This Management's Discussion and Analysis of Financial Conditions and Results of Operations and other portions of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking information. Factors that may cause such differences include, but are not limited to, availability and cost of financial resources, product demand, market acceptance and other factors discussed in this report under the heading "Risk Factors". This Management's Discussion and Analysis of Financial Conditions and Results of Operations should be read in conjunction with our financial statements and the related notes included elsewhere in this report.
Overview
The Company believes that Lm Technology immunotherapies can complement and address significant unmet needs in the current oncology treatment landscape. Specifically, our product candidates (i.e., ADXS-PSA and ADXS-504) have the potential to optimize, enhance checkpoint performance of other oncology treatments, while having a generally well-tolerated safety profile.
New Ayala is currently winding down or has wound down clinical studies of Lm Technology immunotherapies in three program areas:
? Human Papilloma Virus ("HPV")-associated cancers ? Personalized neoantigen-directed therapies ? Human epidermal growth factor receptor-2 (HER-2) associated cancers 60
All these clinical program areas are anchored in the Company's Lm TechnologyTM,
a unique platform designed for its ability to safely and effectively target
various cancers in multiple ways. While we are currently winding down clinical
studies of Lm Technology immunotherapies in these three program areas, our
license agreements continue with
Recent Developments
Merger with
On
At the effective time of the Merger (the "Effective Time"), each share of share
capital of Old Ayala issued and outstanding immediately prior to the Effective
Time was converted into the right to receive a number of shares of New Ayala
common stock, par value
Results of Operations for the Fiscal Year Ended
Revenue
Revenue was
Research and Development Expenses
We invest in research and development to advance our Lm technology through our preclinical and clinical development programs. Research and development expenses for the years endedOctober 31, 2022 and 2021 were categorized as follows (in thousands): Fiscal Years Ended Increase October 31, (Decrease) 2022 2021 $ % Hotspot/Off-the-Shelf therapies$ 4,323 $ 4,261 $ 62 1 % Prostate cancer 94 30 64 213 % HPV-associated cancers 263 2,069 (1,806 ) (87 )% Personalized neoantigen-directed therapies 11 495 (484 ) (98 )% Other expenses 2,925 3,707 (782 ) (21 )% Total research & development expense$ 7,616 $ 10,562 $ (2,946 ) (28 )% Stock-based compensation expense included in research and development expense $ 47$ 164 $ (117 ) (71 )% 61
Hotspot/Off-the-Shelf Therapies (ADXS-HOT)
Research and development costs associated with our hotspot mutation-based
therapy for the fiscal year ended
Prostate Cancer (ADXS-PSA)
Research and development costs associated with our prostate cancer therapy for
the year ended
HPV-Associated Cancers (AXAL)
The majority of the HPV-associated research and development costs include
clinical trial and other related costs associated with our AXAL programs in
cervical and head and neck cancers. HPV-associated costs for the year ended
Personalized Neoantigen-Directed Therapies (ADXS-NEO)
Research and development costs associated with personalized neoantigen-directed
therapies for the year ended
Other Expenses
Other expenses include salary and benefit costs, stock-based compensation
expense, professional fees, laboratory costs and other internal and external
costs associated with our research & development activities. Other expenses for
the year ended
General and Administrative Expenses
General and administrative expenses primarily include salary and benefit costs
and stock-based compensation expense for employees included in our finance,
legal and administrative organizations, outside legal and professional services,
and facilities costs. General and administrative expenses for the years ended
Years Ended Increase October 31, (Decrease) 2022 2021 $ % General and administrative expense$ 8,891 $ 11,464 $ (2,573 ) (22 )% Stock-based compensation expense included in general and administrative expense$ 50 $ 402 $ (352 ) (88 )% 62
General and administrative expenses for the year ended
Intangible Asset Impairment
During the year ended
Changes in Fair Values
For the year ended
For the year ended
Liquidity and Capital Resources
Going Concern and Management's Plans
Similar to other development stage biotechnology companies, our products that are being developed have not generated significant revenue. As a result, we have historically suffered recurring losses and we have required significant cash resources to execute our business plans. These losses are expected to continue for the foreseeable future. Additionally, due to the Merger, we will need additional cash resources to properly integrate and implement the operations of Old Ayala. The aforementioned factors raise substantial doubt about our ability to continue as a going concern. The accompanying 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. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern within twelve months after the date the financial statements are issued.
Historically, the Company's major sources of cash have comprised proceeds from
various public and private offerings of its securities (including common stock),
debt financings, clinical collaborations, option and warrant exercises, income
earned on investments and grants, and interest income. From
The COVID-19 pandemic has created significant volatility and disruption of
financial markets. An extended period of economic disruption could negatively
affect the Company's business, financial condition, and access to sources of
liquidity. As of
63
The Company recognizes that it will need to raise additional capital in order to continue to execute its business plan in the future. There is no assurance that additional financing will be available when needed or that the Company will be able to obtain financing on terms acceptable to it or whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to further scale back its operations. The Company based this estimate on assumptions that may prove to be incorrect, and we could use available capital resources sooner than currently expected.
