UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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TABLE OF CONTENTS
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers are cautioned that known and unknown risks, uncertainties and other factors, including those over which we may have no control and others listed in the “Risk Factors” section of this Report, may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future, although not all forward-looking statements contain these words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance, or achievement to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements include, but are not limited to, statements about:
| ● | our financial position and estimated cash burn rate; |
| ● | our estimates regarding expenses, future revenues, and capital requirements; |
| ● | our ability to continue as a going concern; |
| ● | our need to raise substantial additional capital to fund our operations and repay indebtedness; |
| ● | our ability to commercialize or monetize Proclarix and integrate the assets and commercial operations acquired in the share exchange with Proteomedix AG (“Proteomedix”); |
| ● | our reliance on third parties, including Laboratory Corporation of America (“LabCorp”), to develop, market, distribute and sell our products; |
| ● | the successful development of our commercialization capabilities, including sales and marketing capabilities; |
| ● | our ability to maintain the necessary regulatory approvals to market and commercialize our products; |
| ● | the results of market research conducted by us or others; |
| ● | our ability to obtain and maintain intellectual property protection for our current products; |
| ● | our ability to protect our intellectual property rights and the potential for us to incur substantial costs from lawsuits to enforce or protect our intellectual property rights; |
ii
| ● | the possibility that a third party may claim we or our third-party licensors have infringed, misappropriated, or otherwise violated their intellectual property rights and that we may incur substantial costs and be required to devote substantial time defending against claims against us; |
| ● |
our reliance on third parties, including manufacturers and logistics companies; |
| ● | the success of competing therapies or diagnostics and products that are or become available; |
| ● | our ability to successfully compete against current and future competitors; |
| ● | our ability to expand our organization to accommodate potential growth and our ability to motivate, retain, and attract key personnel; |
| ● | the potential for us to incur substantial costs resulting from product liability lawsuits against us and the potential for these product liability lawsuits to cause us to limit our commercialization of our products; |
| ● | market acceptance of our products, the size and growth of the potential markets for our current products, and our ability to serve those markets; and |
| ● | disruptions in the business of Onconetix or Proteomedix, which could have an adverse effect on their respective businesses and financial results. |
These forward-looking statements involve numerous risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results of operations or the results of other matters that we anticipate herein could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other sections in this Report. You should thoroughly read this Report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all our forward-looking statements by these cautionary statements.
The forward-looking statements made in this Report relate only to events or information as of the date on which the statements are made in this Report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this Report and the documents that we refer to in this Report and have filed as exhibits to this Report, completely and with the understanding that our actual future results may be materially different from what we expect.
iii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
ONCONETIX, INC.
Condensed Consolidated Balance Sheets (Unaudited)
| September 30, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Prepaid expenses, long-term | ||||||||
| Property and equipment, net | ||||||||
| Deferred offering costs | ||||||||
| Operating right of use asset | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Notes payable, net of debt discounts of $ | ||||||||
| Operating lease liability, current | ||||||||
| Subscription agreement liability – related party | ||||||||
| Contingent warrant liability | ||||||||
| Total current liabilities | ||||||||
| Note payable, net of current portion | ||||||||
| Subscription agreement liability – related party | ||||||||
| Pension benefit obligation | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Deferred tax liability, net | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (see Note 10) | ||||||||
| Series B Convertible Redeemable Preferred stock, $ | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Series A Convertible Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in-capital | ||||||||
| Treasury stock, at cost; | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total Onconetix stockholders’ equity (deficit) | ( | ) | ||||||
| Non-controlling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities, convertible redeemable preferred stock, and stockholders’ equity (deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
ONCONETIX, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Impairment of ENTADFI assets | ||||||||||||||||
| Impairment of goodwill | ||||||||||||||||
| Impairment of deposit on asset purchase agreement | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (expense) income | ||||||||||||||||
| Interest expense - related party | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on extinguishment of note payable | ( | ) | ( | ) | ||||||||||||
| Change in fair value of subscription agreement liability – related party | ( | ) | ( | ) | ||||||||||||
| Change in fair value of contingent warrant liability | ( | ) | ( | ) | ||||||||||||
| Other - net | ||||||||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding, basic and diluted | ||||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign currency translation | ( | ) | ||||||||||||||
| Change in pension benefit obligation | ( | ) | ||||||||||||||
| Total comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
ONCONETIX, INC.
Condensed Consolidated Statements of Convertible Redeemable Preferred Stock and
Stockholders’ Equity (Deficit)
(Unaudited)
| Series B Preferred | Series A Preferred | Common | Additional | Other | Total Onconetix | Non- | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Paid-in | Treasury Stock | Accumulated | Comprehensive | Equity | controlling | Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Income | (Deficit) | Interest | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Changes in pension benefit obligation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||||||
| Restricted stock forfeitures | — | — | ( | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes in pension benefit obligation | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock and warrants from exercise of preferred investment options, net of issuance costs | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of pre-funded warrants | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares and pre-funded warrants in connection with related party subscription agreement | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series A Preferred Stock to common stock | — | ( | ) | ( | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series B Preferred Stock to common stock | ( | ) | ( | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in pension benefit obligation | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B Preferred | Series A Preferred | Common | Additional | Other | Total Onconetix | Non- | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Paid-in | Treasury Stock | Accumulated | Comprehensive | Equity | controlling | Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Income | (Deficit) | Interest | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Exercise of pre-funded warrants | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | — | — | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | — | — | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock from exercise of preferred investment options, net of issuance costs | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants for settlement of contingent warrants | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeitures | — | — | ( | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ONCONETIX, INC.
Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Impairment of deposit on asset purchase agreement | ||||||||
| Impairment on other long-lived assets | ||||||||
| Impairment of goodwill | ||||||||
| Impairment of ENTADFI assets | ||||||||
| Amortization of debt discounts | ||||||||
| Amortization of debt discount – related party | ||||||||
| Loss on related party receivable | ||||||||
| Loss on extinguishment of note payable | ||||||||
| Depreciation and amortization | ||||||||
| Change in fair value of subscription agreement liability – related party | ||||||||
| Net periodic pension benefit | ||||||||
| Stock-based compensation | ||||||||
| Interest accrued on note payable | ||||||||
| Interest accrued on note payable – related party | ||||||||
| Loss on impairment of inventory of ENTADFI | ||||||||
| Change in fair value of contingent warrant liability | ( | ) | ||||||
| Deferred tax benefit | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Prepaid expenses, long-term | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of assets, including transaction costs of $ | ( | ) | ||||||
| Deposit made in connection with asset purchase agreement | ( | ) | ||||||
| Purchases of other long-lived assets | ( | ) | ||||||
| Net advances to related parties | ( | ) | ||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of note payable – related party | ||||||||
| Proceeds from issuance of note payable | ||||||||
| Payment of financing costs | ( | ) | ||||||
| Principal payments of notes payable | ( | ) | ( | ) | ||||
| Proceeds from exercise of preferred investment options, net | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Payment of deferred offering costs | ( | ) | ||||||
| Purchase of treasury shares | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ||||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Noncash investing and financing activities: | ||||||||
| Inventory and intangible assets acquired through issuance of notes payable | $ | $ | ||||||
| Incremental fair value of exchanged preferred investment options | $ | $ | ||||||
| Deferred offering costs included in accounts payable and accrued expenses | $ | $ | ||||||
| Recognition of contingent warrant liability | $ | $ | ||||||
| Warrants issued for settlement of contingent warrants | $ | $ | ||||||
| Deferred offering costs previously included in prepaid expenses | $ | $ | ( | ) | ||||
| Conversion of Series A Preferred Stock to common stock | $ | $ | ||||||
| Conversion of Series B Preferred Stock to common stock | $ | $ | ||||||
| Exercise of pre-funded warrants | $ | $ | ||||||
| Issuance of restricted stock | $ | $ | ||||||
| Restricted stock forfeitures | $ | $ | ( | ) | ||||
| Settlement of related party note payable and accrued interest through issuance of common stock | $ | $ | ||||||
| Operating right-of-use asset obtained in exchange of lease liability | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 1 — Organization and Basis of Presentation
Organization and Nature of Operations
Onconetix, Inc. (formerly known as Blue Water Biotech, Inc. and Blue Water Vaccines Inc.) (the “Company” or “Onconetix”) was formed on October 26, 2018, and is a commercial stage biotechnology company focused on the research, development, and commercialization of innovative solutions for men’s health and oncology.
On December 15, 2023, Onconetix acquired
In April 2023, the Company acquired ENTADFI, a Food and Drug Administration (“FDA”)-approved, once daily pill that combines finasteride and tadalafil for the treatment of benign prostatic hyperplasia.
Historically, the Company’s focus was on the research and development of transformational vaccines to prevent infectious diseases worldwide, until the third quarter of 2023, at which time the Company halted its efforts on vaccine development activities to focus on commercialization activities for ENTADFI and pursue other potential acquisitions. However, in light of (i) the time and resources needed to continue pursuing commercialization of ENTADFI, and (ii) the Company’s cash runway and indebtedness, the Company determined to pause its commercialization of ENTADFI during the first quarter of 2024, as it explores strategic alternatives to monetize ENTADFI, such as a potential sale of the ENTADFI assets. To that end, the Company is working with an investment advisor to assist with the potential sale or other transaction of the ENTADFI assets. There is currently no plan to resume commercialization of ENTADFI, and as such, if the Company is not able to consummate a sale or other transaction of the ENTADFI assets, it may abandon the assets and destroy its inventory of the product. Based on the circumstances surrounding ENTADFI, the ENTADFI assets were fully impaired at June 30, 2024 (see Notes 4 and 5).
Reverse Stock Split
On September 24, 2024,
Basis of Presentation and Principles of Consolidation
The Company’s condensed consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) and include the accounts of Onconetix and its
Unaudited Interim Consolidated Financial Statements
The accompanying condensed consolidated balance sheet as of September 30, 2024, and the condensed consolidated statements of operations and comprehensive loss and the condensed consolidated statements of convertible redeemable preferred stock and stockholders’ equity (deficit) for the three and nine months ended September 30, 2024 and 2023, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2024 and 2023 are unaudited. These unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2024 and its results of operations and comprehensive loss for the three and nine months ended September 30, 2024 and 2023, and its cash flows for the nine months ended September 30, 2024 and 2023. The financial data and the other financial information disclosed in the notes to these condensed consolidated financial statements related to the three and nine-month periods are also unaudited. Operating results for the three and nine months ended September 30, 2024, are not necessarily indicative of the results that may be expected for the year ending December 31, 2024, any other interim periods, or any future year or period. The unaudited condensed consolidated financial statements included in this Report should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which includes a broader discussion of the Company’s business and the risks inherent therein.
5
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 2 — Going Concern and Management’s Plans
The Company’s operating activities to date have been devoted to seeking licenses, engaging in research and development activities, potential asset and business acquisitions, expenditures associated with the previously planned commercial launch of ENTADFI, and the commercialization of Proclarix.
The Company has incurred substantial operating losses since inception
and expects to continue to incur significant operating losses for the foreseeable future. As of September 30, 2024, the Company had cash
of approximately $
Management’s plans for funding the Company’s operations include generating product revenue from sales of Proclarix, which is still subject to further successful development and commercialization activities within certain jurisdictions. Management also intends to secure additional required funding through equity or debt financings if available, and to utilize the ELOC entered into in October 2024 (see Note 15) on an as-needed basis to assist with the paydown of notes issued to Veru and to fund current operating needs, subject to certain restrictions and beneficial ownership constraints. However, based on the terms of the ELOC and the current maximum availability, Management determined that the funds readily available under the ELOC will not be sufficient to sustain operations. In addition, there are currently no other commitments in place for further financing nor is there any assurance that such financing will be available to the Company on favorable terms, if at all. This creates significant uncertainty whether the Company will have the funds available to be able to sustain its operations and expand commercialization of Proclarix. If the Company is unable to secure additional capital, it may be required to curtail any future clinical trials, development and/or commercialization of future product candidates, and it may take additional measures to reduce expenses in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations.
Because of historical and expected operating losses and net operating cash flow deficits, there is substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the condensed consolidated financial statements, which is not alleviated by management’s plans. The condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. These condensed consolidated financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty.
6
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 3 — Summary of Significant Accounting Policies
During the three and nine months ended September 30, 2024, there were no changes to the Company’s significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Selected significant accounting policies are discussed in further detail below:
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. The most significant estimates in the Company’s condensed consolidated financial statements relate to accounting for acquisitions, valuation of inventory, the useful life of the amortizable intangible assets, estimates of future cash flows used to evaluate impairment of intangible assets, assumptions related to the pension benefit obligation, assumptions related to the related party subscription agreement liability, assumption related to note payables, and accounting for income taxes. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
Segment Information
Operating segments are defined as components of
an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker (“CODM”),
or decision-making group, in deciding how to allocate resources and in assessing performance. As of September 30, 2024 and December 31,
2023, the Company was operating in
7
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 3 — Summary of Significant Accounting Policies (cont.)
Fair Value Measurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
| ● | Level 1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets; |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. Financial instruments, including cash, inventory, accounts receivable, accounts payable, accrued liabilities, operating lease liabilities, and notes payable are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.
The fair value of the contingent warrant liability and the related party subscription agreement liability are valued using significant unobservable measures and other fair value inputs and are therefore classified as Level 3 financial instruments.
| As of September 30, 2024 | ||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent warrant liability | $ | $ | ||||||||||||||
| Subscription agreement liability – related party | $ | $ | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| As of December 31, 2023 | ||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent warrant liability | $ | $ | ||||||||||||||
| Subscription agreement liability – related party | $ | $ | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
During the year ended December 31, 2023, in connection with the acquisition of Proteomedix, the Company recorded intangible assets, which were recognized at fair value (see Note 5). Additionally, as a result of the impairment losses recorded on the Company’s ENTADFI asset group during the nine months ended September 30, 2024, the related assets were recorded at fair value as of September 30, 2024. These non-financial assets were valued using significant unobservable measures and other fair value inputs and are therefore classified as Level 3 measurements. See Note 4.
None of the Company’s other non-financial assets or liabilities are recorded at fair value on a non-recurring basis as of September 30, 2024 and December 31, 2023. There were no transfers between levels during the periods presented.
8
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 3 — Summary of Significant Accounting Policies (cont.)
| Subscription Agreement Liability | ||||
| Balance at December 31, 2023 | $ | |||
| Change in fair value | ||||
| Balance at September 30, 2024 | $ | |||
| Contingent Warrant Liability | ||||
| Balance at December 31, 2023 | $ | |||
| Fair value upon issuance | ||||
| Change in fair value | ( | ) | ||
| Balance at September 30, 2024 | $ | |||
Revenue Recognition
The following is a description of principal activities from which the Company generates its revenue:
Development Services
Proteomedix provides a range of services to life sciences customers referred to as “Development Services” including testing for biomarker discovery, assay design and development. These Development Services are performed under individual statement of work (“SOW”) arrangements with specific deliverables defined by the customer. Development Services are generally performed on a time and materials basis. During the performance and through completion of the service to the customer in accordance with the SOW, the Company has the right to bill the customer for the agreed upon price and recognizes the Development Services revenue over the period estimated to complete the SOW. The Company generally identifies each SOW as a single performance obligation.
Completion of the service and satisfaction of the performance obligation under a SOW is typically evidenced by access to the data or test made available to the customer or any other form or applicable manner of delivery defined in the SOW. However, for certain SOWs under which work is performed pursuant to the customer’s highly customized specifications, the Company has the enforceable right to bill the customer for work completed, rather than upon completion of the SOW. For those SOWs, the Company recognizes revenue over a period of time during which the work is performed based on the expended efforts (inputs). As the performance obligation under the SOW is satisfied, any amounts earned as revenue and billed to the customer are included in accounts receivable.
Product Sales
The Company derives revenue through sales of its products, which includes Proclarix, its diagnostic product, directly to end users, including laboratories, hospitals, and medical centers, and to distributors. During the nine months ended September 30, 2024, the majority of the Company’s product revenue was generated from sales of Proclarix assays to LabCorp for review and testing in connection with the Company’s license agreement with LabCorp (see Note 6). The Company considers customer purchase orders, which in some cases are governed by master sales agreements or standard terms and conditions, to be the contracts with a customer. For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects to be entitled. The Company fulfills its performance obligation applicable to product sales once the product is transferred to the customer.
9
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 3 — Summary of Significant Accounting Policies (cont.)
