UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-36208
TetraLogic Pharmaceuticals Corporation
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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42-1604756
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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343 Phoenixville Pike
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Malvern, Pennsylvania
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19355
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(Address of Principal Executive Offices)
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(Zip Code)
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(610) 889-9900
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting company ☒
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
The number of shares outstanding of the registrant’s common stock, $0.0001 par value per share, as of October 30, 2015 was 24,769,083.
Cautionary Note Regarding Forward-Looking Statements and Industry Data
In addition to historical facts or statements of current condition, this report and the documents into which this report is and will be incorporated contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may, in some cases, use terms such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “projects,” “intends,” “potential,” “may,” “could,” “might,” “will,” “should,” “approximately” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements appear in a number of places throughout this report and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ability to develop and commercialize our product candidates, birinapant and suberohydroxamic acid 4-methoxycarbonyl phenyl ester, or SHAPE; status, timing and results of pre-clinical studies and clinical trials; the potential benefits of our product candidates; the timing of seeking regulatory approval of our product candidates; our ability to obtain and maintain regulatory approval for our product candidates; our estimates of expenses and future revenues and profitability; our estimates regarding our capital requirements and our needs for additional financing; difficulties with increasing the size and complexity of our organization to assist with the expansion of our operations; our plans to develop and market our product candidates and the timing of our development programs; our estimates of the size of the potential markets for our product candidates; our selection and licensing of our product candidates; our ability to attract collaborators with acceptable development, regulatory and commercial expertise; the benefits to be derived from corporate collaborations, license agreements, and other collaborative or acquisition efforts, including those relating to the development and commercialization of our product candidates; sources of revenues and anticipated revenues, including contributions from corporate collaborations, license agreements, and other collaborative efforts for the development and commercialization of products; our ability to create an effective sales and marketing infrastructure if we elect to market and sell our product candidates directly; the rate and degree of market acceptance of our product candidates; the timing and amount or reimbursement for our product candidates; the success of other competing therapies that may become available; the manufacturing capacity for our product candidates; our ability to manage the growth and size of our organization as a result of our acquisition of Shape Pharmaceuticals, Inc., or Shape Pharmaceuticals; our intellectual property position; our ability to maintain and protect our intellectual property rights; our results of operations; financial condition, liquidity, prospects, and growth and strategies; the industry in which we operate; the trends that may affect the industry or us; the market price of our stock; our ability to pay existing indebtedness; the effect of our indebtedness on our business and liquidity; the decrease in the market price of our common stock from the issuance of additional shares of or instruments convertible into common stock; the effect on our financial results from the conversion of our convertible notes; the dilution of existing stockholders from the conversion of our convertible notes: and our ability to use our net operating loss carryforwards and certain other tax attributes to offset future taxable income.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change, and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate are consistent with the forward-looking statements contained in this report, they may not be predictive of results or developments in future periods.
Actual results could differ materially from our forward-looking statements due to a number of factors, including risks related to:
our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;
the success and timing of our pre-clinical studies and clinical trials;
the difficulties with increasing the size and complexity of our organization to assist with the expansion of our operations;
the potential that results of pre-clinical studies and clinical trials indicate birinapant or SHAPE is unsafe or ineffective;
our exposure to business disruptions;
our dependence on third parties in the conduct of our pre-clinical studies and clinical trials;
the difficulties and expenses associated with obtaining and maintaining regulatory approval of our product candidates, and the labeling under any approval we may obtain;
our plans and ability to develop and commercialize our product candidates;
our ability to acquire or license additional product candidates;
our failure to recruit or retain key scientific or management personnel or to retain our executive officers;
the size and growth of the potential markets for our product candidates, market acceptance of our product candidates and our ability to serve those markets;
legal and regulatory developments in the U.S. and foreign countries;
our ability to limit our exposure to product liability lawsuits;
our exposure to scrutiny and increased expenses as a result of being a public company;
the rate and degree of market acceptance of our product candidates;
obtaining and maintaining intellectual property protection for our product candidates and our proprietary technology;
the successful development of our commercialization capabilities, including sales and marketing capabilities;
recently enacted and future legislation regarding the healthcare system;
the success of competing therapies and products that are or become available;
our ability to acquire products or product candidates with acceptable economics;
our ability to raise additional capital;
our ability to pay existing indebtedness;
the decrease in the market price of our common stock from the issuance of additional shares of or instruments convertible into common stock;
the effect on our financial results from the conversion of our convertible notes; and
the dilution of existing stockholders from the conversion of our convertible notes.
