Cardiff Oncology, Inc. (CRDF) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company Overview

We are a clinical stage oncology company, developing new precision medicine treatment options for cancer patients in indications with the greatest unmet medical need. Our goal is to target tumor vulnerabilities with treatment combinations that overcome disease resistance and improve disease response to standard treatment regimens and to increase overall survival. We are developing onvansertib, an oral and highly selective PLK1 inhibitor, in combination with standard-of-care anti-cancer therapeutics. Our clinical development programs incorporate tumor genomics and biomarker technology to refine assessment of patient response to treatment. We have three clinical programs currently ongoing: a Phase 1b/2 study of onvansertib in combination with FOLFIRI/Avastin® (bevacizumab) in mCRC; a Phase 2 trial of onvansertib in combination with nanoliposomal irinotecan, leucovorin and fluorouracil for the second-line treatment of patients with PDAC; and a Phase 2 study of onvansertib in combination with Zytiga® (abiraterone)/prednisone in mCRPC.

Financial and Company Updates

Financial

On November 18, 2021 we announced that Pfizer, Inc. made an equity investment of $15.0 million in the Company as part of the Pfizer Breakthrough Growth Initiative. In connection with the equity investment, Adam Schayowitz, Ph.D., MBA, Vice President & Medicine Team Group Lead for Breast Cancer, Colorectal Cancer and Melanoma at Pfizer, will join our Scientific Advisory Board and Pfizer has rights of first access to any pre-clinical or final clinical data and results generated as part of the onvansertib development program at least two business days prior to us providing such data to a third party.

Company

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On July 12, 2021, we announced the appointments of Katherine L. Ruffner, M.D., as Chief Medical Officer and James E. Levine as Chief Financial Officer. We entered into an employment agreement with Mr. Levine on July 12, 2021 and with Dr. Ruffner on August 4, 2021.

On January 11, 2022 we announced the appointment of Tod Smeal, Ph.D., as Chief Scientific Officer and Charles Monahan, R.Ph., as Senior Vice President, Regulatory Affairs.

Our accumulated deficit through December 31, 2021 is $259.8 million. To date, we have generated minimal revenues and expect to incur additional losses to perform further research and development activities.

Our drug development efforts are in their early stages, and we cannot make estimates of the costs or the time that our development efforts will take to complete, or the timing and amount of revenues related to the sale of our drugs. The risk of completion of any program is high because of the many uncertainties involved in developing new drug candidates to market, including the long duration of clinical testing, the specific performance of proposed products under stringent clinical trial protocols, extended regulatory approval and review cycles, our ability to raise additional capital, the nature and timing of research and development expenses, and competing technologies being developed by organizations with significantly greater resources.

Critical Accounting Estimate

Our accounting policies are described in Part II, Item 8. Financial Statements—Note 2 Basis of Presentation and Summary of Significant Accounting Policies in this Annual Report on Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 period. Actual results could differ from those estimates. We believe that the following discussion represents our critical accounting policies.

Accrued Clinical Trial Expenses

We accrue and expense research and development expenditures as incurred, which include costs related to clinical trial activities. We accrue costs for clinical trial activities based upon estimates of the services received and related expenses incurred that have yet to be invoiced by the Clinical Research Organizations ("CROs"), professional service providers, and other vendors providing clinical trial services (collectively, the “service providers”). We accrue costs based on estimated work completed in accordance with agreements established with our service providers. We determine the estimated costs through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trial activities.

Recent Accounting Pronouncements

See Item 8. Financial Statements—Note 2 Basis of Presentation and Summary of Significant Accounting Policies in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.

Results of Operations

Years Ended December 31, 2021 and 2020

Revenues

Our total revenues were $359,000 and $366,000 for the years ended December 31, 2021 and 2020, respectively. Revenues are from our sales-based or usage-based royalties on other intellectual property licenses, unrelated to onvansertib. Revenue recognition of the royalty depends on the timing and overall sales activities of the licensees.

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Research and Development Expenses

Research and development expenses consisted of the following:

Research and development expenses increased by $6.1 million to $17.4 million for the year ended December 31, 2021 from $11.2 million for the year ended December 31, 2020. The overall increase in research and development expenses was primarily due to costs associated with clinical programs and outside service costs for three ongoing clinical trials related to the development of our lead drug candidate, onvansertib. Facilities costs increased due to amending our operating lease. Stock based compensation costs increased primarily due to new grants issued during 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consisted of the following:

Selling, general and administrative expenses increased by $3.6 million to $11.8 million for the year ended December 31, 2021, from $8.2 million for the year ended December 31, 2020. The significant components of the increase were outside services and stock-based compensation. The increase in outside services is primarily related to strategic valuation consulting related to our lead drug candidate, onvansertib. Outside services and professional fees also increased due to legal expenses related to the expansion of our patent portfolio and recruiting fees related to hiring of key employees and directors. The increase in stock-based compensation is primarily due to additional stock option grants to employees and directors during the period and the modification of stock option grants for departing directors in June 2021.

