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Home›Conditional Sales Contract›ALLARITY THERAPEUTICS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

ALLARITY THERAPEUTICS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

By Mabel McCaw
May 17, 2022
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The following discussion and analysis provide information which Allarity
Therapeutics' management believes is relevant to an assessment and understanding
of Allarity Therapeutics Inc's consolidated results of operations and financial
condition. You should read the following discussion and analysis of Allarity
Therapeutics' financial condition and results of operations together with
Allarity Therapeutic Inc.'s audited consolidated financial statements and notes
thereto included elsewhere in this Annual Report. In addition to historical
financial information, this discussion contains forward-looking statements based
upon Allarity Therapeutics' current expectations that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those set forth under "Risk Factors" and elsewhere in this Annual Report. Unless
otherwise indicated or the context otherwise requires, references in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations section to "Allarity Therapeutics," "we," "us," "our," and other
similar terms refer to Allarity Therapeutics Inc. and its consolidated
subsidiaries.



We caution readers not to place undue reliance on any forward-looking statements
made by us, which speak only as of the date they are made. We disclaim any
obligation, except as specifically required by law and the rules of the SEC, to
publicly update or revise any such statements to reflect any change in our
expectations or in events, conditions, or circumstances on which any such
statements may be based, or that may affect the likelihood that actual results
will differ from those set forth in the forward-looking statements.



Overview



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.



Risks and Uncertainties



The Company is subject to risks common to companies in the biotechnology
industry, including but not limited to, risks of failure of preclinical studies
and clinical trials, the need to obtain marketing approval for any drug product
candidate that it may identify and develop, the need to successfully
commercialize and gain market acceptance of its product candidates, dependence
on key personnel and collaboration partners, protection of proprietary
technology, compliance with government regulations, development by competitors
of technological innovations, and the ability to secure additional capital to
fund operations. Product candidates currently under development will require
significant additional research and development efforts, including preclinical
and clinical testing and regulatory approval prior to commercialization. Even if
the Company's research and development efforts are successful, it is uncertain
when, if ever, the Company will realize significant revenue from product sales.



Impacts of COVID-19 on our activities – Update



In March 2020, the World Health Organization declared COVID-19 a global
pandemic. COVID-19 has had an impact on our operations as it caused some
unexpected delays in our clinical program activities as clinical trials were
delayed. Management is unable to estimate the future financial effects, if any,
to our business because of COVID-19 because of the high level of uncertainties
and unpredictable outcomes of this disease.



                                      172





We are continuing to evaluate the impact of COVID-19 pandemic on our business
and are taking proactive measures to protect the health and safety of our
employees, as well as to maintain business continuity. Based on guidance issued
by federal, state, and local authorities, we transitioned to a remote work model
for our employees, effective March 16, 2020. During the last two quarters of the
year ended December 31, 2021 and the first quarter of 2022, restrictions due to
COVID-19 have lifted significantly and as a result, our Danish employees have
returned to work. Our North American employees are continuing to work remotely.
We will continue to closely monitor and seek to comply with guidance from
governmental authorities and adjust our activities as appropriate.



The ultimate impact of the COVID-19 pandemic or a similar health epidemic is
highly uncertain and subject to change. We do not yet know the full extent of
potential delays or impacts on our business, our clinical trial, healthcare
systems or the global economy. However, these effects could harm our operations,
and we will continue to monitor the COVID-19 situation closely.



Impact of the Russian-Ukrainian 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. We expect the Ukraine
crisis will have an impact on the Danish and worldwide economy and energy
supply, potentially increasing the Company's costs.



Overview of financial operations

Since our inception in September of 2004, we have focused substantially all our
resources on conducting research and development activities, including drug
discovery and preclinical studies, establishing, and maintaining our
intellectual property portfolio, the manufacturing of clinical and research
material, hiring personnel, raising capital and providing general and
administrative support for these operations. In recent years, we have recorded
very limited revenue from collaboration activities, or any other sources. We
have funded our operations to date primarily from convertible notes and the
issuance and sale of our ordinary shares.