Birinapant and SHAPE are investigational drugs undergoing clinical development and have not been approved by the U.S. Food and Drug Administration, or FDA, or submitted to the FDA for approval. Birinapant and SHAPE have not been, nor may ever be, approved by any regulatory agency or marketed anywhere in the world. Statements contained in this report should not be deemed to be promotional.
Any forward-looking statement that we make in this report speaks only as of the date of such statement, and, except as required by law, we undertake no obligation to update such statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
You should also read carefully the factors described in the “Risk Factors” section of this report and of our annual report on Form 10-K for the year ended December 31, 2014, or the Annual Report, to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all.
PART I — FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
TETRALOGIC PHARMACEUTICALS CORPORATION
CONSOLIDATED BALANCE SHEETS
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December 31,
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September 30,
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2014
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2015
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Assets
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(unaudited)
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Current assets:
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Cash and cash equivalents
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$
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13,073,137
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$
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15,909,751
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Short-term investments
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40,624,349
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13,627,943
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Deferred financing costs, short-term
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375,808
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346,458
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Prepaid expenses and other current assets
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1,784,069
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1,468,767
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Total current assets
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55,857,363
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31,352,919
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Property and equipment, net
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528,476
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465,451
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Intangible assets
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41,575,516
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41,575,516
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Goodwill
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16,902,466
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16,902,466
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Deferred financing costs, long-term
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1,299,674
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952,760
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Other assets
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2,127,551
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1,814,102
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Total assets
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$
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118,291,046
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$
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93,063,214
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Liabilities and stockholders’ equity
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Current liabilities:
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Accounts payable
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$
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1,138,470
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$
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621,761
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Accrued expenses
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3,727,784
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4,579,176
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Derivative liabilities
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256,027
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71,489
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Total current liabilities
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5,122,281
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5,272,426
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Convertible notes payable, net of discount
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28,979,342
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28,811,539
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Derivative liabilities
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2,400,000
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345,000
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Deferred taxes
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16,879,659
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16,879,659
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Contingent consideration and other liabilities
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31,507,588
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34,754,287
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Total liabilities
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84,888,870
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86,062,911
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Commitments and contingencies
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Stockholders’ equity (deficit):
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Preferred stock, $0.0001 par value; 25,000,000 shares authorized, none issued and outstanding
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—
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—
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Common stock, $0.0001 par value; 100,000,000 shares authorized, 22,334,901 and 24,769,083 shares issued and outstanding at December 31, 2014 and September 30, 2015, respectively
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2,234
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2,477
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Additional paid‑in capital
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159,308,307
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168,329,051
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Cumulative translation adjustment
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(69,031)
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(49,549)
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Cumulative unrealized gain (loss) on investments
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(8,117)
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1,528
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Accumulated deficit
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(125,831,217)
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(161,283,204)
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Total stockholders’ equity
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33,402,176
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7,000,303
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Total liabilities and stockholders’ equity
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$
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118,291,046
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$
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93,063,214
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See accompanying notes to consolidated financial statements.
