Kazia Therapeutics(KZIA) - 2020 Q4 - Annual Report

Key Information This section presents selected financial data and details the company's significant financial, operational, and intellectual property risks Selected Financial Data Selected financial data for fiscal years 2016-2020, prepared under IFRS in A$, shows consistent net losses increasing to A$12.5 million in 2020 Consolidated Financial Summary (2018-2020, A$'000) | Financial Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Profit or Loss | | | | | Revenue and other income | 1,061 | 1,565 | 13,108 | | Loss after income tax expense | (12,467) | (10,270) | (6,039) | | Basic loss per share (cents) | (17.07) | (17.86) | (12.48) | | Financial Position | | | | | Cash and cash equivalents | 8,764 | 5,434 | 5,956 | | Total assets | 23,063 | 21,177 | 28,175 | | Net assets/Equity | 14,125 | 14,195 | 19,242 | - The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB[25] Risk Factors The company faces significant financial, operational, developmental, commercial, intellectual property, and securities-related risks Financial and Capital Risks The company faces substantial financial and capital risks, including a history of net losses and dependence on future capital raising - The company has incurred significant net losses, including A$12.5 million for the fiscal year ended June 30, 2020, and anticipates continued losses for the foreseeable future[31] - As of June 30, 2020, accumulated losses totaled A$36.2 million[32] - Existing cash and cash equivalents are expected to be sufficient to fund R&D activities until approximately the first quarter of calendar 2022, making the company's going concern status dependent on its ability to raise more capital[41] - The company's R&D tax rebate from the Australian government decreased from A$1.4 million in fiscal 2019 to A$1.0 million in fiscal 2020, with further declines expected as more R&D expenditure occurs in the U.S[44][159] Business Operation Risks Operational risks include reliance on key personnel, IT system vulnerabilities, and uncertainty regarding the utilization of carried-forward tax losses - The company's success is highly dependent on the continued service of key management and specialized technical personnel[51] - Internal and third-party IT systems are vulnerable to cyber-attacks and other failures, which could disrupt product development programs and lead to data loss[55] - The ability to utilize substantial carried-forward tax losses is uncertain, as it depends on meeting either the continuity of ownership test (COT) or the same business test (SBT) under Australian law[56][57] Product Development and Regulatory Risks Significant risks exist in product development and regulatory approval, as preclinical success does not guarantee clinical trial outcomes or market exclusivity - The FDA granted Orphan Drug Designation for Cantrixil in ovarian cancer (April 2015), paxalisib in glioblastoma (February 2018), and paxalisib in malignant glioma (August 2020)[60] - There is a significant risk that positive results from preclinical studies may not be replicated in human clinical trials, a common setback in the biotechnology industry[62] Commercialization Risks Commercialization risks include challenges in securing partnerships, achieving market acceptance, and competing with larger, better-resourced companies - The company must establish contractual arrangements for manufacturing, marketing, and distribution, but there is no assurance of negotiating commercially acceptable agreements[65][66] - The company faces competition from large pharmaceutical and biotechnology companies that have significantly greater capital resources, larger R&D staff, and more experience in drug development and marketing[69] Intellectual Property Risks Intellectual property risks involve challenges in patent protection, potential invalidation of patents, and difficulties in enforcing IP rights internationally - The company relies on a combination of patents, trade secret protection, and confidentiality agreements to protect its product candidates[70] - Patent applications may fail to issue, or issued patents may be invalidated through legal challenges, which could impair the company's ability to prevent competition[71] - Enforcing patent rights in certain countries, particularly developing ones, is difficult and costly, which could allow competitors to infringe on the company's IP[77] Third-Party Reliance Risks The company's reliance on third parties for preclinical, clinical, and manufacturing services poses significant operational and cost control risks - The company relies on third parties, including laboratories, investigators, and CROs, to conduct all of its preclinical and clinical studies[78] - Manufacturing of drug candidates is outsourced to third parties, meaning the company has no direct control over production costs, which could increase and adversely affect future profitability[80] Securities Risks