Item
1: Financial Statements
Sonnet
BioTherapeutics Holdings, Inc.
Consolidated
Balance Sheets
(unaudited)
See
accompanying notes to unaudited interim consolidated financial statements
Sonnet
BioTherapeutics Holdings, Inc.
Consolidated
Statements of Operations
(unaudited)
See
accompanying notes to unaudited interim consolidated financial statements
Sonnet
BioTherapeutics Holdings, Inc.
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit)
(unaudited)
See
accompanying notes to unaudited interim consolidated financial statements
Sonnet
BioTherapeutics Holdings, Inc.
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit)
(unaudited)
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
Total
|
|
|
|
Common
stock
|
|
|
Additional
paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
Total
|
|
Balance
at October 1, 2019
|
|
|
5,547,643
|
|
|
$
|
555
|
|
|
$
|
9,594,100
|
|
|
$
|
(12,440,142
|
)
|
|
$
|
(2,845,487
|
)
|
Sale
of common stock, net of issuance costs
|
|
|
128,313
|
|
|
|
13
|
|
|
|
2,715,017
|
|
|
|
—
|
|
|
|
2,715,030
|
|
Issuance
of common stock to settle related-party notes
|
|
|
8,526
|
|
|
|
1
|
|
|
|
199,999
|
|
|
|
—
|
|
|
|
200,000
|
|
Sale
of common stock and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of common stock and warrants, Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to affect the Relief acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to affect the Relief acquisition, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with Merger (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with Merger (Note 3), shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,469,054
|
)
|
|
|
(2,469,054
|
)
|
Balance
at December 31, 2019
|
|
|
5,684,482
|
|
|
|
569
|
|
|
|
12,509,116
|
|
|
|
(14,909,196
|
)
|
|
|
(2,399,511
|
)
|
Sale
of common stock, net of issuance costs
|
|
|
57,762
|
|
|
|
5
|
|
|
|
1,354,995
|
|
|
|
—
|
|
|
|
1,355,000
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,496,747
|
)
|
|
|
(2,496,747
|
)
|
Balance
at March 31, 2020
|
|
|
5,742,244
|
|
|
|
574
|
|
|
|
13,864,111
|
|
|
|
(17,405,943
|
)
|
|
|
(3,541,258
|
)
|
Balance
|
|
|
5,742,244
|
|
|
$
|
574
|
|
|
$
|
13,864,111
|
|
|
$
|
(17,405,943
|
)
|
|
$
|
(3,541,258
|
)
|
Sale
of common stock and warrants
|
|
|
2,152,360
|
|
|
|
215
|
|
|
|
14,999,785
|
|
|
|
—
|
|
|
|
15,000,000
|
|
Issuance
of common stock to affect the Relief acquisition
|
|
|
757,933
|
|
|
|
76
|
|
|
|
6,700,052
|
|
|
|
—
|
|
|
|
6,700,128
|
|
Issuance
of common stock in connection with Merger (Note 3)
|
|
|
547,639
|
|
|
|
55
|
|
|
|
(6,000,055
|
)
|
|
|
—
|
|
|
|
(6,000,000
|
)
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,779,050
|
)
|
|
|
(11,779,050
|
)
|
Balance
at June 30, 2020
|
|
|
9,200,176
|
|
|
$
|
920
|
|
|
$
|
29,563,893
|
|
|
$
|
(29,184,993
|
)
|
|
$
|
379,820
|
|
Balance
|
|
|
9,200,176
|
|
|
$
|
920
|
|
|
$
|
29,563,893
|
|
|
$
|
(29,184,993
|
)
|
|
$
|
379,820
|
|
See
accompanying notes to unaudited interim consolidated financial statements
Sonnet
BioTherapeutics Holdings, Inc.
Consolidated
Statements of Cash Flows
(unaudited)
See
accompanying notes to unaudited interim consolidated financial statements
1. Organization and description of business
Description
of business
Sonnet
BioTherapeutics, Inc. (“Sonnet”) was incorporated as a New Jersey corporation on April 6, 2015. Sonnet is a clinical stage,
oncology-focused biotechnology company with a proprietary platform for innovating biologic medicines of single- or bi-specific action.
Known as FHAB™ (Fully Human Albumin Binding), the technology utilizes a fully human single chain antibody fragment (scFv) that
binds to and “hitch-hikes” on human serum albumin (HSA) for transport to target tissues. Sonnet’s lead proprietary
asset, SON-1010, is a fully human version of Interleukin 12 (“IL-12”), covalently linked to the FHAB construct,
for which Sonnet intends to pursue clinical development in solid tumor indications, including non-small cell lung cancer and head and
neck cancer. Sonnet has completed a nonhuman primate (“NHP”) GLP toxicity study with SON-1010 and is preparing an Investigational
New Drug (“IND”) application for submission to the FDA with the goal of initiating a Phase 1 clinical trial during the second
half of 2021 and having initial top line clinical safety data available during the first half of 2022. The Company acquired the global
development rights to its most advanced compound, SON-080, a fully human version of Interleukin 6 (“IL-6”), in April 2020.
Sonnet is advancing SON-080 in target indications of Chemotherapy-Induced Peripheral Neuropathy (“CIPN”) and Diabetic Peripheral
Neuropathy (“DPN”). Sonnet intends to file an IND for a U.S. Phase 1b/2a pilot-scale efficacy study with SON-080 in CIPN
during the second half of 2021 that could yield initial top line clinical safety data during the first half of 2022. Pursuant to a license
agreement the Company entered with New Life in May 2021, Sonnet and New Life will be jointly responsible for leading the development
program for SON-080 in DPN with the objective of initiating an ex-US Phase 1b/2a pilot-scale efficacy study during the second half of
2021 or first half of 2022 that could yield initial top line clinical safety data as early as the first half of 2022. Regarding Sonnet’s
lead bispecific candidate, SON-1210, which combines Interleukins 12 and 15 (“IL-15”) covalently linked to the FHAB
construct, Sonnet intends to file an IND to begin human clinic testing during the first half of 2022.
On
April 1, 2020, Sonnet completed its merger (the “Merger”) with publicly-held Chanticleer Holdings, Inc. (“Chanticleer”)
in accordance with the terms of the Plan of Merger dated October 10, 2019, as amended by Amendment No. 1 on February 7, 2020 (the “Merger
Agreement”). Immediately prior to the Merger, Chanticleer spun-off its restaurant operations to a spin-off entity and no assets
or liabilities of the restaurant business remained after the spin-off. After the Merger, Chanticleer changed its name to Sonnet BioTherapeutics
Holdings, Inc. (“Sonnet Holdings” or the “Company”) and is focused on advancing Sonnet’s pipeline of oncology
candidates and the strategic expansion of Sonnet’s technology platform into other human disease.
Global
pandemic - COVID-19
On
March 10, 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic. There is significant uncertainty
as to the likely effects of this disease which may, among other things, materially impact the Company’s planned clinical trials.
This pandemic or outbreak could result in difficulty securing clinical trial site locations, clinical research organizations (“CROs”),
and/or trial monitors and other critical vendors and consultants supporting the trial. In addition, outbreaks or the perception of an
outbreak near a clinical trial site location could impact the Company’s ability to enroll patients. These situations, or others
associated with COVID-19, could cause delays in the Company’s clinical trial plans and could increase expected costs, all of which
could have a material adverse effect on the Company’s business and its financial condition. At the current time, the Company is
unable to quantify the potential effects of this pandemic on its future operations.
Liquidity
The
Company has incurred recurring losses and negative cash flows from operations activities since inception and it expects to generate losses
from operations for the foreseeable future primarily due to research and development costs for its potential product candidates. The
Company believes its cash of $6.0 million at June 30, 2021 will fund the Company’s projected operations into October 2021. Substantial
additional financing will be needed by the Company to fund its operations. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
The
Company filed a registration statement on Form S-1 on July 22, 2021, as subsequently amended, registering an aggregate of $34.5 million
of shares of common stock (or common stock equivalent) to be sold in a firm commitment underwritten public offering and has engaged BTIG,
LLC (“BTIG”) to act as the sole book-running manager in such offering. As of the date of this report, the offering has not
priced, and no assurance can be given that the offering will price or close, and for any particular amount of proceeds and at any particular
offering price.