TETRALOGIC PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2014
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2015
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2014
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2015
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Revenue
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$
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—
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$
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—
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$
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—
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$
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—
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Expenses:
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General and administrative
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2,623,538
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2,523,104
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8,136,735
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8,542,635
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Research and development
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5,968,181
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6,096,424
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13,955,119
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20,252,415
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Change in fair value of contingent consideration
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984,000
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1,123,000
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1,902,000
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3,252,000
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Total expenses
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9,575,719
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9,742,528
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23,993,854
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32,047,050
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Loss from operations
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(9,575,719)
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(9,742,528)
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(23,993,854)
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(32,047,050)
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Change in fair value of derivative liabilities
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1,799,501
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431,358
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1,637,381
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2,073,581
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Debt exchange expense
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—
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—
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—
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(818,541)
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Interest and other income
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41,375
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21,614
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72,571
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82,754
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Interest expense
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(1,595,275)
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(1,606,402)
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(1,734,721)
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(4,742,731)
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Net loss
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$
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(9,330,118)
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$
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(10,895,958)
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$
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(24,018,623)
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$
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(35,451,987)
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Per share information:
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Net loss per common share:
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Basic
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$
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(0.42)
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$
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(0.46)
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$
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(1.08)
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$
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(1.52)
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Diluted
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$
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(0.42)
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$
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(0.46)
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$
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(1.10)
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$
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(1.52)
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Weighted average shares outstanding:
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Basic
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22,307,138
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23,830,978
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22,280,232
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23,329,464
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Diluted
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22,364,231
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23,864,931
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22,344,129
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23,369,342
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Net loss
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$
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(9,330,118)
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$
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(10,895,958)
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$
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(24,018,623)
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$
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(35,451,987)
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Foreign currency gains/(losses)
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(41,626)
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(13,300)
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(39,004)
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19,482
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Unrealized gains/(losses) on available-for-sale securities
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1,635
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3,796
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(369)
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9,645
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Comprehensive loss
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$
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(9,370,109)
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$
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(10,905,462)
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$
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(24,057,996)
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$
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(35,422,860)
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See accompanying notes to consolidated financial statements.
TETRALOGIC PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Nine Months Ended September 30,
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2014
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2015
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Cash flows from operating activities
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Net loss
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$
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(24,018,623)
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$
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(35,451,987)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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83,823
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139,691
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Stock-based compensation expense
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2,486,477
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4,325,575
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Change in fair value of derivative liabilities
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(1,637,381)
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(2,073,581)
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Change in fair value of contingent consideration
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1,902,000
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3,252,000
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Non-cash interest expense
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711,165
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2,129,286
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Debt exchange expense
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—
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818,541
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Unrealized foreign currency loss
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—
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89,660
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Changes in operating assets and liabilities:
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Prepaid expenses and other assets
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(2,624,564)
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628,751
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Accounts payable, accrued expenses and other liabilities
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2,042,588
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445,460
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Net cash used in operating activities
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(21,054,515)
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(25,696,604)
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Cash flows from investing activities
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Purchase of property and equipment
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(405,179)
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(76,666)
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Restricted cash
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20,000
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—
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Acquisition of Shape Pharmaceuticals, net of cash acquired
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(12,847,803)
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|
—
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Purchase of short-term investments
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(63,427,188)
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(19,292,969)
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Sales and maturities of short-term investments
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15,322,731
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|
46,299,020
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Net cash provided by (used in) investing activities
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(61,337,439)
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26,929,385
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Cash flows from financing activities
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|
|
|
|
|
Proceeds from exercise of stock options and warrants
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|
168,667
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|
31,201
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|
Proceeds from convertible notes payable, net
|
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44,146,830
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|
|
—
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Retirement of convertible notes payable
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—
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(825,001)
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|
Proceeds from issuance of common stock, net
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|
|
—
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|
|
2,583,889
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|
Net cash provided by financing activities
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|
44,315,497
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|
|
1,790,089
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Effect of exchange rate changes on cash and cash equivalents
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(39,004)
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|
(186,256)
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Net increase (decrease) in cash and cash equivalents
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|
(38,115,461)
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|
|
2,836,614
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Cash and cash equivalents—beginning of period
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|
55,135,508
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|
|
13,073,137
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|
Cash and cash equivalents—end of period
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|
$
|
17,020,047
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|
$
|
15,909,751
|
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Supplemental disclosure of cash flow information
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|
|
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|
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Noncash investing and financing activities:
|
|
|
|
|
|
|
|
Conversion of convertible notes to common stock
|
|
$
|
—
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|
$
|
2,080,292
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|
Cash paid for interest
|
|
$
|
—
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|
$
|
1,750,000
|
|
See accompanying notes to consolidated financial statements.