During the three and nine months ended September
30, 2024, the Company recorded approximately $
| European Union | Non-European Union | United States | ||||||||||
| Development services | % | % | % | |||||||||
| Product sales | % | % | % | |||||||||
The Company’s revenue was generated from the following geographic regions during the nine months ended September 30, 2024:
| European Union | Non-European Union | United States | ||||||||||
| Development services | % | % | % | |||||||||
| Product sales | % | % | % | |||||||||
| For the Three Months Ended September 30, 2024 | For the Nine Months Ended September 30, 2024 | |||||||||||||||
| Development Services | Product Sales | Development Services | Product Sales | |||||||||||||
| Customer A | % | % | ||||||||||||||
| Customer B | % | |||||||||||||||
| Customer C | % | % | ||||||||||||||
Any revenues earned but not yet billed to the
customer as of the date of the condensed consolidated financial statements are recorded as contract assets and are included in prepaid
expenses and other current assets in the accompanying condensed consolidated financial statements. The Company had no unbilled accounts
receivable as of September 30, 2024 and an insignificant balance as of December 31, 2023. Amounts recorded in contract assets are reclassified
to accounts receivable in our condensed consolidated financial statements when the customer is invoiced according to the billing schedule
in the contract. Accounts receivable was approximately $
In relation to customer contracts, the Company incurs costs to fulfill a contract but does not incur costs to obtain a contract. These costs to fulfill a contract do not meet the criteria for capitalization and are expensed as incurred.
New Accounting Pronouncements
There was no new accounting pronouncements issued since the Company’s filing of the Annual Report on Form 10-K for the year ended December 31, 2023, which could have a significant effect on the accompanying condensed consolidated financial statements, except for the following:
In November 2024, the FASB issued Accounting Standards Update No. 2024-03, Disaggregation of Income Statement Expenses. This guidance will require additional disclosures and disaggregation of certain costs and expenses presented on the face of the income statement. The amendments are effective for annual reporting periods beginning after December 15, 2026 and interim reporting period beginning after December 15, 2027 with early adoption permitted. The Company is currently evaluating the impact of this new guidance to our condensed consolidated financial statements.
10
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 4 — Balance Sheet Details
Inventories
| September 30, 2024 | December 31, 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
The Company recorded an impairment on the ENTADFI
inventory in the amount of approximately $
Prepaid Expenses and Other Current Assets
| September 30, 2024 | December 31, 2023 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid regulatory fees | ||||||||
| Prepaid research and development | ||||||||
| Prepaid professional fees | ||||||||
| VAT taxes receivable | ||||||||
| Prepaid other | ||||||||
| Total | $ | $ | ||||||
Intangible Assets
| Balance at December 31, 2023 | Impairment | Foreign Currency Translation | Balance at September 30, 2024 | |||||||||||||
| Gross basis: | ||||||||||||||||
| Trade name | $ | $ | $ | ( | ) | $ | ||||||||||
| Product rights for developed technology | ( | ) | ( | ) | ||||||||||||
| Customer relationships | ( | ) | ||||||||||||||
| Total intangible assets, gross | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
11
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 4 — Balance Sheet Details (cont.)
| Balance at December 31, 2023 | Amortization | Foreign Currency Translation | Balance at September 30, 2024 | |||||||||||||
| Accumulated amortization: | ||||||||||||||||
| Product rights for developed technology | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Customer relationships | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total intangible assets, accumulated amortization | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||||||||||
The finite lived intangible assets held by the
Company, which includes customer relationships and product rights for developed technology, are being amortized over their estimated useful
lives of
During the three months ended March 31, 2024, the Company became aware of a new competitor that received approval by the FDA for a combined finasteride-tadalafil capsule, which is a direct competitor product to ENTADFI. This was determined to be a triggering event that could result in a decrease in future expected cash flows, and thus indicated the carrying amount of the ENTADFI asset group may not be fully recoverable. The Company performed an undiscounted cash flow analysis over the ENTADFI asset group and determined that the carrying value of the asset group is not recoverable. The Company then estimated the fair value of the asset group to measure the impairment loss for the period. Significant assumptions used to determine this non-recurring fair value measurement included projected sales driven by market share and product sales price estimates, associated expenses, growth rates, the discount rate used to measure the fair value of the net cash flows associated with this asset group, as well as Management’s estimates of an expected sales price for the asset group, and the probability of each potential strategic alternative taking place.
During the three months ended June 30, 2024, the Company reevaluated the probability of each potential strategic alternative occurring and determined that the change in probabilities is a triggering event that could result in a decrease in future expected cash flows, and thus indicated the carrying amount of the ENTADFI asset group may not be fully recoverable. The Company further determined that the asset group was fully impaired at June 30, 2024, and recorded a corresponding impairment charge during the three months ended June 30, 2024, thus resulting in no remaining carrying value for the assets in the ENTADFI asset group.
The Company recorded impairment charges on
its intangible assets during the three months ended September 30, 2024. For the nine months ended September 30, 2024, approximately $
12
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 4 — Balance Sheet Details (cont.)
| Years ending December 31, | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
As of September 30, 2024, the weighted-average
remaining amortization period for intangible assets was approximately
Trade names, which do not have legal, regulatory,
contractual, competitive, economic, or other factors that limit the useful lives are considered indefinite lived assets and are not amortized
but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. The Company tested its trade name for impairment during the three months ended September 30, 2024, as a
result of certain triggering events discussed below. The Company determined that there was no impairment of its trade name as of September
30, 2024. As of September 30, 2024 and December 31, 2023, $
Goodwill
Goodwill was recorded during the year ended December 31, 2023, in connection with the Proteomedix acquisition (see Note 5).
13
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 4 — Balance Sheet Details (cont.)
During the three months ended March 31, 2024,
the Company’s stock price and market capitalization declined, and the Company determined that this was an indicator of a potential
impairment of its goodwill, and accordingly, as of March 31, 2024, the Company performed a quantitative analysis to identify and
measure the amount of impairment loss to be recognized, if any. To perform its quantitative test, the Company compared the fair value
of the Proteomedix reporting unit to its carrying value and determined that the fair value of the reporting unit was less than its carrying
value. The Company determined the amount of impairment charges to its goodwill for the three months ended March 31, 2024 to be approximately
$
Historically, the Company was organized in two reporting units,
Proteomedix and ENTADFI. The goodwill arising from the Proteomedix acquisition was assigned solely to the Proteomedix reporting unit.
The Company reevaluated its reporting units during the three months ended June 30, 2024, and determined that as of April 30, 2024, ENTADFI
no longer qualified as a separate reporting unit. As a result, since that date, the Company’s goodwill is assigned to a single reporting
unit. Accordingly, the Company performed a quantitative analysis immediately prior to the change in reporting units, and immediately after
the change in reporting units, to identify and measure the amount of impairment loss to be recognized, if any. To perform its quantitative
tests, the Company compared the fair value of the reporting unit to its carrying value and determined that the fair value of the reporting
unit was less than its carrying value. The Company determined the amount of impairment charges to its goodwill for the three months ended
June 30, 2024 to be approximately $
During the three months ended September 30, 2024, the Company’s re-evaluation of market conditions and anticipated timing of projected sales prompted the Company to determine that there was an indicator of a potential impairment of its related intangible assets and goodwill, and accordingly, as of September 30, 2024, the Company performed a quantitative analysis to identify and measure the amount of impairment loss to be recognized, if any. It was determined no further impairment on goodwill was required for the three months ended September 30, 2024.
The Company has recorded a cumulative $
The fair value estimate of the reporting units for the quarter ended March 31, 2024 and June 30, 2024 was derived from a combination of an income approach and a market approach, and a reconciliation to the Company’s market capitalization. The fair value estimate of the reporting units for the quarter ended September 30, 2024 was derived solely from the income approach. The method was changed for the quarter ended September 30, 2024 to reflect the disparity between the Company and the guideline transactions that were previously selected in prior quarters. Under the income approach, the Company estimated the fair value of the reporting unit based on the present value of estimated future cash flows, which the Company considers to be a Level 3 unobservable input in the fair value hierarchy. The Company prepared cash flow projections based on management’s estimates of future revenue and operating costs, taking into consideration the historical performance and the current macroeconomic, industry, and market conditions. The Company based the discount rate on the weighted-average cost of capital considering Company-specific characteristics and changes in the reporting unit’s projected cash flows. Under the market approach, the Company estimated the fair value of the reporting unit based on revenue market multiples derived from comparable companies with similar characteristics as the reporting unit, as well as an estimated control premium.
| Balance as of December 31, 2023 | $ | |||
| Impairment loss | ( | ) | ||
| Foreign currency translation | ( | ) | ||
| Balance as of September 30, 2024 | $ |
Accrued Expenses
| September 30, 2024 | December 31, 2023 | |||||||
| Accrued compensation | $ | $ | ||||||
| Accrued research and development | ||||||||
| Accrued professional fees | ||||||||
| Other accrued expenses | ||||||||
| Accrued implementation fees | ||||||||
| Accrued franchise taxes | ||||||||
| Accrued interest | ||||||||
| Accrued deferred offering costs | ||||||||
| Total | $ | $ | ||||||
14
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 5 — Acquisitions
ENTADFI
On April 19, 2023, the Company and Veru,
Inc. (“Veru”) entered into an Asset Purchase Agreement (the “Veru APA”). Pursuant to, and subject to the terms
and conditions of, the Veru APA, the Company purchased substantially all of the assets related to Veru’s ENTADFI product (“ENTADFI”)
(the “Transaction”) for a total possible consideration of $
In accordance with the Veru APA, the Company agreed
to provide Veru with initial consideration totaling $
Additionally, the terms of the Veru APA require
the Company to pay Veru up to an additional $
In connection with the Transaction, the Company
also assumed royalty and milestone obligations under an asset purchase agreement for tadalafil-finasteride combination entered into
by Veru and Camargo Pharmaceutical Services, LLC on December 11, 2017 (the “Camargo Obligations”). The Camargo Obligations
assumed by the Company include a
On September 29, 2023, the Company entered into
an amendment to the Veru APA (the “Veru APA Amendment”), which provides that the $
On April 24, 2024, the Company entered into a
Forbearance Agreement with Veru in connection with the Company’s default on the $
On September 19, 2024, the Company entered into an Amended and Restated Forbearance Agreement with Veru, which further modified the terms of both the April and September Veru notes outstanding (see Note 7).
Also, in connection with, and at the time of the Transaction, and pursuant to the Veru APA, the Company entered into non-competition and non-solicitation agreements (the “Non-Competition Agreements”) with two of Veru’s key stockholders and employees (the “Restricted Parties”). The Non-Competition Agreements generally prohibit the Restricted Parties from either directly or indirectly engaging in the Restricted Business (as such term is defined in the Veru APA) for a period of five years from the closing of the Transaction.
The acquisition of ENTADFI was accounted for as an asset acquisition in accordance with ASC 805-50 because substantially all of the fair value of the assets acquired is concentrated in a single asset, the ENTADFI product rights. The ENTADFI products rights consist of trademarks, regulatory approvals, and other records, and are considered a single asset as they are inextricably linked.
15
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 5 — Acquisitions (cont.)
| Consideration Transferred | ||||
| Consideration transferred at closing | $ | |||
| Fair value of notes payable issued | ||||
| Transaction costs | ||||
| Total consideration transferred | $ | |||
The fair value of the non-interest-bearing notes
payable was estimated using a net present value model using discount rates averaging
Management evaluated
| Assets Recognized | ||||
| Inventory | $ | |||
| ENTADFI Intangible | ||||
| Total fair value of identifiable assets acquired | $ | |||
In accordance with ASC 805-50, the acquired inventory
was recorded at fair value. The remaining consideration transferred was allocated to the ENTADFI intangible asset, which was to be amortized
over its estimated useful life, which was expected to begin upon launch of ENTADFI. Acquired inventory is comprised of work-in-process
and raw materials. The fair value of work-in-process inventory was determined based on an estimated sales price of the finished goods,
adjusted for costs to complete the manufacturing process, costs of the selling effort, a reasonable profit allowance for the
remaining manufacturing and selling effort, and an estimate of holding costs, and resulted in a fair value adjustment of approximately
$
The Company recorded an impairment charge on the
ENTADFI asset group of approximately $
16
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 5 — Acquisitions (cont.)
WraSer:
On June 13, 2023 (the “Execution Date”), the Company entered into an asset purchase agreement with WraSer, LLC, and affiliates (the “WraSer Seller”) (the “WraSer APA”). Pursuant to, and subject to the terms and conditions of, the WraSer APA, on the WraSer Closing Date (as defined below) the Company was to purchase six FDA-approved pharmaceutical assets across several indications, including cardiology, otic infections, and pain management (the “WraSer Assets”).
Under the terms of the WraSer APA, the Company
was to purchase the WraSer Assets for
In conjunction with the WraSer APA, the Company
and the WraSer Seller entered into a Management Services Agreement (the “MSA”) on the Execution Date. Pursuant to the terms
of the MSA, the Company would act as the manager of the WraSer Seller’s business during the period between the Execution Date and
the WraSer Closing Date. During this period, the Company would make advances to WraSer, if needed. If, on the WraSer Closing Date, the
WraSer Seller’s cash balance is in excess of the target amount (“Cash Target”) specified in the MSA, the Company would
apply that excess to the $
The WraSer APA could be terminated prior to the
closing upon agreement with all parties or upon breach of contract of either party, uncured within 20 days of notice. If the WraSer APA
was terminated upon agreement with all parties or upon uncured breach of contract by the Company, the initial $
Management evaluated the terms of the WraSer APA and the WraSer MSA, and determined that, at the Execution Date, control under the provisions of ASC 805, Business Combinations (“ASC 805”), did not transfer to the Company; if the transaction closes, control will transfer then, and the acquisition date will be the closing date. Management further evaluated the requirements pursuant to ASC 810, Consolidations, and determined based on the terms of the MSA, and the Company’s involvement in the WraSer Seller’s business, that the WraSer Seller is a variable interest entity (“VIE”) to the Company. Management determined that the Company is not the primary beneficiary of the VIE as the WraSer APA and MSA do not provide the Company with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. While the Company was involved in the day-to-day business activities of the VIE until WraSer filed for relief under Chapter 11 of the U.S. Bankruptcy Court (see below), the WraSer Seller had to approve substantially all business activities and transactions that significantly impact the economic performance of WraSer during the term of the MSA. Additionally, the Company is not required to absorb the losses of WraSer if the WraSer APA does not close. As such, the Company was not required to consolidate WraSer in the Company’s financial statements as of September 30, 2024 and December 31, 2023.
The Company recorded the initial $
17
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 5 — Acquisitions (cont.)
On September 26, 2023, WraSer and its affiliates
filed for relief under chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court. On October 4, 2023, the parties agreed to amend
the WraSer APA, which was subject to court approval. Shortly after its bankruptcy filing, WraSer filed a motion seeking approval of the
WraSer APA as amended. The amendment, among other things, eliminates the $
In October 2023, WraSer alerted the Company
that its sole manufacturer for the active pharmaceutical ingredient (“API”) for Zontivity, the key driver for the WraSer acquisition,
would no longer manufacture the API for Zontivity. The Company believes that this development constituted a Material Adverse Effect under
the WraSer APA and the WraSer MSA, enabling the Company to terminate the WraSer APA and the WraSer MSA. On October 20, 2023, the Company
filed a motion for relief from the automatic stay in the Bankruptcy Court so that the Company can exercise the termination rights under
the WraSer APA, as amended. On December 18, 2023, the Bankruptcy Court entered into an Agreed Order lifting the automatic stay to
enable the Company to exercise its rights to terminate the WraSer APA and the WraSer MSA. On December 21, 2023, the Company
filed a Notice with the Bankruptcy Court terminating the WraSer APA and the WraSer MSA. WraSer has advised the Company that it does not
believe that a Material Adverse Effect occurred. In addition, WraSer recently filed a plan of reorganization that indicates it may seek
damages from the Company due to the termination of the APA and MSA. Due to the WraSer bankruptcy filing and the Company’s status
as an unsecured creditor of WraSer, it is unlikely that the Company will recover the $
Proteomedix
On December 15, 2023 (the “Acquisition Date”),
Onconetix entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Proteomedix and each of the holders
of outstanding capital stock or Proteomedix convertible securities (other than Proteomedix stock options) (collectively the “Sellers”),
pursuant to which the Company acquired
Upon approval by the requisite vote of stockholders
of Onconetix at the Special Meeting of the Stockholders (“Stockholder Approval”), each share of Series B Convertible Redeemable
Preferred Stock (“Series B Preferred Stock”) was automatically convertible into
18
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 5 — Acquisitions (cont.)
The consummation (the “Closing”) of the PMX Transaction was subject to customary closing conditions and the agreement to enter into a subscription agreement (see Note 8) with Altos Ventures, a shareholder of Proteomedix, prior to the closing of the PMX Transaction (the “PMX Investor”).
