The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes thereto and other disclosures included in this Quarterly Report on Form 10-Q, including the disclosures under Part II, Item IA "Risk Factors," and our audited condensed consolidated financial statements and the accompanying notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSecurities and Exchange Commission , or theSEC , onMarch 12, 2021 . Our condensed consolidated financial statements have been prepared in accordance withU.S. GAAP and, unless otherwise indicated, amounts are presented inU.S. dollars. Company Overview We are a biopharmaceutical company developing novel therapies designed to treat patients with cancer by inhibiting fundamental tumor-promoting pathways and by harnessing the immune system to attack cancer cells. Our strategy is to identify, acquire, and develop molecules that will rapidly translate into high impact therapeutics that generate durable clinical benefit and enhanced patient outcomes. Our lead clinical stage program is DKN-01, a monoclonal antibody that inhibits Dickkopf-related protein 1, orDKK1 .DKK1 is a protein that regulates the Wnt signaling pathways and enables tumor cells to proliferate and spread, as well as suppresses the immune system from attacking the tumor. When DKN-01 binds toDKK1 , an anti-tumor effect can be generated. DKN-01-based therapies have generated responses and clinical benefit in several patient populations. We are currently studying DKN-01 in multiple ongoing clinical trials in patients with esophagogastric cancer, hepatobiliary cancer, gynecologic cancers, or prostate cancer. We entered into an exclusive option and license agreement (the "BeiGene Agreement") with BeiGene, Ltd., or BeiGene, which granted BeiGene the right to develop and commercialize DKN-01 inAsia (excludingJapan ),Australia , and
New Zealand . Recent Developments
Since
Purchase Common Stock. In
? underwritten public offering yielding aggregate gross proceeds of
million, resulting in net proceeds to us after underwriting discounts and
offering expenses of
Initial Data from the DisTinGuish Clinical Trial of DKN-01 Plus Tislelizumab
and Chemotherapy Presented at
data from the first-line cohort of the Phase 2a study in patients with gastric
or gastroesophageal junction (G/GEJ) cancer. Of the 25 first-line HER2- G/GEJ
patients who received a full cycle of DKN-01 therapy, overall response rate
? (ORR) was 68.2%, with 90% ORR in
patients. Among those patients with PD-L1-low expression ORR was 79% (with 100%
ORR in
with PD-L1-high expression ORR was 67% (with 75% ORR in
50% inDKK1 -low patients), suggesting response to DKN-01 was independent of PD-L1 expression. 25 Table of Contents Financial Overview Revenues Our revenues relate to our performance obligations under the BeiGene Agreement and may include such things as providing intellectual property licenses, performing technology transfer, performing research and development consulting services and notifying the customer of any enhancements to licensed technology or new technology that we discover, among others. We have determined that our performance obligations under the BeiGene Agreement, as evaluated at contract inception, were not distinct and represented a single performance obligation. Upfront payments are amortized to revenue on a straight-line basis over the performance period. Upfront payment contract liabilities resulting from the BeiGene Agreement do not represent a financing component as the payment is not financing the transfer of goods or services, and the technology underlying the license granted reflects research and development expenses already incurred by us. Generally, all amounts received or due other than sales-based milestones and royalties are classified as license revenues. Sales-based milestones and royalties under the BeiGene Agreement will be recognized as royalty revenue in the period the related sale occurred. We generally invoice our licensee upon the completion of the effort or achievement of a milestone, based on the terms of the BeiGene Agreement. Deferred revenue arises from amounts received in advance of the culmination of the earnings process and is recognized as revenue in future periods as performance obligations are satisfied. Deferred revenue expected to be recognized within the next twelve months is classified as a current liability.
Research and Development Expenses
Our research and development activities have included conducting nonclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for DKN-01 and TRX518. We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:
? salaries and related overhead expenses for personnel in research and
development functions, including costs related to stock-based compensation;
fees paid to consultants and CROs for our nonclinical and clinical trials, and
? other related clinical trial fees, including but not limited to laboratory
work, clinical trial database management, clinical trial material management
and statistical compilation and analysis;
? costs related to acquiring and manufacturing clinical trial material; and
? costs related to compliance with regulatory requirements.
We plan to increase our research and development expenses for the foreseeable future as we continue the development of DKN-01 and any other product candidates, subject to the availability of additional funding.
Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of internal and external costs, such as employee costs, including salaries and stock-based compensation, other internal costs, fees paid to consultants, central laboratories, contractors and CROs in connection with our clinical and preclinical trial development activities. We use internal resources to manage our clinical and preclinical trial development activities and perform data analysis for such activities. We participate, through our subsidiary inAustralia , in the Australian government's research and development ("R&D") Incentive program, such that a percentage of our eligible research and development expenses are reimbursed by the Australian government as a refundable tax offset and such incentives are reflected as other income. 26 Table of Contents The table below summarizes our research and development expenses incurred by development program and the R&D Incentive income for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) (in thousands) Direct research and development by program: DKN01 program $ 10,073 $ 5,275$ 24,060 $ 13,273 TRX518 program 4 94 30 2,049 Total research and development expenses $ 10,077 $ 5,369$ 24,090 $ 15,322 Australian research and development incentives $ 1,269 $ 228 $ 1,584 $ 343 The successful development of our clinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
? the scope, rate of progress and expense of our ongoing, as well as any
additional, clinical trials and other research and development activities;
? future clinical trial results; and
? the timing and receipt of any regulatory approvals.
A change in the outcome of any of these variables with respect to the development of a product candidate could result in a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel 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. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance costs as well as investor and public relations expenses associated with being a public company. Interest income
Interest income consists primarily of interest income earned on cash and cash equivalents.
Research and development incentive income
Research and development incentive income includes payments under the R&D Incentive program from the government ofAustralia . The R&D Incentive program is one of the key elements of the Australian Government's support forAustralia's innovation system. It was developed to assist businesses in recovering some of the costs of undertaking research and development. The research and development tax incentive provides a tax offset to eligible companies that engage in research and development activities. 27 Table of Contents
Companies engaged in research and development may be eligible for either:
? a 43.5% refundable tax offset for entities with an aggregated turnover of less
than
? a 38.5% non-refundable tax offset for all other entities.
We recognize as income the amount we expect to be reimbursed for qualified expenses.
Foreign currency translation adjustment
Foreign currency translation adjustment consists of gains (losses) due to the revaluation of foreign currency transactions attributable to changes in foreign currency exchange rates associated with our Australian subsidiary.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States , or GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are 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. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, using the full retrospective transition method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. We utilize key assumptions to determine a stand-alone selling price for performance obligations, which may include revenue forecasts, expected development timelines, discount rates, probabilities of technical and regulatory success and costs for manufacturing clinical supplies. Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations- Critical Accounting Policies and Significant Judgments and Estimates" in our Annual Report on Form 10-K filed with theSEC onMarch 12, 2021 and the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We believe that of our critical accounting policies, the following accounting policies involve the most judgment and complexity: ? revenue recognition;
? accrued research and development expenses;
? research and development incentive receivable; and
? stock-based compensation. 28 Table of Contents Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended September 30, 2021 2020 Change (in thousands) License revenue $ 375 $ 375 $ - Operating expenses: Research and development 10,077 5,369 4,708 General and administrative 2,438 2,514 (76) Total operating expenses 12,515 7,883 4,632 Loss from operations (12,140) (7,508) (4,632) Interest income 1 3 (2) Interest expense (9) (17) 8
Australian research and development incentives 1,269
228 1,041 Foreign currency gain (loss) (260) 237 (497) Net loss$ (11,139) $ (7,057) $ (4,082) Revenues
License revenues for each of the three months endedSeptember 30, 2021 and 2020 were$0.4 million , and relate to the BeiGene Agreement for the development and commercialization of DKN-01 inAsia (excludingJapan ),Australia, and New Zealand . The BeiGene Agreement became effective onJanuary 3, 2020 .
Research and Development Expenses
Three Months Ended September 30, Increase 2021 2020 (Decrease) (in thousands) Direct research and development by program: DKN01 program $ 10,073 $ 5,275$ 4,798 TRX518 program 4 94 (90) Total research and development expenses $ 10,077
$ 5,369$ 4,708 Research and development expenses were$10.1 million for the three months endedSeptember 30, 2021 , compared to$5.4 million for the three months endedSeptember 30, 2020 . The increase of$4.7 million in research and development expenses was due to an increase of$3.3 million in manufacturing costs related to clinical trial material due to timing of manufacturing campaigns, an increase of$0.7 million in clinical trial costs due to timing of patient enrollment, an increase of$0.6 million in payroll and other related expenses due to an increase in headcount of our research and development full time employees and an increase of$0.1 million in stock based compensation expense due to new stock options granted to research and development full time employees in 2021.
