DIAMEDICA THERAPEUTICS INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon accounting principles generally accepted inthe United States of America and discusses the financial condition and results of operations forDiaMedica Therapeutics Inc. and its subsidiaries for the three and nine months endedSeptember 30, 2022 and 2021. This discussion should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report and our Annual Report on Form 10-K for the year endedDecember 31, 2021 . The following discussion contains forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from the forward-looking statements as a result of these risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements" for additional cautionary information. Business Overview We are a clinical stage biopharmaceutical company committed to improving the lives of people suffering from serious diseases.DiaMedica's lead candidate, DM199, is the first pharmaceutically active recombinant (synthetic) form of the human tissue kallikrein-1 (KLK1) protein to be studied in patients. KLK1 is an established therapeutic modality for the treatment of acute ischemic stroke (AIS) and chronic kidney disease (CKD). Our long-term goal is to use our patented and in-licensed technologies to establish our Company as a leader in the development of therapeutic treatments from novel recombinant proteins. Our current focus is on the treatment of AIS and CKD. We plan to advance DM199 through required clinical trials to create shareholder value by establishing its clinical and commercial potential as a therapy for AIS and CKD. KLK1 is a serine protease (protein), produced primarily in the kidneys, pancreas and salivary glands, which plays a critical role in the regulation of local blood flow and vasodilation (the widening of blood vessels which decreases vascular resistance) in the body, as well as an important role in reducing inflammation and oxidative stress (an imbalance between potentially damaging reactive oxygen species, or free radicals and antioxidants in your body). We believe DM199 has the potential to treat a variety of diseases where healthy functioning requires sufficient activity of KLK1 and its system, the kallikrein-kinin system.
Our product development pipeline is as follows:
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Neuro: AIS Phase 2/3 ReMEDy2 Study of DM199
Our ReMEDy2 trial is an adaptive design, randomized, double-blind, placebo-controlled trial intended to enroll approximately 350 patients at 75 sites inthe United States . Patients enrolled in the trial will be treated with either DM199 or placebo within 24 hours of the onset of AIS symptoms. The trial excludes patients treated with tissue plasminogen activator (tPA) and those with large vessel occlusions. The study population is representative of the approximately 80% of AIS patients who do not have treatment options today, primarily due to the limitations on treatment with tPA or mechanical thrombectomy.DiaMedica believes that the proposed trial has the potential to serve as a pivotal registration study of DM199 in this patient population. 16 -------------------------------------------------------------------------------- OnJuly 6, 2022 , we announced that the FDA placed a clinical hold on the Company's Phase 2/3 ReMEDy2 trial. The clinical hold was issued following the Company voluntarily pausing patient enrollment in the trial to investigate three unexpected instances of clinically significant hypotension (low blood pressure) occurring shortly after initiation of the intravenous (IV) dose of DM199. The acutely low blood pressure levels in the three patients recovered back to their baseline blood pressure within minutes after the IV infusion was stopped, and the patients suffered no injuries. In response to theFDA's clinical hold letter, onSeptember 16, 2022 , we submitted to the FDA supporting in-vitro data that the etiology (cause) of the hypotensive events is likely related to switching the type of IV bag used in the prior ReMEDy 1 trial, where no hypotensive episodes were reported, versus the current ReMEDy 2 trial. We observed significant differences in DM199 binding between the two types of IV bags used in the studies that we believe altered, and unintentionally elevated, the total amount of DM199 being administered to patients in the ReMEDY2 trial triggering the hypotensive events. In addition to our analysis of the events leading to and causing the hypotensive events, we also included in this FDA submission, proposed protocol modifications to address the mitigation of these events, including a reduction in the DM199 dose level for the initial IV dose to effectively match the well tolerated IV dose administered in the ReMEDy1 trial. Following review of this data, the FDA responded to our submission, indicating that the FDA was continuing the clinical hold and requesting, among other items, an additional in-use in vitro stability study of the IV administration of DM199, which includes the IV tubing and mechanical infusion pump, to further rule out any other cause of the hypotension events. There can be no assurance that our belief as to the cause of the hypotension events or our response to prevent future events is correct, or that we will be able to fully respond to theFDA's latest questions sufficiently for the FDA to lift the clinical hold on a timely basis or at all. It is also possible that the FDA may subsequently make additional requests that we would need to fulfill prior to the lifting of the clinical hold, such as requiring us to complete additional clinical testing or imposing stricter approval conditions than we recently proposed for our DM199 product candidate. We may not enroll any additional patients in the ReMEDy2 trial until we provide the FDA with the requested data and the FDA notifies us that the FDA has lifted the clinical hold and we may resume enrollment in the clinical trial. Prior to voluntarily halting enrollment, we had experienced slower than expected site activations and enrollment in our ReMEDy2 trial and may continue to experience these conditions if and when we are able to resume enrollment. We believe this was due to a number of factors, including the reduction or suspension of research activities at our current and targeted clinical study sites, as well as staffing shortages, due to COVID-19 and concerns managing logistics and protocol compliance for patients discharged from the hospital to an intermediate care facility. While we have taken and intend to continue to take certain actions to assist study sites in overcoming these issues, if and when we resume enrollment in the ReMEDy2 trial, no assurances can be provided as to if and when these issues will resolve.