In addition, each option to purchase shares of Proteomedix (each, a “Proteomedix Stock Option”) outstanding immediately before the Closing, whether vested or unvested, remains outstanding until the Conversion unless otherwise terminated in accordance with its terms. At the Conversion, each outstanding Proteomedix Stock Option, whether vested or unvested, shall be assumed by Onconetix and converted into the right to receive (a) an option to acquire shares of common stock (each, an “Assumed Option”) or (b) such other derivative security as Onconetix and Proteomedix may agree, subject in either case to substantially the same terms and conditions as were applicable to such Proteomedix Stock Option immediately before the Closing. Each Assumed Option shall: (i) represent the right to acquire a number of shares of common stock equal to the product of (A) the number of Proteomedix common shares that were subject to the corresponding Proteomedix Option immediately prior to the Closing, multiplied by (B) the Exchange Ratio (as defined in the Share Exchange Agreement”); and (ii) have an exercise price (as rounded down to the nearest whole cent) equal to the quotient of (A) the exercise price of the corresponding Proteomedix Option, divided by (B) the Exchange Ratio. The Company completed the Conversion on September 24, 2024, and the Company is in process of exchanging the Proteomedix Stock Options into Onconetix restricted stock units as of the date of this filing. As of September 30, 2024, the PMX option holders continue to own Proteomedix Stock Options.
Management determined that the PMX Transaction
was a business combination as defined within ASC 805, and that Onconetix was the accounting acquirer. The Company determined that
Onconetix was the accounting acquirer based on the guidance contained within ASC 805-10. The significant factors that led to the Company’s
conclusion were (
The assets acquired and liabilities assumed are recognized provisionally in the accompanying condensed consolidated balance sheets at their estimated fair values as of the acquisition date. The initial accounting for the business combination is not complete as the Company is in the process of obtaining additional information for the valuation of acquired intangible assets and deferred tax liabilities. The provisional amounts are subject to change to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date. Under U.S. GAAP, the measurement period shall not exceed one year from the acquisition date and the Company will finalize these amounts no later than December 15, 2024. The estimated fair values as of the acquisition date are based on information that existed as of the acquisition date. During the measurement period the Company may adjust provisional amounts recorded for assets acquired and liabilities assumed to reflect new information that the Company has subsequently obtained regarding facts and circumstances that existed as of the acquisition date.
19
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 5 — Acquisitions (cont.)
| Consideration Transferred | ||||
| Common stock | $ | |||
| Series B Preferred Stock | ||||
| Total consideration transferred | $ | |||
The fair value of the Company’s common shares issued as consideration was based on the closing price of the Company’s common stock as of the Acquisition Date. The fair value of the Series B Preferred Stock issued as consideration was based on the underlying fair value of the number of common shares that the Series B Preferred Stock converts into, also based on the closing price of the Company’s common stock as of the Acquisition Date.
| Exercise price | $ | |||
| Stock price | $ | |||
| Term (years) | ||||
| Expected stock price volatility | ||||
| Risk-free rate of interest |
| Net Assets Recognized | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Inventories | ||||
| Prepaid expenses and other current assets | ||||
| Right of use asset | ||||
| Property and equipment, net | ||||
| Trade name | ||||
| Customer relationships | ||||
| Product rights for developed technology | ||||
| Goodwill | ||||
| Total assets acquired | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Operating lease liability | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Pension benefit obligation | ( | ) | ||
| Note payable | ( | ) | ||
| Total liabilities assumed | ( | ) | ||
| Net assets | ||||
| Less non-controlling interest | ( | ) | ||
| Net assets acquired | $ | |||
20
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 5 — Acquisitions (cont.)
The goodwill recognized as a result of the PMX Transaction is attributable primarily to expected synergies and the assembled workforce of Proteomedix. None of the goodwill is expected to be deductible for income tax purposes.
The fair values of the acquired tangible and intangible assets were determined using variations of the cost, income approach using the excess earnings, lost profits, and relief from royalty methods. The income approach valuation methodology used for the intangible assets acquired in the PMX Transaction makes use of Level 3 inputs.
The trade name intangible asset represents the
value of the Proclarix™ brand name and was valued using a relief from royalty method under an income approach. A royalty rate of
The customer relationship intangible assets represent
the value of the existing customer contract with LabCorp (see Note 6) and was valued using the lost profits method under the income approach.
The fair value of this asset was determined based on a cash flow model using forecasted revenues specifically tied to Proteomedix’s
LabCorp contract. Those cash flows were then discounted at
The product rights for developed technology acquired
in the PMX Transaction represents know-how and patented intellectual property held by PMX pertaining to its commercial-ready prostate
cancer diagnostic system, Proclarix™. The fair value of this asset was determined based on a cash flow model based on forecasted
revenues and expenses specifically tied to Proclarix™. Those cash flows were then discounted at
The fair value of the non-controlling interest
in Proteomedix is estimated to be $
The Company recognized approximately $
The following summary, prepared on a pro forma
basis, presents the Company’s unaudited consolidated results of operations for the three and nine months ended September 30, 2023,
as if the PMX Transaction had been completed as of January 1, 2023. The pro forma results below include the impact of amortization of
intangible assets. This pro forma information is presented for illustrative purposes only, is not necessarily indicative of future results
of operations and does not include any impact of transaction synergies.
Unaudited Ended | Unaudited For The | |||||||
| Revenue | $ | $ | ||||||
| Net loss | ||||||||
21
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 6 — Significant Agreements
Services Agreement
On July 21, 2023, the Company, entered into a
Licensing and Services Master Agreement (“Master Services Agreement”) and a related statement of work with a vendor, pursuant
to which the vendor was to provide to the Company commercialization services for the Company’s products, including recruiting, managing,
supervising and evaluating sales personnel and providing sales-related services for such products, for fees totaling up to $
Laboratory Corporation of America
On March 23, 2023, Proteomedix entered into a license agreement with
LabCorp, pursuant to which LabCorp has the exclusive right to develop and commercialize Proclarix, and other products developed by LabCorp
using Proteomedix’s intellectual property covered by the license, in the United States (“Licensed Products”). In consideration
for granting LabCorp an exclusive license, Proteomedix received an initial license fee in the mid-six figures upon signing of the contract.
Additionally, Proteomedix is entitled to royalty payments of between
| ● | After the first sale of Proclarix as a laboratory developed test, LabCorp will pay an amount in the mid-six figures, |
| ● | after LabCorp achieves a certain amount in the low seven figures in net sales of Licensed Products, LabCorp will pay Proteomedix an amount in the low seven figures, |
| ● | after a certain amount in the mid-seven figures in net sales of Licensed Products, LabCorp will pay Proteomedix an amount in the low seven figures. |
The total available milestone payments available
under the terms of this contract is $
LabCorp is wholly responsible for the cost, if any, of research, development and commercialization of Licensed Products in the United States but has the right to offset a portion of those costs against future royalty and milestone payments. Additionally, LabCorp may deduct royalties or other payments made to third parties related to the manufacture or sale of Licensed Products up to a maximum amount of any royalty payments due to Proteomedix.
The license agreement and related royalty payment provisions expire during 2038, which approximates the expiration of the last patent covered by the license agreement. LabCorp has the right to terminate the license agreement for any reason by providing 90 days written notice to Proteomedix. Either party may terminate the license agreement due to a material breach of the terms of the license agreement with 30 days’ notice, provided such breach is not cured within the foregoing 30-day period. Finally, Proteomedix may terminate the license agreement with 60 days’ notice in the event LabCorp fails to make any undisputed payment due, provided that LabCorp does not remit the payment within the foregoing 60-day period.
As of September 30, 2024, the sale of Licensed Products by LabCorp under the license agreement has not commenced. The Company has sold product to LabCorp for their use in internal trials of the test.
22
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Notes 7 — Notes Payable
Veru Notes Payable
In connection with the Veru APA (see Note 5),
the Company executed three non-interest-bearing notes payable (the “Notes”) in the principal amounts of $
The Company imputed interest on the Notes using
an average discount rate of
On September 29, 2023, the Company and the note
holder entered into an amendment to the Veru APA, which provided that the $
On April 24, 2024, the Company entered into
a forbearance agreement with Veru (the “Original Forbearance Agreement”) due to the Company’s failure to repay the principal
balance on the $
Interest will accrue on any unpaid principal balance
of the April Veru Note at a rate of
In consideration for Veru’s entrance into the Original Forbearance Agreement, the Company agreed to pay Veru:
| ● | $ |
| ● |
| ● |
The Company also agreed to a general release of claims against Veru and its representatives arising out of or relating to any act or omission thereof prior to April 24, 2024.
The Company determined that the Original Forbearance Agreement should be accounted for as a modification of the April Veru Note and the September Veru Note in accordance with ASC 470-50, Debt - Modifications and Extinguishments (“ASC 470”), as the change in cash flows expected under the April Veru Note and the September Veru Note was not substantial. A new effective interest rate was established based on the carrying value of the original Notes and the revised cash flows and no gain or loss was recorded.
23
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Notes 7 — Notes Payable (cont.)
On September 19, 2024, the Company entered into an Amended and Restated Forbearance Agreement with Veru (the “Amended and Restated Forbearance Agreement” or “A&R Forbearance Agreement”), which amends and restates the Original Forbearance Agreement in its entirety. Pursuant to the A&R Forbearance Agreement, Veru will forbear from exercising its rights under both the April Veru Note and the September Veru Note, subject to the terms and conditions set forth below.
Pursuant to the A&R Forbearance Agreement, the April 2024 Forbearance Period continues to end on the earlier of (a) March 31, 2025 and (b) the occurrence of an Event of Default (as defined in the Amended and Restated Forbearance Agreement). The A&R Forbearance Agreement also extends the due date for the September Veru Note until the earlier to occur of (i) June 30, 2025 or (ii) the occurrence of any Event of Default. The Amended and Restated Forbearance Agreement also effected certain modifications to the payment terms in the Original Forbearance Agreement and amended certain terms of the September Veru Note as summarized below.
Pursuant to the A&R Forbearance Agreement, the Company agreed to make the following required payments (the “Required Payments”) during the April 2024 Forbearance Period, first to accrued and unpaid interest under the April Veru Note and then any remainder to the outstanding principal amount of the April Veru Note:
| ● | Interest
at the rate of |
| ● | Monthly
payments equal to |
| ● | Payment
of |
| ● | The remaining balance of the April Veru Note will be due at the end of the April 2024 Forbearance Period. |
The Company and Veru also agreed to the following amendments to the September Veru Note in the A&R Forbearance Agreement:
| ● | As noted above, an extension of the maturity date to June 30, 2025; |
| ● | The
accrual of interest at the rate of |
| ● | Any amounts owed on the September Veru Note, including but not limited to unpaid principal and accrued interest, will be paid in cash or, upon the mutual written consent of Veru and the Company, in shares of the Company’s Common Stock or a combination of cash and the Company’s Common Stock; |
| ● | Following full repayment of all principal and interest under the April Veru Note, the Company will make the Required Payments first towards accrued and unpaid interest under the September Veru Note and then towards the remaining principal balance payable under the September Veru Note; |
| ● | If
the aggregate unpaid principal outstanding under the April Veru Note and the September Veru Note and all accrued and unpaid interest
thereon is repaid in cash on or before December 31, 2024, then the total principal balance under the September Veru Note that will be
payable by the Company in satisfaction of its obligations under the September Veru Note will be reduced from $ |
The Company determined the A&R Forbearance Agreement should be accounted for as a modification of both the April and September Veru Notes in accordance with ASC 470-50, Debt - Modifications and Extinguishments (“ASC 470”), as the change in cash flows expected under the April Veru Note and the September Veru Note was not substantial. A new effective interest rate was established based on the carrying value of the original Notes and the revised cash flows and no gain or loss was recorded.
24
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Notes 7 — Notes Payable (cont.)
During the three and nine months ended September
30, 2024, the Company recorded approximately $
Future minimum principal payments on the Notes
as of September 30, 2024 includes $
Related Party Debenture
On January 23, 2024, the Company issued a non-convertible
debenture (the “Debenture”) to the PMX Investor, a related party, in the principal sum of $
On April 24, 2024, the maturity date of the related party debenture was extended to October 31, 2024, through the execution of an extension agreement (the “Extension Agreement”) between the Company and the PMX investor. No other terms of the Debenture were modified in connection with the Extension Agreement.
The Company considered the guidance of ASC 470-60, Troubled Debt Restructuring by Debtors, and concluded that the Extension Agreement should be accounted for as a troubled debt restructuring as the Company is experiencing financial difficulty and since the effective borrowing rate under the Extension Agreement is less than the effective borrowing rate under the original agreement, which indicates that a concession is deemed to have been granted. This did not result in a gain on restructuring as the future undiscounted cash outflows required under the Extension Agreement exceed the carrying value of the Debenture immediately prior to the extension. A new effective rate was established based on the carrying value of the original Debenture and the revised cash flows.
In connection with the issuance of the Debenture,
the Company incurred approximately $
On September 24, 2024, the Company converted all
unpaid principal and accrued interest due under the Debenture into
The Company recorded approximately $
25
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Notes 7 — Notes Payable (cont.)
Insurance Financing
During the nine months ended September 30, 2024, the Company obtained financing for certain Director & Officer liability insurance policy premiums. The agreement assigns the lender a first priority lien on and security interest in the financed policies and any additional premium required in the financed policies.
The total premiums, taxes and fees financed are
approximately $
PMX Note Payable
The Company also assumed an obligation in the
amount of
Note 8 — Subscription Agreement
On December 18, 2023, the Company entered into
a subscription agreement (the “Subscription Agreement”) with the PMX Investor, who became a stockholder of Onconetix at the
closing of the PMX Transaction (see Notes 5 and 11), for the sale of
The Subscription Agreement is accounted for as
a liability in accordance with ASC 480, Distinguishing Liabilities from Equity, (“ASC 480”), as the make-whole provision
could result in a variable number of shares being issued upon settlement. The related party subscription agreement liability is measured
at fair value at the commitment date and at each subsequent reporting period, with changes in fair value recorded as a component of other
income (expense), net in the condensed consolidated statements of operations and comprehensive loss. As of September 30, 2024 and December
31, 2023, the fair value of the related party subscription agreement liability is estimated to be approximately $
| September 30, 2024 | December 31, 2023 | |||||||
| Exercise price | $ | $ | ||||||
| Term (years) | ||||||||
| Expected stock price volatility | % | % | ||||||
| Risk-free rate of interest | % | % | ||||||
26
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 9 — Convertible Redeemable Preferred Stock and Stockholders’ Equity
Authorized Capital
As of September 30, 2024 and December 31, 2023,
the Company is authorized to issue
Preferred Stock
Series Seed Convertible Preferred Stock
The Company has
Series A Convertible Preferred Stock
On September 29, 2023, the Company filed a Certificate
of Designations of Rights and Preferences of Series A Preferred Stock of the Company (the “Series A Certificate of Designations”)
with the State of Delaware to designate and authorize the issuance of up to
On October 3, 2023, the Company issued
On September 24, 2024, Veru converted all
Series B Convertible Preferred Stock
On December 15, 2023, the Company filed a Certificate
of Designations of Rights and Preferences of Series B Convertible Preferred Stock of the Company (the “Series B Certificate of Designations”)
with the State of Delaware to designate and authorize the issuance of up to
On December 15, 2023, in connection with the PMX
Transaction, as part of the purchase consideration, the Company issued
The Company evaluated the terms of the Series B Preferred Stock, and in accordance with the guidance of ASC 480, the Series B Preferred Stock was classified as temporary equity in the accompanying consolidated balance sheets, as the shares may be redeemable by the holders for cash, upon certain conditions that are not within the control of the Company. Additionally, the Company does not control the actions or events necessary to deliver the number of required shares upon exercise by the holders of the conversion feature. The Series B Preferred Stock was recorded at its fair value as of the issuance date (see Note 5). The Series B Preferred Stock was not previously redeemable or probable of becoming redeemable because it was subject to, among other things, Stockholder Approval as described above, and therefore the carrying amount was not accreted to its redemption value in prior periods.
On September 5, 2024, Stockholder Approval was
obtained, and on September 24, 2024, the Company effected the conversion of all
27
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 9 — Convertible Redeemable Preferred Stock and Stockholders’ Equity (cont.)
Common Stock
As of September 30, 2024 and December 31, 2023
there were
Warrant Inducements:
July 2024 Inducement
On July 11, 2024, the Company entered into common
stock preferred investment options exercise inducement offer letters (the “Inducement Letters”) with certain holders of existing
preferred investment options to purchase shares of the Company’s common stock at the original exercise prices of $
On July 11, 2024, the Company consummated the
transaction contemplated by the Inducement Letters upon unanimous written consent of the Board of Directors (the “Warrant Inducement”).