Securities risks include high stock price volatility, potential NASDAQ delisting, and adverse U.S. tax consequences from PFIC classification - The trading price of the company's ordinary shares and ADSs is highly volatile and subject to broad market fluctuations[82] - There is a risk of being classified as a Passive Foreign Investment Company (PFIC), which would result in adverse U.S. federal income tax consequences for U.S. holders[87][311] - The company is subject to Australian takeover laws, which prohibit acquisitions that would lead to a person's voting power exceeding 20%, potentially discouraging takeover offers[89] Company Information This section details the company's history, business operations, drug pipeline, regulatory environment, recent developments, and organizational structure History and Development Kazia Therapeutics Limited, an Australian oncology biotechnology company, is listed on ASX and NASDAQ via ADSs - Kazia Therapeutics Limited was incorporated in March 1994 in New South Wales, Australia[90] - The company's Ordinary Shares are listed on the ASX under 'KZA', and its ADSs trade on NASDAQ under 'KZIA', with each ADS representing ten Ordinary Shares[92] Business Overview Kazia is an oncology-focused biotechnology company developing paxalisib for brain cancers and Cantrixil for ovarian cancer Drug Pipeline and Clinical Trials The company's drug pipeline includes paxalisib for brain cancers and Cantrixil for ovarian cancer, both in clinical trials with promising interim results - The lead drug candidate is paxalisib (formerly GDC-0084), a small molecule inhibitor of the PI3K/Akt/mTOR pathway, being developed for glioblastoma (GBM) and other brain cancers[93][95] - Interim data from the Phase II trial of paxalisib in GBM showed a median overall survival (OS) of 17.7 months, which compares favorably to the 12.7 months associated with the existing standard of care, temozolomide[99] - In August 2020, the FDA awarded paxalisib Fast Track Designation for glioblastoma and Rare Pediatric Disease Designation for DIPG, a rare childhood brain cancer[95] - The company's second clinical asset, Cantrixil, is in a Phase I trial for ovarian cancer, which reported an overall response rate (ORR) of 19% in an interim analysis[94][110] - The company has adopted the GBM AGILE platform study as the pivotal trial for registration of paxalisib, with recruitment expected to commence in late 2020[105] Regulatory Environment The company's products are subject to stringent regulatory approval processes by authorities like the FDA, TGA, and EMA - In the U.S., the FDA drug approval process generally involves preclinical testing, submission of an IND application, and successful completion of Phase I, II, and III clinical trials before an NDA can be filed[124][131] - In Australia, pharmaceutical products must be approved by the Therapeutic Goods Administration (TGA) and included in the Australian Register of Therapeutic Goods (ARTG)[113] - In the European Union, marketing authorizations can be obtained through a centralized procedure via the European Medicines Agency (EMA) or through national procedures[140] Recent Developments (Fiscal 2020) Fiscal 2020 saw increased focus on clinical programs, with significant capital raised to fund the pivotal GBM AGILE study - Raised A$3.7 million (net) in November 2019 and A$8.4 million (net) in April/May 2020 through share placements and a Share Purchase Plan[146] - Post-balance date, in October 2020, the company raised an additional A$23 million (net) to fund its participation in the GBM AGILE study[147] - Cash outlay for clinical programs increased to 72% of the total cash outlay for fiscal 2020, up from 63% in the prior year, reflecting the company's strategic focus[149] Organizational Structure Kazia Therapeutics Limited operates as an Australian parent company with four wholly-owned subsidiaries in Australia and the United States Company Subsidiaries | Name | Country of incorporation | | :--- | :--- | | Kazia Laboratories Pty Ltd | Australia | | Kazia Research Pty Ltd | Australia | | Kazia Therapeutics Inc. | United States (Delaware) | | Glioblast Pty Ltd | Australia | Operating and Financial Review This section reviews the company's operating results, liquidity, capital resources, R&D activities, and future outlook Operating Results Net loss increased to A$12.5 million in fiscal 2020, driven by higher R&D expenses and a reduced R&D tax rebate - Research and development expenses increased by 47% to A$9.5 million in fiscal 2020 from A$6.5 million in fiscal 2019, largely due to the paxalisib glioblastoma trial[161] - General and administrative costs remained stable, decreasing slightly by 3% to A$3.7 million in fiscal 2020[162] - The net loss after tax increased to A$12.5 million in fiscal 2020, compared to A$10.3 million in fiscal 2019, due to higher R&D spending and a lower R&D tax rebate[163] - The R&D tax rebate decreased from A$1.4 million in FY2019 to