The
Company entered into an At-the-Market Sales Agreement with BTIG on February 5, 2021 (the “Sales Agreement”). Pursuant to
the Sales Agreement, the Company had the ability to offer and sell, from time to time, through BTIG, as sales agent and/or principal,
shares of its common stock, having an aggregate offering price of up to $15,875,000, subject to certain limitations set forth in the
Sales Agreement. Through June 30, 2021 the Company sold an aggregate of 7,454,238 shares under the Sales Agreement for gross proceeds
of $15.9 million and net proceeds of $15.3 million, thus reaching the maximum amount able to be sold under the Sales Agreement.
On
May 2, 2021, the Company entered into a License Agreement with New Life Therapeutics PTE, LTD. (See Note 8).
The
Company plans to secure additional capital in the future through equity or debt financings, partnerships, collaborations, or other sources
to carry out the Company’s planned development activities. If additional capital is not available when required, the Company may
need to delay or curtail its operations until such funding is received. Various internal and external factors will affect whether and
when the Company’s product candidates become approved for marketing and successful commercialization. The regulatory approval and
market acceptance of the Company’s product candidates, length of time and cost of developing and commercializing these product
candidates and/or failure of them at any stage of the approval process will materially affect the Company’s financial condition
and future operations.
Operations
since inception have consisted primarily of organizing the Company, securing financing, developing its technologies through performing
research and development and conducting preclinical studies. The Company faces risks associated with companies whose products are in
development. These risks include the need for additional financing to complete its research and development, achieving its research and
development objectives, defending its intellectual property rights, recruiting and retaining skilled personnel, and dependence on key
members of management.
2. Summary of Significant Accounting Policies
a. Basis of presentation
The
accompanying unaudited interim consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting
principles (“U.S. GAAP”) for interim financial information as found in the Accounting Standard Codification (“ASC”)
and Accounting Standards Updates (ASUs”) of the Financial Accounting Standards Board (“FASB”). In the opinion of management,
the accompanying unaudited interim consolidated financial statements include all normal and recurring adjustments (which consist primarily
of accruals, estimates and assumptions that impact the unaudited interim financial statements) considered necessary to present fairly
the Company’s financial position as of June 30, 2021 and its results of operations and cash flows for the three and nine months
ended June 30, 2021 and 2020. The unaudited interim consolidated financial statements presented herein do not contain the required disclosures
under U.S. GAAP for annual financial statements and should be read in conjunction with the annual audited financial statements and related
notes of Sonnet Holdings as of and for the year ended September 30, 2020 included in the Company’s Annual Report on Form 10-K for
the fiscal year ended September 30, 2020.
b.
Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
c. Use of estimates
The
preparation of 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 and disclosure of contingent assets and liabilities as of the date of the consolidated
financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Estimates and assumptions are periodically reviewed, and the effects of revisions are reflected in the consolidated financial statements
in the period they are determined to be necessary. Significant estimates include the recording of prepayments and accruals related to
research and development.
d. Property and equipment
Property
and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Expenditures
for repairs and maintenance that do not extend the estimated useful life or improve an asset are expensed as incurred. Upon retirement
or sale, the cost and related accumulated depreciation and amortization of assets disposed of are removed from the accounts, and any
resulting gain or loss is included in the statement of operations. As of June 30, 2021, the property and equipment balance was comprised
of leasehold improvements and computer equipment associated with the Princeton office lease discussed in Note 7.
e.
Collaboration revenue
Collaboration
arrangements may contain multiple components, which may include (i) licenses; (ii) research and development activities; and (iii) the
manufacturing and supply of certain materials. Payments pursuant to these arrangements may include non-refundable payments, upfront payments,
milestone payments upon the achievement of significant regulatory and development events or sales of product at certain agreed-upon amounts,
sales milestones and royalties on product sales. The amount of variable consideration is constrained until it is probable that the revenue
is not at a significant risk of reversal in a future period.
In
determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under a collaboration arrangement,
the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of
whether the promised goods or services are performance obligations, including whether they are capable of being distinct; (iii) measurement
of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance
obligations; and (v) recognition of revenue as the Company satisfies each performance obligation.
The
Company applies significant judgment when evaluating whether contractual obligations represent distinct performance obligations, allocating
transaction price to performance obligations within a contract, determining when performance obligations have been met, and assessing
the recognition of variable consideration. When consideration is received prior to the Company completing its performance obligation
under the terms of a contract, a contract liability is recorded as deferred income. Deferred income expected to be recognized as revenue
within the twelve months following the balance sheet date is classified as current liabilities. On May 2, 2021, the Company entered into
a License Agreement (the “New Life Agreement”) with New Life Therapeutics PTE, LTD (“New Life”). See Note 9 for
further discussion of the Company's revenue recognition associated with the New Life Agreement.
f.
Net loss per
share
Basic
net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during each
period (and potential shares of common stock that are exercisable for little or no consideration). Included in basic weighted-average
number of shares of common stock outstanding during the three and nine months ended June 30, 2021 are the Series B warrants and certain
warrants issued to the spin-off entity with exercise prices of $0.0001 and $0.01 per share, respectively.
Diluted
loss per share includes the effect, if any, from the potential exercise or conversion of securities such as common stock warrants and
stock options which would result in the issuance of incremental shares of common stock. For diluted net loss per share, the weighted-average
number of shares of common stock is the same for basic net loss per share due to the fact that when a net loss exists, dilutive securities
are not included in the calculation as the impact is anti-dilutive.
The
following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock
outstanding as they would be anti-dilutive:
Schedule of Potentially Dilutive Securities
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
Warrants
|
|
|
105,812
|
|
|
|
105,812
|
|
Legacy
Chanticleer warrants
|
|
|
17,760
|
|
|
|
20,180
|
|
Series
A warrants
|
|
|
—
|
|
|
|
3,300,066
|
|
Series
C warrants
|
|
|
11,329,463
|
|
|
|
—
|
|
Unvested
restricted stock
|
|
|
363,268
|
|
|
|
—
|
|
|
|
|
11,816,303
|
|
|
|
3,426,058
|
|
g.
Recent accounting
pronouncements
Recently
Announced
In
December 2019, the FASB issued ASU 2019-12, “Income Taxes Topic 740-Simplifying the Accounting for Income Taxes” (“ASU
2019-12”), which intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions
to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application of Topic 740.
This guidance is effective for fiscal years beginning after December 15, 2020, including interim periods therein, and early adoption
is permitted. The Company is currently evaluating the new standard, but adoption is not expected to have a material impact on its financial
condition, results of operations, cash flows, and financial statement disclosures.
Recently
Adopted
In
August 2018, the FASB issued ASU 2018-13, “Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurements”
(“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC 820. The goal of the ASU is to improve
the effectiveness of ASC 820’s disclosure requirements. The adoption of ASU 2018-13 on October 1, 2019, did not have a material
impact on the consolidated financial statements.
3. Merger with Chanticleer
Sonnet
merged with Chanticleer Holdings on April 1, 2020. The Merger was accounted for as a reverse recapitalization with Sonnet as the accounting
acquirer. Legacy Chanticleer shareholders were issued 547,639 shares of common stock. Merger consideration paid by Sonnet to Chanticleer
Holdings included $6.0 million of cash and issuance of warrants to the spin-off entity. Sonnet reflected the $6.0 million cash paid to
the spin-off entity as a decrease to additional paid-in capital.
4. Relief Acquisition
In
August 2019, the Company executed a Share Exchange Agreement with Relief Holdings, in which the Company agreed to acquire the outstanding
shares of Relief. The Company issued 757,933 shares of common stock upon closing of the transaction on April 1, 2020.
For
accounting purposes, the Company determined that the acquisition of Relief did not meet the definition of a business and was accounted
for as an asset acquisition since substantially all of the fair value of the assets acquired was concentrated in a single identified
intangible asset, atexakin alfa.
Schedule
of Assets and Liability Acquired
Fair
value of common stock issued:
|
|
$
|
6,700,128
|
|
|
|
|
|
|
Assets
acquired:
|
|
|
|
|
Cash
|
|
$
|
16,194
|
|
Prepaid
expenses and other current assets
|
|
|
29,311
|
|
In-process
research and development (IPPR&D)
|
|
|
6,826,495
|
|
Total
assets acquired
|
|
|
6,872,000
|
|
|
|
|
|
|
Liabilities
assumed:
|
|
|
|
|
Accounts
payable
|
|
|
45,757
|
|
Accrued
expenses
|
|
|
126,115
|
|
Total
liabilities assumed
|
|
|
171,872
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
6,700,128
|
|
The
Company expensed the acquired IPR&D as of the acquisition date since further development and regulatory approval are required.