The Company received aggregate net proceeds of approximately $
The Company agreed to file a registration statement
covering the resale of the Inducement PIO Shares issued or issuable upon the exercise of the Inducement PIOs (the “Resale Registration
Statement”) within
The Company engaged H.C. Wainwright & Co.,
LLC (“Wainwright”) to act as its exclusive placement agent in connection with the transactions summarized herein and paid
Wainwright a cash fee equal to
The Company evaluated the terms of the Inducement PIOs and the Wainwright Inducement Warrants (collectively, the “August 2023 Inducement Warrants”), and determined that they should be classified as equity instruments based upon accounting guidance provided in ASC 480 and ASC 815-40.
The Warrant Inducement, which resulted in the lowering of the exercise
price of the Existing PIOs and the issuance of the Inducement PIOs, is considered a modification of the Existing PIOs under the guidance
of Accounting Standards Update (“ASU”) No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of
Equity Classified Written Call Options. The modification is consistent with the “Equity Issuance” classification under
that guidance as the reason for the modification was to induce the holders of the Existing PIOs to cash exercise their warrants, resulting
in the imminent exercise of the Existing PIOs, which raised equity capital and generated net proceeds for the Company of approximately
$
28
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 9 — Convertible Redeemable Preferred Stock and Stockholders’ Equity (cont.)
In addition, the change in fair value of the contingent warrant liability
associated with
The Company evaluated the terms of the
August 2023 Inducement
On July 31, 2023, the Company entered into a common stock preferred
investment option exercise inducement letter (the “Inducement Letter”) with a certain holder of existing preferred investment
options to purchase shares of the Company’s common stock at the original exercise price of $
On August 2, 2023, the Company consummated the transactions contemplated
by the Inducement Letter (the “Warrant Inducement”). The Company received aggregate net proceeds of approximately $
Upon close of the transaction, the Company issued the Holder
The Company agreed to file a registration statement covering the resale of the Inducement PIO Shares issued or issuable upon the exercise of the Inducement PIOs, as soon as practicable, and to use commercially reasonable efforts to have such Resale Registration Statement declared effective by the SEC within 90 days following the date of the Inducement Letter, and to keep the Resale Registration Statement effective at all times until there are no Inducement PIO Shares. The provision to register the underlying shares in the Warrant Inducement does not require payment related to the registration rights provided. As such, while the shares were not registered within 90 days of the date of the Inducement Letter, there is no accounting impact for this provision.
The Company engaged Wainwright to act as its placement agent in connection
with the Warrant Inducement and paid Wainwright a cash fee equal to
The Company evaluated the terms of the Inducement PIOs and the Wainwright Inducement Warrants (collectively, the “August 2023 Inducement Warrants”), and determined that they should be classified as equity instruments based upon accounting guidance provided in ASC 480 and ASC 815-40. The Company also evaluated the unissued shares held in abeyance, which represent a prepaid forward contract, and determined that it is an equity instrument based on the guidance provided in ASC 480 and ASC 815-40.
29
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 9 — Convertible Redeemable Preferred Stock and Stockholders’ Equity (cont.)
The Warrant Inducement, which resulted in the lowering of the exercise
price of the Existing PIOs and the issuance of the Inducement PIOs, is considered a modification of the Existing PIOs under the guidance
of Accounting Standards Update (“ASU”) No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of
Equity Classified Written Call Options. The modification is consistent with the “Equity Issuance” classification under
that guidance as the reason for the modification was to induce the holders of the Existing PIOs to cash exercise their warrants, resulting
in the imminent exercise of the Existing PIOs, which raised equity capital and generated net proceeds for the Company of approximately
$
In addition, the change in fair value of the contingent warrant liability
associated with
The Company evaluated the terms of the Inducement Contingent Warrants
and determined that they should be classified as a liability based upon accounting guidance provided in ASC 815-40. Since the Inducement
Contingent Warrants are a form of compensation to Wainwright, the Company recorded the value of the liability of approximately $
Treasury Stock
On November 10, 2022, the Board approved a stock repurchase program
(the “Repurchase Program”) to allow the Company to repurchase up to
There were no repurchases of common stock during the three and nine
months ended September 30, 2024. During the three and nine months ended September 30, 2023, the Company repurchased
On November 13, 2024, the Board terminated the Repurchase Program.
At the Market Offering Agreement
On March 29, 2023, the Company entered into an
At The Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC, as sales agent (the “Agent”),
to create an at-the-market equity program under which it may sell up to $
30
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 9 — Convertible Redeemable Preferred Stock and Stockholders’ Equity (cont.)
Deferred offering costs associated with the ATM Agreement are reclassified to additional paid in capital on a pro-rata basis when the Company completes offerings under the ATM Agreement. Any remaining deferred costs will be expensed to the statements of operations should the planned offering be abandoned.
As of September 30, 2024, no shares have been
sold under the ATM Offering, and the Company has recorded approximately $
Warrants
| Number of | Exercise | Expiration | ||||||||
| Description | Shares | Price | Date | |||||||
| April 2022 Offering Placement Agent Warrants | $ | |||||||||
| August 2022 Offering Placement Agent Warrants | ||||||||||
| August 2023 Offering Placement Agent Warrants | ||||||||||
| July 2024 Offering Placement Warrants | ||||||||||
| July 2024 Offering Placement Warrants | ||||||||||
| July 2024 Offering Placement Agent Warrants | ||||||||||
| Total warrants outstanding | ||||||||||
As of September 30, 2024, the Company had outstanding
warrants, which are exercisable into
Additionally, as of September 30, 2024, the fair
value of contingent warrants issuable upon exercise of the July 2024 Inducement PIOs was approximately $
Onconetix Equity Incentive Plans
The Company’s 2019 Equity Incentive Plan
(the “2019 Plan”) was adopted by its board of directors and by its stockholders on July 1, 2019. On February 23, 2022 the
Company’s board of directors adopted the Company’s 2022 Equity Incentive Plan (the “2022 Plan”), which is the
successor and continuation of the Company’s 2019 Plan. Under the 2022 Plan, the Company may grant stock options, restricted stock,
restricted stock units, stock appreciation rights, and other forms of awards to employees, directors, and consultants of the Company.
In May 2023, the number of shares of common stock reserved for issuance under the 2022 Plan was increased to 78,750, and in September
2024, the number of shares of common stock reserved for issuance under the 2022 Plan was increased to
31
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 9 — Convertible Redeemable Preferred Stock and Stockholders’ Equity (cont.)
Stock Options
| Weighted | ||||||||||||
| Average | ||||||||||||
| Weighted | Remaining | |||||||||||
| Average | Contractual | |||||||||||
| Number of | Exercise | Life | ||||||||||
| Shares | Price | (in years) | ||||||||||
| Outstanding as of December 31, 2023 | $ | |||||||||||
| Granted | — | |||||||||||
| Forfeited / cancelled | ( | ) | — | |||||||||
| Exercised | ( | ) | — | |||||||||
| Outstanding as of September 30, 2024 | ||||||||||||
| Options vested and exercisable as of September 30, 2024 | $ | |||||||||||
| For the Nine Months Ended September 30, | ||
| 2023 | ||
| Exercise price | $ | |
| Term (years) | ||
| Expected stock price volatility | ||
| Risk-free rate of interest |
The weighted average grant date fair value of
stock options granted during the nine months ended September 30, 2023 was $
32
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 9 — Convertible Redeemable Preferred Stock and Stockholders’ Equity (cont.)
Restricted Stock
On May 9, 2023, the Board’s Compensation
Committee approved the issuance of restricted stock, granted under the Company’s 2022 Plan, to the Company’s executive officers,
employees, and certain of the Company’s consultants. The restricted shares granted totaled
| Weighted | ||||||||
| Average | ||||||||
| Number of | Grant Date | |||||||
| Shares | Fair Value | |||||||
| Nonvested as of December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested as of September 30, 2024 | $ | |||||||
Proteomedix Stock Option Plan
Proteomedix sponsors a stock option plan (the “PMX Option Plan”) which provides common stock option grants to be granted to certain employees and consultants, as was determined by the board of directors of Proteomedix. In connection with the PMX Transaction, the Company assumed the PMX Option Plan (see Note 5).
Generally, options issued under the PMX Option
Plan have a term of not more than
On April 16, 2024, the board of directors of Proteomedix
approved a two-year extension of
There was no other activity under the PMX Option
Plan for the three and nine months ended September 30, 2024. As of September 30, 2024, there were
33
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 9 — Convertible Redeemable Preferred Stock and Stockholders’ Equity (cont.)
Stock-Based Compensation
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Selling, general and administrative | $ | $ | $ | $ | ||||||||||||
| Research and development | ( | ) | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
During the nine months ended September 30, 2024,
in connection with the termination of three Company employees, outstanding stock options and restricted stock awards to these individuals
were modified to allow continued vesting during the term of their respective new consulting agreements. The Company recognized a net credit
of approximately $
Note 10 — Commitments and Contingencies
Office Leases
Proteomedix leases office and lab space in Zurich
Switzerland. On April 1, 2024, the original lease was amended to add additional office and laboratory space. The lease amendment was accounted
for as a separate lease, resulting in an additional right-of-use asset and lease liability of approximately $
The Company entered into a short-term lease in
Palm Beach, Florida with an unrelated party, with a commencement date of May 1, 2022, for approximately $
Litigation
From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities. As of September 30, 2024, the Company is not a party to any material legal proceedings and is not aware of any pending or threatened claims. However, as discussed in Note 5, on December 21, 2023, the Company filed a notice with the Bankruptcy Court terminating the WraSer APA and the WraSer MSA, after having determined that a Material Adverse Effect had occurred. WraSer has advised the Company that it does not believe that a Material Adverse Effect occurred, and they recently filed a plan of reorganization that indicates it may seek damages from the Company due to the termination of the WraSer APA and WraSer MSA.
Registration Rights Agreements
In connection with private placements consummated
in April 2022 and August 2022, the Company entered into Registration Rights Agreements with the purchasers. Upon the occurrence of any
Event (as defined in each Registration Rights Agreement), which, among others, prohibits the purchasers from reselling the securities
for more than ten consecutive calendar days or more than an aggregate of fifteen calendar days during any 12-month period, and should
the registration statement cease to remain continuously effective, the Company would be obligated to pay to each purchaser, on each monthly
anniversary of each such Event, an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of
34
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 10 — Commitments and Contingencies (cont.)
Indemnification
In the normal course of business, the Company
enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications.
The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the
future but have not yet been made. To date, the Company has not been required to defend any action related to its indemnification obligations.
However, during the third quarter of 2023, the Company received a claim from its former CEO and a former accounting employee requesting
advancement of certain expenses. The Company recorded approximately $
Note 11 — Related Party Transactions
During 2022 the Company entered into a lease agreement that was personally guaranteed by the Company’s former CEO. The lease expired on April 30, 2023 (see Note 9).
During the year ended December 31, 2023, the Company’s
Audit Committee completed a review of the Company’s expenses due to certain irregularities identified with regards to the related
party balance. Based on the results of the review, it was determined that the Company paid and recorded within selling, general and administrative
expenses, personal expenditures of the Company’s former CEO and an accounting employee who was also the former CEO’s assistant,
during 2022 and during the first three quarters of 2023. The Company evaluated the receivable, which was approximately $
On December 18, 2023, the Company entered into
the Subscription Agreement with the PMX Investor, a
On February 6, 2024, the Company appointed Thomas
Meier, PhD, as a member of the Company’s board of directors. Dr. Meier provides consulting services to Proteomedix, through a consulting
agreement that was effective January 4, 2024. The Company recorded approximately $
35
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 12 — Income Taxes
The Company’s tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, management updates the estimate of the annual effective tax rate, and any changes are recorded in a cumulative adjustment in that quarter. The quarterly tax provision and quarterly estimate of the annual effective tax rate are subject to significant volatility due to several factors, including management’s ability to accurately predict the portion of income (loss) before income taxes in multiple jurisdictions, and the effects of acquisitions and the integration of those acquisitions.
For the three and nine months ended September
30, 2024, the Company recorded an income tax benefit of approximately $
The Company has incurred net operating losses for all of the periods presented and has not reflected any benefit in the accompanying condensed consolidated financial statements for its U.S. net operating loss carryforwards and only a partial benefit for its Swiss net operating loss carryforwards due to uncertainty around utilizing these tax attributes within their respective carryforward periods. The Company has recorded a full valuation allowance against its U.S. deferred tax assets as it is not more likely than not that such assets will be realized in the near future. During 2023, the Company recognized a foreign deferred tax liability related to the acquisition of Proteomedix (see Note 5). A partial valuation allowance has been recognized against the Company’s Swiss deferred tax assets that are not more likely than not expected to be realizable.
The Company’s policy is to recognize interest expense and penalties related to income tax as income tax expense. For the three and nine months ended September 30, 2024 and 2023, the Company has not recognized any interest or penalties related to income taxes.
Note 13 — Net Loss Per Share
Basic net loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period. The weighted average number of shares of common stock outstanding includes pre-funded warrants because their exercise requires only nominal consideration for delivery of shares; it does not include any potentially dilutive securities or any unvested restricted shares of common stock. Certain restricted shares, although classified as issued and outstanding at September 30, 2024, are considered contingently returnable until the restrictions lapse and will not be included in the basic net loss per share calculation until the shares are vested. Unvested shares of the Company’s restricted stock do not contain non-forfeitable rights to dividends and dividend equivalents. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the Company’s warrants, options, and restricted shares. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including warrants, stock options, and unvested restricted shares, to the extent they are dilutive.
The two-class method is used to determine earnings per share based on participation rights of participating securities in any undistributed earnings. Each share of preferred stock that includes rights to participate in distributed earnings is considered a participating security and the Company uses the two-class method to calculate net income available to the Company’s common stockholders per common share — basic and diluted.
| Three and Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Options to purchase shares of common stock | ||||||||
| Warrants | ||||||||
| Unvested shares of restricted stock | ||||||||
| Total | ||||||||
36
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 14 — Defined Benefit Plan
Proteomedix sponsors a defined benefit pension plan (the “Swiss Plan”) covering certain eligible employees. The Swiss Plan provides retirement benefits based on years of service and compensation levels.
| September 30, 2024 | December 31, 2023 | |||||||
| Discount rate | % | % | ||||||
| Expected long-term rate of return on plan assets | % | % | ||||||
| Rate of compensation increase | % | % | ||||||
Changes in these assumptions may have a material impact on the plan’s obligations and costs.
| For The Three Months Ended September 30, 2024 | For the Nine Months Ended September 30, 2024 | |||||||
| Service cost | $ | $ | ||||||
| Interest cost | ||||||||
| Expected return on plan assets | ( | ) | ||||||
| Amortization of net (gain) | ( | ) | ||||||
| Total | $ | $ | ||||||
During the three and nine months ended September
30, 2024, the Company made pension contributions of approximately $
Note 15 — Subsequent Events
Series C Convertible Preferred Sock
On October 1, 2024, the Board of Directors authorized
the Company to create a series of
37
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 15 — Subsequent Events (cont.)
After the Stockholder Approval Date, if a Triggering
Event occurs and is continuing at any time after the earlier of the holders’ receipt of a Triggering Event Notice and such holder
becoming aware of such Triggering Event (such earlier date, the “Alternate Conversion Right Commencement Date”) and ending
on the twentieth (20th) Trading Day after the later of (x) the date of such Triggering Event is cured and (y) such holder’s
receipt of a Triggering Event Notice (such ending date, the “Alternate Conversion Right Expiration Date”), and each such period,
an “Alternate Conversion Right Period”), such holder may, at such holder’s option, by delivery of a Conversion Notice
to the Company (the date of any such Conversion Notice, each an “Alternate Conversion Date”), convert all, or any number of
Preferred Shares held by such holder into shares of Common Stock at the Alternate Conversion Price (each, an “Alternate Conversion”).
Alternate Conversion Price means, with respect to any Alternate Conversion that price will be the lowest of (i) the applicable Conversion
Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, and (ii) the greater of (x) the Floor Price
and (y)
At any time,
In no event may any Preferred Shares be converted
(or Warrants be exercised) and shares of Common Stock be issued to any holder if after giving effect to the issuance of shares of Common
Stock upon such conversion of the Preferred Shares (or exercise of the Warrants), the holder (together with its affiliates, if any) would
beneficially own more than
Private Placement
On October 2, 2024, the Company entered into,
and sold, to six institutional investors (collectively, the “PIPE Investors”), pursuant to the securities purchase agreement
an aggregate of
38
ONCONETIX, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 15 — Subsequent Events (cont.)
