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 $79.7 million as of September 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 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.
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 nine months ended September 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 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.
Certain amounts in prior
periods financial statements have been reclassified to conform to current period presentation.
| 2. | Summary of Significant Accounting Policies |
| (a) | Use of Estimates and Assumptions |
The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the
reported amounts of revenues and expenses during the reporting years. Significant estimates and assumptions reflected in these consolidated
financial statements include, but are not limited to, the fair value of the Series A preferred shares, warrants, convertible 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.
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 September 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 September 30, 2022 and 2021, the Company recorded accumulated foreign currency translation
losses of ($643) and ($1,101) respectively; and instrument specific credit risk losses of $0 and $0 respectively. During the nine months
ended September 30, 2022 and 2021, the Company recorded accumulated foreign currency translation losses of ($1,271) and ($1,785) respectively;
and instrument specific credit risk losses of $0 and ($9) respectively.
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.
The Company’s other
current assets are comprised of the following:
| |
September 30,
2022 | | |
December 31,
2021 | |
Deposits | |
$ | 47 | | |
$ | 53 | |
Salary deposit | |
| 84 | | |
| 65 | |
Value added tax (“VAT”) receivable | |
| 46 | | |
| 507 | |
Other | |
| 5 | | |
| — | |
Net other current assets | |
$ | 182 | | |
$ | 625 | |
| |
September 30,
2022 | | |
December 31,
2021 | |
Prepaid insurance | |
$ | 409 | | |
$ | 14 | |
Other prepayments | |
| 83 | | |
| 22 | |
| |
$ | 491 | | |
$ | 36 | |
The Company owned 43,898
common shares in Lantern Pharma Inc. (“Lantern Pharma”) because of a prior license agreement made with Lantern Pharma in 2017.
During September 2020 Lantern Pharma became publicly listed. During July 2022, the Company sold its 43,898 common shares in Lantern
Pharma in exchange for net proceeds of $235 and recognized a loss of $115.
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Opening balance | |
$ | 350 | | |
$ | 845 | |
Less receipt of sale proceeds, net | |
| (235 | ) | |
| — | |
Loss recognition | |
| (115 | ) | |
| (495 | ) |
Ending balance | |
$ | — | | |
$ | 350 | |
| 6. | Property, plant and equipment, net |
Property, plant and equipment,
net consisted of the following:
| |
September 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 nine months ended September 30, 2022, and September 30, 2021
was $58 and $90 respectively.
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 | |
| (2,101 | ) |
Ending balance, September 30, 2022 | |
$ | 12,027 | |
| |
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
performed an impairment assessment on its individual intangible assets during the period ended March 31, 2022 utilizing a discounted cash
flow model with a weighted average cost of capital (“WACC”) of 16%, and recognized an impairment charge of $14,007 during
the three month period ended March 31, 2022. The Company has further assessed the fair value of its intangible assets at June 30,
2022 and September 30, 2022 and determined that no further impairment is warranted as of those dates. Individual material development
projects in progress are as follows:
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Stenoparib | |
$ | 12,027 | | |
$ | 25,407 | |
Dovitinib | |
| — | | |
| 2,728 | |
Total | |
$ | 12,027 | | |
$ | 28,135 | |
The Company’s accrued
liabilities are comprised of the following:
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
3i LP floor price liability | |
$ | 1,646 | | |
$ | — | |
Milestone liabilities | |
| 1,400 | | |
| — | |
Consultants | |
| 200 | | |
| — | |
Development cost liability | |
| 83 | | |
| 6,750 | |
Payroll accruals | |
| 412 | | |
| 1,088 | |
Accrued Board member fees | |
| 70 | | |
| 54 | |
Accrued audit and legal | |
| 265 | | |
| 316 | |
Other | |
| 3 | | |
| 382 | |
| |
$ | 4,079 | | |
$ | 8,590 | |
9. Convertible promissory note
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).