5. Accrued Expenses
Accrued
expenses consisted of the following:
Schedule of Accrued Expenses
|
|
June
30,
|
|
|
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
Compensation
and benefits
|
|
$
|
846,488
|
|
|
$
|
1,065,398
|
|
Research
and development
|
|
|
1,460,781
|
|
|
|
519,159
|
|
Professional
fees
|
|
|
191,568
|
|
|
|
479,121
|
|
Other
|
|
|
10,119
|
|
|
|
—
|
|
Accrued
Expenses
|
|
$
|
2,508,956
|
|
|
$
|
2,063,678
|
|
6. Debt
Related-party
notes
During
the nine months ended June 30, 2020, the Company issued unsecured notes payable to various related parties resulting in cash proceeds
of $55,000. These notes are payable on demand and payments of $20,436 and $46,461 were made during the nine months ended June 30, 2021
and 2020, respectively. The interest on these notes was de minimis during each of those periods.
In
October 2019, the Company issued 8,526 shares of common stock to settle $0.2 million of related party notes.
PPP
Loan
On
March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
The CARES Act includes a provision for a Paycheck Protection Program (“PPP”), administered by the U.S. Small Business Administration
(“SBA”) and further amended by the Paycheck Protection Program Flexibility Act of 2020 (“PPP Flexibility Act”),
which was enacted on June 5, 2020.
In
May 2020, the Company received a PPP Loan of $0.1 million. The application for these funds required the Company to certify in good faith
that current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. The Company was also
required to certify that the loan funds would be used to retain workers and maintain payroll or make mortgage payments, lease payments,
and utility payments. The PPP Loan had a two-year term and bore interest at a rate of 1.0% per year.
Under
the terms of the CARES Act, the Company could apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness,
if any, would be determined, subject to limitations, based on the use of loan proceeds for payroll costs, rent and utility costs and
provided that only a portion of the use of proceeds are for non-payroll costs. The unforgiven portion of the PPP Loan could be repaid
by the Company at any time prior to maturity with no prepayment penalty. The Company’s PPP Loan and the related interest were forgiven
in full in June 2021. Forgiveness of the PPP Loan is included in other income within the Company’s consolidated statement of operations
for the three and nine months ended June 30, 2021.
7. Leases
The
Company adopted ASC 842, “Leases” (“ASC 842”), on October 1, 2019. Through September 30, 2019, the Company’s
leases consisted of leased office space under various operating leases with terms of one year or less. These leases qualified as short-term
leases and as such, there was no cumulative impact from the adoption of ASC 842.
In
December 2019, the Company entered a 36-month lease for office space in Princeton, New Jersey, which commenced February 1, 2020. At that
time, the Company terminated its existing month-to-month leases for office space.
The
components of lease expense for the nine months ended June 30, 2021 are as follows:
Schedule of Lease Expenses
Lease
expense
|
|
|
|
|
Operating
lease expense
|
|
$
|
76,617
|
|
Short-term
lease expense
|
|
|
12,555
|
|
Total
lease cost
|
|
$
|
89,172
|
|
At
June 30, 2021, the weighted-average remaining lease term was 1.58 years and the weighted average discount rate was 12%.
Cash
paid for amounts included in the measurement of lease liabilities:
Schedule of Operating Lease Liabilities
|
|
|
|
|
Operating
cash flow from operating lease
|
|
$
|
75,974
|
|
Future
minimum lease payments under non-cancellable leases at June 30, 2021 are as follows:
Schedule of Future Minimum Lease Payments
Fiscal
year
|
|
|
|
2021
(excluding the nine months ended June 30, 2021)
|
|
$
|
25,537
|
|
2022
|
|
|
103,440
|
|
2023
|
|
|
34,695
|
|
Total
undiscounted lease payments
|
|
|
163,672
|
|
Less:
imputed interest
|
|
|
(16,969
|
)
|
Total
lease liabilities
|
|
$
|
146,703
|
|
8. Commitments and Contingencies
Legal
Proceedings
From
time to time, the Company is a party to various lawsuits, claims, and other legal proceedings that arise in the ordinary course of its
business. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters
will have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
License
Agreements
The
Company has entered into a Discovery Collaboration Agreement (the “Collaboration Agreement”) with XOMA (US) LLC (“XOMA”),
pursuant to which XOMA granted to the Company a non-exclusive, non-transferrable license and/or right to use certain materials, technologies
and related information related to discovery, optimization and development of antibodies and related proteins and to develop and commercialize
products thereunder. The Company is obligated to make contingent milestone payments to XOMA totaling $3.8 million on a product-by-product
basis upon the achievement of certain development and approval milestones related to a product. The Company has also agreed to pay XOMA
low single-digit royalties on net sales of products sold by the Company. Royalties on each product are payable on a country-by-country
basis until the later of (i) a specified period of time after the first commercial sale, and (ii) the date of expiration of the last
valid claim in the last-to-expire of the issued patents covered by the Collaboration Agreement.
The
Company has entered into a License Agreement (the “ARES License Agreement”) with Ares Trading, a wholly-owned subsidiary
of Merck KGaA (“ARES”). Under the terms of the ARES License Agreement, ARES has granted the Company a sublicensable, exclusive,
worldwide, royalty-bearing license on proprietary patents to research, develop, use and commercialize products using atexakin alfa (“Atexakin”),
a low dose formulation of human interleukin-6 in peripheral neuropathies and vascular complications. Pursuant to the ARES License Agreement,
the Company will pay ARES high single-digit royalties on net sales of products sold by the Company. Royalties are payable on a product-by-product
and country-by-country basis until the later of (i) a specified period of time after the first commercial sale in such country, and (ii)
the last date on which such product is covered by a valid claim in such country.
Employment
Agreements
The
Company has entered into employment contracts with its officers and certain employees that provide for severance and continuation of
benefits in the event of termination of employment either by the Company without cause or by the employee for good reason, both as defined
in the contract. In addition, in the event of termination of employment following a change in control, as defined, either by the Company
without cause or by the employee for good reason, any unvested portion of the employee’s initial stock option grant becomes immediately
vested.
9.
License and Collaboration Agreement
Under
the New Life Agreement, the Company granted New Life an exclusive license (with the right to sublicense) to develop and commercialize
pharmaceutical preparations containing a specific recombinant human interleukin-6, SON-080 (the “Compound”) (such preparations,
the “Products”) for the prevention, treatment or palliation of diabetic peripheral neuropathy in humans (the “DPN Field”)
in Malaysia, Singapore, Indonesia, Thailand, Philippines, Vietnam, Brunei, Myanmar, Lao PDR and Cambodia (the “Exclusive Territory”).
New Life may exercise the option to expand (1) the field of the exclusive license to include the prevention, treatment or palliation
of chemotherapy-induced peripheral neuropathy in humans (the “CIPN Field”), which option is non-exclusive and will expire
on December 31, 2021; and/or (2) the territorial scope of the license to include the People’s Republic of China, Hong Kong and/or
India, which option is exclusive and will also expire on December 31, 2021. If these options are exercised, the terms of the CIPN Field
and the territory expansion will be negotiated by the parties.
The
Company will retain all rights to manufacture Compounds and Products anywhere in the world. The Company and New Life shall enter into
a follow-on supply agreement pursuant to which the Company shall supply to New Life Products for development and commercialization thereof
in the DPN Field (and the CIPN Field, if applicable) in the Exclusive Territory on terms to be negotiated by the parties. The Company
will also assist in transferring certain preclinical and clinical development know-how that is instrumental in New Life’s ability
to benefit from the license.
New
Life will bear the cost of, and be responsible for, among other things, conducting clinical studies and additional non-clinical studies
and other developmental and regulatory activities for and commercializing Products in the DPN Field (and the CIPN Field, if applicable)
in the Exclusive Territory.
New
Life paid the Company a $0.5 million non-refundable upfront cash payment in August 2020 upon executing a letter of intent to negotiate
a license agreement and a $0.5 million non-refundable upfront cash payment in June 2021 in connection with the execution of the New Life
Agreement. New Life is also obligated to pay a non-refundable deferred license fee of an additional $1.0 million at the time of the satisfaction
of certain milestones, as well as potential additional milestone payments to the Company of up to $19.0 million subject to the achievement
of certain development and commercialization milestones. In addition, during the Royalty Term (as defined below), New Life is obligated
to pay the Company tiered double digit royalties ranging from 12% to 30% based on annual net sales of Products in the Exclusive Territory.
