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XORTX Therapeutics (XRTX) - 2023 Q4 - Annual Report

Part I Identity of Directors, Senior Management and Advisers This section identifies key individuals in leadership and names Smythe LLP as the company's auditor since 2018 - The company's leadership includes Allen Davidoff as President & CEO, James Fairbairn as CFO, and Anthony J. Giovinazzo as Non-Executive Chair41 - Smythe LLP, based in Vancouver, Canada, has served as the company's auditor since 201843 Key Information This section details significant financial, business development, commercialization, securities, third-party dependence, and intellectual property risks Risk Factors The company faces substantial financial, operational, commercialization, and intellectual property risks, requiring significant additional funding Historical Net Losses | Fiscal Year | Net Loss ($) | | :--- | :--- | | 2023 | 2,158,065 | | 2022 | 7,718,882 | | 2021 | 1,579,274 | - As of December 31, 2023, the company's accumulated deficit was approximately $17,854,90751 - The company has no products approved for commercial sale and has not generated any revenue from product sales to date50 - The company plans to utilize the 505(b)(2) NDA pathway for future marketing applications, which relies on FDA's prior findings for an approved product; rejection could increase time and resources for approval8788 Information on the Company This section provides a comprehensive overview of XORTX Therapeutics, detailing its history, strategy, product pipeline, and regulatory landscape History and Development of the Company XORTX Therapeutics Inc. was formed in 2018, underwent share consolidations for Nasdaq compliance, and recently raised CAD $2.7 million - In 2021, the company completed a 1-for-11.74 share consolidation to qualify for its Nasdaq listing and closed its US IPO, raising approximately USD $12 million259260 - In November 2023, the company executed a 1-for-9 share consolidation to regain compliance with the Nasdaq's minimum bid price requirement299302 - In early 2024, the company raised approximately CAD $2.7 million through a non-brokered offering and proposed to reprice over 1 million outstanding warrants to an exercise price of $5.00244245246 - Key milestones in 2023 included receiving U.S. Orphan Drug Designation (ODD) for the XRx-008 program for ADPKD and aligning with the FDA on endpoints for a Phase 3 trial, making the program eligible for accelerated approval248 Business Overview XORTX is a late clinical-stage biotech developing kidney disease therapies using proprietary oxypurinol formulations and a 505(b)(2) pathway Product Candidate Pipeline | Product Candidate | Indication | Development Stage | | :--- | :--- | :--- | | XRx-008 | Autosomal Dominant Polycystic Kidney Disease (ADPKD) | Pre-Phase 3 Registration Trial | | XRx-101 | Acute Kidney Injury (AKI) in Respiratory Virus Infections | Advancing toward Phase 3 | | XRx-225 | Type 2 Diabetic Nephropathy (T2DN) | Non-clinical Stage | - The company's core strategy is to develop proprietary formulations of oxypurinol, a uric acid lowering agent, to treat various kidney diseases308 - XORTX plans to use the FDA's 505(b)(2) pathway, which allows reliance on previous clinical studies of the active ingredient (oxypurinol), potentially accelerating the approval process for its XRx-008 and XRx-101 programs324349 - The company holds granted U.S. and European patents for its proprietary formulations of xanthine oxidase inhibitors and has licensed patents covering the use of uric acid lowering agents for insulin resistance and diabetic nephropathy322 Organizational Structure The company maintains a simple organizational structure, comprising XORTX Therapeutics Inc. and its wholly owned subsidiary, XORTX Pharma Corp - XORTX Therapeutics Inc. has one wholly owned subsidiary, XORTX Pharma Corp474 Operating and Financial Review and Prospects This section refers to the Management's Discussion and Analysis (MD&A) for the year ended December 31, 2023, included as Exhibit 15.1 - The Management's Discussion and Analysis (MD&A) for the fiscal year ended December 31, 2023, is provided as Exhibit 15.1 in this Annual Report476 Directors, Senior Management and Employees This section details the company's leadership, compensation practices, board structure, and share ownership, including executive contracts and committee roles Compensation Executive compensation includes salary, bonuses, and stock options, with CEO Allen Davidoff's 2023 total compensation at $378,436 2023 Named Executive Officer Compensation (US$) | Name and Position | Salary | Stock Option Value | Total Compensation | | :--- | :--- | :--- | :--- | | Allen Davidoff, CEO | 337,794 | 40,642 | 378,436 | | James Fairbairn, CFO | 76,201 | — | 76,201 | | Stacy Evans, CBO | 280,000 | — | 280,000 | | Dr. Stephen Haworth, CMO | 200,229 | 15,041 | 215,270 | - Non-executive directors received CAD $3,000 per quarter and committee meeting fees in 2023; the Board Chair received annual compensation of $125,000500 Board Practices Key executives have employment agreements, and the Board operates with Audit, Compensation, and Corporate Governance & Nominating committees - CEO Allen Davidoff's employment agreement provides for a lump sum payment equal to 12 times his monthly base salary upon termination without cause or following a change of control508 - The Board of Directors has three primary committees: Audit, Compensation, and Corporate Governance & Nominating, each composed of independent directors513521523 Share Ownership As of April 30, 2024, Armistice Capital, LLC holds 5.9% of shares, while all executive officers and directors collectively own 6.4% Beneficial Share Ownership (as of April 30, 2024) | Name / Group | Percentage of Shares Beneficially Owned | | :--- | :--- | | Armistice Capital, LLC | 5.9% | | All executive officers and directors as a group (10 persons) | 6.4% | - The company's Stock Option Plan allows for the issuance of options up to an aggregate of 10% of the issued and outstanding Common Shares533 Major Shareholders