We have incurred net losses in each year since inception. Our net losses were
$26.6 million and $6.6 million for 2021 and 2020, respectively. As of December
31, 2021, we had an accumulated deficit of $66.5 million. Substantially all our
net losses have resulted from costs incurred in connection with our research and
development programs and from general and administrative costs associated with
our operations. We expect to continue to incur significant expenses and
increasing operating losses over at least the next several years. We expect our
expenses will increase substantially in connection with our ongoing activities,
as we:


? advancing drug candidates through clinical trials;

? pursue regulatory approval of drug candidates;

? operate as a public company;

? continue our preclinical programs and our clinical development efforts;

? continue research activities for the discovery of new drug candidates; and

? manufacture supplies for our preclinical studies and clinical trials.



                                      173




Components of operating expenses

Research and development costs

Research and development costs include:

? expenses incurred under agreements with third-party organizations under contract, and

   consultants;




? costs related to the production of the drug substance, including fees paid for the contract

   manufacturers;




? laboratory and supplier fees related to the performance of preclinical trials;

? personnel expenses, which include salaries, benefits and shares

   compensation; and




? patent maintenance and renewal fees.

We expense all research and development costs in the periods in which they are
incurred. Costs for certain development activities are recognized based on an
evaluation of the progress to completion of specific tasks and estimates of
services performed using information and data provided to us by our vendors and
third-party service providers. Non-refundable advance payments for goods or
services to be received in future periods for use in research and development
activities are deferred and accounted for as prepaid expenses. The prepayments
are then expensed as the related goods are delivered and as services are
performed.



To date, most of these expenditures have been incurred to advance our lead drug candidates, dovitinib, stenoparib and IXEMPRA®.



We expect our research and development expenses to increase substantially for
the foreseeable future as we continue to invest in research and development
activities related to developing our drug candidates, as our drug candidates
advance into later stages of development, and as we continue to conduct clinical
trials. The process of conducting the necessary clinical research to obtain
regulatory approval is costly and time-consuming, and the successful development
of our drug candidates is highly uncertain. As a result, we are unable to
determine the duration and completion costs of our research and development
projects or when and to what extent we will generate revenue from the
commercialization and sale of any of our drug candidates.



Results of Operations


Comparison of years ended December 31, 2021 and 2020



The following table summarizes our results of operations for the years ended
2021 and 2020:



                                         For the years ended
                                             December 31,              Increase/
                                        2021             2020         (Decrease)
                                            (In thousands)
Operating expenses:                                   (Restated)
Research and development             $    14,196     $      4,218     $     9,978
General and administrative                12,360            4,101           8,259
Total operating costs and expenses        26,556            8,319         
18,237
Loss from operations:                $   (26,556 )   $     (8,319 )   $   (18,237 )




                                      174




Research and development costs

At this time, we do not track our research and development costs by product candidate. A breakdown by nature of type of expenditure for the closed financial years December 31, 2021and December 31, 2020is provided below.


                                For the year ended
                                   December 31,              Increase/
                              2021             2020         (Decrease)
                                  (In thousands)
                                            (Restated)
Research study expenses    $     2,329     $      2,119     $       210
Recovery of R&D costs                -              (22 )            22
Tax credit                        (875 )           (908 )            33
Milestone payments               5,000                -           5,000
Manufacturing & supplies         1,105              332             773
Contractors                      2,765            1,106           1,659
Patents                            273              198              75
Staffing                         3,429              954           2,475
Amortization                       103              149             (46 )
Other                               67              290            (223 )
                           $    14,196     $      4,218     $     9,978



For the year ended December 31, 2021versus December 31, 2020:



The increase of $10.0 million in research and development cost was due to an
increase of $210 thousand in research study expenses, a decrease of $22 thousand
in recovery of R&D costs, a decrease of $33 thousand in tax credits, an increase
of $5.0 million in milestone payments, an increase of $773 thousand in
manufacturing and supplies, an increase of $1.7 million in contractors costs, an
increase in patents expenses of $75 thousand, and an increase in staffing costs
of $2.5 million, offset by a reduction in amortization expenses of $46 thousand
and reduced other costs of $223 thousand.