TETRALOGIC PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited)
1. Organization and Description of the Business
We are a clinical-stage biopharmaceutical company focused on discovering and developing novel small molecule therapeutics in oncology and infectious diseases. We have two clinical-stage product candidates in development: birinapant and suberohydroxamic acid 4-methoxycarbonyl phenyl ester (SHAPE). Our operations to date have been directed primarily toward developing business strategies, raising capital, research and development activities, conducting pre-clinical testing and human clinical trials of our product candidates and recruiting personnel.
Liquidity
At September 30, 2015, we had working capital of $26.1 million and cash, cash equivalents and investments of $29.5 million. We have not generated any product revenues and have not yet achieved profitable operations. There is no assurance that profitable operations will ever be achieved, and if achieved, could be sustained on a continuing basis. In addition, development activities, clinical and pre-clinical testing, and commercialization of our products will require significant additional financing.
We believe that our existing cash and cash equivalents will enable us to fund our currently expected operating expenses and capital expenditure requirements through the first quarter of 2016. However, we will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of our planned research and development activities. We plan to finance our future operations with a combination of proceeds from the issuance of equity securities, the issuance of additional debt, potential collaborations and revenues from potential future product sales, if any.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, or GAAP, for interim financial information. Certain information and footnotes normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC.
Unaudited Interim Financial Information
The accompanying unaudited consolidated balance sheet as of September 30, 2015, consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2014 and 2015, and consolidated statements of cash flows for the nine months ended September 30, 2014 and 2015 are unaudited. The interim unaudited consolidated financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our financial position as of September 30, 2015 and the results of our operations and comprehensive loss for the three and nine months ended September 30, 2014 and 2015, and our cash flows for the nine months ended September 30, 2014 and 2015. The financial data and other information disclosed in these notes as of September 30, 2015 and for the three and nine months ended September 30, 2014 and 2015 are unaudited. The results for the three and nine months ended September 30, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015, any other interim periods, or any future year or period.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 requires entities to present debt issuance costs related to a recognized liability in the balance sheet as a direct deduction from that liability rather than as an asset. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. We do not expect that the adoption of ASU 2015-03 will have a significant effect on our consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the Company beginning in the first quarter of 2016 with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2014-15 on its consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.
Significant Accounting Policies
Our significant accounting policies are disclosed in our annual report on Form 10-K for the year ended December 31, 2014 filed on February 26, 2015, or the Form 10-K. Since the date of those financial statements, there have been no changes to our significant accounting policies.
3. Fair Value Measurements
FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, we use quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources.