A$1.0 million in FY2020 because a majority of R&D expenditure occurred in the United States and was therefore ineligible[159] Liquidity and Capital Resources As of June 30, 2020, the company held A$8.8 million in cash, funding operations primarily through equity offerings and grants - As of June 30, 2020, the company had cash and cash equivalents of A$8.8 million and no borrowings[166][167] Cash Flow Summary (A$ thousands) | (in A$ thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (8,809) | (6,714) | (8,661) | | Net cash from investing activities | — | 2,359 | 150 | | Net cash from financing activities | 12,139 | 3,815 | — | - Financing activities in fiscal 2020 and 2019 consisted of private placements of ordinary shares and Share Purchase Plans, raising A$12.1 million and A$3.8 million, respectively[172] Research and Development R&D expenses, the company's primary cost, increased to A$9.5 million in fiscal 2020 and are expected to continue rising - R&D costs are expensed as incurred, as development programs are not yet considered technically or commercially feasible to justify capitalization[182] R&D Expenditure (A$ million) | Fiscal Year | R&D Expense | | :--- | :--- | | 2020 | A$9.5 million | | 2019 | A$6.5 million | | 2018 | A$9.8 million | Trend Information and Outlook Fiscal 2021 outlook includes final clinical trial results for paxalisib and Cantrixil, and commencement of the GBM AGILE pivotal study - Key expectations for fiscal 2021 include: - Final results from the Phase II paxalisib (glioblastoma) trial - Final results from the Phase I Cantrixil (ovarian cancer) trial - Interim results from the Phase I paxalisib (DIPG) trial - Commencement of recruitment for the GBM AGILE pivotal study of paxalisib[186][189] Directors, Senior Management and Employees This section covers compensation, board practices, employee details, and share ownership for directors and senior management Compensation Executive compensation includes fixed salary, cash bonuses, and ESOP, with total KMP compensation at A$1.65 million in fiscal 2020 - The executive remuneration framework consists of three components: fixed remuneration, short-term cash bonuses, and share-based payments via the ESOP[198] FY2020 Key Management Personnel Compensation (A$) | Name | Title | Cash Salary & Fees | Cash Bonus | Share-based payments | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | I Ross | Chairman | 135,272 | — | — | 135,272 | | B Carmine | Non-Exec Director | 75,000 | — | — | 82,125 | | S Coffey | Non-Exec Director | 75,000 | — | — | 82,125 | | J Garner | CEO | 473,000 | 180,000 | 206,465 | 944,923 | | G Heaton | Director of Finance | 195,000 | 17,500 | 10,745 | 250,708 | | K Hill | Company Secretary | 127,875 | 15,000 | 12,826 | 155,701 | | Total | | 1,081,147 | 212,500 | 230,036 | 1,650,854 | - During fiscal 2020, the company issued 1,450,000 share options under its ESOP, with 1,300,000 granted to Key Management Personnel[204] Board Practices The Board of Directors, comprising four members with three independent non-executives, oversees governance through two key committees - The Board consists of four directors, three of whom are non-executive and considered independent: Iain Ross (Chairman), Bryce Carmine, and Steven Coffey[223][229] - The Board has two key committees: the Audit, Risk and Governance Committee and the Remuneration and Nomination Committee[230] - Both committees are composed of the three independent directors, with Steven Coffey chairing the Audit Committee and Bryce Carmine chairing the Remuneration Committee[232][234] Employees As of June 30, 2020, the company maintained 5.3 FTE employees, stable across the past three fiscal years Full-Time Equivalent Employees by Function | Category of Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Research and Development | 3.6 | 3.6 | 3.6 | | Finance and Administration | 1.7 | 1.7 | 1.7 | | Total | 5.3 | 5.3 | 5.3 | Share Ownership Directors and KMP collectively held 1,707,768 ordinary shares and 1,762,000 options at the end of fiscal 2020 - At the end of fiscal 2020, Directors and KMP held a total of 1,707,768 ordinary shares[240] - At the end of fiscal 2020, Directors and KMP held a total of 1,762,000 options over ordinary shares[241] Major Shareholders and Related Party Transactions This section identifies major shareholders as of October 2020 and confirms no significant related party transactions in fiscal 2020 Major Shareholders (as of October 14, 2020) | 5% or greater shareholders | Ordinary shares beneficially owned | % | | :--- | :--- | :--- | | Hishenk Pty Limited and associated entities | 18,570,000 | 16.1% | | Platinum International Healthcare Fund | 11,356,760 | 9.9% | | Quest Asset Partners Pty Ltd | 7,215,790 | 6.3% | - As of October 12, 2020, 31,302,996 ordinary shares (27.1% of outstanding shares) were held in the form of ADSs[244] - The company did not enter into any significant transactions or loans with related parties during