ELOC
On October 2, 2024, the Company entered into a
Common Stock ELOC Purchase Agreement relating to a Committed Equity Facility with an institutional investor (the “ELOC Purchaser”),
whereby the Company may offer and sell, from time to time at its sole discretion, and whereby the ELOC Purchaser has committed to purchase,
up to $
The Company may not issue or sell any shares of
Common Stock to the ELOC Purchaser under the Common Stock Purchase Agreement, if it would result in the ELOC Purchaser beneficially owning
more than
November Amended and Restated Forbearance Agreement with Veru
On November 26, 2024, the Company entered into another Amended and
Restated Forbearance Agreement with Veru (the “November Amended and Restated Forbearance Agreement” or “November A&R
Forbearance Agreement”), which amends and restates certain terms of the Amended and Restated Forbearance Agreement. Pursuant to
the November A&R Forbearance Agreement, Veru agreed to waive the due date for payment of applicable Cash Receipt Payments (as such
term is defined in the A&R Forbearance Agreement) generated in October 2024 until the Company receives funds of at least $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Report and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the SEC, on April 11, 2024. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors. See “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We are a commercial stage biotechnology company focused on the research, development, and commercialization of innovative solutions for men’s health and oncology. Through our recent acquisition of Proteomedix, which closed on December 15, 2023, we own Proclarix, an in vitro diagnostic test for prostate cancer originally developed by Proteomedix and approved for sale in the European Union under the In Vitro Diagnostic Regulation (“IVDR”), which we anticipate will be marketed in the U.S. as a lab developed test through our license agreement with LabCorp.
We also own ENTADFI, an FDA-approved, once daily pill that combines finasteride and tadalafil for the treatment of BPH, a disorder of the prostate. However, in light of (i) the time and resources needed to continue pursuing commercialization of ENTADFI, and (ii) the Company’s cash runway and indebtedness, the Company determined to pause its commercialization of ENTADFI during the first quarter of 2024, as it explores strategic alternatives to monetize ENTADFI, such as a potential sale of the ENTADFI assets. To that end, the Company has been working with an investment advisor to assist with a potential sale or other transaction of the ENTADFI assets during the second and third quarters of 2024. There is currently no plan to resume commercialization of ENTADFI, and as such, if we are not able to consummate a sale or other transaction of the ENTADFI assets, we may abandon the assets and destroy our inventory of the product. In addition, as part of cost reduction efforts and in connection with our initial pause in commercializing ENTADFI, we terminated three employees involved with the ENTADFI program, effective April 30, 2024, with such individuals to continue assisting the Company on an as-needed, consulting basis. Based on the current circumstances surrounding ENTADFI, at June 30, 2024, the ENTADFI assets were fully impaired. Refer to Notes 4 and 5 in the accompanying condensed consolidated financial statements included elsewhere in this Report for further discussion. The Company continues to search for a permanent Chief Executive Officer and Chief Financial Officer.
We are currently focusing our efforts on commercializing Proclarix.
Proclarix is an easy-to-use next generation protein-based blood test that can be done with the same sample as a patient’s regular Prostate-Specific Antigen (“PSA”) test. The PSA test is a well-established prostate specific marker that measures the concentration of PSA molecules in a blood sample. A high level of PSA can be a sign of prostate cancer. However, PSA levels can also be elevated for many other reasons including infections, prostate stimulation, vigorous exercise, or even certain medications. PSA results can be confusing for many patients and even physicians. It is estimated over 50% of biopsies with elevated PSA are negative or clinically insignificant resulting in an overdiagnosis and overtreatment that impacts the physician’s routine, our healthcare system, and the quality of patients’ lives. Approximately 10% of all men have elevated PSA levels, commonly referred to as the diagnostic “grey zone”, of which only 20 – 40% present clinically with cancer. Proclarix is intended for use in diagnosing these patients where it is difficult to decide if a biopsy is necessary to verify a potential clinically significant cancer diagnosis. Proclarix helps doctors and patients with unclear PSA test results through the use of our proprietary Proclarix Risk Score which delivers clear and immediate diagnostic support for further treatment decisions. No additional intervention is required, and results are available quickly. Local diagnostic laboratories can integrate this multiparametric test into their current workflow because Proclarix assays use the enzyme-linked immunosorbent assay (ELISA) standard, which most diagnostic laboratories are already equipped to process.
Since our inception in October 2018 until April 2023, when we acquired ENTADFI, we devoted substantially all of our resources to performing research and development, undertaking preclinical studies and enabling manufacturing activities in support of our product development efforts, hiring personnel, acquiring and developing our technology and now halted vaccine candidates, organizing and staffing our company, performing business planning, establishing our intellectual property portfolio and raising capital to support and expand such activities.
During the third quarter of 2023, we halted our vaccine discovery and development programs, and accordingly, we now operate in one segment: commercial. The commercial segment was new in the second quarter of 2023 and is currently dedicated to the development and commercialization of Proclarix.
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Given Proclarix is CE-marked for sale in the European Union, we expect to generate revenue from sales of Proclarix by 2026. Although we anticipate these sales to offset some expenses relating to commercial scale up and development, we expect our expenses will increase substantially in connection with our ongoing activities, as we:
| ● | commercialize Proclarix; |
| ● | hire additional personnel; |
| ● | operate as a public company; and |
| ● | obtain, maintain, expand, and protect our intellectual property portfolio. |
We rely and will continue to rely on third parties for the manufacturing of Proclarix. We have no internal manufacturing capabilities, and we will continue to rely on third parties, of which the main suppliers are single-source suppliers, for commercial products.
We do not have any products approved for sale, aside from Proclarix in the European Union, and ENTADFI, from which we have not generated any revenue from product sales, and for which we have now abandoned commercialization activities for. We are exploring strategic alternatives to monetize ENTADFI, such as a potential sale of the ENTADFI assets. However, if we are not able to consummate a sale or other transaction of the ENTADFI assets, we may abandon the assets and destroy our inventory of the product. To date, we have financed our operations primarily with proceeds from our sale of preferred securities to seed investors, the initial public offering, the private placements completed during 2022, the proceeds received from a warrant exercise in August 2023, the proceeds received from the issuance of debt in January 2024, the proceeds received from a warrant exercise in July 2024, and proceeds received from the private placement in October 2024 . We will continue to require significant additional capital to commercialize Proclarix, and to fund operations for the foreseeable future. Accordingly, until such time as we can generate significant revenue, if ever, we expect to finance our cash needs through public or private equity or debt financings, third-party funding and to rely on third-party resources for marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches, to support our operations.
Since June 30, 2024, some key developments affecting our business include the following:
Altos Units
On January 23, 2024, the Company issued a non-convertible debenture (the “Altos Debenture”) in the principal sum of $5.0 million, in connection with a Subscription Agreement, to Altos Ventures, a stockholder of the Company and related party (“Altos”). The Altos Debenture was originally payable in full upon the earlier of (i) the closing under the Subscription Agreement and (ii) June 30, 2024. On April 24, 2024, the Altos Debenture was amended to extend the maturity date to the earlier of (i) the closing under the Subscription Agreement and (ii) October 31, 2024 (the “Altos Amendment”). On September 24, 2024, upon obtaining stockholder approval and pursuant to the Subscription Agreement, dated December 28, 2023, the Company issued an aggregate of 513,424 units (the “Units”) to Altos, each Unit comprised of (i) one share of Common Stock and (ii) one pre-funded warrant (collectively, the “Altos Warrants”) to purchase 0.3 shares of Common Stock at an exercise price of $0.04 per share. The Altos Warrants were immediately exercisable at any time on or after the date of issuance and had a term of exercise of five (5) years from the date of issuance. The outstanding debt, as per the Altos Debenture agreement, is considered settled through the unit issuance.
Additional shares are issuable to Altos to the extent Altos continues to hold Common Stock included in the Units and if the VWAP during the 270 days following closing is less than $10.00, as set forth in the Subscription Agreement.
On September 24, 2024, Altos exercised all the Altos Warrants, and the Company issued to Altos an additional 154,027 shares of Common Stock upon such exercise.
41
Amended Forbearance Agreement
On September 19, 2024, the Company entered into an Amended and Restated Forbearance Agreement with Veru (the “Amended and Restated Forbearance Agreement” or “A&R Forbearance Agreement”), which amends and restates the Original Forbearance Agreement in its entirety. Pursuant to the A&R Forbearance Agreement, Veru will forbear from exercising its rights under both April Veru Note and the September Veru note, subject to the terms and conditions set forth below.
Pursuant to the A&R Forbearance Agreement, the April 2024 Forbearance Period continues to end on the earlier of (a) March 31, 2025 and (b) the occurrence of an Event of Default (as defined in the Amended and Restated Forbearance Agreement). The A&R Forbearance Agreement also extends the due date for the September Veru Note until the earlier to occur of (i) June 30, 2025 or (ii) the occurrence of any Event of Default. The Amended and Restated Forbearance Agreement also effected certain modifications to the payment terms in the Original Forbearance Agreement and amended certain terms of the September Veru Note as summarized below.
Pursuant to the A&R Forbearance Agreement, the Company agreed to make the following required payments (the “Required Payments”) during the April 2024 Forbearance Period first to accrued and unpaid interest under the April Veru note and then any remainder to the outstanding principal amount of the April Veru Note:
| ● | Interest at the rate of 10% per annum shall accrue on any unpaid principal balance of the April Veru Note commencing on April 20, 2024 through the date that the outstanding principal balance under the April Veru Note is paid in full; |
| ● | Monthly payments equal to 25% (increased from 15% in the Original Forbearance Agreement) of (i) the monthly cash receipts of Proteomedix for the licensing or sale of any products or services, (ii) monthly cash receipts of the Company or any of its subsidiaries for the sales of Proclarix anywhere in the world, and (iii) monthly cash receipts of the Company or any of its subsidiaries for milestone payments or royalties from LabCorp cash receipts of the Company of its subsidiaries from certain sale or licensing revenues or payments (the “Ordinary Cash Revenue”), which increased amount shall begin October 20, 2024 for cash receipts in September 2024; |
| ● | Payment of 20% (increased from 10% in the Original Forbearance Agreement) of the net proceeds from certain financing or other transactions outside the ordinary course of business completed by the Company or any of its subsidiaries during the April 2024 Forbearance Period, which increased amount will begin for any net proceeds received after September 19, 2024; and |
| ● | The remaining balance of the April Veru Note will be due at the end of the April 2024 Forbearance Period. |
The Company and Veru also agreed to the following amendments to the September Veru Note in the A&R Forbearance Agreement:
| ● | As noted above, an extension of the maturity date to June 30, 2025; |
| ● | The accrual of interest at the rate of 10% per annum on any unpaid principal balance of the September Veru Note commencing on October 1, 2024 through the date that the outstanding principal balance under the September Veru Note is paid in full; |
| ● | Any amounts owed on the September Veru Note, including but not limited to unpaid principal and accrued interest, will be paid in cash or, upon the mutual written consent of Veru and the Company, in shares of the Company’s Common Stock or a combination of cash and the Company’s Common Stock; |
| ● | Following full repayment of all principal and interest under the April Veru Note, the Company will make the Required Payments first towards accrued and unpaid interest under the September Veru Note and then towards the remaining principal balance payable under the September Veru Note; and |
| ● | If the aggregate unpaid principal outstanding under the April Veru Note and the September Veru Note and all accrued and unpaid interest thereon is repaid in cash on or before December 31, 2024, then the total principal balance under the September Veru Note that will be payable by the Company in satisfaction of its obligations under the September Veru Note will be reduced from $5,000,000 to $3,500,000. |
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November Amended and Restated Forbearance Agreement with Veru
On November 26, 2024, the Company entered into another Amended and Restated Forbearance Agreement with Veru (the “November Amended and Restated Forbearance Agreement” or “November A&R Forbearance Agreement”), which amends and restates certain terms of the A&R Forbearance Agreement. Pursuant to the November A&R Forbearance Agreement, Veru agreed to waive the due date for payment of applicable Cash Receipt Payments (as such term is defined in the A&R Forbearance Agreement) generated in October 2024 until the Company receives funds of at least $97,000 pursuant to its equity line of credit facility with Keystone Capital Partners LLC. In exchange, the Company agreed to increase its payments to be made to Veru out of future financing and strategic transactions through June 30, 2025, from 20% to 25% of net proceeds generated from such transactions. All other terms of the A&R Forbearance Agreement with Veru remain the same.
Warrant Inducement
On July 11, 2024, the Company entered into the Inducement Letters with certain holders of existing preferred investment options to purchase shares of the Company’s common stock at the original exercise prices of $101.84 and $43.60 per share, issued on August 11, 2022 and August 2, 2023, respectively, pursuant to which the holders agreed to exercise for cash their Existing PIOs to purchase an aggregate of 186,466 shares of the Company’s common stock, at a reduced exercise price of $6.00 per share, in consideration for the Company’s agreement to issue new preferred investment options (the “Inducement PIOs”) to purchase up to an aggregate of 559,397 shares of the Company’s common stock. Of the 559,397 PIOs issued, 186,465 have a contractual term of 5 years, while the remaining 372,932 have a contractual term of 2 years. Aside from the contractual terms, the Inducement PIOs have substantially the same terms as the Existing PIOs.
On July 11, 2024, the Company consummated the transaction contemplated by the Inducement Letters upon unanimous written consent of the Board of Directors (the “Warrant Inducement”). The Company received aggregate net proceeds of approximately $0.9 million from the exercise of the Existing PIOs by the holders and the sale of the Inducement PIOs, after deducting placement agent fees and other offering expenses payable by the Company.
The Company agreed to file a registration statement covering the resale of the Inducement PIO Shares issued or issuable upon the exercise of the Inducement PIOs (the “Resale Registration Statement”) within 30 days after the date of the Inducement Letter and to use commercially reasonable efforts to cause such Resale Registration Statement to be declared effective by the SEC within 60 days following the date of the Inducement Letter (or within 90 days following the date of the Inducement Letter in the case of full review of the Resale Registration Statement by the SEC).
The Company engaged H.C. Wainwright & Co., LLC (“Wainwright”) to act as its exclusive placement agent in connection with the transactions summarized herein and will pay Wainwright a cash fee equal to 7.5% of the gross proceeds received form the exercise of the Existing PIOs as well as a management fee equal to 1.0% of the gross proceeds from the exercise of the Existing PIOs. The Company also agreed to reimburse Wainwright for its expenses in connection with the exercise of the Existing PIOs and the issuance of the Inducement PIOS, up to $50,000 for fees and expenses of legal counsel and other out-of-pocket expenses and agreed to pay Wainwright for non-accountable expenses in the amount of $35,000. The Company also agreed to issue to Wainwright or its designees warrants (the “Placement Agent Warrants”), and as such shares of common stock issuable thereunder, (the “Placement Agent Warrant Shares”) to purchase (i) 13,054 shares of common stock which will have the same terms as the Inducement PIOs except for an exercise price equal to $7.50 per share and a term of five (5) years following the date of stockholder approval and (ii) upon any exercise for cash of the Inducement PIOs, 7.5% of the aggregate exercise price and that number of shares of common stock equal to 7.0% of the aggregate number of such shares of common stock underlying the Inducement PIOs that have not been exercised, which will have substantially the same terms as the Placement Agent Warrants.
The Company evaluated the terms of the Inducement PIOs and the Wainwright Inducement Warrants (collectively, the “August 2023 Inducement Warrants”), and determined that they should be classified as equity instruments based upon accounting guidance provided in ASC 480 and ASC 815-40. The Company also evaluated the unissued shares held in abeyance, which represent a prepaid forward contract, and determined that it is an equity instrument based on the guidance provided in ASC 480 and ASC 815-40.
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The Warrant Inducement, which resulted in the lowering of the exercise price of the Existing PIOs and the issuance of the Inducement PIOs, is considered a modification of the Existing PIOs under the guidance of Accounting Standards Update (“ASU”) No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Equity Classified Written Call Options. The modification is consistent with the “Equity Issuance” classification under that guidance as the reason for the modification was to induce the holders of the Existing PIOs to cash exercise their warrants, resulting in the imminent exercise of the Existing PIOs, which raised equity capital and generated net proceeds for the Company of approximately $0.9 million. As the Existing PIOs and the Inducement PIOs were classified as equity instruments before and after the exchange, and as the exchange is directly attributable to an equity offering, the Company recognized the effect of the modification of approximately $1.9 million as an equity issuance cost.
In addition, the change in fair value of the contingent warrant liability associated with 3,729 of the August 2022 Contingent Warrants and 7,459 of the August 2023 Contingent Warrants was decreased to $0 upon the agreement with Wainwright that all prior contingent warrants were no longer issuable or due upon the Warrant Inducement Transaction. The fair value of the contingent warrant liability of approximately $2,700 was derecognized as of the settlement date, with the corresponding amount, representing the fair value of the Wainwright Inducement Warrants, was recognized as additional paid-in capital.