The fair value hierarchy is broken down into three levels based on the source of inputs as follows:
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·
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Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities. |
|
·
| |
Level 2 — Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities. |
|
·
| |
Level 3 — Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement. |
The following fair value hierarchy table presents information about each major category of our financial assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (cash equivalents)
|
|
$
|
13,073,137
|
|
$
|
—
|
|
$
|
—
|
|
$
|
13,073,137
|
|
Short-term investments
|
|
|
—
|
|
|
40,624,349
|
|
|
—
|
|
|
40,624,349
|
|
Total assets
|
|
$
|
13,073,137
|
|
$
|
40,624,349
|
|
$
|
—
|
|
$
|
53,697,486
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest make-whole derivative
|
|
|
—
|
|
|
—
|
|
$
|
2,400,000
|
|
$
|
2,400,000
|
|
Shape contingent consideration
|
|
|
—
|
|
|
—
|
|
|
31,491,686
|
|
|
31,491,686
|
|
Common stock warrant liability
|
|
|
—
|
|
|
—
|
|
|
256,027
|
|
|
256,027
|
|
Total liabilities
|
|
$
|
—
|
|
$
|
—
|
|
$
|
34,147,713
|
|
$
|
34,147,713
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (cash equivalents)
|
|
$
|
15,909,751
|
|
$
|
—
|
|
$
|
—
|
|
$
|
15,909,751
|
|
Short-term investments
|
|
|
—
|
|
|
13,627,943
|
|
|
—
|
|
|
13,627,943
|
|
Total assets
|
|
$
|
15,909,751
|
|
$
|
13,627,943
|
|
$
|
—
|
|
$
|
29,537,694
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest make-whole derivative
|
|
|
—
|
|
|
—
|
|
$
|
345,000
|
|
$
|
345,000
|
|
Shape contingent consideration
|
|
|
—
|
|
|
—
|
|
|
34,743,686
|
|
|
34,743,686
|
|
Common stock warrant liability
|
|
|
—
|
|
|
—
|
|
|
71,489
|
|
|
71,489
|
|
Total liabilities
|
|
$
|
—
|
|
$
|
—
|
|
$
|
35,160,175
|
|
$
|
35,160,175
|
|
We had outstanding warrants to purchase our series B convertible preferred stock, or the 2006 Warrants, that converted into warrants to purchase our common stock at the time of our initial public offering in December 2013. The 2006 Warrants contain a provision whereby the exercise price may be reduced upon the occurrence of certain events within our control, such as the future issuance of equity securities or rights to purchase equity securities at a price below the current exercise price of the 2006 Warrants. Accordingly, the 2006 Warrants are recorded as a derivative liability on our balance sheets, with subsequent changes to fair value recorded through earnings at each reporting period on our statements of operations and comprehensive loss as change in fair value of derivative liabilities. Each subsequent change in fair value is reflected in our statements of cash flows as a noncash adjustment to net loss under operating activities. Upon exercise of these warrants, the cash inflow is recorded as a financing activity on the statements of cash flows. The fair value of the warrant liability is estimated using an option-pricing model, which requires inputs such as the expected volatility based on comparable public companies (86%), the fair value of our common stock, and the remaining contractual term of the warrant (0.5 years). For this liability, we developed our own assumptions that do not have observable inputs or available market data to support the fair value.
In 2009 and 2010, we issued warrants to purchase our common stock, or the 2009/2010 Warrants, which contain a provision whereby the exercise price may be reduced upon the occurrence of certain events within our control, such as the future issuance of equity securities or rights to purchase equity securities at a price below the current exercise price of the 2009/2010 Warrants. Accordingly, the 2009/2010 Warrants are recorded as a derivative liability on our balance sheets, with subsequent changes to fair value recorded through earnings at each reporting period on our statements of operations and comprehensive loss as change in fair value of derivative liabilities. Each subsequent change in fair value is reflected in our statements of cash flows as a noncash adjustment to net loss under operating activities. Upon exercise of these warrants, the cash inflow is recorded as a financing activity on the statements of cash flows. The fair value of each 2009/2010 Warrant is estimated using an option-pricing model, which requires inputs such as the expected volatility based on comparable public companies (75%), the fair value of the common stock, and the contractual term of the warrant (4.2 to 4.5 years). For this liability, we developed our own assumptions that do not have observable inputs or available market data to support the fair value.
Significant decreases in our stock price volatility will significantly decrease the overall valuation of our derivative liabilities, while significant increases in our stock price volatility will significantly increase the overall valuation. As discussed above, the strike price of our 2009/2010 Warrants may be decreased. Accordingly, a significant decrease in the strike price of the 2009/2010 Warrants will substantially increase the overall valuation. In addition, changes in the market price of our common stock will have a significant effect on the overall valuation of the warrant liabilities.