fiscal 2020[246] Financial Information This section references full financial statements, notes an ongoing IP legal proceeding, and confirms no dividends paid - The company is engaged in an ongoing legal proceeding to prosecute its Intellectual Property (IP) rights against an Austrian company, APOtrend, with the outcome and potential financial impact currently uncertain[249] - No dividends were paid, recommended, or declared during the fiscal years 2020, 2019, or 2018[250] Additional Information This section provides additional details on material contracts and taxation matters Material Contracts Material contracts include the 2016 paxalisib licensing agreement with Genentech and the 2020 GBM AGILE study agreement with GCAR - In October 2016, the company entered into a worldwide licensing agreement with Genentech for paxalisib (GDC-0084), paying an upfront fee of US$5 million, with additional performance-related milestones and royalties[285] - In October 2020, the company entered into an agreement with the Global Coalition for Adaptive Research (GCAR) to include paxalisib in the GBM AGILE pivotal study, which included an upfront payment of US$5 million[290] Taxation This section outlines U.S. and Australian tax implications for shareholders, including potential PFIC classification and dividend/capital gains tax rules - U.S. Tax Risk: The company believes it may be treated as a Passive Foreign Investment Company (PFIC) for its 2020 taxable year, which could result in adverse U.S. federal income tax consequences for U.S. holders[311] - Australian Dividend Tax: Unfranked dividends paid to non-Australian shareholders are subject to withholding tax, which is generally limited to 15% for U.S. residents under the current tax treaty[320] - Australian Capital Gains Tax: Non-Australian shareholders are generally not subject to Australian capital gains tax on the sale of shares unless they hold 10% or more of the company's issued capital[322] Market Risk Disclosures The company's primary market risks are interest rate and foreign currency exposure, managed through natural hedging without derivatives - The company is exposed to interest rate risk on its cash investments and foreign currency risk, primarily with respect to the U.S. dollar[336][340] - Foreign exchange risk is managed through natural hedging; the company does not currently use derivative financial instruments for this purpose[341] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[353] - Based on an evaluation using the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of June 30, 2020[354] Corporate Governance This section details corporate governance, including an audit committee financial expert, a Code of Ethics, and NASDAQ exemptions for foreign private issuers - The Board of Directors has determined that Steven Coffey qualifies as an "audit committee financial expert"[360] - The company has adopted a Code of Ethics and Business Conduct applicable to all employees and directors[361] - As a foreign private issuer, Kazia is exempt from certain NASDAQ corporate governance standards, such as shareholder quorum requirements, and follows Australian practices instead[372][375] Financial Statements This section presents the company's audited consolidated financial statements for fiscal years 2018-2020, prepared under IFRS Consolidated Statement of Profit or Loss The company reported a net loss of A$12.47 million in fiscal 2020, primarily due to increased research and development expenses Key Profit & Loss Items (A$'000) | Item | 2020 | 2019 | | :--- | :--- | :--- | | Research and development expense | (9,494) | (6,475) | | General and administrative expense | (3,690) | (3,785) | | Loss before income tax | (12,765) | (10,568) | | Income tax benefit | 298 | 298 | | Loss after income tax | (12,467) | (10,270) | - Basic and diluted loss per share for fiscal 2020 was (17.07) cents, compared to (17.86) cents in fiscal 2019[394] Consolidated Statement of Financial Position As of June 30, 2020, total assets were A$23.06 million, with A$8.76 million in cash and A$12.41 million in intangibles Key Balance Sheet Items (A$'000) | Item | 30 June 2020 | 30 June 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 8,764 | 5,434 | | Intangibles | 12,410 | 13,494 | | Total Assets | 23,063 | 21,177 | | Liabilities | | | | Total current liabilities | 5,067 | 1,900 | | Total non-current liabilities | 3,871 | 5,082 | | Total Liabilities | 8,938 | 6,982 | | Net Assets (Equity) | 14,125 | 14,195 | Consolidated Statement of Cash Flows Fiscal 2020 saw A$8.81 million cash used in operations, offset by A$12.14 million from financing, increasing cash to A$8.76 million Cash Flow Summary (A$'000) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | (8,810) | (6,714) | | Net cash from investing activities | — | 2,359 | | Net cash from financing activities | 12,139 | 3,816 | | Net increase/(decrease) in cash | 3,329 | (539) | | Cash at end of year | 8,764 | 5,434 |