The “Royalty Term” means, on a Product-by-Product and a country-by-country basis in the Exclusive Territory, the period commencing
on the date of the first commercial sale (subject to certain conditions) of such Product in such country in the Exclusive Territory and
continuing until New Life ceases commercialization of such Product in the DIPN Field (or CIPN Field, if applicable).
The
New Life Agreement will remain in effect on a Product-by-Product, country-by-country basis and will expire upon the expiration of the
Royalty Term for the last-to-expire Product in the last-to-expire country, subject to (i) each party’s early termination rights
including for material breach or insolvency or bankruptcy of the other party and (ii) the Company’s Buy Back Right and New Life’s
Give Back Right (as defined below).
In
addition, New Life granted to the Company an exclusive option to buy back the rights granted by the Company to New Life and the Company
granted New Life the right to give back the rights with respect to Products in the DPN Field and/or the CIPN Field (if applicable) in
one or more countries in the Exclusive Territory on terms to be agreed upon, which options will expire upon the initiation of a Phase
III Trial for the applicable Product.
Revenue
Recognition
The
Company first assessed the New Life Agreement under ASC 808, Collaborative Arrangements (“ASC 808”) to determine whether
the New Life Agreement or units of accounts within the New Life Agreement represent a collaborative arrangement based on the risks and
rewards and activities of the parties. The Company concluded that New Life represented a customer and applied relevant guidance from
ASC 606, Revenue from Contracts with Customers (“ASC 606”) to evaluate the appropriate accounting under the New Life Agreement.
In accordance with this guidance, the Company identified the following obligations under the arrangement: (i) License to develop, market,
import, use and commercialize the Product in the Field in the Exclusive Territory (the “License”); and (ii) transfer of know-how
and clinical development and regulatory activities (“R&D Activities”). The options to expand the CIPN Field and territory
as well as the future supply agreement represent optional purchases, which are accounted for as separate contracts unless they convey
a material right to the customer. The Company evaluated these separate contracts and did not identify any material right to be present.
The Company determined that License and the R&D services are not distinct from each other and therefore combined these material promises
into a single performance obligation.
The
Company determined the initial transaction price of the single performance obligation to be $1.0 million, as the future development and
commercialization milestones, which represent variable consideration, are subject to constraint at inception. At the end of each subsequent
reporting period, the Company will reevaluate the probability of achievement of the future development and commercialization milestones
subject to constraint and, if necessary, will adjust its estimate of the overall transaction price. Any such adjustments will be recorded
on a cumulative catch-up basis. For the sales-based royalties, the Company will recognize revenue when the related sales occur.
The
Company has deferred the entire $1.0 million of transaction price as of June 30, 2021.
10. Stockholders’
Equity
Common
stock
During
the nine months ended June 30, 2021, the Company sold common stock of 7,454,238 shares under the at-the-market sales agreement discussed
in Note 1 for gross proceeds of an aggregate of $15.9 million and net proceeds of $15.3 million. In addition, the Company issued 127,880
shares of common stock upon the vesting of restricted stock units.
Prior
to the Merger, during the six months ended March 31, 2020, the Company sold 186,075 shares of common stock and issued warrants to purchase
93,038 shares of common stock with an exercise price of $29.32 per share for net proceeds of $4.1 million. In addition, the Company issued
8,526 shares of common stock upon conversion of outstanding promissory notes with an outstanding principal balance of $0.2 million at
the time of conversion.
Upon
consummation of the Merger, the Company issued 547,639 common shares and 206,371 warrants to legacy Chanticleer shareholders. The warrants
are to purchase shares of common stock with exercise prices ranging from $0.01 per share to $1,820 per share and a weighted average exercise
price of $26.60 per share.
On
April 1, 2020, the Company sold 1,699,232 shares of common stock to new investors for net proceeds of $15 million in a private placement.
The new investors also received 3,300,066 Series A warrants with an exercise price of $5.3976 and 2,247,726 Series B warrants with an
exercise price of $0.0001. An advisor for the private placement was issued 453,128 shares of common stock.
The
Company issued 757,933 shares to acquire the nets assets of Relief (see Note 4).
Common
stock warrants
As
of June 30, 2021, the following equity-classified warrants and related terms were outstanding:
Schedule of Warrants Outstanding
|
|
Warrants
Outstanding
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
Warrants
|
|
|
105,812
|
|
|
$
|
29.32
|
|
|
October
1, 2022 - March 10, 2023
|
Chanticleer
warrants
|
|
|
17,760
|
|
|
$
|
58.50
- $91.00
|
|
|
April
30, 2027 - December 17, 2028
|
Series
B warrants
|
|
|
42,373
|
|
|
$
|
0.0001
|
|
|
April
16, 2025
|
Series
C warrants
|
|
|
11,329,463
|
|
|
$
|
3.19
|
|
|
October
16, 2025
|
|
|
|
11,495,408
|
|
|
|
|
|
|
|
During
the nine months ended June 30, 2021, the Series B warrant holders exercised 23,863 warrants for proceeds of $2. An additional 2,242,427
of Series B warrants were net share settled, resulting in the issuance of 2,242,339 shares of common stock.
During
the nine months ended June 30, 2021, the Chanticleer warrants to purchase 186,161 shares of common stock with an exercise price of $0.01
per share were net share settled, resulting in the issuance of 185,422 shares of common stock.
11. Share-Based
Compensation
In
April 2020, the Company adopted the 2020 Omnibus Equity Incentive Plan (the “Plan”). The total number of shares authorized
under the Plan as of June 30, 2021 was 687,029. The Plan increases the amount of shares issuable under the Plan by four percent of the
outstanding shares of common stock at each January 1, each year. Shares issued under the Plan that are forfeited, cancelled, returned
to the Company or surrendered in payment or partial payment of the exercise price and/or taxes withheld with respect to the exercise
thereof, are not counted against the maximum share limitations. The Plan permits the granting of share-based awards, including stock
options, restricted stock units and awards, stock appreciation rights and other types of awards as deemed appropriate, in each case,
in accordance with the terms of the Plan. The terms of the awards are determined by the Company’s Board of Directors.
Restricted
Stock Units
In
July of 2020, 653,846 restricted stock units (“RSUs”) were granted, 50% of which vested on April 2, 2021 and the remaining
50% vest on April 2, 2022. In March of 2021, an additional 47,000 RSUs were granted, 50% of which vest on March 25, 2022 and the remaining
50% vest on March 25, 2023. Any unvested RSUs will be forfeited upon termination of services. The fair value of an RSU is equal to the
fair market value of the Company’s common stock on the date of grant. RSU expense is amortized straight-line over the vesting period.
The
Company recorded share-based compensation expense associated with the RSUs in its accompanying statements of operations.
Schedule of Share-based Compensation Expense
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June
30, 2021
|
|
|
June
30, 2021
|
|
Research
and development
|
|
$
|
105,712
|
|
|
$
|
317,101
|
|
General
and administrative
|
|
|
211,944
|
|
|
|
740,665
|
|
|
|
$
|
317,656
|
|
|
$
|
1,057,766
|
|
The
following table summarizes RSU activity under the Plan:
Schedule of Restricted Stock Units Activity
|
|
RSU
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Unvested
balance at September 30, 2020
|
|
|
653,845
|
|
|
$
|
3.63
|
|
Granted
|
|
|
47,000
|
|
|
$
|
2.38
|
|
Vested
|
|
|
(326,920
|
)
|
|
$
|
3.63
|
|
Forfeited
|
|
|
(10,657
|
)
|
|
$
|
3.63
|
|
Unvested
balance at June 30, 2021
|
|
|
363,268
|
|
|
$
|
3.47
|
|
As
of June 30, 2021, total unrecognized compensation expense relating to unvested RSUs granted was $1.1 million, which is expected to be
recognized over one year.
12. Subsequent
Event
The
Company has evaluated subsequent events and there are no items requiring disclosure except the following:
The
Company filed a registration statement on Form S-1 on July 22, 2021, as subsequently amended, registering an aggregate of $34.5 million
of shares of common stock (or common stock equivalent) to be sold in a firm commitment underwritten public offering and has engaged BTIG,
LLC (“BTIG”) to act as the sole book-running manager in such offering. As of the date of this report, the offering has not
priced, and no assurance can be given that the offering will price or close, and for any particular amount of proceeds and at any particular
offering price.
