Allarity Therapeutics, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial amounts are in U.S. dollars, generally in thousands, unless stated otherwise. The company is a clinical-stage oncology biotechnology company developing drug candidates and drug-response companion diagnostics. It reported no product revenue for the periods presented.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Research and development expense | $1,696 | $2,279 | $2,985 | $3,531 |
| General and administrative expense | $3,146 | $2,097 | $6,159 | $3,307 |
| Intangible asset impairment | — | — | $14,007 | — |
| Operating loss | $(4,842) | $(4,376) | $(23,151) | $(6,838) |
| Net loss | $(5,103) | $(5,396) | $(8,183) | $(8,481) |
| Net loss attributable to common stockholders | $(6,480) | $(5,396) | $(11,266) | $(8,481) |
| Basic and diluted loss per common share | $(0.72) | $(1.08) | $(1.30) | $(1.78) |
- Cash and liquidity: Cash was $7.677 million at June 30, 2022, down from $19.555 million at December 31, 2021. Current assets were $10.119 million and current liabilities $11.462 million. The filing states cash was insufficient to fund the operating plan and planned capital expenditures for the next 12 months and concludes substantial doubt exists about the company’s ability to continue as a going concern.
- Cash flows: Operating activities used $9.963 million in the first six months, compared with $6.833 million in the restated prior-year period. Investing activities provided $809,000, primarily from IP sale proceeds. Financing activities used $2.311 million, including preferred-stock conversion-related payments and an $800,000 registration-delay payment. Cash fell by $11.878 million, including a $413,000 adverse foreign-exchange effect.
- Debt and obligations: The balance sheet included a $1.031 million net Novartis convertible promissory note and $5.555 million of accounts payable. Subsequent to quarter-end, the company disclosed $5 million in accounts payable for a Novartis milestone payment and amended the payment schedule; it paid the first $1 million installment in September. The amendment increased the relevant milestone by $500,000 and permits payments through 2023. Total potential Novartis milestone payments under the amended terms could reach $26.5 million if milestones are achieved.
- Margins: The company reported no product revenue, so gross margin is not applicable. Operating expenses are primarily research and development and general and administrative costs.
Material changes versus prior periods
- Six-month operating loss rose to $23.151 million from $6.838 million, principally due to a $14.007 million impairment charge against intangible assets, following the FDA’s refusal-to-file decisions on dovitinib and its companion diagnostic. Excluding the impairment, operating expenses were still higher, mainly because G&A increased.
- Six-month net loss was lower than the restated 2021 loss, mainly because of a $13.440 million noncash gain from changes in fair value of derivative and warrant liabilities, plus $1.780 million of income related to an IP sale. These items offset the impairment and other expenses; the fair-value gain is not operating cash generation.
- G&A expense increased by $2.852 million year over year for the first six months, with higher audit and legal, insurance, staffing and consulting costs. R&D expense declined by $546,000, which management attributed principally to lower clinical activity and reduced manufacturing and contractor costs.
- Intangible assets declined to $12.811 million from $28.135 million at year-end, reflecting the impairment and foreign-currency translation. The remaining carrying amount was attributed to stenoparib; dovitinib was written down to zero.
- The 2021 comparative financial statements were restated for errors involving warrant and derivative valuation, an unrecorded convertible note, deferred-tax valuation, and certain presentation and classification matters. The filing also describes prior restatements for other periods.
Outlook, risks and unusual items
- Pipeline and FDA: The FDA issued Refusal to File letters on the dovitinib NDA and its companion diagnostic PMA in February 2022. After a May meeting, management expected the FDA to require a prospective Phase 3 trial and additional dose-optimization work for dovitinib monotherapy in third-line metastatic renal cell carcinoma. The company said it no longer viewed that monotherapy route as the best path and shifted its strategy toward combination therapies.
- Development plans: Subject to financing, management expected to start enrollment by or before Q4 2022 in a Phase 1b/2 trial of stenoparib plus dovitinib for later-line metastatic ovarian cancer. It also planned to evaluate other combination studies. Interim readouts for ongoing stenoparib and IXEMPRA monotherapy Phase 2 studies were anticipated in Q4 2022 and Q1 2023, respectively. These are forward-looking targets, not guarantees.
- Financing: Management planned to seek additional capital through public or private equity, debt, collaborations or other sources, but gave no assurance of success or favorable terms. The company warned it may need funding sooner than expected and that failure to obtain it could impair operations and drug development.
- Preferred stock and dilution: Series A preferred stock includes conversion-price adjustments, redemption rights and other investor protections. During the first half, 2,782 preferred shares converted into 1,187,281 common shares. The company recorded a $1.572 million deemed dividend and paid $1.511 million in floor-price adjustments. A triggering event under the preferred-stock terms occurred in April; 3i agreed to forbear temporarily subject to conditions. After quarter-end, further conversions created a recorded $1.598 million floor-amount liability.
- Other unusual items: The company recognized a $14.007 million impairment, $800,000 in registration-delay payments, and a $13.440 million fair-value gain on derivatives and warrants for the six-month period. Fair values rely on Level 3 assumptions and may fluctuate materially.
- Controls and governance: Management concluded disclosure controls were not effective at June 30, 2022, citing material weaknesses in accounting resources, U.S. GAAP procedures, complex-transaction accounting and segregation of duties. Remediation was underway. The CEO and CFO both left in June; interim replacements were appointed. The filing reports no current material legal proceedings.
- Other risks: Development and regulatory approval are uncertain; the company depends on third-party manufacturers and collaborators. It cited possible clinical delays from COVID-19 and potential Danish laboratory-material cost effects from the Russia-Ukraine war, neither quantified in the filing.
Important facts for investors to verify
- Current cash, subsequent financing and the resulting runway; the filing states cash on hand was insufficient for at least 12 months.
- Status and terms of the Novartis milestone installments, the $5 million payable disclosed at quarter-end, and any financing-related acceleration or additional milestone exposure.
- Current preferred-stock conversions, floor-price adjustment liabilities, 3i forbearance status, and the potential dilution and cash-redemption consequences of the preferred stock and warrants.
- Whether the combination-trial plans and stated data-readout timelines proceeded, and whether additional financing was secured to support them.
- Progress in remediating material weaknesses and whether future filings or financial statements require further correction.