General and Administrative Expenses
General and administrative expenses were$2.4 million for the three months endedSeptember 30, 2021 , compared to$2.5 million for the three months endedSeptember 30, 2020 . The decrease of$0.1 million in general and administrative expenses was due to a$0.4 million decrease in professional fees partially offset by an increase of a$0.2 million in stock based compensation expense due to new stock options granted to general and administrative full time employees in 2021 and an increase of$0.1 million in payroll and other related expenses.
Interest Income
We recorded an immaterial amount of interest income in the three months ended
29 Table of Contents
We recorded R&D incentive income of$1.3 million and$0.2 million , respectively, during the three months endedSeptember 30, 2021 , based upon the applicable percentage of eligible research and development activities under the Australian Incentive Program, which expenses included the cost of manufacturing clinical trial material.
The R&D incentive receivable has been recorded as "Research and development incentive receivable" in the condensed consolidated balance sheets.
Foreign Currency Gains (loss)
During the three months endedSeptember 30, 2021 and 2020, we recorded a foreign currency gain (loss) of($0.3) million and$0.2 million , respectively. Foreign currency gains and losses are due to changes in the Australian dollar exchange rate related to activities of the Australian entity.
Comparison of the Nine Months Ended
The following table summarizes our results of operations for the nine months
ended
Nine Months Ended September 30, 2021 2020 Change (in thousands) License revenue $ 1,125 $ 1,125 $ - Operating expenses: Research and development 24,090 15,322 8,768 General and administrative 7,973 7,188 785 Total operating expenses 32,063 22,510 9,553 Loss from operations (30,938) (21,385) (9,553) Interest income 4 91 (87) Interest expense (39) (42) 3
Australian research and development incentives 1,584
343 1,241 Foreign currency gain (loss) (410) 189 (599) Net loss$ (29,799) $ (20,804) $ (8,995) Revenues License revenues for each of the nine months endedSeptember 30, 2021 and 2020 were$1.1 million , and relate to the BeiGene Agreement for the development and commercialization of DKN-01 inAsia (excludingJapan ),Australia, and New Zealand . The BeiGene Agreement became effective onJanuary 3, 2020 .
Research and Development Expenses
Nine Months Ended September 30, Increase 2021 2020 (Decrease) (in thousands) Direct research and development by program: DKN-01 program$ 24,060 $ 13,273 $ 10,787 TRX518 program 30 2,049 (2,019) Total research and development expenses$ 24,090 $
15,322$ 8,768 30 Table of Contents Research and development expenses were$24.1 million for the nine months endedSeptember 30, 2021 , compared to$15.3 million for the nine months endedSeptember 30, 2020 . The increase of$8.8 million in research and development expenses was primarily due to an increase of$4.4 million in manufacturing costs related to clinical trial material due to timing of manufacturing campaigns, an increase of$1.9 million in clinical trial costs due to timing of patient enrollment, an increase of$2.2 million in payroll and other related expenses due to an increase in headcount of our research and development full time employees and an increase of$0.5 million in stock based compensation expense due to new stock options granted to our research and development full time employees in 2021. These increases were partially offset by a decrease of$0.2 million in consulting expenses related to research and development activities.
General and Administrative Expenses
General and administrative expenses were$8.0 million for the nine months endedSeptember 30, 2021 , compared to$7.2 million for the nine months endedSeptember 30, 2020 . The increase of$0.8 million in general and administrative expenses was due to a$0.6 million increase in payroll and other related expenses during the nine months endedSeptember 30, 2021 as compared to the same period in 2020, a$0.4 million increase in stock based compensation expense due to new stock options granted to our general and administrative full time employees and a$0.2 million increase in insurance costs primarily related to an increase in our directors and officers insurance. These increases were partially offset by a$0.4 million decrease in professional fees.
Interest Income
We recorded interest income in the nine months ended
We recorded R&D incentive income of$1.6 million and$0.3 million , respectively, during the nine months endedSeptember 30, 2021 and 2020, based upon the applicable percentage of eligible research and development activities under the Australian Incentive Program, which expenses included the cost of manufacturing clinical trial material.
The R&D incentive receivable has been recorded as "Research and development incentive receivable" in the condensed consolidated balance sheets.
Foreign Currency Gains (loss)
During the nine months endedSeptember 30, 2021 and 2020, we recorded a foreign currency gain (loss) of($0.4) million and$0.2 million , respectively. Foreign currency gains and losses are due to changes in the Australian dollar exchange rate related to activities of the Australian entity.