In April 2014, we acquired by merger 100% of Shape Pharmaceuticals. The acquisition of Shape Pharmaceuticals includes a contingent consideration arrangement that may require us to pay additional consideration in the form of
milestone payments and tiered royalty payments upon commercialization. We account for contingent consideration in accordance with applicable guidance provided within Accounting Standards Codification (ASC) 805, Business Combinations. It is currently estimated that the Shape Pharmaceuticals milestone payments will occur between 2016 and 2021. The range of undiscounted milestones we could be required to pay under our agreement is between zero and $64.5 million. We determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration liability associated with future milestone payments was based on several factors including:
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·
| |
estimated cash flows projected from the success of unapproved product candidates in the U.S. and ROW; |
|
·
| |
the probability of success for product candidates including risks associated with uncertainty, achievement and payment of milestone events; |
|
·
| |
the time and resources needed to complete the development and approval of product candidates; |
|
·
| |
the life of the potential commercialized products and associated risks of obtaining regulatory approvals in the U.S. and ROW; and |
|
·
| |
the risk adjusted discount rate for fair value measurement. |
In June 2014, we issued $47.0 million in aggregate principal amount of 8.00% convertible senior notes due June 15, 2019 (the “8% Notes”), of which $43.75 million are outstanding at September 30, 2015. The 8% Notes include an interest make-whole feature whereby if a note holder converts any of the Notes after December 31, 2014, they are entitled, in addition to the other consideration payable or deliverable in connection with such conversion, to an interest make-whole payment through the earlier of (i) the date that is three years after the conversion date and (ii) the maturity date if the notes had not been so converted. We have determined that this feature is an embedded derivative and have recognized the fair value of this derivative as a liability in our balance sheet, with subsequent changes to fair value recorded through earnings at each reporting period on our statements of operations and comprehensive loss as change in fair value of derivative liabilities. The fair value of this embedded derivative was determined based on a binomial lattice model.
The following tables set forth a summary of changes in the fair value of Level 3 liabilities for the nine months ended September 30, 2014 and 2015:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
September 30,
|
|
|
|
2013
|
|
Additions
|
|
Deductions
|
|
Conversions
|
|
Fair Value
|
|
2014
|
|
Interest make-whole derivative
|
|
$
|
—
|
|
$
|
3,055,000
|
|
|
—
|
|
|
—
|
|
$
|
(1,155,000)
|
|
$
|
1,900,000
|
|
Shape contingent consideration
|
|
|
—
|
|
|
22,587,339
|
|
$
|
(12,653)
|
|
|
—
|
|
|
1,902,000
|
|
|
24,476,686
|
|
Common stock warrant liability
|
|
|
793,744
|
|
|
—
|
|
|
—
|
|
$
|
(28,720)
|
|
|
(482,381)
|
|
|
282,643
|
|
Total liabilities
|
|
$
|
793,744
|
|
$
|
25,642,339
|
|
$
|
(12,653)
|
|
$
|
(28,720)
|
|
$
|
264,619
|
|
$
|
26,659,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
September 30,
|
|
|
|
2014
|
|
Additions
|
|
Deductions
|
|
Conversions
|
|
Fair Value
|
|
2015
|
|
Interest make-whole derivative
|
|
$
|
2,400,000
|
|
|
—
|
|
|
—
|
|
$
|
(165,957)
|
|
$
|
(1,889,043)
|
|
$
|
345,000
|
|
Shape contingent consideration
|
|
|
31,491,686
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,252,000
|
|
|
34,743,686
|
|
Common stock warrant liability
|
|
|
256,027
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(184,538)
|
|
|
71,489
|
|
Total liabilities
|
|
$
|
34,147,713
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(165,957)
|
|
$
|
1,178,419
|
|
$
|
35,160,175
|
|
As of September 30, 2015, the fair value and carrying value of our convertible debt was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Carrying Value
|
|
Face Value
|
|
|
|
|
|
|
|
|
|
|
|
|
8.00% convertible senior notes due June 15, 2019
|
|
$
|
30,717,000
|
|
$
|
28,811,539
|
|
$
|
43,750,000
|
|
The fair value shown above represents the fair value of the total debt instrument, inclusive of both the liability and equity components, while the carrying value represents the carrying value of the liability. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the total debt instrument was based on several factors including the terms of the instrument, our common stock price at the valuation date, the expected stock price volatility, the remaining term of the convertible notes, and the risk-free interest rate.