Renal: CKD Phase 2 REDUX Clinical Trial of DM199
As ofDecember 31, 2021 , we completed patient enrollment in our REDUX clinical trial for the treatment of CKD with a total of 79 patients enrolled and initiating treatment, including 21African American patients into Cohort 1, 25 patients with IgAN into Cohort 2 and 33 patients with Type 2 diabetes in Cohort 3. As ofMarch 31, 2022 , all patients had completed their treatment periods. We are currently working towards finalizing the data and related analyses and evaluating next steps for our CKD program. Other: DM300
We have identified a potential novel new treatment for inflammatory diseases, named DM300, which is currently in the preclinical stage of development.
Financial Overview Since our inception, we have not generated any revenues from product sales. We have financed our operations from public and private sales of equity, the exercise of warrants and stock options, interest income on funds available for investment and government grants. We have incurred losses in each year since our inception. Our net losses were$9.9 million and$10.3 million for the nine months ended September, 2022 and 2021, respectively. As ofSeptember 30, 2022 , we had an accumulated deficit of$92.4 million . Substantially all of our operating losses resulted from expenses incurred in connection with the development of our DM199 product candidate, our primary research and development (R&D) activities and general and administrative (G&A) support costs associated with our operations. 17
-------------------------------------------------------------------------------- We expect to continue to incur significant expenses and increased operating losses for at least the next several years as we advance our clinical programs. In the near term, we anticipate that our expenses will increase as compared to prior periods as we resume enrollment in our pivotal Phase 2/3 ReMEDy2 trial, if and when the clinical hold is lifted, and continue site activations. While we expect our rate of future negative cash flow per month will vary due to the timing of site activations and patient enrollment expenses, we expect our current cash resources will be sufficient to allow us to continue to work with the FDA to lift the clinical hold and continue our Phase 2/3 ReMEDy2 trial in patients with AIS, complete patient follow-up in our REDUX Phase 2 trial in patients with CKD and otherwise fund our planned operations for at least the next twelve months from the date of issuance of the condensed consolidated financial statements included in this report. However, the amount and timing of future funding requirements will depend on many factors, including the timing and results of our ongoing development efforts, site activations and enrollment in our clinical study, the potential expansion of our current development programs, potential new development programs, related G&A support and the effects of the COVID-19 pandemic. We may require significant additional funds earlier than we currently expect and there is no assurance that we will not need or seek additional funding prior to such time, especially if market conditions for raising additional capital are favorable.
Overview of Expense Components
Research and Development Expenses
R&D expenses consist primarily of fees paid to external service providers such
as contract research organizations; contractual obligations for clinical
development including clinical sites; outside nursing services and laboratory
testing and preclinical trials; development of manufacturing processes; costs
for production runs of DM199; salaries, benefits and share-based compensation;
and other personnel costs.
At this time, due to the risks inherent in the clinical development process and
the clinical stage of our product development programs, including our ability to
continue working with the FDA to address the FDA-imposed clinical hold on our
ReMEDy2 trial, we are unable to estimate the total costs we will incur in the
continued development of DM199 or any of our preclinical development programs.
Prior to voluntarily halting enrollment in the ReMEDy2 trial, we had experienced
slower than expected site activations and enrollment. We believe this was due to
a number of factors, including the reduction or suspension of research
activities at our current and targeted clinical study sites due to COVID-19, as
well as staffing shortages and concerns managing logistics and protocol
compliance for patients discharged from the hospital to an intermediate care
facility. While we are encouraged that COVID-19 related hospitalizations are
down compared to prior periods and while we are taking certain actions to assist
study sites in overcoming these issues when enrollment resumes, no assurances
can be provided as to if and when these issues will resolve.