and Related Party Transactions Armistice Capital is a major shareholder with future offering participation rights, and related party transactions primarily involve management compensation - Armistice Capital is a major shareholder and has the right to participate in future offerings for up to 50% of the offering size, until 18 months from October 7, 2022538540 Management Compensation (US$) | Year Ended Dec 31 | Short-term employee benefits | Directors' fees | Share-based payments | Total | | :--- | :--- | :--- | :--- | :--- | | 2023 | 974,240 | 182,675 | 77,779 | 1,234,694 | | 2022 | 880,387 | 127,053 | 404,573 | 1,412,013 | | 2021 | 442,932 | 51,280 | 276,436 | 771,188 | Financial Information This section confirms audited consolidated financial statements for 2021-2023 are in Item 18, with no significant changes since December 31, 2023 - The audited consolidated financial statements for the years ended December 31, 2023, 2022, and 2021 are located in Item 18546 - There have been no significant changes since December 31, 2023, that are not disclosed elsewhere in the report547 Additional Information This section details the company's corporate structure, material contracts, and U.S. federal income tax implications, including its PFIC status for 2023 - The company's authorized share capital consists of an unlimited number of common shares without par value; as of the report date, 2,903,565 common shares were issued and outstanding561 - The company believes it was classified as a Passive Foreign Investment Company (PFIC) for the taxable year ended December 31, 2023, and may be a PFIC for 2024, which has adverse U.S. federal income tax consequences for U.S. shareholders170594 - The company has not paid any dividends since its inception and does not anticipate paying any in the foreseeable future, intending to retain earnings for development and growth632 Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to credit, liquidity, and market risks, including foreign currency fluctuations from Canadian Dollar assets Financial Position Summary (US$) | Instrument | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | 3,447,665 | 10,434,196 | | Accounts payable and accrued liabilities | 283,428 | 1,445,213 | | Derivative warrant liability | 531,000 | 3,854,403 | - As of December 31, 2023, the company had a net exposure of ($136,441) to Canadian Dollar currency fluctuations; a 10% change in the CAD/USD exchange rate would affect net earnings by approximately $13,664645 Part II Material Modifications to the Rights of Security Holders and Use of Proceeds In October 2022, the company reduced warrant exercise prices, and net proceeds from the 2021 US IPO have been fully utilized for operations and R&D - In October 2022, the exercise price for certain warrants held by specific investors was reduced from US$4.77 to US$1.17 per share653654 - The net proceeds from the 2021 US IPO have been fully utilized for general corporate purposes, including R&D and clinical trial support657 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no auditor attestation required - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report658 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023663 - As an "emerging growth company," XORTX is exempt from the requirement to have its independent auditor provide an attestation report on internal controls over financial reporting664 Corporate Governance and Other Matters This section covers corporate governance, including the audit committee financial expert, Code of Conduct, principal accountant fees, and foreign private issuer quorum practices - The Board of Directors has determined that Paul Van Damme is an "audit committee financial expert"666 Principal Accountant Fees (2023 vs 2022) | Service Type | 2023 ($) | 2022 ($) | | :--- | :--- | :--- | | Audit Fees | 80,126 | 61,459 | | Audit-Related Fees | 528 | 530 | | Tax Fees | 3,090 | 3,846 | | Other Fees | 8,793 | 7,307 | | Total | 92,536 | 73,142 | - As a foreign private issuer, the company follows its home country practice for shareholder meeting quorum, which requires two shareholders present in person or by proxy, differing from the Nasdaq requirement of 33 1/3% of outstanding shares679 Part III Financial Statements This section presents audited consolidated financial statements for 2021-2023, showing a reduced net loss in 2023 due to fair value adjustments and lower R&D expenses Consolidated Statements of Financial Position Total assets decreased from $12.37 million to $5.47 million in 2023, driven by reduced cash and liabilities, leading to lower shareholders' equity Consolidated Balance Sheet Highlights (US$) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | 5,467,964 | 12,374,026 | | Cash | 3,447,665 | 10,434,196 | | Total Liabilities | 825,938 | 5,377,215 | | Derivative warrant liability | 531,000 | 3,854,403 | | Total Shareholders' Equity | 4,642,026 | 6,996,811 | Consolidated Statements of Comprehensive Loss The company reported a net loss of $2.16 million in 2023, a significant reduction from $7.72 million in 2022, driven by fair value adjustments and lower R&D expenses Consolidated Income Statement Highlights (US$) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Research and development | (2,418,715) | (6,761,818) | (677,576) | | Fair value adjustment on derivative warrant liability | 3,641,403 | 3,396,137 | 2,636,391 | | Net loss for the year | (2,158,065) | (7,718,882) | (1,579,274) | | Basic and diluted loss per common share | (1.09) | (5.22) | (1.44) | Consolidated Statements of Cash Flows Net cash decreased by $6.99 million in 2023, ending at $3.45 million, primarily due to cash used in operations and a shift from financing inflows to outflows Consolidated Cash Flow Highlights (US$) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | (6,583,165) | (8,963,557) | | Net cash used in investing activities | (46,363) | (45,701) | | Net cash (used in) provided by financing activities | (361,044) | 4,709,739 | | (Decrease) increase in cash | (6,986,531) | (4,435,665) | | Cash, end of year | 3,447,665 | 10,434,196 |