Overall, the increase was because during the year ended December 31, 2020, our
research and development activity was paused or significantly slowed due to
Covid-19. Research and development in the last two quarters of the year ended
December 31, 2021, increased as activity in the clinical trials coming back to a
pre-pandemic level. The milestone payment to Novartis was due to the NDA filing.
Manufacturing & supplies and contractor costs have increased significantly in
preparation of our NDA filing for Dovitinib. Staffing costs increased primarily
because of stock option grants and bonuses.



General and administrative expenses

General and administrative expenses consist primarily of personnel-related
costs, facilities costs, depreciation and amortization expenses and professional
services expenses, including legal, human resources, audit, and accounting
services. Personnel-related costs consist of salaries, benefits, and stock-based
compensation. Facilities costs consist of rent and maintenance of facilities.
Legal costs incurred in connection with patents are accounted for as general and
administrative expense. We expect our general and administrative expenses to
increase for the foreseeable future due to anticipated increases in headcount to
advance our drug candidates and because of operating as a public company,
including expenses related to compliance with the rules and regulations of the
SEC, Nasdaq, additional insurance expenses, investor relations activities and
other administrative and professional services.



General and administrative expenses increased by $8.3 million for the year ended
December 31, 2021, compared to 2020. The increase was primarily due to an
increase in professional fees of $3.3 million, staffing expenses of $4 million,
listings expenses of $547 thousand, premises expenses of $8 thousand, insurance
of $60 thousand, and $243 thousand in other administrative costs. Professional
fees, listing costs and other administrative expenses all increased as the
Company prepared its prospectus to file with the SEC and list on Nasdaq in the
U.S. Staffing costs increased primarily because of stock option grants and
bonuses.



                                      175




Other income (expense), net (2020 restated – see note 3 to the financial statements)



Other income (expense) of $41 thousand recognized in the year ended December 31,
2021, consisted primarily of a $2.1 million fair value adjustment to warrants
and derivative liabilities, and $1.0 million in other income received in
connection with our sale of intangible IP assets to Lantern Pharma, offset by
($1.3) million in finance expenses, ($499) thousand in interest expenses, ($495)
thousand in loss on our equity investment in Lantern Pharma, Inc., a ($474)
thousand change in fair value of convertible debt, a ($141) thousand loss on
extinguishment of convertible debt, and net foreign exchange losses of ($95)
thousand.



Other income (expense) of $1.9 million recognized in the year ended December 31,
2020, consisted primarily of a $2.1 million fair value adjustment to derivative
liabilities, a gain of $708 thousand on our investment in Lantern Pharma, and a
net foreign exchange gain of $62 thousand, offset by a ($573) thousand change in
fair value of convertible debt, ($108) thousand loss on extinguishment of
convertible debt, and ($320) thousand in interest expenses.



Changes in fair value of our derivative liabilities and convertible debt are measured using level 3 inputs described in our consolidated financial statements.

Income taxes (2020 restated – see Financial Statements Note 3)

Over the years ended December 31, 2021and December 31, 2020we recognized ($133) and (198) thousand dollars in income tax expense respectively.


                                      176




Liquidity, capital resources and plan of operations



Since our inception through December 31, 2021, our operations have been financed
primarily by the sale of preferred stock, convertible promissory notes and the
sale and issuance of our ordinary shares. As of December 31, 2021, we had $19.6
million in cash, and an accumulated deficit of $66.5 million.



