You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis, particularly with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.





Overview

We are a preclinical biotechnology company committed to discovering and developing new cancer therapies designed to target the products of mutated genes that are drivers of human malignancies. Throughout most of 2019, we ran a Phase 2 study, designated Codex, evaluating inodiftagene vixtepasmid in patients with BCG-unresponsive NMIBC. However, in November 2019, after a thorough evaluation of data, we determined there was a low probability of surpassing the pre-defined futility threshold at the planned interim analysis of the study, and announced the discontinuation of the study and of active clinical development of inodiftagene vixtepasmid.

We acquired the rights to two developmental programs targeting oncogenic pathways (small-molecule pan-mutant RAS inhibitors and inhibitors of PDE10 and the ?-catenin pathway) pursuant to the Collaboration and License Agreement (the "License Agreement") into which we entered with ADT Pharmaceuticals, LLV ("ADT") on September 20, 2019. Our operations are focused on the successful development, regulatory approval and commercialization of products derived from the compounds conveyed and contemplated under the License Agreement, which are in the research stage. Under the agreement, we are primarily responsible for the research, development, manufacturing, regulatory and commercial activities with respect to the Compounds.

Our corporate structure consists of a parent company, Anchiano Therapeutics Ltd., incorporated in Israel, which wholly owns a subsidiary, Anchiano Therapeutics Israel Ltd, incorporated in Israel, which itself wholly owns a subsidiary, Anchiano Therapeutics, Inc. incorporated in Delaware. We currently maintain offices in Cambridge, MA and an office and laboratory in Jerusalem, Israel. However, in January 2020 our Board of Directors approved management's recommendation to close our Israeli office and laboratories in 2020, with our operations to continue from our Cambridge office. The closure is expected to be completed in the second quarter of 2020.





License Agreement

In September 2019, we publicly announced that we had entered into an option to license agreement with ADT. Pursuant to the terms and conditions set forth in the agreement, we have mutually agreed to use commercially reasonable efforts to conduct research and development activities of novel small-molecule inhibitors (RAS and PDE10/?-catenin). As part of the arrangement, we will be primarily responsible for the research, development, manufacturing and regulatory activities and ADT will assist with the research activities as necessary in exchange for a quarterly fee. In connection with the agreement, ADT also granted us exclusive rights to research, develop, manufacture and commercialize the aforementioned compounds relating to patents owned by ADT and any products containing such compounds worldwide. In consideration for the rights granted under the agreement, we paid ADT a $3 million upfront fee, and agreed to pay (i) a fee upon transfer of the know-how and intellectual property rights to us; and (ii) additional payments, including milestone and royalty payments. We have the ability to terminate the agreement at any time in its entirety or on a compound-by-compound basis after providing 90 days written notice to ADT. The upfront fee was paid in 2019. Since there is no alternative future use for the upfront fee, we accounted for it as a research and development expense.





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Components of Operating Results





Revenues

To date, we have not generated any revenue. We do not expect to receive any revenue unless and until we obtain regulatory approval and commercialize a future product candidate, or until we receive revenue from a collaboration such as a co-development or out-licensing agreement. There can be no assurance that we will receive such regulatory approvals, and if a future product candidate is approved, that we will be successful in commercializing it.

Research and Development Expenses

Research and development activities are our primary focus. Due to the inherently unpredictable nature of preclinical and clinical development, we are unable to estimate with certainty the costs we will incur and the timelines that will be required in the continued development and approval of our product candidates. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. In addition, we cannot forecast which product candidates may be subject to future collaborations, if and when such arrangements will be entered into, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We expect our research and development expenses to increase over the next several years as our development programs progress and as we seek to initiate clinical trials. We also expect to incur increased research and development expenses as we selectively identify and develop additional product candidates.

Research and development expenses include the following:

· employee-related expenses, such as salaries and share-based compensation;

· expenses relating to outsourced and contracted services, such as CROs, external


   laboratories and consulting, research and advisory services;

· supply, development and manufacturing costs relating to clinical trial


   materials;

· preclinical study expenses and related developmental costs; and

· costs associated with regulatory compliance.