The Company evaluated the terms of the 39,158 Inducement Contingent Warrants (equivalent to 7.0% of the aggregate number of such shares of common stock underlying the Inducement PIOs that have not been exercised), which are issuable upon a future inducement, and determined that they should be classified as a liability based upon accounting guidance provided in ASC 815-40. Since the Inducement Contingent Warrants are a form of compensation to Wainwright, the Company recorded the value of the liability of approximately $158,000 as a reduction of additional paid in capital, with subsequent changes in the value of the liability recorded in other income (expense) in the accompanying condensed statements of operations.
Reverse Stock Split
On September 24, 2024, the Company effected a Reverse Stock Split of all shares of its issued and outstanding Common Stock at a ratio of one-for-forty (1:40). The Company accounted for the reverse stock split on a retrospective basis pursuant to Accounting Standards Codification (“ASC”) 260, Earnings Per Share. All issued and outstanding common stock, common stock warrants, and share-based awards’ exercise prices and per share data have been adjusted in these condensed consolidated financial statements, on a retrospective basis, to reflect the reverse stock split for all periods presented. The number of authorized shares and par value of the preferred stock and common stock were not adjusted because of the reverse stock split.
Conversion of Series A Preferred Stock
On September 24, 2024, the Company issued an aggregate of 142,749 shares of Common Stock to Veru Inc., following Veru’s election to convert all the 3,000 shares of Series A preferred stock (“Series A Preferred Stock”) of the Company issued to it on September 29, 2023. The Series A Preferred Stock was originally issued to Veru pursuant to an Amendment to the Asset Purchase Agreement, dated September 29, 2023, between the Company and Veru.
Conversion of Series B Preferred Stock
On September 24, 2024 the Company issued an aggregate of 6,741,820 shares of Common Stock (the “PMX Converted Shares”) to certain stockholders of the Company who were formerly holders of outstanding capital stock or convertible securities (the “Sellers”) of PMX, pursuant to the automatic conversion of all the 2,696,729 shares of Series B preferred stock (“Series B Preferred Stock”) of the Company, which Series B Preferred Stock was originally issued to the Sellers on December 15, 2023. The Series B Preferred Stock was originally issued to the Sellers pursuant to a Share Exchange Agreement, dated December 15, 2023, between the Company, PMX, and the Sellers (the “Share Exchange Agreement”), and was subject to the automatic conversion following (i) the Company’s receipt of stockholder approval for the issuance of the PMX Converted Shares and ii) the effectiveness of the Reverse Stock Split, which provided for a sufficient number of authorized shares to issue the PMX Converted Shares, as contemplated by the Share Exchange Agreement.
Series C Preferred Stock
On October 1, 2024, the Board of Directors authorized the Company to create a series of 10,000 shares of preferred stock designated as “Series C convertible Preferred Stock”, with a par value of $0.00001, pursuant to the certificate of designations. At any time after the initial issuance date of Series C convertible Preferred Stock, each Preferred Share shall be convertible into validly issued, fully paid and non-assessable shares of Common Stock. The holders of Series C Preferred Stock are entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of Common Stock, when and if actually paid. Each holder is entitled to convert any portion of the outstanding Preferred Shares held by such holder into validly issued, fully paid and non-assessable Conversion shares at the Conversion Rate, which can be determined by dividing (x) the Conversion Amount of such Preferred Share by (y) the Conversion Price, $4.5056, subject to adjustment as provided in the Certificate of Designations.
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PIPE Financing and ELOC
On October 1, 2024, the Board of Directors authorized the Company to create a series of 10,000 shares of preferred stock designated as “Series C convertible Preferred Stock”, with a par value of $0.00001, pursuant to the certificate of designations. At any time after the initial issuance date of Series C convertible Preferred Stock, each Preferred Share shall be convertible into validly issued, fully paid and non-assessable shares of Common Stock. The holders of Series C Preferred Stock are entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of Common Stock, when and if actually paid. In addition, from and after the occurrence and during the continuance of any Triggering Event, dividends (“Default Dividends”) will accrue on the Stated Value of each Preferred Share at a rate of fifteen percent (15.0%) (the “Default Rate”) per annum. Each holder is entitled to convert any portion of the outstanding Preferred Shares held by such holder into validly issued, fully paid and non-assessable Conversion shares at the Conversion Rate, which can be determined by dividing (x) the Conversion Amount of such Preferred Share by (y) the Conversion Price, $4.5056, subject to adjustment as provided in the Certificate of Designations.
After the Stockholder Approval Date, if a Triggering Event occurs and is continuing at any time after the earlier of the holders’ receipt of a Triggering Event Notice and such holder becoming aware of such Triggering Event (such earlier date, the “Alternate Conversion Right Commencement Date”) and ending on the twentieth (20th) Trading Day after the later of (x) the date of such Triggering Event is cured and (y) such holder’s receipt of a Triggering Event Notice (such ending date, the “Alternate Conversion Right Expiration Date”), and each such period, an “Alternate Conversion Right Period”), such holder may, at such holder’s option, by delivery of a Conversion Notice to the Company (the date of any such Conversion Notice, each an “Alternate Conversion Date”), convert all, or any number of Preferred Shares held by such holder into shares of Common Stock at the Alternate Conversion Price (each, an “Alternate Conversion”). Alternate Conversion Price means, with respect to any Alternate Conversion that price will be the lowest of (i) the applicable Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, and (ii) the greater of (x) the Floor Price and (y) 80% of the lowest VWAP of the Common Stock during the five (5) consecutive Trading Day period ending and including the Trading Day immediately preceding the delivery or deemed delivery of the applicable Conversion Notice (such period, the “Alternate Conversion Measuring Period”).
At any time, the Company has the right to redeem in cash all, but not less than all, of the Preferred Shares then outstanding at a price (the “Company Optional Redemption Price”) equal to 125% of the greater of (i) the Conversion Amount being redeemed and (ii) the product of (1) the Conversion Rate with respect to the Conversion Amount being redeemed multiplied by (2) the greatest closing sale price of the Company’s Common Stock on any Trading Day during the period commencing on the date immediately preceding the date the Company notifies the holders of its elections to redeem and the date the Company makes the entire payment required. Upon the occurrence of a Bankruptcy Triggering Event, the Company will immediately redeem, in cash, each of the Preferred Shares then outstanding at a redemption price equal to the greater of (i) the product of (A) the Conversion Amount to be redeemed multiplied by (B) 125% and (ii) the product of (X) the Conversion Rate with respect to the Conversion Amount in effect immediately following the date of initial public announcement of such Bankruptcy Triggering Event multiplied by (y) the product of (1) 125% multiplied by (2) the greatest closing sale price of the Common Stock on any Trading Day during the period commencing on the date immediately preceding such Bankruptcy Triggering Event and ending on the date the Company pays the entire payment required.
In no event may any Preferred Shares be converted (or Warrants be exercised) and shares of Common Stock be issued to any holder if after giving effect to the issuance of shares of Common Stock upon such conversion of the Preferred Shares (or exercise of the Warrants), the holder (together with its affiliates, if any) would beneficially own more than 4.99% of the outstanding shares of Common Stock, which we refer to herein as the “PIPE Blocker”. The PIPE Blocker may be raised or lowered to any percentage not in excess of 9.99% at the option of the applicable holder of the Preferred Shares (or Warrants), except that any raise will only be effective upon 61-days’ prior notice to the Company.
On October 2, 2024, the Company entered into, and sold, to six institutional investors (collectively, the “PIPE Investors”), pursuant to the securities purchase agreement an aggregate of 3,499 shares of Series C convertible preferred stock, par value $0.00001 per share, which includes an issuance of 840 shares of Series C Preferred Stock to the lead investor in consideration for the PIPE Investors’ irrevocable commitment to purchase shares of the Series C Preferred Stock, and warrants to purchase 591,856 shares of Common Stock, (together, the “PIPE Securities”) for aggregate net cash proceeds to the Company of $1.9 million. The exercise price of the warrants is $4.38, and the warrants are exercisable six months after the issuance date and expire on the third anniversary of the initial exercisability date.
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On October 2, 2024, the Company entered into a Common Stock ELOC Purchase Agreement relating to a Committed Equity Facility with an institutional investor (the “ELOC Purchaser”), whereby the Company may offer and sell, from time to time at its sole discretion, and whereby the ELOC Purchaser has committed to purchase, up to $25.0 million of the Company’s newly issued Common Stock, subject to certain limitations. Concurrently with entering into the ELOC Purchase Agreement, the Company also entered into a registration rights agreement with the ELOC Purchaser, pursuant to which it agreed to provide the ELOC Purchaser with certain registration rights related to the shares issued under the ELOC Purchase Agreement (the “ELOC Registration Rights Agreement”). In no event will the Company issue to the Purchaser under the ELOC Purchase Agreement more than 1,658,525 shares of Common Stock, representing 19.99% of the total number of shares of Common Stock outstanding immediately prior to the execution of the Common Stock Purchase Agreement (the “Exchange Cap”), unless (i) the Company obtains the approval of the issuance of such shares by its stockholders in accordance with the applicable stock exchange rules or (ii) sales of Common Stock are made at a price equal to or in excess of the lower of (A) the closing price immediately preceding the delivery of the applicable notice to the Purchaser and (B) the average of the closing prices of the Common Stock for the five business days immediately preceding the delivery of such notice, such that the sales of such Common Stock to the Purchaser would not count toward the Exchange Cap because they are “at market” under applicable stock exchange rules.
The Company may not issue or sell any shares of Common Stock to the ELOC Purchaser under the Common Stock Purchase Agreement, if it would result in the ELOC Purchaser beneficially owning more than 4.99% of the outstanding shares of Common Stock (the “ELOC Blocker”). The ELOC Blocker may be raised or lowered to any other percentage not in excess of 9.99% at the option of the ELOC Purchaser, except that any raise will only be effective upon 61 days’ prior notice to the Company.
Liquidity Outlook
We have incurred net losses since inception and expect to continue to incur net losses in the foreseeable future. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending in large part on the timing of our preclinical studies, clinical trials and manufacturing activities, our expenditures on other research and development activities and commercialization activities. As of September 30, 2024, the Company had a working capital deficit of approximately $16.3 million and an accumulated deficit of approximately $86.0 million. In addition, as of December 5, 2024, the Company’s cash balance was approximately $0.4 million, all of which is currently held by the Company’s foreign subsidiary. The Company believes that its current cash balance is only sufficient to fund its operations through the end of December 2024, until it can utilize the Equity Financing Line of Credit, which it entered into in on October 2, 2024, and as such, we will need to raise additional capital prior to this to sustain operations.
Until we generate revenue sufficient to support self-sustaining cash flows, if ever, we will need to raise additional capital to fund our continued operations, including our product development and commercialization activities related to our current and future products. There can be no assurance that additional capital will be available to us on acceptable terms, or at all, or that we will ever generate revenue sufficient to provide self-sustaining cash flows. These circumstances raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements as of and for the nine months ended September 30, 2024, included elsewhere in this Report do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.
Because of the numerous risks and uncertainties associated with our business, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Additionally, even if we are able to generate revenue from Proclarix or our other assets, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and may be forced to reduce our operations.
Certain Significant Relationships
We have entered into license and other arrangements with various third parties as summarized below. For further details regarding these and other agreements, see Notes 6 and 9 to each of our audited financial statements included in the Form 10-K and unaudited financial statements included elsewhere in this Report.
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Laboratory Corporation of America
On March 23, 2023, Proteomedix entered into a license agreement with LabCorp pursuant to which LabCorp has the exclusive right to develop and commercialize Proclarix, and other products developed by LabCorp using Proteomedix’s intellectual property covered by the license, in the United States (“Licensed Products”). In consideration for granting LabCorp an exclusive license, Proteomedix received an initial license fee in the mid-six figures upon signing of the contract. Additionally, Proteomedix is entitled to royalty payments between 5% and 10% on the net sales recognized by LabCorp of any Licensed Products plus milestone payments as follows:
| ● | after the first sale of Proclarix as a laboratory developed test, LabCorp will pay an amount in the mid-six figures; |
| ● | after LabCorp achieves a certain amount in the low seven figures in net sales of Licensed Products, LabCorp will pay Proteomedix an amount in the low seven figures; and |
| ● | after a certain amount in the mid-seven figures in net sales of Licensed Products, LabCorp will pay Proteomedix an amount in the low seven figures. |
The total available milestone payments available under the terms of this contract is $2.5 million. An additional $0.5 million was paid to Proteomedix as an initial license fee in 2023.
LabCorp is wholly responsible for the cost, if any, of research, development and commercialization of Licensed Products in the United States but has the right to offset a portion of those costs against future royalty and milestone payments. Additionally, LabCorp may deduct royalties or other payments made to third parties related to the manufacture or sale of Licensed Products up to a maximum amount of any royalty payments due to Proteomedix.
The license agreement and related royalty payment provisions expire during 2038, which approximates the expiration of the last patent covered by the license agreement. LabCorp has the right to terminate the license agreement for any reason by providing 90 days written notice to Proteomedix. Either party may terminate the license agreement due to a material breach of the terms of the license agreement with 30 days’ notice, provided such breach is not cured within the foregoing 30-day period. Finally, Proteomedix may terminate the license agreement with 60 days’ notice in the event LabCorp fails to make any undisputed payment due, provided that LabCorp does not remit the payment within the foregoing 60-day period.
Services Agreement
On July 21, 2023, the Company, entered into a Licensing and Services Master Agreement (“Master Services Agreement”) and a related statement of work with IQVIA, pursuant to which IQVIA was to provide to the Company commercialization services for the Company’s products, including recruiting, managing, supervising and evaluating sales personnel and providing sales-related services for such products, for fees totaling up to $29.1 million over the term of the statement of work. The statement of work had a term through September 6, 2026, unless earlier terminated in accordance with the Master Services Agreement and the statement of work. On July 29, 2023, a second statement of work was entered into with the IQVIA for certain subscription services providing prescription market data access to the Company. The fees under the second statement of work totaled approximately $800,000, and the term was through July 14, 2025. On October 12, 2023, the Company terminated the Master Services Agreement and the statements of work. The Company recorded net credits of approximately $0.4 million related to this contract during the nine months ended September 30, 2024, respectively, which is included in selling, general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss. The Company had approximately $1.1 million and $1.8 million recorded in related accounts payable as of September 30, 2024 and December 31, 2023, respectively, which includes amounts due for early termination of the contract. See Note 6 to our consolidated financial statements included elsewhere in this Report.
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Components of Results of Operations
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of commercialization activities, payroll, and personnel expenses, including salaries and bonuses, benefits and stock-based compensation expenses, professional fees for legal, consulting, accounting and tax services, information technology costs, costs incurred with respect to acquisitions and potential acquisitions, and other general operating expenses.
We anticipate that our selling, general and administrative expenses related to Proteomedix will increase when compared to historical levels as a result of efforts to commercialize Proclarix, and costs associated with integration of Proteomedix’s operations.
Research and Development Expenses
Historically, substantially all of our research and development expenses consist of expenses incurred in connection with the development of our product candidates. These expenses historically have included fees paid to third parties to conduct certain research and development activities on our behalf, consulting costs, costs for laboratory supplies, product acquisition and license costs, certain payroll, and personnel-related expenses, including salaries and bonuses, employee benefit costs and stock-based compensation expenses for our research and product development employees. We expense both internal and external research and development expenses as they are incurred.
We do not allocate our costs by product candidate, as a significant amount of research and development expenses include internal costs, such as payroll and other personnel expenses, laboratory supplies, and external costs, such as fees paid to third parties to conduct research and development activities on our behalf, that are not tracked by product candidate.
As discussed above, we have terminated the vaccine programs that substantially all of our research and development historically related to. We do not anticipate incurring significant research and development expenses in the near future, unless we are able to resume such activities. Predicting the timing or cost to complete our clinical programs for future product candidates, or validation of our commercial manufacturing and supply processes is difficult and delays may occur because of many factors, including factors outside of our control, such as regulatory approvals. Furthermore, we are unable to predict when or if our future product candidates will receive regulatory approval with any certainty.
Other Income (Expense)
Other income (expense) is comprised of interest expense on notes payable, the change in fair value of financial instruments that are recorded as liabilities, which includes the related party subscription agreement liability and the contingent warrant liability, and other financing-related costs.