In the year ended December 31, 2021, we received $20 million in gross proceeds
from the issuance of Series A preferred stock, $14.9 million in gross proceeds
from the issuance of shares, and $1.1 million in proceeds from convertible debt.
We also received and repaid a bridge loan of $2.9 million, and we received $1
million in proceeds from the sale of IP.



In the year ended December 31, 2020, we received $3.0 million in net proceeds
from the sale and issuance of convertible notes. We also received $3.7 million
in proceeds from share issuance.



Our primary use of cash is to fund operating expenses, which consist of research
and development as well as regulatory expenses related to our lead drug
candidate, dovitinib, and clinical programs for stenoparib and IXEMPRA®, and to
a lesser extent, general and administrative expenses. Cash used to fund
operating expenses is impacted by the timing of when we pay these expenses, as
reflected in the change in our outstanding accounts payable and accrued
expenses.



As of December 31, 2021, the Company's cash deposits of $19.6 million were
determined to be insufficient to fund its current operating plan and planned
capital expenditures for at least the next 12 months. We estimate that as of the
date of this filing, our cash reserves are sufficient for approximately 6
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 other such arrangements when needed would have a negative
impact on its business, results of operations and financial condition and its
ability to develop its product candidates.



We expect to incur substantial expenses in the foreseeable future for the
development and potential commercialization of our drug candidates and ongoing
internal research and development programs. At this time, we cannot reasonably
estimate the nature, timing, or aggregate amount of costs for our development,
potential commercialization, and internal research and development programs.
However, to complete our current and future preclinical studies and clinical
trials, and to complete the process of obtaining regulatory approval for our
drug candidates, as well as to build the sales, marketing, and distribution
infrastructure that we believe will be necessary to commercialize our drug
candidates, if approved, we may require substantial additional funding in the
future.



                                      177





Cash Flows


The following table summarizes our cash flows for the years indicated:


                                                                                     Year Ended
                                                                                    December 31,
                                                                                        2020
                                                                                     (Restated -
                                                                 Year Ended           Financial
                                                                December 31,         Statements
(In thousands)                                                      2021               Note 3)
Net Cash used in operating activities                          $      (15,050 )   $          (7,251 )
Net Cash provided by (used) in investing activities                     1,000                    (3 )
Net Cash provided by financing activities                              33,819                 6,033
Net increase (decrease) in cash                                $       19,769     $          (1,221 )




Operating Activities



During the year ended December 31, 2021, cash used in operating activities of
$15.0 million was attributable to a net loss of $26.6 million, and $6.0 million
in net non-cash charges. This was offset by a $5.6 million change in net
operating assets and liabilities.



The non-cash charges consisted of stock-based compensation of $6.4 million,
deferred tax expense of $20 thousand, non-cash interest of $238 thousand, loss
on investment of $495 thousand, non-cash finance costs of $1.3 million, an
increase in fair value adjustment of convertible debt of $474 thousand, loss on
extinguishment of convertible debt of $141 thousand, depreciation and
amortization of $106 thousand, and gain on foreign currency of $74 thousand,
offset by a $2.1 million fair value adjustment to derivative liabilities and
$1.0 million gain from the sale of IP. The change in operating assets and
liabilities of $5.6 million was primarily due to a $7.2 million increase in
accrued liabilities, a decrease in prepaid expenses of $130 thousand, and a
decrease in income taxes receivable of $8 thousand, offset by a $1.3 million
decrease in accounts payable, a $330 increase in other current assets, and a
decrease in operating lease liability of $124 thousand.



During the year ended December 31, 2020, cash used in operating activities of
$7.3 million was attributable to a net loss of $6.6 million, and $1.1 million in
net other non-cash charges. This was offset by a $445 thousand change in net
operating assets and liabilities.



