This section presents management's perspective on our financial condition and results of operations. The following discussion and analysis (the "MD&A") is intended to highlight and supplement data and information presented elsewhere in this Annual Report on Form 10-K. The MD&A is also intended to provide you with information that will assist you in understanding our consolidated financial statements, the changes in key items in those consolidated financial statements from year to year, and the primary factors that accounted for those changes. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause the Company's financial results to differ materially from management's expectations. Factors that could cause such differences are discussed in the "Cautionary Note Regarding Forward-Looking Statements" section of this Quarterly Report and in the "Risk Factors" in our Annual Report on Form10-K.
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Our MD&A is organized as follows:
? Company Overview - Discussion of our Business Plan and strategy to provide context for the remainder of the MD&A. ? Results of Operations - Analysis of our financial results comparing the year endedDecember 31, 2022 , to the year endedDecember 31, 2021 . ? Liquidity and Capital Resources - Analysis of changes in our cash flows, and discussion of our financial condition and potential sources of liquidity. ? Critical Accounting Policies and Use of Estimates - Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. Company Overview Business
Our first diagnostic test, CyPath® Lung, addresses the need for noninvasive detection of early-stage lung cancer. Lung cancer is the leading cause of cancer-related deaths. Physicians are able to order CyPath® Lung to assist in their assessment of patients who are at high risk for lung cancer. The CyPath® Lung test enables physicians to more confidently distinguish between patients who will likely benefit from timely intervention and more invasive follow-up procedures from patients who are likely without lung cancer and should continue annual screening. CyPath® Lung has the potential to increase overall diagnostic accuracy of lung cancer, which could lead to increased survival, fewer unnecessary invasive procedures, reduced patient anxiety, and lower medical costs.
Through our wholly owned subsidiary, OncoSelect®
Recent Developments ? In the third quarter of 2022, the Company completed our initial public offering (IPO), with net proceeds of$6.0 million after deducting underwriting discounts, commissions and offering expenses. In connection with our IPO, the Company converted almost$11 million in debt and related accrued interest into shares of Common Stock. ? In the third quarter of 2022, the Company raised additional proceeds of$7.8 million from the sale of warrants and the exercise of options. ? In the second quarter of 2022, we recognized royalty revenue on sales of our CyPath® Lung test to physicians by Precision Pathology Services ("Precision Pathology"), a CAP-accredited, CLIA-certified clinical pathology laboratory and our licensee inSan Antonio, Texas . 17 ? We have determined we will need to enroll an estimated 1,800 participants in our pivotal clinical trial that is designed to confirm the sensitivity and specificity of CyPath® Lung in detecting lung cancer in persons at high risk for the disease, including patients who display indeterminate lung nodules between 6mm and 30 mm in size which often present a challenge in diagnosis. ? In the third quarter of 2022, the Company was awarded therapeutic patents inThe People's Republic of China ,Mexico , andAustralia directed at compounds comprised of porphyrins conjugated to chemotherapeutic agents that can provide selective treatment for cancer. ? In the third quarter of 2022, Precision was inspected by theCollege of American Pathologists (CAP) including inspection of the CyPath® Lung test in accordance with CAP/CLIA regulatory standards and regulations. The inspection resulted in continued accreditation for the laboratory and the CyPath® Lung test as a Laboratory Developed Test (LDT). ? In the first quarter of 2023, the Company announced publication of "Detection of early-stage lung cancer in sputum using automated flow cytometry and machine learning" detailing results of the Company's validation clinical trial for its non-invasive diagnostic CyPath® Lung inRespiratory Research , which showed CyPath® Lung had 92% sensitivity and 87% specificity in high-risk patients who had nodules smaller than 20 millimeters or no nodules in the lung, with an area under the ROC curve of 94%. Overall, the test resulted in specificity of 88% and sensitivity of 82%. More than half of those in the cancer cohort had early Stage I or II lung cancer. CyPath® Lung detected multiple forms of cancer including adenocarcinoma, squamous cell carcinoma, and small cell lung cancer. ? In the first quarter of 2023, the Company announced publication in the peer-reviewed journal JoVE of "Porphyrin-modified beads for use as compensation controls in flow cytometry" that describes the beads engineered by the Company for use with its CyPath® Lung test. ? In the first quarter of 2023, the Company announced that theU.S. Patent and Trademark Office (USPTO) issued a Notice of Allowance for a therapeutic patent application directed at compounds comprised of porphyrins conjugated to chemotherapeutic agents that can provide selective treatment for cancer.