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Results of Operations
Comparison of the Three Months Ended September 30, 2024 and 2023
The following table summarizes our statements of operations for the periods indicated:
| Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | $ Change | % Change | |||||||||||||
| Revenue | $ | 406,859 | $ | - | $ | 406,859 | 100.0 | % | ||||||||
| Cost of revenue | 301,445 | - | 301,445 | 100.0 | % | |||||||||||
| Gross profit | 105,414 | - | 105,414 | 100.0 | % | |||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | $ | 2,641,916 | $ | 4,268,845 | (1,626,929 | ) | (38.1 | )% | ||||||||
| Research and development | 109,365 | 219,238 | (109,873 | ) | (50.1 | )% | ||||||||||
| Total operating expenses | 2,751,281 | 4,488,083 | (1,736,802 | ) | 38.7 | % | ||||||||||
| Loss from operations | (2,645,867 | ) | (4,488,083 | ) | 1,842,216 | 41.0 | % | |||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense – related party | (153,302 | ) | - | (153,302 | ) | (100.0 | )% | |||||||||
| Interest expense | (231,656 | ) | (269,097 | ) | 37,441 | 13.9 | % | |||||||||
| Change in fair value of subscription agreement liability – related party | (928,400 | ) | - | (928,400 | ) | (100.0 | )% | |||||||||
| Change in fair value of contingent warrant liability | 30,448 | (99,728 | ) | 130,176 | 130.5 | % | ||||||||||
| Loss on extinguishment of note payable | - | (490,000 | ) | 490,000 | 100.0 | % | ||||||||||
| Other - net | 44,988 | - | 44,988 | (100.0 | )% | |||||||||||
| Total other expense | (1,237,922 | ) | (858,825 | ) | (379,097 | ) | (44.1 | )% | ||||||||
| Loss before income taxes | (3,883,789 | ) | (5,346,908 | ) | 1,463,119 | 27.4 | % | |||||||||
| Income tax benefit | 56,384 | - | 56,384 | 100.0 | % | |||||||||||
| Net loss | $ | (3,827,405 | ) | $ | (5,346,908 | ) | 1,519,503 | 28.4 | % | |||||||
Revenue, Cost of Revenue, and Gross Margin
For the three months ended September 30, 2024, the Company had approximately $0.4 million of revenue, which was attributable to development services generated by Proteomedix. Cost of revenue of approximately $0.3 million was mostly attributable to costs incurred on Proteomedix revenue including amortization of the product rights intangible asset of approximately $0.2 million. The Company did not have any revenue during the three months ended September 30, 2023.
Selling, General and Administrative Expenses
For the three months ended September 30, 2024, selling, general and administrative expenses decreased by $1.6 million compared to the same period in 2023. The decrease was due to the halt in commercialization of activities beginning in late 2023, specifically in sales and marketing efforts and business consulting, which contributed $1.5 million towards the decrease and payroll expenses, which contributed an additional $0.5 million towards the decrease. Furthermore, the impairment of intangible assets recorded in the prior year of approximately $0.3 million contributed to the decrease as well. The decrease was offset by Proteomedix’s selling, general and administrative expense increase of $0.7 million fully related to the acquisition of the subsidiary in the last quarter of 2023.
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Research and Development Expenses
For the three months ended September 30, 2024, research and development expenses decreased by approximately $0.1 million compared to the same period in 2023. The decrease was primarily attributable to the Company’s decision to halt its vaccine programs and focus on commercialization activities, which occurred during the third quarter of 2023. This change in business strategy led to a halt in the Company’s clinical and other research activities.
Other Income (Expense)
Other expenses incurred during the three months ended September 30, 2024, increased by approximately $0.4 million compared to the same period in 2023. The increase was primarily due to approximately $0.2 million of increased related party interest expense, primarily related to the Altos Debenture issued in January 2024, and an increase of $0.9 million in the change in fair value of the subscription liability. These items were offset by the loss on extinguishment of note payable recognized in the prior year of approximately $0.5 million, an approximate $0.1 million decrease in change in fair value of contingent warrant liability as a result of the issuance of new contingent warrants upon the PIO inducement transaction, and a decrease of approximately $0.1 million of interest expense due to the one of the ENTADFI notes outstanding in the third quarter of 2023 being fully paid off prior to the current quarter.
Income Tax Benefit
The Company recorded an income tax benefit of approximately $56,000 during the three months ended September 30, 2024, related to foreign deferred income taxes recorded in connection with Proteomedix. There was no income tax benefit or expense recorded during the same period in 2023.
Comparison of the Nine Months Ended September 30, 2024 and 2023
The following table summarizes our statements of operations for the periods indicated:
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | $ Change | % Change | |||||||||||||
| Revenue | $ | 1,812,140 | $ | - | $ | 1,812,140 | 100.0 | % | ||||||||
| Cost of revenue | 1,417,010 | - | 1,417,010 | 100.0 | % | |||||||||||
| Gross profit | 395,130 | - | 395,130 | 100.0 | % | |||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | $ | 8,599,642 | $ | 8,337,615 | 262,027 | 3.1 | % | |||||||||
| Research and development | 154,649 | 2,148,327 | (1,993,678 | ) | (92.8 | )% | ||||||||||
| Impairment of goodwill | 15,453,000 | - | 15,453,000 | 100.0 | % | |||||||||||
| Impairment of ENTADFI assets | 3,530,716 | - | 3,530,716 | 100.0 | % | |||||||||||
| Impairment of deposit on asset purchase agreement | - | 3,500,000 | (3,500,000 | ) | (100.0 | )% | ||||||||||
| Total operating expenses | 27,738,007 | 13,985,942 | 13,752,065 | (98.3 | )% | |||||||||||
| Loss from operations | (27,342,877 | ) | (13,985,942 | ) | (13,356,935 | ) | (95.5 | )% | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense – related party | (534,245 | ) | - | (534,245 | ) | (100.0 | )% | |||||||||
| Interest expense | (625,084 | ) | (483,093 | ) | (141,991 | ) | (29.4 | )% | ||||||||
| Change in fair value of subscription agreement liability – related party | (950,000 | ) | - | (950,000 | ) | (100.0 | )% | |||||||||
| Change in fair value of contingent warrant liability | 30,448 | (99,787 | ) | 130,235 | 130.5 | % | ||||||||||
| Loss on extinguishment of note payable | - | (490,000 | ) | 490,000 | 100.0 | % | ||||||||||
| Other expense | 41,894 | - | 41,894 | (100.0 | )% | |||||||||||
| Total other expense | (2,036,987 | ) | (1,072,880 | ) | (964,107 | ) | (89.9 | )% | ||||||||
| Loss before income taxes | (29,379,864 | ) | (15,058,822 | ) | (14,321,042 | ) | (95.1 | )% | ||||||||
| Income tax benefit | 127,183 | - | 127,183 | 100.0 | % | |||||||||||
| Net loss | $ | (29,252,681 | ) | $ | (15,058,822 | ) | (14,193,859 | ) | (94.3 | )% | ||||||
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Revenue, Cost of Revenue, and Gross Margin
For the nine months ended September 30, 2024, the Company had approximately $1.8 million of revenue, which was attributable to product sales of approximately $0.1 million and development services of approximately $1.7 million generated by Proteomedix. Cost of revenue of approximately $1.4 million was attributable to $0.5 million of costs incurred on the generation of Proteomedix revenue, as well as amortization of the product rights intangible asset of approximately $0.5 million, and approximately $0.4 million related to the full impairment of ENTADFI inventory. The Company did not have any revenue during the nine months ended September 30, 2023.
Selling, General and Administrative Expenses
For the nine months ended September 30, 2024, selling, general and administrative expenses increased by approximately $0.3 million compared to the same period in 2023. Proteomedix’s selling, general, and administrative expenses totaled approximately $2.2 million, of which approximately $1.6 million was related to audit and legal fees, and salaries and benefits. Onconetix expenses offset this increase by $1.9 million, which was due to a reduction in commercialization activities of approximately $0.7 million, including a reduction in fees due to IQVIA of approximately $0.5 million, decrease in stock-based compensation expense of approximately $0.3 million, a decrease in impairment of long-lived assets of approximately $0.3 million, and a $0.2 million decrease in the loss on related party receivable.
Research and Development Expenses
For the nine months ended September 30, 2024, research and development expenses decreased by approximately $2.0 million compared to the same period in 2023. The decrease was primarily attributable to the Company’s decision to halt its vaccine programs and focus on commercialization activities, which occurred during the third quarter of 2023. This change in business strategy led to a halt in the Company’s clinical and other research activities. The decrease was only slightly offset by minimal research and development activities still ongoing at Proteomedix.
Impairments
During the nine months ended September 30, 2024, the Company recorded impairment losses of approximately $15.5 million related to goodwill recorded in connection with the PMX acquisition, and an impairment loss of approximately $3.5 million on the assets acquired as part of the ENTADFI asset acquisition.
During the nine months ended September 30, 2023, a $3.5 million impairment loss was recorded on the deposit for the WraSer APA.
Other Income (Expense)
Other expenses incurred during the nine months ended September 30, 2024, increased by approximately $1.0 million compared to the same period in 2023. The increase was primarily due to (i) approximately $0.5 million of interest expense related to the Altos Debenture issued in January 2024, (ii) an increase of $0.1 million of interest related to the April Veru Note, which was amended in April 2024, and (iii) a $1.0 million increase in the fair value of the subscription liability. These increases were offset by a decrease in the fair value of the contingent warrant liability expense of approximately $0.1 million and the extinguishment of the note payable in the previous period of approximately $0.5 million.
Income Tax Benefit
The Company recorded an income tax benefit of approximately $127,000 during the nine months ended September 30, 2024, related to foreign deferred income taxes recorded in connection with Proteomedix. There was no income tax benefit or expense recorded during the same period in 2023.
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Liquidity and Capital Resources
The Company’s operating activities to date have been devoted to seeking licenses, engaging in research and development activities, potential asset and business acquisitions, and expenditures associated with the previously planned commercial launch of ENTADFI and the commercialization of Proclarix.
The Company has incurred substantial operating losses since inception and expects to continue to incur significant operating losses for the foreseeable future. As of September 30, 2024, the Company had cash of approximately $0.3 million, a working capital deficit of approximately $16.3 million and an accumulated deficit of approximately $86.0 million. During the nine months ended September 30, 2024, the Company used approximately $9.6 million in cash for operating activities. In addition, as of December 5, 2024, the Company’s cash balance was approximately $0.4 million, all of which is currently held by the Company’s foreign subsidiary. The Company’s current cash balance is not sufficient to fund its operations through the end of December 2024 until it can utilize the Equity Financing Line of Credit (“ELOC”), which it entered into on October 2, 2024, referred herein as the ELOC Purchase Agreement, and this raises substantial doubt about the Company’s ability to continue as a going concern within one year from the date of the issuance of these condensed consolidated financial statements. The Company’s projections are also indicative that it is currently unable to meet its contractual commitments and obligations as they come due in the ordinary course of business. The Company will require significant additional capital in the short-term to fund its continuing operations, satisfy existing and future obligations and liabilities, including the remaining payments due for the acquisition of the ENTADFI assets, and funds needed to support the Company’s working capital needs and business activities. These business activities include the development and commercialization of Proclarix, and the development and commercialization of the Company’s future product candidates.
Management’s plans for funding the Company’s operations include generating product revenue from sales of Proclarix, which is still subject to further successful commercialization activities within certain jurisdictions. Management also intends to secure additional required funding through equity or debt financings if available, and to utilize the ELOC entered into in October 2024 (see Note 15) on an as-needed basis to assist with the paydown of the debentures and to fund current operating needs, subject to certain restrictions and beneficial ownership constraints. However, based on the terms of the ELOC and the current maximum availability, Management determined that the funds readily available under the ELOC will not be sufficient to sustain operations. In addition, there are currently no other commitments in place for further financing nor is there any assurance that such financing will be available to the Company on favorable terms, if at all. This creates significant uncertainty whether the Company will have the funds available to be able to sustain its operations and expand commercialization of Proclarix. If the Company is unable to secure additional capital, it may be required to curtail any future clinical trials, development and/or commercialization of future product candidates, and it may take additional measures to reduce expenses in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations, or, if it is required to, file for bankruptcy.
Because of historical and expected operating losses, net operating cash flow deficits, and debts due within one year, there is substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the condensed consolidated financial statements, which is not alleviated by management’s plans. The condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. These condensed consolidated financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty.
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Future Funding Requirements
We anticipate that we will continue to incur significant expenses for the foreseeable future as we continue to commercialize Proclarix and expand our corporate infrastructure.
We will require significant amounts of additional capital in the short-term, to continue to fund our continuing operations, satisfy existing and future obligations and liabilities, including the remaining payments due under the Veru APA and other contracts entered into in support of the Company’s commercialization plans, in addition to funds needed to support our working capital needs and business activities, including the development and commercialization of Proclarix, and the development and commercialization of our future product candidates. Until we can generate a sufficient amount of revenue from sales of Proclarix, if at all, we expect to finance our future cash needs through public or private equity or debt financings, third-party funding and marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. The future sale of equity or convertible debt securities may result in dilution to our stockholders, and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. Debt financing may subject us to covenant limitations or restrictions on our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable or acceptable to us. If we are unable to obtain adequate financing when needed or on terms favorable or acceptable to us, we may be forced to delay, reduce the scope of our business activities.
Our future capital requirements will depend on many factors, including:
| ● | the costs of future commercialization activities, including product manufacturing, marketing, sales, royalties, and distribution, for Proclarix, and other products for which we may receive marketing approval; | |
| ● | the timing, scope, progress, results and costs of research and development, testing, screening, manufacturing, preclinical, non-clinical studies, and clinical trials; | |
| ● | the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform field efficacy studies, require more studies than those that we currently expect or change their requirements regarding the data required to support a marketing application; | |
| ● | our ability to maintain existing, and establish new, strategic collaborations, licensing or other arrangements and the financial terms of any such agreements, including the timing and amount of any future milestone, royalty, or other payments due under any such agreement; | |
| ● | any product liability or other lawsuits related to our products; | |
| ● | the expenses needed to attract, hire, and retain skilled personnel; | |
| ● | the revenue, if any, received from commercial sales of Proclarix, or other products for which we may have received or will receive marketing approval; | |
| ● | the costs to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing our patents or other intellectual property rights; and | |
| ● | the costs of operating as a public company. |
A change in the outcome of any of these or other variables could significantly change the costs and timing associated with our business activities. Furthermore, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such change.
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Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||||||
| Net cash used in operating activities | $ | (9,578,169 | ) | $ | (9,269,131 | ) | ||
| Net cash used in investing activities | (24,597 | ) | (9,864,613 | ) | ||||
| Net cash provided by financing activities | 5,440,310 | 1,035,060 | ||||||
| Effect of exchange rate changes on cash | (50,384 | ) | - | |||||
| Net decrease in cash | $ | (4,212,840 | ) | $ | (18,098,684 | ) | ||
Cash Flows from Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2024 was approximately $9.6 million, which primarily resulted from a net loss of approximately $29.3 million, net change in our operating assets and liabilities of approximately $2.3 million and net change of deferred tax benefit by approximately $0.1 million. These items were offset by several non-cash items, which include: impairments of goodwill and ENTADFI of approximately $15.5 million and $3.5 million, respectively, depreciation and amortization expense of approximately $0.6 million, loss on impairment of ENTADFI inventory of approximately $0.4 million, noncash interest expense and amortization of debt discounts of approximately $1.1 million, and increase in the fair value of subscription liability of $1.0 million.
Net cash used in operating activities for the nine months ended September 30, 2023 was approximately $9.3 million, which primarily resulted from a net loss of $15.1 million. This was offset by a change in our operating assets and liabilities of $0.1 million, an impairment loss of $3.5 million related to the deposit of the WraSer APA, an approximate $0.5 million loss on the extinguishment of a note payable, noncash stock-based compensation of approximately $0.6 million, noncash interest expense of approximately $0.5 million, a $0.3 million loss on impairment of long-lived assets, and the loss on related party receivable of approximately $0.3 million.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2024 of approximately $25,000 resulted from purchases of property and equipment.
Net cash used in investing activities for the nine months ended September 30, 2023 was approximately $9.9 million, of which approximately $6.1 million was used for the acquisition of ENTADFI, $3.5 million was used for the deposit in connection with the WraSer APA, and approximately $0.3 million is the net change in the receivable from related parties.
Cash Flows from Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2024 was approximately $5.4 million, and resulted primarily from the issuance of an aggregate of approximately $5.9 million in notes payable, consisting of a $5.0 million debenture and approximately $0.9 million for the financing of director and officer liability insurance policy premiums and the proceeds received from the exercise of preferred investment options in connection with the warrant inducement transaction of approximately $0.9 million. These proceeds were offset by approximately $0.9 million in payments on the notes payable and $0.4 million in the payment of financing costs.