The non-cash charges consisted of a $2.1 million increase in fair value
adjustment of the derivative liability, a $708 gain on investment, a $68
thousand gain on foreign currency, deferred income tax expense of $165 thousand,
an increase of $573 thousand in fair value adjustment of convertible debt, $616
thousand in expense related to stock-based compensation, $280 thousand in
non-cash interest, $108 thousand in loss on extinguishment of convertible debt,
$46 thousand in depreciation and amortization, and $40 thousand in non-cash
lease expense. The $445 thousand change in operating assets and liabilities was
primarily due to a $605 thousand decrease in accounts receivable and other
current assets and a $97 thousand decrease in prepaid expenses, offset by an
increase in tax credit receivable of $104 thousand, decrease in accounts payable
of $62 thousand, decrease in accrued liabilities of $36 thousand, and a decrease
in operating lease liability of $88 thousand.



Investing Activities


During the year ended December 31, 2021the company received $1.0 million proceeds from the sale of intellectual property.

During the year ended December 31, 2020cash used in investing activities $3,000 was used to purchase equipment.


                                      178





Financing Activities



During the year ended December 31, 2021, cash provided by financing activities
of $33.8 million was related to proceeds of $20 million from the sale of Series
A preferred stock, $14.9 million from common stock issuance, and convertible
loan proceeds of $1.1 million, offset by $1.6 million in Series A preferred
stock issuance costs, $484 thousand in share issuance costs, and $84 thousand
repayment of our line of credit. We also received and repaid $2.9 million in
loan funding during the year ended December 31, 2021.



In 2020, cash provided by financing activities of $6.0 million was related to
net proceeds of $3.7 million from the issuance of common shares, $3.0 million
from convertible debt, and $84 thousand from line of credit, partially offset by
repayment of a loan of $533 thousand and share issuance costs of $223 thousand.



Contractual obligations and commitments



The following table summarizes our commitments and contractual obligations as of
December 31, 2021:



                                                                Payments Due By Period
                                                  Less than                                              More than
                                    Total          1 Year         1 - 3 Years        3 - 5 Years          5 Years
                                                                    (In thousands)
Operating lease obligations       $      114     $       105     $            9     $            -     $           -



We enter into agreements in the normal course of business with vendors for
preclinical studies, clinical trials and other service providers for operating
purposes. We have not included these payments in the table of contractual
obligations above since these contracts are generally cancellable at any time by
us following a certain period after notice and therefore, we believe that our
non-cancellable obligations under these agreements are not material.



Working capital and capital expenditure requirements



We believe that the net proceeds from the PIPE Investment, together with our
existing cash and cash equivalents as of the date of this Annual Report, and our
anticipated expenditures and commitments for calendar year 2022, will enable us
to fund our operating expenses and capital expenditure requirements for 6 months
from the date of this Annual Report. Our estimate as to how long we expect the
net proceeds from the PIPE Investment, together with our existing cash and cash
equivalents, to be able to continue to fund our operations is based on
assumptions that may prove to be wrong, and we could use our available capital
resources sooner than we currently expect. Further, changing circumstances, some
of which may be beyond our control, could cause us to consume capital
significantly faster than we currently anticipate, and we may need to seek
additional funds sooner than planned.



Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of financial condition and results of
operations is based upon our audited condensed consolidated financial statements
for the years ended December 31, 2021, and December 31, 2020, which have been
prepared in accordance with U.S. GAAP. 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 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 consolidated financial statements.
Actual results could differ from those estimates or assumptions.



                                      179




While our significant accounting policies are described in the notes to our
consolidated financial statements for the years ended December 31, 2021, and
December 31, 2020, we believe that the following critical accounting policies
are most important to understanding and evaluating our reported financial
results.



Use of Estimates



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 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 consolidated financial
statements. Actual results could differ from those estimates or assumptions.