We recognize research and development expenses as we incur them.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, including share-based compensation related to directors and employees, facility costs, patent application and maintenance expenses, and external professional service costs, including legal, accounting, audit, finance, business development, investor relations and human resource services, and other consulting fees.

Finance (Income) Expense, Net

Finance (Income) expense, net, consisted primarily of finance expenses recorded due to revaluation of investor warrants at fair value during a period where these could not be classified within equity (for more details, see Note 7a in "Item 1. Financial Statements Unaudited" above), offset by interest income received on the Company's cash and cash equivalents and foreign currency exchange gains and losses.





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Restructuring Expense

We have recognized restructuring provisions for the direct expenditures arising from restructuring initiatives, where the plans are sufficiently detailed and where appropriate communication to those affected has been made To this end, we have recorded restructuring expenses comprised principally of contract termination costs, employee severance and associated termination costs related to the reduction of our workforce and costs associated with the early termination of facility leases.

One-time termination benefits are expensed at the date the employees are notified, unless the employees must provide future services beyond a minimum retention period, in which case the benefits are expensed ratably over the future service periods. A provision for contract termination costs, in which a contract is terminated or the entity will continue to incur costs under a contract for its remaining term without economic benefit (an onerous contract), is recognized only when the contract is terminated or when the entity permanently ceases using the rights granted under the contract.





Results of Operations

Below is a summary of our results of operations for the periods indicated:





                                        Three months ended
                                             March 31,              Increase/(decrease)
                                         2020          2019            $              %
                                          (in thousands)
    Operating expenses:
    Research and development          $    1,050     $  4,135     $     (3,085 )       -75 %
    General and administrative             1,825        1,291              534          41 %
    Restructuring expense                    670            -              670           -
    Operating loss                        (3,545 )     (5,426 )         (1,881 )        35 %
    Financing (income) expense, net          (10 )      4,487           (4,497 )      -100 %
    Net loss                          $   (3,535 )   $ (9,913 )   $     (6,378 )        64 %

Our results of operations have varied in the past and can be expected to vary in the future due to numerous factors. We believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance.

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Research and development expenses

Research and development expense decreased by approximately $3.0 million, or 73%, in the three months ended March 31, 2020 from the comparable period of 2019. The decrease is primarily due to reductions in third-party clinical trial and manufacturing costs of approximately $2.8 million associated with the Phase 2 Codex clinical trial which was discontinued in November 2019, partially offset by third-party development costs of $0.3 million incurred in 2020 associated with the RAS program acquired in September 2019.

General and administrative expenses

General and administrative costs increased by approximately $0.5 million, or 42%, in the three months ended March 31, 2020 from the comparable period of 2019. The increase is primarily due to increased personnel costs, insurance costs and professional fees associated with establishing an infrastructure to support a U.S. publicly traded company.





Restructuring expense

In November 2019, we decided to discontinue our Phase 2 Codex study in patients with BCG-unresponsive NMIBC. In connection with this decision, we are required to make certain payments under contracts with CROs and with other manufactures of the drug in order to terminate the contracts and close the trials. Moreover, the restructuring plan included a reduction in the workforce of seven employees.





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Separately, in January 2020 our board of directors approved management's recommendation to close our office and laboratories located in Israel. The closure resulted in the termination of employment of the Company's remaining five Israeli employees.

Restructuring expenses incurred during the first quarter of 2020 were comprised principally of contract termination costs, employee severance and associated termination costs related to the reduction of our workforce, and costs associated with the early termination of our lease facility.

Financing (income) expense, net

Financing (income) expense, net decreased by approximately $4.5 million.

For the three months ended March 31, 2020, finance expense was primarily interest income and foreign currency exchange rate gains.

For the three months ended March 31, 2019, finance expense of $4.5 million was primarily related to the revaluation of investor warrants at fair value during a period where these could not be classified within shareholders' equity, due to the following circumstances:

On initial measurement, the warrants together with their price protections were classified as equity instruments that are not subsequently measured at fair value, and thus we allocated the proceeds according to the relative fair value of the instruments. However, we changed our functional currency from NIS to USD as of January 1, 2019. Due to this change from this date, the exercise price of the warrants was no longer denominated in our functional currency and the warrants were therefore not considered indexed to our own stock according to ASC 815-40 and no longer met all the criteria to be classified within equity. Therefore, the warrants were reclassified as a liability at their fair value as of January 1, 2019, and any difference was accounted for as an adjustment to equity. Upon our Nasdaq initial public offering of February 14, 2019, the warrants' exercise price currency was changed to USD. As a result, the warrants were reclassified within equity. Consequently, the warrants were measured at fair value from January 1, 2019 until February 14, 2019, with resulting finance expenses of $4.6 million, until they were reclassified within equity.