ITEM
2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read together with our financial statements
and the related notes and the other financial information included elsewhere in this Quarterly Report. This discussion contains forward-looking
statements 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 discussed below and elsewhere in this Quarterly Report, particularly those
under “Risk Factors.”
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations,
assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which
may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future
results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of
historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our
use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,”
“would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,”
“continue,” “plan,” “point to,” “project,” “predict,” “could,”
“intend,” “target,” “potential” and other similar words and expressions of the future.
There
are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking
statement made by us. These factors include, but are not limited to:
|
●
|
our
lack of operating history and history of operating losses;
|
|
|
|
|
●
|
our
need for significant additional capital and our ability to satisfy our capital needs;
|
|
|
|
|
●
|
our
ability to complete required clinical trials of our products and obtain approval from the FDA or other regulatory agents in different
jurisdictions;
|
|
|
|
|
●
|
the
potential impact of the recent COVID-19 pandemic on our operations, including on our clinical development plans and timelines;
|
|
|
|
|
●
|
our
ability to maintain or protect the validity of our patents and other intellectual property;
|
|
|
|
|
●
|
our
ability to retain key executive members;
|
|
|
|
|
●
|
our
ability to internally develop new inventions and intellectual property;
|
|
|
|
|
●
|
interpretations
of current laws and the passages of future laws;
|
|
|
|
|
●
|
acceptance
of our business model by investors;
|
|
|
|
|
●
|
the
accuracy of our estimates regarding expenses and capital requirements; and
|
|
|
|
|
●
|
our
ability to adequately support growth.
|
The
foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or
risk factors that we are faced with that may cause our actual results to differ from those anticipate in our forward-looking statements.
Please see “Risk Factors” for additional risks which could adversely impact our business and financial performance.
All
forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue
reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by
reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking
statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections
in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections
will result or be achieved or accomplished.
Overview
Sonnet
BioTherapeutics Holdings, Inc. (“Sonnet Holdings,” “we,” “us,” “our” or the “Company”),
is a clinical stage, oncology-focused biotechnology company with a proprietary platform for innovating biologic medicines of single-
or bi-specific action. Known as FHAB™ (Fully Human Albumin Binding), the technology utilizes a fully human single chain
antibody fragment that binds to and “hitch-hikes” on human serum albumin for transport to target tissues. We designed the
construct to improve drug accumulation in specific tissues, as well as to extend the duration of activity in the body. FHAB
development candidates are produced in a mammalian cell culture, which enables glycosylation, thereby reducing the risk of immunogenicity.
We believe our FHAB technology, for which we received a U.S. patent in June 2021, is a distinguishing feature of our biopharmaceutical
platform that is well suited for future drug development across a range of human disease areas, including in oncology, autoimmune, pathogenic,
inflammatory, and hematological conditions.
Our
current internal pipeline development activities are focused on cytokines, a class of cell signaling peptides that, among other important
functions, serve as potent immunomodulatory agents. Working both independently and synergistically, specific cytokines have shown the
ability to modulate the activation and maturation of immune cells that fight cancer and pathogens. However, because they do not preferentially
accumulate in specific tissues and are quickly eliminated from the body, the conventional approach to achieving a treatment effect with
cytokine therapy typically requires the administration of high and frequent doses. This can result in a reduced treatment effect accompanied
by the potential for systemic toxicity, which poses challenges to the therapeutic application of this class of drugs.
Sonnet’s
lead proprietary asset, SON-1010, is a fully human version of Interleukin 12 (“IL-12”), covalently linked to the FHAB
construct, for which Sonnet intends to pursue clinical development in solid tumor indications, including non-small cell lung cancer and
head and neck cancer. Sonnet has completed a nonhuman primate (“NHP”) GLP toxicity study with SON-1010 and is preparing an
Investigational New Drug (“IND”) application for submission to the FDA with the goal of initiating a Phase 1 clinical trial
during the second half of 2021 and having initial top line clinical safety data available during the first half of 2022. The Company
acquired the global development rights to its most advanced compound, SON-080, a fully human version of Interleukin 6 (“IL-6”),
in April 2020. Sonnet is advancing SON-080 in target indications of Chemotherapy-Induced Peripheral Neuropathy (“CIPN”) and
Diabetic Peripheral Neuropathy (“DPN”). Sonnet intends to file an IND for a U.S. Phase 1b/2a pilot-scale efficacy study with
SON-080 in CIPN during the second half of 2021 that could yield initial top line clinical safety data during the first half of 2022.
Pursuant to a license agreement the Company entered with New Life in May 2021, Sonnet and New Life will be jointly responsible for leading
the development program for SON-080 in DPN with the objective of initiating an ex-US Phase 1b/2a pilot-scale efficacy study during the
second half of 2021 or first half of 2022 that could yield initial top line clinical safety data as early as the first half of 2022.
Regarding Sonnet’s lead bispecific candidate, SON-1210, which combines Interleukins 12 and 15 (“IL-15”) covalently
linked to the FHAB construct, Sonnet intends to file an IND to begin human clinic testing during the first half of 2022.
We
have incurred recurring operating losses and negative cash flows since inception. Our ability to generate product or licensing revenue
sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of
our current or future product candidates. Our net losses were $18.0 million and $16.7 million for the nine months ended June 30, 2021
and 2020, respectively. As of June 30, 2021, we had cash of $6.0 million. We expect to continue to incur significant expenses and increasing
operating losses for at least the next several years. We expect that our expenses and capital requirements will increase substantially
in connection with our ongoing activities, particularly if and as we:
|
●
|
conduct
additional clinical trials for product candidates;
|
|
|
|
|
●
|
continue
to discover and develop additional product candidates;
|
|
|
|
|
●
|
acquire
or in-license other product candidates and technologies;
|
|
|
|
|
●
|
maintain,
expand and protect our intellectual property portfolio;
|
|
|
|
|
●
|
hire
additional clinical, scientific and commercial personnel;
|
|
|
|
|
●
|
establish
a commercial manufacturing source and secure supply chain capacity sufficient to provide commercial quantities of any product candidates
for which we may obtain regulatory approval;
|
|
|
|
|
●
|
seek
regulatory approval for product candidates that successfully complete clinical trials;
|
|
|
|
|
●
|
establish
a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval; and
|
|
|
|
|
●
|
add
operational, financial and management information systems and personnel, including personnel to support our product development and
planned future commercialization efforts, as well as to support our operation as a public reporting company.
|
We
will not generate revenue from product sales, if any, unless and until we receive licensing revenue and/or successfully complete clinical
development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates
and do not enter into a commercialization partnership, we expect to incur significant expenses related to developing our internal commercialization
capability to support product sales, marketing and distribution. As a result of the Merger, as described below, we will continue to incur
significant costs associated with operating as a public company.
As
a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such
time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity,
debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. We may
not be able to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all.
If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, reduce or eliminate
the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.
Because
of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased
expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not
become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable
to continue our operations at planned levels and be forced to reduce or terminate operations.
Since
our inception in 2015, we have devoted substantially all of our efforts and financial resources to organizing and staffing the Company,
business planning, raising capital, acquiring or discovering product candidates and securing related intellectual property rights and
conducting discovery, research and development activities for product candidates. We do not have any products approved for sale and have
not generated any revenue from product sales. We have funded our operations to date primarily with proceeds from sales of common stock,
warrants and proceeds from the issuance of convertible debt.
Recent
Events
New
Life Therapeutics License Agreement
On
May 2, 2021, we entered into a License Agreement (the “Agreement”) with New Life Therapeutics PTE, LTD., a company organized
under the laws of Singapore (“New Life”). Pursuant to the Agreement, we granted New Life an exclusive license (with the right
to sublicense) to develop and commercialize pharmaceutical preparations containing a specific recombinant human interleukin-6, SON-080
(or any derivatives, fragments or conjugates thereof) (the “Compound”) (such preparations, the “Products”) for
the prevention, treatment or palliation of diabetic peripheral neuropathy in humans (the “DPN Field”) in Malaysia, Singapore,
Indonesia, Thailand, Philippines, Vietnam, Brunei, Myanmar, Lao PDR and Cambodia (the “Exclusive Territory”). New Life may
exercise the option to expand (1) the field of the exclusive license to include the prevention, treatment or palliation of chemotherapy-induced
peripheral neuropathy in humans (the “CIPN Field”), which option is non-exclusive and will expire on December 31, 2021; and/or
(2) the territorial scope of the license to include the People’s Republic of China, Hong Kong and/or India, which option is exclusive
and will also expire on December 31, 2021. We are excluded from developing, using, selling or otherwise commercializing any Compounds
or Products for use in the DPN Field in the Exclusive Territory during the term of the Agreement.