Research in progress acquired and Development (IPR&D)



Acquired IPR&D represents the fair value assigned to research and development
assets that the Company acquires and have not been completed at the acquisition
date. The fair value of IPR&D acquired in a business combination is recorded on
the consolidated balance sheets at the acquisition-date fair value and is
determined by estimating the costs to develop the technology into commercially
viable products, estimating the resulting revenue from the projects, and
discounting the projected net cash flows to present value. IPR&D is not
amortized, but rather is reviewed for impairment on an annual basis or more
frequently if indicators of impairment are present, until the project is
completed, abandoned, or transferred to a third-party. The projected discounted
cash flow models used to estimate the fair value of partnered assets and cost
approach model used to estimate proprietary assets as part of the Company's
IPR&D reflect significant assumptions regarding the estimates a market
participant would make in order to evaluate a drug development asset, including
the following:


? Development expenditure obsolescence estimates;

? Likelihood of passing clinical trials and obtaining

   approval;




? Estimates of future cash flows from potential milestone and royalty payments

related to the sales of licensed products; and

? A discount rate reflecting the weighted average cost of capital of the Company and

   specific risk inherent in the underlying assets.



Once commissioned, intangible assets are amortized over their estimated economic life, which, for acquired DPI assets, is over the remaining life of the relevant patents.

Costs of research contracts and accruals



The Company has entered into various research and development contracts with
companies both inside and outside of the United States. These agreements are
generally cancellable, and related payments are recorded as research and
development expenses as incurred. The Company records accruals for estimated
ongoing research costs. When evaluating the adequacy of the accrued liabilities,
the Company analyzes progress of the studies or trials, including the phase or
completion of events, invoices received and contracted costs. Significant
judgments and estimates are made in determining the accrued balances at the end
of any reporting period. Actual results could differ from the Company's
estimates. The Company's historical accrual estimates have not been materially
different from the actual costs.



                                      180





Convertible note:


The Company accounts for certain convertible notes issued during the years ended
December 31, 2021, and December 31, 2020, under the fair value option ("FVO")
election of ASC 825, Financial Instruments ("ASC-825") as discussed below.



The convertible notes accounted for under FVO wherein the financial instrument
is initially measured at its issue-date estimated fair value and then
subsequently re-measured at estimated fair value on a recurring basis at each
reporting period date. The estimated fair value adjustments are based upon a
discounted cash flow valuation technique using a weighted cost of capital of 15%
and are recognized as other income (expense) in the accompanying consolidated
statement of operations and the portion of the fair value adjustment attributed
to a change in the instrument-specific credit risk is recognized as a component
of other comprehensive income ("OCI").



Convertible debt securities:



The Company follows ASC 480-10, Distinguishing Liabilities from Equity in its
evaluation of the accounting for a hybrid instrument. A financial instrument
that embodies an unconditional obligation, or a financial instrument other than
an outstanding share that embodies a conditional obligation, that the issuer
must or may settle by issuing a variable number of its equity shares shall be
classified as a liability (or an asset in some circumstances) if, at inception,
the monetary value of the obligation is based solely or predominantly on any one
of the following: (a) a fixed monetary amount known at inception; (b) variations
in something other than the fair value of the issuer's equity shares; or (c)
variations inversely related to changes in the fair value of the issuer's equity
shares. Hybrid instruments meeting these criteria are not further evaluated for
any embedded derivatives and are carried as a liability at fair value at each
balance sheet date with remeasurements reported in change on fair value expense
in the accompanying Statements of Operations. If it is determined that an
instrument is not within the scope of ASC 480-10, further evaluation of all
identified features is performed pursuant to ASC 815 in order to determine if
any bifurcation from the host instrument is required.