Cash Flows



The table below shows a summary of our cash flow activities for the periods
indicated:



                                          Three months ended
                                              March 31,                  Increase/(decrease)
                                         2020            2019             $                %
                                            (in thousands)
Net cash used in operating
activities                            $    (3,536 )   $   (3,122 )   $        414              13 %
Net cash used in investing
activities                                    (34 )          (75 )            (41 )           -55 %
Net cash provided by financing
activities                                      -         27,819          (27,819 )          -100 %
Net increase (decrease) in cash,
cash equivalents and restricted
cash                                  $    (3,570 )   $   24,622     $    (28,192 )          -114 %




Operating activities

Net cash used in operating activities increased by $0.4 million, or 14%, for the three months ended March 31, 2020 compared to the same period of 2019. Net loss adjusted for non-cash activities was $3.2 million for the three months ended March 31, 2020 compared to $4.9 million resulting in favorable cash flow of $1.7 million. This was more than offset by unfavorable changes in working capital of approximately $2.2 million.





Investing activities

Investing activities in the three months ended March 31, 2020 and 2019 are purchases of fixed assets.





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Financing activities

Financing activities in the three months ended March 31, 2019 reflect the net proceeds from the Company's IPO on February 14, 2019. There were no financing activities in the three months ended March 31, 2020.





Contractual Commitments



The Company's contractual commitments are as follows at March 31, 2020 (in
thousands):



Remainder of 2020   $ 164
2021                  189
2022                   16
Total               $ 369

Effects of Currency Fluctuation

Currency fluctuations could affect us through increased or decreased costs, mainly for goods and services acquired outside of the United States. Currency fluctuations have not had a material effect on our results of operations during the three months ended March 31, 2020 or 2019.

Off-Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities as to which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that would expose us to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.





Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based on our financial statements, which we prepared in accordance with U.S. GAAP. Comparative figures, which were previously presented and publicly reported in accordance with IFRS as issued by the International Accounting Standards Board, have been adjusted as necessary to be compliant with our policies under U.S. GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail throughout this section. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For a discussion of our critical accounting policies, please read Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Form 10-K. There have been no material changes to these critical accounting policies since our 2019 Form 10-K.

Recently-Issued Accounting Pronouncements

Certain recently-issued accounting pronouncements are discussed in Note 2, Summary of Significant Accounting Policies, to the unaudited condensed consolidated financial statements included in "Item 1. Financial Statements Unaudited"

Liquidity and Capital Resources

The condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company has incurred losses and cash flow deficits from operations since inception, resulting in an accumulated deficit at March 31, 2020 of $109.0 million. The Company has financed operations to date primarily through public and private placements of equity securities. The Company anticipates that it will continue to incur net losses for the foreseeable future. The Company believes that its existing cash and cash equivalents will only be sufficient to fund its projected cash needs until the first quarter of 2021. Accordingly, these factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. To meet future capital needs, the Company would need to raise additional capital through equity or debt financing or other strategic transactions. However, any such financing may not be on favorable terms or even available to the Company. The failure of the Company to obtain sufficient funds on commercially-acceptable terms when needed, would have a material adverse effect on the Company's business, results of operations and financial condition. The forecast of cash resources is forward-looking information that involves risks and uncertainties, and the actual amount of the Company's expenses could vary materially and adversely as a result of a number of factors. The Company has based its estimates on assumptions that may prove to be wrong, and the Company's expenses could prove to be significantly higher than it currently anticipates.

In April, as previously disclosed, the Company received a deficiency letter from the Nasdaq Stock Market regarding noncompliance with certain minimum bid price requirements. The Company will work to formulate a plan to regain compliance within the required time periods. An inability to regain compliance during the applicable time periods, and any subsequent extension periods, if any, would have a material adverse effect.

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