Development of Our Diagnostic Tests
Our first diagnostic test, CyPath® Lung, is a noninvasive test to detect early-stage lung cancer in people at high risk for the disease. Our current five-year Business Plan for the commercial development of CyPath® Lung contemplates the following major initiatives:
? Initial market launch of CyPath® Lung as an LDT inTexas , expanding sales to theSouthwest U.S. to be followed by an expanding sale of the test toU.S. physicians; ? Launch CyPath® Lung as a CE-marked in vitro diagnostic (IVD) test in the EU; ? Initiate and complete a pivotal clinical trial proving the efficacy of CyPath® Lung; ? Submit to theU.S. Food and Drug Administration (FDA) for clearance for the Company to directly sell CyPath® Lung as an FDA-cleared test toU.S. physicians for detection of early-stage lung cancer in people at high risk for the disease; and ? Expand the EU market and sale of CyPath® Lung inAsia ,Eastern Europe , andAustralia .
Notwithstanding that initial and interim data appear promising, the outcomes of our future clinical trials are uncertain, and future clinical trials may ultimately be unsuccessful.
Financial
To date, we have devoted a substantial portion of our efforts and financial
resources to the development of our first diagnostic test, CyPath® Lung. As a
result, since our inception in 2014, we have funded our operations principally
through private sales of our equity or debt securities. From
18
In
In the second quarter of 2022, we started to recognize revenue from sales of the
CyPath® Lung test by our licensee, Precision Pathology. We have never been
profitable, and as of
We anticipate raising additional cash needed through the private or public sales of equity or debt securities, collaborative arrangements, or a combination thereof, to continue to fund our operations and develop our products. There is no assurance that any such collaborative arrangement will be entered into or that financing will be available to us when needed in order to allow us to continue our operations, or if available, on terms acceptable to us. If we do not raise sufficient funds in a timely manner, we may be forced to curtail operations, delay our clinical trials, cease operations altogether, or file for bankruptcy.
Results of Operations
Year Ended
Our results of operations have varied significantly from year to year and
quarter to quarter and may vary significantly in the future. Net loss for the
year ended
Revenue
Our revenue is generated exclusively from royalties for our first diagnostic
test, CyPath® Lung, from sales by Precision Pathology, a CAP-accredited,
CLIA-certified clinical pathology laboratory and our licensee. Although
Precision Pathology placed CyPath® Lung on its list of tests offered to
physicians in second quarter 2022, there was limited marketing of the product
until our IPO in September provided funds to assemble a marketing team of
experts focused on demonstrating the clinical value of CyPath®Lung in the
marketplace. The limited test market launch in the
We expect our revenue to continue to grow for CyPath® Lung as we add physicians prescribing our diagnostic test and expand our outreach to other geographic areas. Our revenues are affected by the test volume of our products, patient adherence rates, payer mix, the levels of reimbursement, and payment patterns of payers and patients.
19 Cost of Sales Cost of sales is comprised primarily of costs related to inventory production and usage and shipment of collection kits to patients and healthcare providers. The increase in cost of sales for the year endedDecember 31, 2022 , is primarily due to the launch of sales in the second quarter of 2022, compared to no sales in the prior year. Operating Expenses Year Ended Change in 2022 December 31, Versus 2021 2022 2021 $ % (amounts in (amounts in thousands) thousands) Operating expenses: Research and development$ 1,143 $ 1,008 $ 135 13 % Clinical development ?146 ?130 ?16 12 % Selling, general and administrative ?2,727 ??1,069 1,658 155 % Total operating expense$ 4,016 $ 2,207 $ 1,809 82 %
Operating expenses totaled
Research and Development
Our research and development expenses consist primarily of expenditures for lab operations, preclinical studies, compensation, and consulting costs.
Research and development expenses totaled
Clinical Development
Clinical development expenses totaled approximately
Selling, General and Administrative
Our selling, general and administrative expenses consist primarily of expenditures related to compensation, legal, accounting, tax and other professional services, and general operating costs.