We expect that our R&D expenses will increase in the future if we are successful
in advancing DM199, or any of our preclinical programs, through the required
stages of clinical development. The process of conducting clinical trials
necessary to obtain regulatory approval and manufacturing scale-up to support
expanded development and potential future commercialization is costly and time
consuming. Any failure by us or delay in completing clinical trials, including
as a result of the clinical hold remaining in place on our Phase 2/3 ReMEDy2
trial, manufacturing scale-up or in obtaining regulatory approvals, could lead
to increased R&D expenses and, in turn, have a material adverse effect on our
results of operations.
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General and Administrative Expenses
G&A expenses consist primarily of salaries and employee benefits, including share-based compensation related to our executive, finance, business development and support functions. G&A expenses also include insurance, including directors and officers liability coverage, rent and utilities, travel expenses, patent costs, professional fees, including for auditing, tax and legal services, and milestone payments under our technology license agreement withCatalent Pharma Solutions, LLC . Other Income
Other income, net, consists primarily of interest income and foreign currency exchange gains and/or losses.
Results of Operations
Comparison of the Three and Nine Months ended
The following table summarizes our unaudited results of operations for the three
and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Operating expenses:
Research and development $ 1,640 $ 2,332 $ 5,569 $ 6,894
General and administrative 1,488 1,084 4,459 3,506
Research and Development Expenses
R&D expenses decreased to$1.6 million for the three months endedSeptember 30, 2022 , down$0.7 million from$2.3 million for the three months endedSeptember 30, 2021 . R&D expenses decreased to$5.6 million for the nine months endedSeptember 30, 2022 , down$1.3 million from$6.9 million for the nine months endedSeptember 30, 2021 . The decrease for the nine-month comparison was driven primarily by reduced costs incurred during the wrap-up of our REDUX Phase 2 CKD trial and decreased non-clinical testing and manufacturing process development costs which were incurred during 2021 in preparation for initiating our Phase 2/3 ReMEDy2 trial. These decreases were partially offset by increased costs incurred in performing our Phase 2/3 ReMEDy2 trial, inclusive of costs incurred during the clinical hold, and increased personnel costs associated with expanding our R&D operations.
General and Administrative Expenses
G&A expenses were$1.5 million for the three months endedSeptember 30, 2022 , up from$1.1 million for the three months endedSeptember 30, 2021 . G&A expenses were$4.5 million for the nine months endedSeptember 30, 2022 , up from$3.5 million for the nine months endedSeptember 30, 2021 . The increase for the nine-month comparison was primarily due to increased directors' and officers' liability insurance, and personnel and professional services costs to support our expanding clinical programs. These increases were partially offset by a reduction in non-cash share-based compensation.
Liquidity and Capital Resources
The following tables summarize our liquidity and capital resources as of
Liquidity and Capital Resources September 30, 2022 December 31, 2021
Cash, cash equivalents and marketable securities $ 36,084 $ 45,112
Total assets 37,041 45,551
Total current liabilities 1,542 1,524
Total shareholders' equity 35,079 44,024
Working capital 34,948 43,915
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Nine Months Ended September 30,
Cash Flow Data 2022 2021
Cash flow provided by (used in):
Operating activities $ (8,745 ) $ (9,448 )
Investing activities 6,814 (11,848 )
Financing activities (5 ) 30,106
Net increase (decrease) in cash and cash equivalents
Working Capital We had aggregate cash, cash equivalents and marketable securities of$36.1 million , current liabilities of$1.5 million and working capital of$34.9 million as ofSeptember 30, 2022 , compared to aggregate cash, cash equivalents and marketable securities of$45.1 million ,$1.5 million in current liabilities and$43.9 million in working capital as ofDecember 31, 2021 . The decreases in our combined cash, cash equivalents and marketable securities and in our working capital are due primarily to cash used to fund our operating activities during the nine months endedSeptember 30, 2022 . Cash Flows Operating Activities Net cash used in operating activities for the nine months endedSeptember 30, 2022 was$8.7 million compared to$9.4 million for the nine months endedSeptember 30, 2021 . Cash used in operating activities is driven primarily by our net loss, partially offset by non-cash share-based compensation and the effects of the changes in operating assets and liabilities. Investing Activities Investing activities consist primarily of purchases and maturities of marketable securities. Net cash provided by investing activities was$6.8 million for the nine months endedSeptember 30, 2022 compared to net cash used in investing activities of$11.8 million for the nine months endedSeptember 30, 2021 . This change resulted primarily from the investment of the proceeds from ourSeptember 2021 private placement in the prior year period. Financing Activities Net cash used in financing activities was$5,000 for the nine months endedSeptember 30, 2022 and consisted of principal payments on finance lease