Change in Fair Value of Derivative Financial Instruments—Warrants

We have issued warrants to purchase shares of our common stock that are accounted for as derivative liabilities. As of December 31, 2021, the derivative financial instruments—warrants liabilities related to securities issued were revalued to $0, resulting in a decrease in fair value of $285,000 from December 31, 2020 based primarily upon the fluctuation in our stock price, as well as the decrease in the remaining life of the warrants. The change in value upon remeasurement at December 31, 2021 was recorded as a gain from the change in fair value of derivative financial instruments—warrants in the statement of operations.

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Net Loss

Net loss and per share amounts were as follows:

The increase of $5.7 million in net loss attributable to common shareholders was primarily the result of an increase in operating expenses, offset by a decrease in deemed dividend on preferred stock for the year ended December 31, 2021 compared to the same period in the prior year. The $0.35 decrease in basic and diluted net loss per share was impacted by the increase in net loss attributable to shareholders and by the increase in weighted average shares outstanding resulting primarily from the issuance of approximately 5.2 million shares of common stock during the twelve months ended December 31, 2021.

Liquidity and Capital Resources

The COVID-19 pandemic in the United States has caused business disruptions. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, and impact on our clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. The economic effects of the outbreak could also have an adverse effect on our ability to raise additional capital. At this point, the extent to which COVID-19 may impact our future financial condition or results of operations is uncertain. There has not been a material impact on our financial statements for the twelve months ended December 31, 2021.

As of December 31, 2021, we had $11.9 million in cash and cash equivalents and $128.9 million in short-term investments. Net cash used in operating activities for the year ended December 31, 2021 was $23.0 million, compared to $16.3 million for the year ended December 31, 2020. Our use of cash was primarily a result of the net loss of $28.3 million for the year ended December 31, 2021, adjusted for non-cash items mainly related to stock-based compensation of $3.2 million, release of clinical trial funding commitment of $2.0 million, and depreciation of $0.5 million. The net change in our operating assets and liabilities was $1.8 million increasing cash used in operations. At our current and anticipated level of operating loss, we expect to continue to incur an operating cash outflow for the next several years.

Net cash used by investing activities was $131.4 million and $0.2 million for the years ended December 31, 2021 and 2020, respectively. Investing activities during the year ended December 31, 2021 were primarily related to $131.2 of net purchases of marketable securities. Investing activities during the year ending December 31, 2020 primarily consisted of the purchase of capital equipment.

Net cash provided by financing activities was $35.5 million during the year ended December 31, 2021, compared to $137.3 million provided in financing activities during the year ended December 31, 2020. Financing activities during the year ended December 31, 2021 related primarily to sales of Common Stock and proceeds from exercise of warrants. Financing activities during the year ended December 31, 2020 related primarily to sales of common stock, preferred stock, warrants and proceeds from exercise of warrants.

As of December 31, 2021 and 2020, we had working capital of $139.6 million and $127.2 million, respectively. The increase in working capital is primarily due to the increase in cash and cash equivalents from financing activities during the year ended December 31, 2021.

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We have incurred net losses since our inception and have negative operating cash flows. As of December 31, 2021, we had $140.8 million in cash, cash equivalents and short-term investments and we believe we have sufficient cash to meet our funding requirements for at least the next 12 months following the issuance date of these financial statements.

For the foreseeable future, we expect to continue to incur losses and require additional capital to further advance our clinical trial programs and support our other operations. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we can raise additional funds by issuing equity securities, our stockholders may experience additional dilution. The economic effects of COVID-19 could also have an adverse effect on our ability to raise additional capital.

Our working capital requirements will depend upon numerous factors including but not limited to the nature, cost and timing of our research and development programs. To date, our sources of cash have been primarily limited to the sale of equity securities. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates, all of which may have a material adverse impact on our operations. We may also be required to (i) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (ii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on unfavorable terms. We are evaluating all options to raise additional capital, increase revenue, as well as reduce costs, in an effort to strengthen our liquidity position, which may include the following: (1) Raising capital through public and private equity offerings; (2) Introducing operation and business development initiatives to bring in new revenue streams; (3) Reducing operating costs by identifying internal synergies; and (4) Engaging in strategic partnerships. We continually assess our spending plans to effectively and efficiently address our liquidity needs.