Selling, general and administrative expenses totaled approximately
20 Other Income (Expense) Year Ended Change in 2022 December 31, Versus 2021 2022 2021 $ % (amounts in (amounts in thousands) thousands) Interest income (expense), net$ (2,486 ) $ (1,002 ) $ (1,484 ) 148 % Gain on extinguishment of debt 212 239 (27 ) -11 % Fair value of warrants - (4,080 ) 4,080 -100 % Loss on change in fair value of convertible notes (1,867 ) 725 (2,592 ) -358 % Total other income (expense)$ (4,141 ) $ (4,118 ) $ (23 ) 1 %
Other income (expense) totaled approximately
Interest income (expense)
We had net interest expense of approximately
Gain on Extinguishment of Debt
In
Fair value of warrants
In 2021, in connection with the issuance of the Bridge Notes, the Company
amended the terms of certain convertible notes. As an inducement to amending the
notes, the Company issued Common Stock warrants with the same terms and
conditions as the warrants issued to the Bridge Note holders. The estimated fair
value of the warrants was
(Loss) gain on change in fair value of convertible notes
The loss on the change in fair value of convertible notes totaled approximately
Liquidity and Capital Resources
To date, we have funded our operations primarily through our IPO, exercise of
warrants and options, and the sale of our equity and debt securities, resulting
in gross proceeds of approximately
We have incurred losses since our inception in 2014 as a result of significant
expenditures for operations and research and development and, prior to
21
In the fourth quarter of 2021 and the first quarter of 2022, the Company issued
a total of
In
We continue to seek sources of financing to fund our continued operations and research and development programs. To raise additional capital, we may sell additional equity or debt securities, or enter into collaborative, strategic, and/or licensing transactions. There can be no assurance that we will be able to complete any financing transaction in a timely manner or on acceptable terms or otherwise or enter into a collaborative or strategic transaction. If we are not able to raise additional cash, we may be forced to delay, curtail, or cease development of our diagnostic tests or therapeutic products, or cease operations altogether.
Cash Flows
The following information reflects cash flows for the years presented:
Year EndedDecember 31, 2022 2021 (amounts in thousands)
Cash and cash equivalents at beginning of year
(4,071 ) (2,049 ) Net cash used in investing activities (220 ) - Net cash provided by financing activities 14,344 3,327
Cash and cash equivalents at end of year
Net cash used in operating activities was approximately
22
The Company used approximately
Net Cash Provided by Financing Activities
During the year ended
During the year ended
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) in
Share-Based Compensation
We follow ASC 718, Compensation - Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, directors, and non-employees based on estimated fair values. We have used the Black-Scholes option pricing model to estimate grant date fair value for all option grants. The assumptions we use in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As such, as we use different assumptions based on a change in factors, our stock-based compensation expense could be materially different in the future.
Accounting for Income Taxes
We are governed by
Fair Value of Convertible Notes Payable
We adopted FASB ASU No. 2016-01 "Financial Instruments-Overall (Subtopic 825-10)." In applying ASC 825, it is necessary to determine whether to bifurcate the Beneficial Conversion Feature from the convertible note. Under ASC 825, provided the fixed conversion price stipulated in the convertible note is greater than the fair market value at the date of issuance ("out of the money"), the beneficial conversion feature guidance is not applicable, and the convertible notes are eligible to be valued at fair value and any adjustments recorded in the statement of operations.
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The Company elected to account for the convertible notes payable at fair value with any changes in fair value being recognized in the consolidated statements of operations until the convertible notes are settled. The fair value of the convertible notes is determined with the assistance of a third-party valuation firm. Given the conversion terms that exist, there were two scenarios considered: i) conversion into a preferred share class, or ii) conversion into the common share class. Given the issuance dates, a negotiation discount was calibrated and applied such that the probability weighting of the issued notes is equal to par value as of the respective issuance dates. The probabilities of each conversion scenario were discussed and assigned based on the expectations regarding the future of the Company.
Off-Balance Sheet Arrangements
We do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, as a part of our ongoing business. Accordingly, we did not have any off-balance sheet arrangements during any of the periods presented.
Going Concern
Our evaluation of our ability to continue as a going concern requires us to evaluate our future sources and uses of cash sufficient to fund our currently expected operations in conducting research and development activities one year from the date our financial statements are issued. We evaluate the probability associated with each source and use of cash resources in making our going concern determination. The research and development of our diagnostic tests and therapeutic products are inherently subject to uncertainty.
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