We
retain all rights to manufacture Compounds and Products anywhere in the world. We and New Life shall enter into a follow-on supply agreement
pursuant to which we shall supply to New Life Products for development and commercialization thereof in the DPN Field (and the CIPN Field,
if applicable) in the Exclusive Territory on terms to be negotiated by the parties.
Pursuant
to the terms of the Agreement, New Life will bear the cost of, and be responsible for, among other things, conducting clinical studies
and additional non-clinical studies (if any, subject to both parties’ approval), preparing and filing applications for regulatory
approval and undertaking other developmental and regulatory activities for and commercializing Products in the DPN Field (and the CIPN
Field, if applicable) in the Exclusive Territory. New Life will own and maintain all regulatory filings and approvals for Products in
the Exclusive Territory.
New
Life paid the Company a $500,000 non-refundable upfront cash payment in August 2020 upon executing a letter of intent to negotiate this
license agreement and a $500,000 non-refundable upfront cash payment in June 2021 in connection with the execution of the Agreement,
and is obligated to pay a deferred license fee of an additional $1,000,000 at the time of the satisfaction of certain milestones as well
as potential additional milestone payments to us totaling up to $19,000,000 subject to the achievement of certain development and commercialization
milestones. In addition, during the Royalty Term (as defined below), New Life is obligated to pay us tiered double digit royalties ranging
from 12% to 30% based on annual net sales of Products in the Territory. The “Royalty Term” means, on a Product-by-Product
and a country-by-country basis in the Exclusive Territory, the period commencing on the date of the first commercial sale (subject to
certain conditions) of such Product in such country in the Exclusive Territory and continuing until New Life ceases commercialization
of such Product in the DIPN Field (or CIPN Field, if applicable). In the event New Life (i) files for an initial public offering or (ii)
is subject to a Change of Control, the royalty obligations may be converted to equity subject to mutual agreement of the parties.
In
addition, New Life shall pay to us a percentage, in the double digits, of all revenue received through sublicensing of each Product,
subject to certain exclusions.
The
New Life Agreement will remain in effect on a Product-by-Product, country-by-country basis and will expire upon the expiration of the
Royalty Term for the last-to-expire Product in the last-to-expire country, subject to (i) each party’s early termination rights
including for material breach or insolvency or bankruptcy of the other party and (ii) the Company’s Buy Back Right and New Life’s
Give Back Right (as defined below).
In
addition, New Life granted to the Company an exclusive option to buy back the rights granted by the Company to New Life and the Company
granted New Life the right to give back the rights with respect to Products in the DPN Field and/or the CIPN Field (if applicable) in
one or more countries in the Exclusive Territory on terms to be agreed upon, which options will expire upon the initiation of a Phase
III Trial for the applicable Product.
Merger
On
April 1, 2020, Chanticleer Holdings, Inc (“Chanticleer”), now known as Sonnet BioTherapeutics Holdings, Inc, completed its
merger transaction (the “Merger”) with Sonnet BioTherapeutics, Inc. (“Sonnet”), in accordance with the terms
of the Agreement and Plan of Merger, dated as of October 10, 2019, as amended on February 7, 2020 (the “Merger Agreement”).
Chanticleer shares of common stock traded on the Nasdaq Capital Market through close of Business on Tuesday, March 31, 2020 under the
ticker symbol “BURG”. We commenced trading on the Nasdaq capital Market, under the ticker symbol “SONN” on April
2, 2020.
Immediately
following the Merger, Sonnet became a wholly-owned subsidiary of Sonnet Holdings. For accounting purposes, Sonnet is considered to be
the acquiring company and the Merger has been accounted for as a reverse acquisition and recapitalization with Sonnet being treated as
the accounting acquirer. As such, the financial information prior to the Merger relate solely to Sonnet. Subsequent to the Merger, the
consolidated financial statements relate to the consolidated entities of the Company.
Relief
Acquisition
In
August 2019, Sonnet executed a Share Exchange Agreement with Relief Therapeutics Holdings SA (“Relief Holdings”), in which
Sonnet agreed to acquire the outstanding shares of Relief Therapeutics SA (“Relief”), a wholly-owned subsidiary of Relief
Holdings, by issuing common stock of Sonnet. Sonnet assumed the development of Relief’s asset, atexakin alfa, together with its
proprietary experimental drugs. The acquisition of Relief closed on April 1, 2020 and Relief is now a wholly-owned subsidiary of Sonnet.
COVID-19
Pandemic
In
December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China and on March 11, 2020 was declared
a pandemic by the World Health Organization. To date, many countries around the world have imposed quarantines and restrictions on travel
and mass gatherings to slow the spread of COVID-19 and have closed non-essential businesses. As countries and state and local jurisdictions
continue to put restrictions in place, our ability to continue to operate our business may also be limited. Such events may result in
a period of business, supply and drug product manufacturing disruption, and in reduced operations, any of which could materially affect
our business, financial condition and results of operations.
This
pandemic or outbreak could result in difficulty securing clinical trial site locations, CROs, and/or trial monitors and other critical
vendors and consultants supporting the trial. In addition, outbreaks or the perception of an outbreak near a clinical trial site location
could impact our ability to enroll patients. These situations, or others associated with COVID-19, could cause delays in our clinical
trial plans and could increase expected costs, all of which could have a material adverse effect on our business and its financial condition.
In
particular, although our CIPN program with SON-080 continues to progress forward, the COVID-19 pandemic has impacted workflow at our
contract research partners such that we now estimate delays pushing a trial initiation into 2021 from our previous plan of late 2020.
While
the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic
could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future
negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially
affect our business and the value of our common shares.
The
COVID-19 outbreak may also affect the ability of our staff and the parties we work with to carry out our non-clinical, clinical, and
drug manufacturing activities. We rely or may in the future rely on clinical sites, investigators and other study staff, consultants,
independent contractors, contract research organizations and other third-party service providers to assist us in managing, monitoring
and otherwise carrying out our nonclinical studies and clinical trials. We also rely or may in the future rely on consultants, independent
contractors, contract manufacturing organizations, and other third-party service providers to assist us in managing, monitoring and otherwise
carrying out our API production, formulation, and drug manufacturing activities. COVID-19 may affect the ability of any of these external
people, organizations, or companies to devote sufficient time and resources to our programs or to travel to perform work for us.
Potential
negative impacts of the COVID-19 outbreak on the conduct of current or future clinical studies include delays in gaining feedback from
regulatory agencies, starting new clinical studies, and recruiting subjects to studies that are enrolling. The potential negative impacts
also include inability to have study visits at study sites, incomplete collection of safety and efficacy data, and higher rates of drop-out
of subjects from ongoing studies, delays in site entry of study data into the data base, delays in monitoring of study data because of
restricted physical access to study sites, delays in site responses to queries, delays in data-base lock, delays in data analyses, delays
in time to top-line data, and delays in completing study reports. New or worsening COVID-19 disruptions or restrictions could have the
potential to further negatively impact our non-clinical studies, clinical trials, and drug manufacturing activities.
Components
of Results of Operations
Operating
Expenses
Research
and Development Expenses
Research
and development expenses consist primarily of costs incurred in connection with the discovery and development of the Company’s
product candidates. The Company expenses research and development costs as incurred and such costs include:
|
●
|
employee-related
expenses, including salaries, share-based compensation and related benefits, for employees engaged in research and development functions;
|
|
|
|
|
●
|
expenses
incurred in connection with the preclinical and clinical development of the Company’s product candidates, including under agreements
with third parties, such as consultants and clinical research organizations;
|
|
|
|
|
●
|
the
cost of manufacturing drug products for use in the Company’s preclinical studies and clinical trials, including under agreements
with third parties, such as consultants and contract manufacturing organizations;
|
|
|
|
|
●
|
facilities,
depreciation and other expenses, which include direct or allocated expenses for rent and maintenance of facilities and insurance;
|
|
|
|
|
●
|
costs
related to compliance with regulatory requirements; and
|
|
|
|
|
●
|
payments
made under third-party licensing agreements.
|
We
recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided
by our service providers. This process involves reviewing open contracts and purchase orders, communicating with their personnel to identify
services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the
service when we have not yet been invoiced or otherwise notified of actual costs. Nonrefundable advance payments for goods or services
to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized
as an expense when the goods have been delivered or the services have been performed.