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,
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 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 nine-month
periods ended September 30, 2022 and 2021, the Company recorded $78 and $74 respectively to interest expense and increased the convertible
promissory note liability by the same amount. The roll forward of the Promissory Notes as of September 30, 2022 and December 31, 2021,
is as follows:
| |
September 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 | |
| 40 | | |
| 48 | |
Convertible promissory note, net of discount | |
| 825 | | |
| 785 | |
Interest accretion, opening | |
| 194 | | |
| 143 | |
Interest accretion, expense | |
| 38 | | |
| 51 | |
Ending balance | |
$ | 1,057 | | |
$ | 979 | |
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 nine-month period ended September 30, 2021.
The roll forward of the Notes
for the period ended September 30, 2021, is as follows:
| |
September 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 September 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 September
30, 2021.
| 11. | 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.
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.
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 (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 September 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 because 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; |
|
(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 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. 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 11(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 September 30, 2022, a total of 4,574 Series A Preferred shares were converted into 2,164,143 shares of our common stock, thereby
reducing outstanding Series A Preferred shares at September 30, 2022 to 15,226. The fair value of the derivative liability associated
with the Series A Preferred Stock converted during the nine-month period ended September 30, 2022, as determined by Monte Carlo simulations,
was $955.
Because the latest eight
conversions in the nine-month period ended September 30, 2022, were completed at less than the agreed floor price, we recorded a
floor price liability and recognized a corresponding reduction of additional paid in capital, as follows:
| i. | During the six months ended June 30, 2022, $1,511 (paid in cash prior to June 30, 2022); and |
| ii. | During the three months ended September 30, 2022, $1,646 (recorded as an accrued liability at September
30, 2022, inclusive of accrued interest of $49). (See Note 20) |
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 nine-month period ended September 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 nine-month period ended September 30, 2022 and the fair value of the
Series A Preferred Derivative liability determined at September 30, 2022 and December 31, 2021:
| |
January 1,
2022
– September 30,
2022 | | |
December 31,
2021 | |
Initial exercise price | |
| $9.05 - $9.91 | | |
$ | 9.91 | |
Stock price on valuation date | |
| $1.10 - $10.75 | | |
$ | 10.37 | |
Risk-free rate | |
| 1.03% - 4.23 | % | |
| 0.96 | % |
Time to exercise (years) | |
| 2.22 - 2.96 | | |
| 2.97 | |
Equity volatility | |
| 70%
- 114 | % | |
| 70 | % |
Probability of volume failure | |
| 93%
- 99 | % | |
| 92 | % |
Rounded 10-day average daily volume (in 1,000’s) | |
| $297 - $873 | | |
$ | 908 | |
On September 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 $1,262. 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 September 30, 2022 and December 31, 2021,
using the following inputs:
| |
September 30,
2022 | | |
December 31,
2021 | |
Initial exercise price | |
$ | 9.91 | | |
$ | 9.91 | |
Stock price on valuation date | |
$ | 1.10 | | |
$ | 10.50 | |
Risk-free rate | |
| 4.14 | % | |
| 0.91 | % |
Expected life of the 3i Warrant to convert (years) | |
| 2.22 | | |
| 3.0 | |
Rounded annual volatility | |
| 106 | % | |
| 73 | % |
Timing of liquidity event | |
| November 15, 2022 | | |