obligations. Net cash provided by financing activities was$30.1 million for the nine months endedSeptember 30, 2021 and consisted primarily from net proceeds received from theSeptember 2021 private placement. Capital Requirements Since our inception, we have incurred losses while advancing the R&D of our DM199 product candidate. We have not generated any revenues from product sales and do not know when or if, we will generate any revenues from product sales of our DM199 product candidate or any future product candidate. We expect to continue to incur substantial operating losses until such time as any future product sales, royalty payments, licensing fees and/or milestone payments are sufficient to generate revenues to fund our continuing operations. We expect our operating losses to increase in the near term as compared to prior periods as we continue the research, development and clinical studies of our DM199 product candidate. In the long-term, subject to obtaining regulatory approval of our DM199 product candidate, or any future product candidate, the absence of the assistance of a strategic partner, would further require us to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. 20
-------------------------------------------------------------------------------- Accordingly, we expect we will need substantial additional capital to further our R&D activities, current and anticipated clinical studies, regulatory activities and otherwise develop our product candidate, DM199, or any future product candidate, to a point where the product candidate may be licensed or commercially sold. Although we are striving to achieve these plans, there is no assurance that these and other strategies will be achieved, that additional funding will be required after licensing or that additional funding will be obtained on favorable terms or at all. We expect our rate of future negative cash flow per month will vary depending on our clinical activities and the timing of expenses incurred. We expect our current cash resources will be sufficient to allow us to continue to work with the FDA to lift the clinical hold and, once lifted, continue our Phase 2/3 ReMEDy2 trial in patients with AIS, complete patient follow-up in our REDUX Phase 2 trial in patients with CKD and otherwise fund our planned operations for at least the next twelve months from the date of issuance of the condensed consolidated financial statements included in this report. However, the amount and timing of our future funding requirements will depend on many factors, including the timing and results of our ongoing development efforts, and specifically the initiation of new sites and enrollment in our clinical study, the potential expansion of our current development programs, potential new development programs, the effects of the COVID-19 pandemic, staffing shortages and other factors on our clinical programs and operations and related G&A support. We may require significant additional funds earlier than we currently expect and there is no assurance that we will not need or seek additional funding prior to such time, especially if market conditions for raising additional capital are favorable. Historically we have financed our operations primarily from sales of equity securities and the exercise of warrants and stock options, and we expect to continue this practice for the foreseeable future. We do not have any existing credit facilities under which we could borrow funds. We may seek to raise additional funds through various sources, such as equity or debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us. This is particularly true if our clinical data is not positive or economic and market conditions deteriorate. To the extent we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our shareholders will be diluted. Debt financing, if available, may involve agreements that include conversion discounts or covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, or strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. The availability of financing will be affected by our clinical data and other results of scientific and clinical research; the ability to attain regulatory approvals; market acceptance of our product candidates; the state of the capital markets generally with particular reference to pharmaceutical, biotechnology and medical companies; the status of strategic alliance agreements; and other relevant commercial considerations. If adequate funding is not available when needed, we may be required to scale back our operations by taking actions that may include, among other things, implementing cost reduction strategies, such as reducing use of outside professional service providers, reducing the number of our employees or employee compensation, modifying or delaying the development of our DM199 product candidate; licensing to third parties the rights to commercialize our DM199 product candidate for AIS, CKD or other indications that we would otherwise seek to pursue, or otherwise relinquishing significant rights to our technologies, future revenue streams, research programs or product candidates or granting licenses on terms that may not be favorable to us; and/or divesting assets or ceasing operations through a merger, sale, or liquidation of our company.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and
estimates from the information provided in "Part II. Item 7, Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies," included in our annual report on Form
10-K for the fiscal year ended
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