Our
direct research and development expenses consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs and
research laboratories in connection with preclinical development, process development, manufacturing and clinical development activities.
Our direct research and development expenses also include fees incurred under third-party license agreements. We do not allocate employee
costs and costs associated with discovery efforts, laboratory supplies and facilities, including depreciation or other indirect costs,
to specific product candidates because these costs are deployed across multiple programs and as such, are not separately classified.
We use internal resources primarily to conduct its research and discovery as well as for managing preclinical development, process development,
manufacturing and clinical development activities. These employees work across multiple programs and therefore, we do not track its costs
by product candidate.
We
expect our research and development expense will increase for the foreseeable future as we attempt to advance development of our product
candidates. The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or
know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of our current pipeline
or any future product candidates we may develop due to the numerous risks and uncertainties associated with clinical development, including
risk and uncertainties related to:
|
●
|
the
timing and progress of preclinical and clinical development activities;
|
|
|
|
|
●
|
the
number and scope of preclinical and clinical programs that we decide to pursue;
|
|
|
|
|
●
|
our
ability to maintain our current research and development programs and to establish new ones;
|
|
|
|
|
●
|
establishing
an appropriate safety profile with investigational new drug-enabling studies;
|
|
|
|
|
●
|
successful
patient enrollment in, and the initiation and completion of, clinical trials;
|
|
|
|
|
●
|
the
successful completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any
comparable foreign regulatory authority;
|
|
|
|
|
●
|
the
receipt of regulatory approvals from applicable regulatory authorities;
|
|
|
|
|
●
|
the
timing, receipt and terms of any marketing approvals from applicable regulatory authorities;
|
|
|
|
|
●
|
our
ability to establish new licensing or collaboration arrangements;
|
|
|
|
|
●
|
establishing
agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if any of our
product candidates is approved;
|
|
|
|
|
●
|
development
and timely delivery of clinical-grade and commercial-grade drug formulations that can be used in our clinical trials and for commercial
launch;
|
|
|
|
|
●
|
obtaining,
maintaining, defending and enforcing patent claims and other intellectual property rights;
|
|
|
|
|
●
|
launching
commercial sales of product candidates, if approved, whether alone or in collaboration with others;
|
|
|
|
|
●
|
maintaining
a continued acceptable safety profile of the product candidates following approval; and
|
|
|
|
|
●
|
the
potential impact of COVID-19 on operations which may affect among other things, the timing of clinical trials, availability of raw
materials, and the ability to access and secure testing facilities.
|
A
change in the outcome of any of these variables with respect to the development of our product candidates could significantly change
the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval
for any of our product candidates.
General
and Administrative Expenses
General
and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation, in executive,
finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as
well as professional fees for legal, patent, consulting, accounting, and audit services.
Our
general and administrative expenses will increase in the future as we increase our headcount to support continued research activities
and development of product candidates. We will continue to incur increased accounting, audit, legal, regulatory, compliance and director
and officer insurance costs as well as investor and public relations expenses associated with being a public company.
Foreign
exchange loss
Foreign
exchange loss consists of exchange rate changes on transactions denominated in currencies other than the U.S. dollar.
Results
of Operations
Comparison
of the three months ended June 30, 2021 and 2020
The
following table summarizes the Company’s results of operations for the three months ended June 30, 2021 and 2020:
|
|
Three
Months Ended
June 30,
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
3,887,261
|
|
|
$
|
2,455,822
|
|
|
$
|
1,431,439
|
|
Acquired
in-process research and development
|
|
|
—
|
|
|
|
6,826,495
|
|
|
|
(6,826,495
|
)
|
General
and administrative
|
|
|
2,352,268
|
|
|
|
2,484,148
|
|
|
|
(131,880
|
)
|
Loss
from operations
|
|
|
(6,239,529
|
)
|
|
|
(11,766,465
|
)
|
|
|
5,526,936
|
|
Interest
expense
|
|
|
—
|
|
|
|
(3,798
|
)
|
|
|
3,798
|
|
Foreign
exchange loss
|
|
|
(1,513
|
)
|
|
|
(8,787
|
)
|
|
|
7,274
|
|
Other
income
|
|
|
125,501
|
|
|
|
—
|
|
|
|
125,501
|
|
Net
loss
|
|
$
|
(6,115,541
|
)
|
|
$
|
(11,779,050
|
)
|
|
$
|
5,663,509
|
|
Research
and Development Expenses
Research
and development expenses were $3.9 million for the three months ended June 30, 2021, compared to $2.5 million for the three months ended
June 30, 2020. The increase of $1.4 million was primarily due to increased expenditures for the development of the cell line for IL12-FHAB
and IL12-FHAB-IL15 and increased costs for research and development activities due to the acquisition of Relief and an increase in payroll
and share-based compensation expense as we expanded our operations.
Acquired
In-process Research and Development
In
connection with the acquisition of Relief in April 2020, the intellectual property acquired related to atexakin alfa was immediately
expensed since future development and regulatory approval is required.
General
and Administrative Expenses
General
and administrative expenses were $2.4 million for the three months ended June 30, 2021, compared to $2.5 million for the three months
ended June 30, 2020. The decrease of $0.1 million was primarily due to a $0.9 million decrease in professional fees and transaction
related fees associated with the closing of the Merger, offset by an increase in payroll and share-based compensation expense of
$0.7 million to support our expanded operations.
Other
Income
Other
income of $0.1 million was recognized in connection with forgiveness of the Company’s PPP loan in June of 2021.
Comparison
of the nine months ended June 30, 2021 and 2020
The
following table summarizes the Company’s results of operations for the nine months ended June 30, 2021 and 2020:
|
|
Nine
Months Ended
June
30,
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
11,598,835
|
|
|
$
|
5,166,485
|
|
|
$
|
6,432,350
|
|
Acquired
in-process research and development
|
|
|
—
|
|
|
|
6,826,495
|
|
|
|
(6,826,495
|
)
|
General
and administrative
|
|
|
6,541,717
|
|
|
|
4,753,428
|
|
|
|
1,788,289
|
|
Loss
from operations
|
|
|
(18,140,552
|
)
|
|
|
(16,746,408
|
)
|
|
|
(1,394,144
|
)
|
Interest
income
|
|
|
—
|
|
|
|
10,344
|
|
|
|
(10,344
|
)
|
Foreign
exchange loss
|
|
|
(16,837
|
)
|
|
|
(8,787
|
)
|
|
|
(8,050
|
)
|
Other
income
|
|
|
125,501
|
|
|
|
—
|
|
|
|
125,501
|
|
Net
loss
|
|
$
|
(18,031,888
|
)
|
|
$
|
(16,744,851
|
)
|
|
$
|
(1,287,037
|
)
|
Research
and Development Expenses
Research
and development expenses were $11.6 million for the nine months ended June 30, 2021, compared to $5.2 million for the nine months ended
June 30, 2020. The increase of $6.4 million was primarily due to increased expenditures for the development of the cell line for IL12-FHAB
and IL12-FHAB-IL15 and increased costs for research and development activities due to the acquisition of Relief and an increase in payroll
and share-based compensation expense as we expanded our operations.
Acquired
In-process Research and Development
In
connection with the acquisition of Relief in April 2020, the intellectual property acquired related to atexakin alfa was immediately
expensed since future development and regulatory approval is required.
General
and Administrative Expenses
General
and administrative expenses were $6.5 million for the nine months ended June 30, 2021, compared to $4.8 million for the nine months ended
June 30, 2020. The increase of $1.8 million was primarily due to an increase in insurance expenses related to directors and officer’s
insurance and an increase in payroll and share-based compensation expense as we expanded our operations to support our overall business
objectives, primarily offset by a $1.0 million decrease in professional fees and transaction related fees associated with the closing
of the Merger.
Other
Income
Other
income of $0.1 million was recognized in connection with forgiveness of the Company’s PPP loan in June of 2021.