| Q3 2022 – Q2 2023 | |
Expected probability of event | |
| 98 | % | |
| 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 | | |
| |
| |
Warrant liability | | |
Series A Preferred Derivative Liability | | |
Series A Convertible Preferred Stock – Mezzanine Equity | | |
Additional paid-in capital | | |
Accrued Liabilities | | |
Consolidated Statement of Operations & Comprehensive Loss
Fair value adjustment to derivative and warrant liabilities | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balances, December 31, 2021 | |
$ | 11,273 | | |
$ | 7,181 | | |
$ | 632 | | |
$ | 80 | | |
$ | — | | |
$ | (154 | ) |
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 | |
Conversion of 1,792 shares of Series A Preferred Stock | |
| — | | |
| (341 | ) | |
| (60 | ) | |
| 401 | | |
| — | | |
| — | |
Floor price adjustment on conversion of 1,792 shares of Series A Preferred Stock | |
| — | | |
| — | | |
| — | | |
| (1,646 | ) | |
| 1,646 | | |
| — | |
Fair value adjustment | |
| (257 | ) | |
| 255 | | |
| — | | |
| — | | |
| — | | |
| 2 | |
Balances, September 30, 2022 | |
$ | 1,262 | | |
$ | 2,795 | | |
$ | 2,056 | | |
$ | (3,546 | ) | |
$ | 1,645 | | |
$ | 13,442 | |
| 12. | Derivative Liabilities |
(a) Series A Preferred Stock Conversion Feature
The derivative scope exception
under ASC 815 is not met because a settlement contingency is not indexed to the Company’s stock. Therefore, the redemption feature
(derivative liability) has been bifurcated from the Series A Preferred Stock and recorded as a derivative liability. The derivative value
of the Series A Preferred Stock Redemption Feature (the “Redemption Feature”) is the difference between the fair value of
the Series A Preferred Stock with the Redemption Feature and the Series A Preferred Stock without the Redemption Feature. The Series A
Preferred Stock Redemption Feature has been valued with a Monte Carlo Simulation model, using the inputs as described in Note 12(e).
(b) Investor Warrants
In connection with subscriptions
of Offer Units in the rights issue carried out in September 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 September 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 nine-month period ending September 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 nine-month periods ended
September 30, 2022, and 2021 are presented in the following tables:
| |
3i Fund Series A Conversion Feature | | |
Settlement Warrants | | |
TO2 Warrants | | |
TO3 Warrants | |
| |
September 30, 2022 | | |
September 30, 2021 | | |
September 30, 2021 | | |
September 30,
2021 | |
Balance beginning of period | |
$ | 7,181 | | |
$ | 102 | | |
$ | 47 | | |
$ | — | |
Issued during the period | |
| — | | |
| — | | |
| — | | |
| 2,000 | |
Change in fair value | |
| (3,432 | ) | |
| 124 | | |
| (46 | ) | |
| (1,723 | ) |
Translation effect | |
| | | |
| (8 | ) | |
| (1 | ) | |
| — | |
Amount transferred to Equity | |
| (954 | ) | |
| — | | |
| — | | |
| (277 | ) |
Balance end of period | |
$ | 2,795 | | |
$ | 218 | | |
$ | — | | |
$ | — | |
Fair value Series A Preferred share / Warrant issuable at end of period | |
$ | 183.60 | | |
$ | 0.03 | | |
$ | — | | |
$ | — | |
The assumptions for estimating
the fair value of the 3i Fund Series A Conversion Feature are disclosed in Note 11(e).
The fair value of the Company’s
derivative warrant liabilities as at September 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 | |
| |
Settlement Warrants | |
| |
September 30, 2021 | |
Exercise price | |
$ | 1.9 | |
Share price | |
$ | 5.0 | |
Risk-free interest | |
| (0.52 | )% |
Expected dividend yield | |
| (0 | )% |
Contractual life (years) | |
| 1.67 | |
Expected volatility | |
| 104.20 | % |
The Company measured its
derivative warrant liabilities on a recurring basis using level 3 inputs.
During the three months ended
September 30, 2022, the Company issued 976,862 shares of common stock valued at $401 gross and ($1,245) net of the $1,646 floor price
adjustment payable in cash upon the conversion of 1,792 shares of Series A Preferred stock.