Cash Flows Operating Activities
Net cash used in operating activities was approximately
Investing Activities
Net cash used in investing activities was approximately
Financing Activities
Net cash used in financing activities was approximately
In
On
During the year ended
64
Off-Balance Sheet Arrangements
As of
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in
Warrant Liabilities
We account for our warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant's specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity ("ASC 480") and ASC 815, Derivatives and Hedging ("ASC 815"). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for liability classification under ASC 815, including whether the warrants are indexed to the Company's own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
Some of our warrants meet the criteria as liability classified derivative instruments and are recorded at fair value on the grant date and re-valued at each reporting date, with changes in the fair value reported in the statements of operations. Warrant liabilities are classified on the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date. Volatility in our common stock may result in significant changes in the value of the warrant liabilities and resulting gains and losses on our consolidated statement of operations.
Intangible Assets
Intangible assets primarily consist of legal and filing costs associated with
obtaining patents and licenses and are amortized on a straight-line basis over
their remaining useful lives which are estimated to be twenty years from the
effective dates of the
Critical Accounting Policies Revenue Recognition
Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs 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. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
65
The Company enters into licensing agreements that are within the scope of ASC 606, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, 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 distinct in the context of the contract; (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 when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must use significant judgment to determine: (a) the number of performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; and (c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied.
Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.
Exclusive Licenses. If the license to the Company's intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a performance obligation is distinct from the other performance obligations, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a performance obligation for its intended purpose without the receipt of the remaining performance obligation, whether the value of the performance obligation is dependent on the unsatisfied performance obligation, whether there are other vendors that could provide the remaining performance obligation, and whether it is separately identifiable from the remaining performance obligation. For licenses that are combined with other performance obligation, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.
Milestone Payments. At the inception of each arrangement that includes research or development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. An output method is generally used to measure progress toward complete satisfaction of a milestone. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and earnings in the period of adjustment.
66 Stock Based Compensation
The Company has an equity plan which allows for the granting of stock options to its employees, directors and consultants for a fixed number of shares with an exercise price equal to the fair value of the shares at date of grant. The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date and is then recognized over the requisite service period, usually the vesting period, in both research and development expenses and general and administrative expenses on the consolidated statement of operations, depending on the nature of the services provided by the employees or consultants.
The process of estimating the fair value of stock-based compensation awards and recognizing stock-based compensation cost over their requisite service period involves significant assumptions and judgments. The Company estimates the fair value of stock option awards on the date of grant using the Black Scholes Model ("BSM") for the remaining awards, which requires that the Company makes certain assumptions regarding: (i) the expected volatility in the market price of its common stock; (ii) dividend yield; (iii) risk-free interest rates; and (iv) the period of time employees are expected to hold the award prior to exercise (referred to as the expected holding period). As a result, if the Company revises its assumptions and estimates, stock-based compensation expense could change materially for future grants.
The Company accounts for stock-based compensation using fair value recognition and records forfeitures as they occur. As such, the Company recognizes stock-based compensation cost only for those stock-based awards that vest over their requisite service period, based on the vesting provisions of the individual grants.
Warrant Liabilities
We account for our warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant's specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity ("ASC 480") and ASC 815, Derivatives and Hedging ("ASC 815"). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for liability classification under ASC 815, including whether the warrants are indexed to the Company's own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
Some of our warrants meet the criteria as liability classified derivative instruments and are recorded at fair value on the grant date and re-valued at each reporting date, with changes in the fair value reported in the statements of operations. Warrant liabilities are classified on the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date. Volatility in our common stock may result in significant changes in the value of the warrant liabilities and resulting gains and losses on our consolidated statement of operations.
Intangible Assets
Intangible assets primarily consist of legal and filing costs associated with
obtaining patents and licenses and are amortized on a straight-line basis over
their remaining useful lives which are estimated to be twenty years from the
effective dates of the
Management reviews its long-lived assets for impairment whenever events and
circumstances indicate that the carrying value of an asset might not be
recoverable. Net assets are recorded on the balance sheet for patents related to
ADXS-HER2 and the Lm technology licensed from the
67 Leases
At the inception of an arrangement, the Company determines whether an arrangement is or contains a lease based on the facts and circumstances present in the arrangement. An arrangement is or contains a lease if the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Most leases with a term greater than one year are recognized on the consolidated balance sheet as operating lease right-of-use assets and current and long-term operating lease liabilities, as applicable. The Company has elected not to recognize on the consolidated balance sheet leases with terms of 12 months or less. The Company typically only includes the initial lease term in its assessment of a lease arrangement. Options to extend a lease are not included in the Company's assessment unless there is reasonable certainty that the Company will renew.
Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as prepaid or accrued rent. The interest rate implicit in the Company's leases is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. In transition to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates.
New Accounting Standards
See Note 2 to our financial statements that discusses new accounting standards.
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