We are a biopharmaceutical
company focused on discovering and developing highly targeted anti-cancer drug candidates. Using its Drug Response Predictor (DRP®)
platform, the Company identifies the value in drug assets that have otherwise been discontinued by identifying patient populations where
these drugs are active. The Company’s three lead drug candidates are: the tyrosine kinase inhibitor (TKI) dovitinib, the poly-ADP-ribose
polymerase (PARP) inhibitor stenoparib, and the microtubule inhibitor agent IXEMPRA.