Liquidity
and Capital Resources
Since
inception, we have not generated significant revenue from any sources, including from product sales, and have incurred recurring losses
and negative cash flows from operations. We have funded operations to date primarily with proceeds from sales of common stock, warrants
and proceeds from the issuance of convertible debt. Although we entered into the Agreement with New Life, all of the potential proceeds
from the Agreement, except for the upfront payment that is due within 30 days of the execution of the Agreement, are contingent on various
milestones or other criteria being achieved. The following table summarizes the Company’s sources and uses of cash for each of
the periods presented:
|
|
Nine
Months Ended
June
30,
|
|
|
|
2021
|
|
|
2020
|
|
Net
cash used in operating activities
|
|
$
|
(16,614,118
|
)
|
|
$
|
(10,072,016
|
)
|
Net
cash used in investing activities
|
|
|
—
|
|
|
|
(76,183
|
)
|
Net
cash provided by financing activities
|
|
|
15,302,405
|
|
|
|
13,219,138
|
|
Net
(decrease) increase in cash
|
|
$
|
(1,311,713
|
)
|
|
$
|
3,070,939
|
|
Operating
Activities
During
the nine months ended June 30, 2021, we used $16.6 million of cash in operating activities which was primarily attributable to our net
loss of $18.0 million. This amount was offset by $1.1 million in share-based compensation expense.
During
the nine months ended June 30, 2020, we used $10.1 million of cash in operating activities. Cash used in operating activities reflected
our net loss of $16.7 million, $0.2 million net increase in operating assets and liabilities primarily due to cash outflows for research
and development activities, offset by an add back for a non-cash charge for acquired in-process research and development of $6.8 million.
Investing
Activities
During
the nine months ended June 30, 2020, we purchased $76 thousand of office furniture and computer equipment. No purchases of equipment
were made during the nine months ended June 30, 2021.
Financing
Activities
During
the nine months ended June 30, 2021, we received net proceeds of $15.3 million from the sale of common stock under our at-the market
facility.
During
the nine months ended June 30, 2020, net cash provided by financing activities was $13.2 million, consisting primarily of $19.1 million
of net proceeds from the sale of common stock and warrants, partially offset by a $6.0 million payment to the spin-off entity in connection
with the Merger.
Funding
Requirements
We
expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance preclinical activities
and clinical trials of product candidates in development. In addition, we expect to incur additional costs associated with operating
as a public company. The timing and amount of our operating expenditures will depend largely on:
|
●
|
the
scope, number, initiation, progress, timing, costs, design, duration, any potential delays, and results of clinical trials and nonclinical
studies for our current or future product candidates;
|
|
|
|
|
●
|
the
clinical development plans we establish for these product candidates;
|
|
|
|
|
●
|
the
number and characteristics of product candidates and programs that we develop or may in-license;
|
|
|
|
|
●
|
the
outcome, timing and cost of regulatory reviews, approvals or other actions to meet regulatory requirements established by the FDA
and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to
require that we perform more studies for our product candidates than those that we currently expect;
|
|
|
|
|
●
|
our
ability to obtain marketing approval for product candidates;
|
|
|
|
|
●
|
the
cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights covering our product candidates;
|
|
|
|
|
●
|
our
ability to maintain, expand and defend the scope of our intellectual property portfolio, including the cost of defending intellectual
property disputes, including patent infringement actions brought by third parties against us or our product candidates;
|
|
|
|
|
●
|
the
cost and timing of completion of commercial-scale outsourced manufacturing activities with respect to product candidates;
|
|
|
|
|
●
|
our
ability to establish and maintain licensing, collaboration or similar arrangements on favorable terms and whether and to what extent
we retain development or commercialization responsibilities under any new licensing, collaboration or similar arrangement;
|
|
|
|
|
●
|
the
cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory
approval in regions where we choose to commercialize our products on our own;
|
|
|
|
|
●
|
the
success of any other business, product or technology that the we acquire or in which we invest;
|
|
|
|
|
●
|
the
costs of acquiring, licensing or investing in businesses, product candidates and technologies;
|
|
|
|
|
●
|
our
need and ability to hire additional management and scientific and medical personnel;
|
|
|
|
|
●
|
the
costs to operate as a public company in the United States, including the need to implement additional financial and reporting systems
and other internal systems and infrastructure for our business;
|
|
|
|
|
●
|
market
acceptance of our product candidates, to the extent any are approved for commercial sale;
|
|
|
|
|
●
|
the
effect of competing technological and market developments; and
|
|
|
|
|
●
|
the
potential impact of the COVID-19 pandemic on our clinical trials and operations.
|
Until
such time, if ever, as the we can generate substantial product revenue, we expect to finance our cash needs through a combination of
equity offerings, debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third
parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest
of the Company may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely
affect the rights of our stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include
restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures
or declaring dividends. If we raise funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements
with third parties, we may have to relinquish valuable rights to technologies, future revenue streams, research programs or product candidates
or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings
or other arrangements when needed, we may be required to delay, reduce or eliminate product development or future commercialization efforts,
sell off assets, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market.
The
Company believes its cash of $6.0 million at June 30, 2021 will fund the Company’s projected operations into October 2021. The
Company will need to raise significant additional capital in the near term to fund its continuing operations.
The
Company filed a registration statement on Form S-1 on July 22, 2021, as subsequently amended, registering an aggregate of $34.5 million
of shares of common stock (or common stock equivalent) to be sold in a firm commitment underwritten public offering and has engaged BTIG,
LLC (“BTIG”) to act as the sole book-running manager in such offering. As of the date of this report, the offering has not
priced, and no assurance can be given that the offering will price or close, and for any particular amount of proceeds and at any particular
offering price.
The
Company entered into an At-the-Market Sales Agreement with BTIG on February 5, 2021 (the “Sales Agreement”). Pursuant to
the Sales Agreement, the Company had the ability to offer and sell, from time to time, through BTIG, as sales agent and/or principal,
shares of its common stock, having an aggregate offering price of up to $15,875,000, subject to certain limitations set forth in the
Sales Agreement. Through June 30, 2021 the Company sold an aggregate of 7,454,238 shares under the Sales Agreement for gross proceeds
of $15.9 million and net proceeds of $15.3 million, thus reaching the maximum amount able to be sold under the Sales Agreement.
Contractual
Obligations and Commitments
The
following table summarizes the Company’s contractual obligations as of June 30, 2021 and the effects that such obligations are
expected to have on its liquidity and cash flows in future periods:
|
|
Less
than 1 Year
|
|
|
1
to 3 Years
|
|
|
4
to 5 Years
|
|
|
More
than 5 Years
|
|
|
Total
|
|
Operating
Lease (1)
|
|
$
|
102,956
|
|
|
$
|
60,716
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
163,672
|
|
Debt
Obligations (2)
|
|
$
|
748
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
748
|
|
Total
|
|
$
|
103,704
|
|
|
$
|
60,716
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
164,420
|
|
(1)
Reflects obligations pursuant to the Company’s office lease in Princeton, New Jersey.
(2)
Reflects unsecured notes payable issued to certain related parties.
In
addition to the contracts with payment commitments that we have reflected in the table above, we have entered into other contracts in
the normal course of business with certain CROs, CMOs and other third-parties for preclinical research studies and testing, clinical
trials and manufacturing services. These contracts do not contain any minimum purchase commitments and are cancelable upon prior notice
and as a result, are not included in the table of contractual obligations and commitments above. Payments due upon cancellation consist
only of payments for services provided and expenses incurred, including non-cancelable obligations to our service providers, up to the
date of cancellation.
Critical
Accounting Policies
Our
management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements,
which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets
and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to
the accrual for research and development expenses. We base our estimates on historical experience, known trends and events, and various
other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
While
the Company’s significant accounting policies are described in more detail in the notes to the interim consolidated financial statements
included elsewhere in this Form 10-Q, we believe that the following accounting policies are those most critical to the judgments and
estimates used in the preparation of the financial statements.
Research
and development expenses
Research
and development expense consist primarily of costs incurred in connection with the development of the our product candidates. We expense
research and development costs as incurred.
At
the end of each reporting period, we compare payments made to third-party service providers to the estimated progress toward completion
of the applicable research or development objectives. Such estimates are subject to change as additional information becomes available.
Depending on the timing of payments to the service providers and the progress that we estimate has been made as a result of the service
provided. We may record net prepaid or accrued expense relating to these costs. As of June 30, 2021, we did not make any material adjustments
to our prior estimates of accrued research and development expenses.
Off-Balance
Sheet Arrangements
We
do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured
finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities
involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market
or credit risk that could arise if it had engaged in these relationships.
Recently
Issued Accounting Pronouncements
A
description of recently issued accounting pronouncements that may potentially impact the our financial position and results of operations
is disclosed in Note 2 to the interim consolidated financial statements included elsewhere in this Form 10-Q.