Warrants



When the Company issues warrants, it evaluates the proper balance sheet
classification of the warrant to determine whether the warrant should be
classified as equity or as a derivative liability on the consolidated balance
sheets. In accordance with ASC 815-40, Derivatives and Hedging-Contracts in the
Entity's Own Equity (ASC 815-40), the Company classifies a warrant as equity so
long as it is "indexed to the Company's equity" and several specific conditions
for equity classification are met. A warrant is not considered indexed to the
Company's equity, in general, when it contains certain types of exercise
contingencies or adjustments to exercise price. If a warrant is not indexed to
the Company's equity or it has net cash settlement that results in the warrants
to be accounted for under ASC 480, Distinguishing Liabilities from Equity, or
ASC 815-40, it is classified as a derivative liability which is carried on the
consolidated balance sheet at fair value with any changes in its fair value
recognized immediately in the statement of operations. Warrants are fair valued
using either the Black-Scholes option pricing model or Monte Carlo simulations.
Both the Black-Scholes option pricing model and Monte Carlo simulations require
the use of highly subjective and complex assumptions, including the option's
expected term and the price volatility of the underlying stock, to determine the
fair value of the award. As of December 31, 2021, the Company had warrants that
were classified as equity and warrants that were classified as liabilities.

Derivative financial instruments



The Company does not use derivative instruments to hedge exposures to interest
rate, market, or foreign currency risks. The Company evaluates all its financial
instruments to determine if such instruments contain features that qualify as
embedded derivatives. Embedded derivatives must be separately measured from the
host contract if all the requirements for bifurcation are met. The assessment of
the conditions surrounding the bifurcation of embedded derivatives depends on
the nature of the host contract. Bifurcated embedded derivatives are recognized
at fair value, with changes in fair value recognized in the Consolidated
Statements of Operations and Comprehensive Loss each reporting period.
Bifurcated embedded derivatives are classified as "Derivative liabilities" in
the Consolidated Balance Sheets.



                                      181





Share-based compensation



The Company accounts for share-based compensation in accordance with ASC 718,
Compensation - Stock Compensation ("ASC 718"). ASC 718 requires companies to
estimate the fair value of equity-based payment awards on the date of grant. The
value of the portion of the award that is ultimately expected to vest is
recognized as an expense over the requisite service period in the Company's
consolidated statements of operations and comprehensive loss.



The Company records the expense for option awards using either a graded or
straight-line vesting method. The Company accounts for forfeitures as they
occur. For share-based awards granted to employees, directors and non-employee
consultants, the measurement date is the date of grant. The compensation expense
is then recognized over the requisite service period, which is the vesting
period of the respective award.



The Company reviews stock award modifications when there is an exchange of
original award for a new award. The Company calculates for the incremental fair
value based on the difference between the fair value of the modified award and
the fair value of the original award immediately before it was modified. The
Company immediately recognizes the incremental value as compensation cost for
vested awards and recognizes, on a prospective basis over the remaining
requisite service period, the sum of the incremental compensation cost and any
remaining unrecognized compensation cost for the original award on the
modification date.



The fair value of stock options ("options") on the grant date is estimated using
the Black-Scholes option-pricing model using the single-option approach. The
Black-Scholes option pricing model requires the use of highly subjective and
complex assumptions, including the option's expected term and the price
volatility of the underlying stock, to determine the fair value of the award.
The Company applies the Black-Scholes model as it believes it is the most
appropriate fair value method for all equity awards.



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 consolidated statements of
operations and comprehensive loss.



Interest Rate Risk


We had money $19.6 million from December 31, 2021, composed of species. We had no cash equivalents to December 31, 2021. To date, fluctuations in interest income have not been significant.



We do not enter into investments for trading or speculative purposes and have
not used any derivative financial instruments to manage our interest rate risk
exposure. We have not been exposed to, nor do we anticipate being exposed to,
material risks due to changes in interest rates. A hypothetical 10% change in
interest rates during any of the periods presented would not have had a material
impact on our consolidated financial statements.



Recently issued accounting pronouncements



See the sections titled "Recently Adopted Accounting Pronouncements" in Note
2(dd) and in "Recently issued accounting pronouncements not yet adopted" in Note
2(ee) to the Company's consolidated financial statements for the years ended
December 31, 2021, and December 31, 2020, respectively, appearing elsewhere
herein.

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