Net cash provided by financing activities for the nine months ended September 30, 2023 was approximately $1.0 million, and resulted from net proceeds from the exercise of preferred investment options in connection with the warrant inducement transaction of $2.3 million, offset by $1.0 million in principal payments on a note payable, approximately $0.1 million in purchases of treasury shares and approximately $0.2 million of payment in deferred offering costs.
Legal Contingencies
From time to time, we may become involved in legal proceedings arising from the ordinary course of business. We record a liability for such matters when it is probable that future losses will be incurred and that such losses can be reasonably estimated.
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Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined in the rules and regulations of the SEC.
Recent Accounting Pronouncements Not Yet Adopted
See Note 3 to our condensed consolidated financial statements included elsewhere in this Report for more information.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience, known trends and events and various other factors that are believed to be 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. Actual results may differ from these estimates under different assumptions or conditions.
As of September 30, 2024, there have been no material changes to our critical accounting policies and estimates from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 11, 2024.
As of the close of the NASDAQ stock market on December 5, 2024, our stock price was $0.63 per share. This is a significant decline from September 30, 2024 where our closing price was $5.20 per share. If the stock remains at this level by the close of business on December 31, 2024, we believe this is an indicator for impairment which would require us to perform an impairment test since the fair value of our one reporting unit would be substantially less than its carrying value. Any impairment charge could result in a substantial non-cash expense, affecting our financial performance.
JOBS Act
Section 107 of the Jumpstart Our Business Startups Act (“JOBS”) Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period.
For as long as we remain an “emerging growth company” under the JOBS Act, we will, among other things:
| ● | be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act, which requires that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting; |
| ● | be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and instead provide a reduced level of disclosure concerning executive compensation; and |
| ● | be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements. |
We currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company,” including the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be materially and adversely affected.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2024, as a result of the material weaknesses described below.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
During 2023, after a review completed by the Audit Committee, it was determined that our former CEO and an accounting employee charged certain personal expenses on their corporate credit cards that were not recorded as related party receivables. These unauthorized charges, in addition to personal charges that were identified as such in previous reporting periods, may have constituted personal loans that are not permissible under Section 402 of the Sarbanes-Oxley Act of 2002. We determined that this credit card misuse arose from the following control deficiencies, which we have determined to be material weaknesses as of September 30, 2024:
| ● | We did not maintain an effective control environment as there was an inadequate segregation of duties with respect to certain cash disbursements. The processing and the approval for payment of credit card transactions and certain bank wires were being handled by the CEO and an accounting employee, and the accounting employee was responsible for the reconciliation of credit card statements and bank statements. This allowed these individuals to submit unauthorized payments to unauthorized third parties. |
| ● | We do not have an effective risk assessment process and effective monitoring of compliance with established accounting policies and procedures, and do not demonstrate a sufficient level of precision in the application of our controls, including the maintenance of board committee minutes and unanimous written consents. |
| ● | Our controls over the approval and reporting of expenses paid with the Company’s credit cards and certain bank wires were not designed and maintained to achieve the Company’s objectives. |
| ● | We have insufficient accounting resources to maintain adequate segregation of duties, maintain adequate controls over the approval and posting of journal entries, and to provide optimal levels of oversight in order to process financial information in a timely manner, analyze and account for complex, non-routine transactions, and prepare financial statements. |
| ● | We do not yet have adequate internal controls in place for the timely identification, approval or reporting of related party transactions. |
| ● | The Company did not design, implement, and maintain effective controls to ensure information technology (“IT”) policies and procedures set the tone at the top, to mitigate the risks to the achievement of IT objectives and ITGCs in the change management, logical security, and computer operations domains. Specifically, the design and implementation of user authentication, user access privileges, data backup and data recovery controls as well as the monitoring controls of excessive user access and elevated privileged access to financial applications and data were not appropriately designed and maintained. In addition, these inadequate ITGC controls combined with the use of personal devices to conduct business, can lead to an IT control environment vulnerable to breaches and social engineering persuasion. |
The above material weaknesses did not result in a material misstatement of our previously issued financial statements but could have resulted in material misstatements of our account balances or disclosures of our annual or interim financial statements that would not be prevented or detected. We have developed a remediation plan for these material weaknesses which is described below in Remediation of Material Weaknesses.
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Remediation of Material Weaknesses
We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that the material weaknesses are remediated as soon as possible. We believe we have made progress towards remediation. Management has designed and begun to implement the following remediation plan:
| ● | Terminated the accounting employee involved in the misuse and reassigned such employee’s roles and responsibilities regarding impacted control activities. |
| ● | Implemented a travel, entertainment, and gift policy, which our Board approved on August 31, 2023. |
| ● | Implement a formal information security policy. |
| ● | Review and update, as necessary, the design and operation of our process level and transaction level controls for cash disbursements, credit card transactions, and journal entries. Implement enhanced approval policies. |
We will consider the material weaknesses remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.
The process of designing and implementing an effective accounting and financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain an accounting and financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may determine to take additional actions to address control deficiencies or determine to modify certain of the remediation measures described above. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weakness we have identified or avoid potential future material weaknesses.
Inherent Limitation on the Effectiveness of Internal Control Processes
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended September 30, 2024, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or any of our officers or directors in their corporate capacity.
Item 1A. Risk Factors
In addition to the following risk factors, you should carefully consider the risk factors included in our Annual Report on Form 10-K, filed with the SEC on April 11, 2024, as supplemented and updated by subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we have filed or will file with the SEC. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
Risks Related to our Financial Position and Need for Capital
We have incurred significant net losses since inception, have only generated minimal revenue, and anticipate that we will continue to incur substantial net losses for the foreseeable future and may never achieve profitability. Our stock is a highly speculative investment.
We are a commercial-stage biotechnology company that was incorporated in October 2018. Our net loss was $3.8 million and $29.3 million for the three and nine months ended September 30, 2024. As of September 30, 2024, we had an accumulated deficit of $86.0 million. We also generated negative operating cash flows of $9.6 million for the nine months ended September 30, 2024.
We expect to continue to spend significant resources to commercialize our product. We expect to incur substantial and increasing operating losses over the next several years. As a result, our accumulated deficit will also increase significantly. Additionally, there can be no assurance that our current products or those that may be under development by us in the future will be commercially viable. If we are unable to achieve profitability or raise sufficient working capital, we may be unable to continue our operations.
There is substantial doubt about our ability to continue as a “going concern,” and we will require substantial additional funding to finance our long-term operations. If we are unable to raise additional capital when needed, we could be forced to delay, reduce, or terminate some or all of our products and operations.
The Company has incurred substantial operating losses since inception and expects to continue to incur significant operating losses for the foreseeable future. As of September 30, 2024, the Company had cash of approximately $0.3 million, a working capital deficit of approximately $16.3 million and an accumulated deficit of approximately $86.0 million. In addition, as of December 5, 2024, the Company’s cash balance was approximately $0.4 million, and the Company has approximately $9.8 million of debt due within the next 12 months.
We estimate, as of the date of this Report, that our current cash balance is not sufficient to fund our operations through the end of December until it can utilize the ELOC. We believe that we will need to raise substantial additional capital to fund our continuing operations, satisfy existing and future obligations and liabilities, and otherwise support the Company’s working capital needs and business activities, including making the remaining payments to Veru and the commercialization of Proclarix. Management’s plans for funding the Company’s operations include generating product revenue from sales of Proclarix, which is still subject to further successful development and commercialization activities within certain jurisdictions. Management also intends to secure additional required funding through equity or debt financings if available, and to utilize the ELOC entered into in October 2024 (see Note 15) on an as-needed basis to assist with the paydown of the debentures and to fund current operating needs, subject to certain restrictions and beneficial ownership constraints. However, based on the terms of the ELOC and the current maximum availability, Management determined that the funds readily available under the ELOC will not be sufficient to sustain operations. In addition, there are currently no other commitments in place for further financing nor is there any assurance that such financing will be available to the Company on favorable terms, if at all. This creates significant uncertainty whether the Company will have the funds available to be able to sustain its operations and expand commercialization of Proclarix. If the Company is unable to secure additional capital, it may be required to curtail any future clinical trials, development and/or commercialization of future product candidates, and it may take additional measures to reduce expenses in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations, or, if it is required to, file for bankruptcy.
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These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of time within one year from the issuance of the condensed consolidated financial statements. Our future capital requirements will depend on many factors, including:
| ● | the costs of future development and commercialization activities, including product manufacturing, marketing, sales, royalties, and distribution, for Proclarix and other products for which we have received or will receive marketing approval; |
| ● | our ability to maintain existing, and establish new, strategic collaborations, licensing or other arrangements and the financial terms of any such agreements, including the timing and amount of any future milestone, royalty, or other payments due under any such agreement; |
| ● | any product liability or other lawsuits related to our products; |
| ● | the expenses needed to attract, hire, and retain skilled personnel; |
| ● | the revenue, if any, received from commercial sales of Proclarix or other products for which we may receive marketing approval; |
| ● | the costs to establish, maintain, expand, enforce, and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending, and enforcing our patents or other intellectual property rights; and |
| ● | the costs of operating as a public company. |
Our ability to raise additional funds will depend on financial, economic, and other factors, many of which are beyond our control. We cannot be certain that additional funding will be available on acceptable terms, or at all. We have no committed source of additional capital and if we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may be forced to delay, reduce, or terminate our business activities.
We owe a significant amount of money to Veru, which funds we do not have. Veru may take action against us to enforce its rights to payment in the future, which could have a material adverse effect on us and our operations.
Due to recent financial constraints, the Company may be unable to timely pay amounts due to Veru, from whom we purchased ENTADFI in April 2023. We may not have sufficient funds to pay amounts due to Veru in the near term, if at all, including but not limited to $10 million, $5 million of which was due on April 19, 2024 and is subject to certain forbearance terms, and $5 million of which was due on September 30, 2024 and is subject to certain forbearance terms. On April 24, 2024, Veru agreed to forbear its rights and remedies until March 31, 2025 with respect to, among other things, our inability to pay amounts due on April 19, 2024, and on September 19, 2024, Veru agreed to forbear its rights and remedies until June 30, 2025 with respect to, among other things, our inability to pay amounts due on September 30, 2024. However, Veru may take future action against us, including filing legal proceedings against us seeking amounts due and interest accrued or attempting to terminate its relationship with us. If Veru were to take legal action against us, we may be forced to scale back our business plan and/or seek bankruptcy protection. We may be subject to litigation and damages for our failure to pay amounts due to Veru, and may be forced to pay interest and penalties, which funds we do not currently have. We are currently considering strategic options for ENTADFI, including a potential sale or abandonment, and plan to seek funding to support our operations, and to pay amounts due to Veru, through a combination of equity offerings, debt financing or other capital sources, including potential collaborations, licenses, sales, and other similar arrangements, which may not be available on favorable terms, if at all. The sale of additional equity or debt securities, if accomplished, may result in dilution to our stockholders. Furthermore, any revenue or financing proceeds that we are required to pay to Veru will detract from our ability to use such funds to support our operations.
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Our current liabilities are significant, and if those to whom we owe accounts payable, such as Veru, IQVIA or other creditors or vendors, were to demand payment, we would be unable to pay.
As of September 30, 2024, we had total current liabilities of approximately $17.4 million, including accounts payable of approximately $4.1 million, accrued expenses of approximately $1.3 million, the related party subscription liability of $1.8 million, and approximately $9.8 million (net of discounts) related to notes payable, primarily due to Veru. As of the same date, we had cash of only $0.3 million. We are currently considering strategic options for ENTADFI, including a potential sale or abandonment, and plan to seek funding to support our operations. However, the level of our current liabilities may make it more difficult for us to obtain adequate financing on favorable terms, if at all. If those to whom these payments are due were to demand immediate payment, as they are entitled to do, and we are not able to make the required payments, we would be subject to liability if our creditors chose to enforce their rights, which could result in our bankruptcy and insolvency. Under such a scenario, our assets would be distributed to our creditors, leaving nothing to be distributed to our stockholders.
Risks Related to the Commercialization of our Products
Company shareholders may not realize a benefit from the ENTADFI or Proteomedix acquisitions commensurate with the ownership dilution they have experienced in connection with the transactions.
If the Company is unable to realize the full strategic and financial benefits previously anticipated from the recent ENTADFI and Proteomedix acquisitions, our shareholders may experience a dilution of their ownership interests in our Company without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the Company is able to realize only part of the strategic and financial benefits previously anticipated from the transactions. We are currently considering strategic options for ENTADFI, including a potential sale. There is currently no plan to commercialize ENTADFI, and as such, if we are not able to consummate a sale or other transaction of the ENTADFI assets, we may abandon the assets and destroy our inventory of the product.
We may fail or elect not to commercialize our products.
We may not successfully commercialize our products. We or our collaboration partners in any potential commercial marketing efforts of our product may not be successful in achieving widespread patient or physician awareness or acceptance of this product. Also, we may be subject to pricing pressures from competitive products or from governmental or commercial payors or regulatory bodies that could make it difficult or impossible for us to commercialize our products. Any failure to commercialize our products could have a material adverse effect on our future revenue and our business.
We are currently considering strategic options for ENTADFI, including a potential sale. There is currently no plan to commercialize ENTADFI, and as such, if we are not able to consummate a sale or other transaction of the ENTADFI assets, we may abandon the assets and destroy our inventory of the product. The Company continues to consider various measures, including strategic alternatives, to rationalize its operations and optimize its existing Proclarix diagnostic program.
If we fail to further commercialize Proclarix, our business, financial condition, results of operations and prospects may be materially adversely affected and our reputation in the industry and in the investment community would likely be damaged.
We are dependent on third parties, including LabCorp, to develop, market, distribute and sell our products.
Our ability to receive revenues is dependent upon the sales and marketing efforts of co-marketing partners and third-party distributors. In particular, the development and commercialization of Proclarix in the United States is being pursued by LabCorp, pursuant to an exclusive license agreement that grants LabCorp the exclusive right to develop and commercialize Proclarix, and other products developed by LabCorp using Proteomedix’s intellectual property covered by the license, in the United States for identification, screening, staging, predisposition, diagnosis, prognosis, monitoring, prevention or treatment selection with respect to prostate cancer. However, we do not have control over LabCorp’s development and commercialization of Proclarix, and there can be no guarantee that LabCorp will continue to advance development and commercialization efforts, or that LabCorp will successfully commercialize Proclarix in the United States.
LabCorp may terminate or seek to renegotiate the terms of this agreement, which could adversely affect our business operations and financial condition. If LabCorp terminates the agreement or demands terms that are less favorable to us, we may experience disruptions in our product development and commercialization efforts, potentially leading to a loss of revenue and market share.
Additionally, if LabCorp is unable to commercialize Proclarix in the United States, and we fail to reach an agreement with any other commercialization partner, or upon reaching such an agreement that partner fails to sell a large volume of our products, it may have a negative impact on our business, financial condition, and results of operations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There are no transactions that have not been previously included in a Current Report on Form 8-K.
Issuer Purchases of Equity Securities
There were no share repurchases for the nine months ended September 30, 2024.
On November 13, 2024 the Board terminated the Repurchase Program.
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
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Item 6. Exhibits
The following documents are filed as exhibits to this Report.
EXHIBIT INDEX
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Onconetix, Inc. | ||
| Date: December 9, 2024 | /s/ Ralph Schiess | |
Ralph Schiess Interim Chief Executive Officer | ||
| (principal executive officer) | ||
| Date: December 9, 2024 | By: | /s/ Karina M. Fedasz |
| Karina M. Fedasz | ||
| Interim Chief Financial Officer | ||
| (principal financial and accounting officer) | ||
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Exhibit 31.1
CERTIFICATION OF THE
PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
RULE 13a-14(a) AND RULE 15d-14(a)
UNDER THE
SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ralph Schiess, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Onconetix, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: December 9, 2024 | By: | /s/ Ralph Schiess |
| Ralph Schiess | ||
| Interim Chief Executive Officer | ||
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF THE
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
RULE 13a-14(a) AND RULE 15d-14(a)
UNDER THE
SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Karina M. Fedasz, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Onconetix, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: December 9, 2024 | By: | /s/ Karina M. Fedasz |
| Karina M. Fedasz | ||
| Interim Chief Financial Officer | ||
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF THE
PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Onconetix, Inc. (the “Company”) for the quarterly period ended September 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ralph Schiess, Interim Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. |
| Date: December 9, 2024 | By: | /s/ Ralph Schiess |
| Ralph Schiess | ||
| Interim Chief Executive Officer | ||
| (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION OF THE
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Onconetix, Inc. (the “Company”) for the quarterly period ended September 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Karina M. Fedasz, Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. |
| Date: December 9, 2024 | By: | /s/ Karina M. Fedasz |
| Karina M. Fedasz | ||
| Interim Chief Financial Officer | ||
| (Principal Financial Officer) |