Financial Position, Liquidity and Capital Resources
Since our inception, we have been engaged in organizational activities, including raising capital, and research and development activities. We do not yet have a product that has been approved by theFood and Drug Administration (the "FDA"), have not yet achieved profitable operations, nor have we ever generated positive cash flows from operations. There is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. Further, our future operations are dependent on the success of efforts to raise additional capital, our research and commercialization efforts, regulatory approval, and, ultimately, the market acceptance of our products. In accordance with Accounting Standards Codification ("ASC") 205-40, Going Concern, we have evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. As ofSeptember 30, 2021 , we had cash and cash equivalents of$124.8 million . Additionally, we had an accumulated deficit of$252.8 million atSeptember 30, 2021 , and during the nine months endedSeptember 30, 2021 , we incurred a net loss of$29.8 million . We expect to continue to generate operating losses in the foreseeable future. We believe that our cash and cash equivalents of$124.8 million as ofSeptember 30, 2021 will be sufficient to fund our operating expenses for at least the next 12 months from the issuance of these financial statements. 31 Table of Contents In addition, we will seek additional funding through public or private equity financings or government programs and will seek funding or development program cost-sharing through collaboration agreements or licenses with larger pharmaceutical or biotechnology companies. If we do not obtain additional funding or development program cost-sharing, we will be forced to delay, reduce or eliminate certain clinical trials or research and development programs, reduce or eliminate discretionary operating expenses, and delay company and pipeline expansion, which would adversely affect our business prospects. The inability to obtain funding, as and when needed, would have a negative impact on our financial condition and ability to pursue our business strategies.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented: Nine Months Ended September 30, 2021 2020 (in thousands) Cash used in operating activities$ (24,441) $ (19,969) Cash provided by investing activities - 25 Cash provided by financing activities 97,280 73,997 Effect of exchange rate changes on cash and cash equivalents (139) 31 Net increase in cash and cash equivalents $ 72,700 $ 54,084 Operating activities. Net cash used in operating activities for the nine months endedSeptember 30, 2021 was primarily related to our net loss from the operation of our business of$29.8 million and net changes in working capital, including an increase of$1.6 million in research and development incentive receivable, a decrease of$1.1 million in deferred revenue, an increase of$0.1 million in prepaid expenses and other assets, a decrease in lease liabilities of$0.2 million and a$0.2 million decrease related to change in restricted stock liability. These changes were partially offset by an increase in accounts payable and accrued expenses of$4.9 million , a decrease in deferred offering costs of$0.2 million , foreign currency losses of$0.4 million , noncash stock based compensation expense of$2.7 million , change in a right-of-use asset of$0.2 million and amortization of contract asset of$0.1 million . Net cash used in operating activities for the nine months endedSeptember 30, 2020 was primarily related to our net loss from the operation of our business of$20.8 million and net changes in working capital, including a decrease in accounts payable and accrued expenses of$3.2 million , an increase in contract acquisition costs of$0.3 million and a decrease in lease liabilities of$0.4 million . There was also a noncash change of$0.2 million due to foreign currency gains and a$0.1 million decrease related to change in restricted stock liability. These changes were partially offset by a decrease of$0.7 million in prepaid expenses and other assets, an increase of$1.9 million in deferred revenue, noncash stock based compensation expense of$1.9 million , noncash lease expense of$0.4 million and amortization of contract asset of$0.1 million . Investing Activities. There were no investing activities during the nine months endedSeptember 30, 2021 . Net cash provided by investing activities during the nine months endedSeptember 30, 2020 was related to proceeds from the sale of equipment. Financing Activities. Net cash provided by financing activities for the nine months endedSeptember 30, 2021 consisted of$97.2 million in net proceeds from the issuance of common stock in connection with the public offering the Company completed inSeptember 2021 (the "2021 Public Offering") and$0.1 million in proceeds from the issuance of common stock upon the exercise of stock options and warrants. Net cash provided by financing activities for the nine months endedSeptember 30, 2020 consisted of$48.5 million in proceeds from the issuance of common stock in connection with the public offering the Company completed inJune 2020 (the "2020 Public Offering"),$27.0 million in proceeds from the issuance of Series A Preferred Stock and Series B Preferred Stock in connection with the private placement of common stock completed inJanuary 2020 (the "January 2020 Private Placement") and$0.4 million in proceeds from the issuance of common stock upon the exercise of stock options and warrants. These increases were partially offset by payments of$1.9 million for offering costs.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of
theSEC . 32 Table of Contents
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