During the three months ended
September 30, 2021, the Company issued:
| i. | 290,104
common shares valued at $3,232 upon the exercise of common stock purchase warrants; and |
| ii. | Units
consisting of 482,250 common shares and 482,250 common share purchase warrants valued at $2,384 upon the issuance of Units on July 14,
2021, to the financial advisors of the May 14, 2021, rights issue. The attached warrants are exercisable for $10 each with an original
expiration date of April 15, 2023, subsequently amended to September 13, 2021 (Note 11(a)). |
During the nine months ended
September 30, 2022, the Company issued 2,164,143 shares of common stock valued at $1,103 gross and ($3,626) net of the $4,728 floor price
adjustments payable in cash upon the conversion of 4,574 shares of Series A Preferred stock.
During the nine months ended
September 30, 2021, the Company issued:
| iii. | 295,537
common shares valued at $3,232 upon the exercise of common stock purchase warrants; |
| iv. | 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, and 482,250 common shares and 482,250 common share purchase warrants valued at $2,384 in consideration for
services. The attached warrants are exercisable for $10 each with an original expiration date of September 13, 2023, subsequently
amended to September 13, 2021 (Note 11(a)); and |
| v. | 628,192
common shares valued at $2,880 upon conversion of debt. |
During the three months ended
September 30, 2022, the total stock-based payment expense recorded in the condensed consolidated statement of operations and comprehensive
loss was $406 ($268 and $138 as staffing expenses in general and administrative and research and development expenses respectively) (2021:
expense of $577 of which $381 and $190 are recognized as staffing expense in general and administrative and research and development expenses
respectively).
During the nine months ended
September 30, 2022, total stock-based expenses recognized in the condensed consolidated statement of operations and comprehensive loss
were $1,412 of which $932 and $480 are recognized as staffing expenses in general and administrative and research and development expenses
respectively (2021: expense of $1,205 of which $795 and $410 are recognized as staffing expenses in general and administrative expenses
and research and development expenses respectively).Total unrecognized compensation cost of $1,211 for non-vested options at September
30, 2022 is expected to be realized over a period of approximately 2 years. A summary of stock option activity under the Company’s
stock option plans during the nine-month period ended September 30, 2022, is presented below:
The fair value of stock options
granted in the period ended September 30, 2022 were estimated using the Black-Scholes option pricing model, based on the following assumptions:
During the nine-month period
ended September 30, 2021, a total of 771,687 options were exercised at a weighted exercise price of $2.6 per option and their intrinsic
value was $51,531; 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 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
$1,262 on September 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 $2,795
and $7,181 respectively on September 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 nine-month period ended September 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 nine-month periods ended September 30, 2022 and 2021, was impacted by unbenefited losses. Specifically, the impairment charge
of approximately $14,007 recognized in the nine months ended September 30, 2022, has resulted in a tax benefit of $1,218 in the nine months
ended September 30, 2022.
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 September 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.
Effective July 12, 2022 the
Company’s July 6, 2017 Exclusive License Agreement with Eisai Inc. (as amended December 11, 2020 and August 3, 2021) (the “Third
Amendment”), the terms of the original exclusive license were further amended in order to (1) further postpone the due date of the
Extension Payment and extend the deadline for the Company’s successful completion of its first Phase 1b or Phase 2 clinical trial
for Stenoparib (the “Product”) beyond December 31, 2022; and (2) amend terms related to Eisai’s right of termination
of development.
In consideration of the extended
timeframe, and the Company not achieving the minimum patient enrollment, by July 1, 2022, set out in the Second Amendment, the Company
is obligated to pay Eisai an extension payment as follows:
Once the extension payment
is paid in full, the Company shall have until April 1, 2024, to complete enrollment in a further Phase 1b or Phase 2 Clinical Trial of
the Product. If the Company has not achieved successful completion of a further Phase 1b or Phase 2 Clinical Trial of the Product prior
to April 1, 2024, Eisai may terminate this Agreement in its entirety, in its sole discretion on at least one hundred and twenty (120)
days prior written notice.
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, as 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 the 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 September 30, 2022, we received $459 which
has been recorded in other income as proceeds on sale of IP.
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.
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.