4. Investments
The Company’s investments are classified as available-for-sale pursuant to ASC 320, Investments—Debt and Equity Securities. The Company classifies investments available to fund current operations as current assets on its balance sheets. We consider all investments that have maturities of three months or less when acquired to be cash equivalents. Investments are classified as long-term assets on the balance sheets if (i) the Company has the intent and ability to hold the investments for a period of at least one year and (ii) the contractual maturity date of the investments is greater than one year.
Investments are carried at fair value with unrealized gains and losses included as a component of accumulated other comprehensive loss, until such gains and losses are realized. If a decline in the fair value is considered other-than-temporary, based on available evidence, the unrealized loss is transferred from other comprehensive loss to the statements of operations. There were no charges taken for other-than-temporary declines in fair value of short-term or long-term investments during the three and nine months ended September 30, 2014 and 2015. The Company recorded $1,635, $3,796, $(369) and $9,645 of unrealized gains/(losses) during the three months ended September 30, 2014 and 2015, and the nine months ended September 30, 2014 and 2015, respectively. Realized gains and losses are included in interest income in the statements of operations. The Company recorded $0, $0, $148 and $0 of realized gains during the three months ended September 30, 2014 and 2015, and the nine months ended September 30, 2014 and 2015, respectively. The Company utilizes the specific identification method as a basis to determine the cost of securities sold.
The Company reviews investments for other-than-temporary impairment whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers the intent to sell, or whether it is more likely than not that the Company will be required to sell, the investment before recovery of the investment’s amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and the duration of the impairment and changes in value subsequent to year end. As of September 30, 2015, there were no investments with a fair value that was significantly lower than the amortized cost basis or any investments that had been in an unrealized loss position for a significant period.
Cash, cash equivalents and investments at December 31, 2014 and September 30, 2015 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
13,073,137
|
|
|
—
|
|
|
—
|
|
$
|
13,073,137
|
|
Total cash and cash equivalents
|
|
$
|
13,073,137
|
|
$
|
—
|
|
$
|
—
|
|
$
|
13,073,137
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
37,136,494
|
|
|
—
|
|
$
|
(11,908)
|
|
$
|
37,124,586
|
|
Commercial paper
|
|
|
3,495,972
|
|
|
3,791
|
|
|
—
|
|
|
3,499,763
|
|
Total short-term investments
|
|
$
|
40,632,466
|
|
$
|
3,791
|
|
$
|
(11,908)
|
|
$
|
40,624,349
|
|
Total cash, cash equivalents, and investments
|
|
$
|
53,705,603
|
|
$
|
3,791
|
|
$
|
(11,908)
|
|
$
|
53,697,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
15,909,751
|
|
|
—
|
|
|
—
|
|
$
|
15,909,751
|
|
Total cash and cash equivalents
|
|
$
|
15,909,751
|
|
$
|
—
|
|
$
|
—
|
|
$
|
15,909,751
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
7,629,300
|
|
|
—
|
|
$
|
(1,247)
|
|
$
|
7,628,053
|
|
Commercial paper
|
|
|
5,997,115
|
|
|
2,775
|
|
|
—
|
|
|
5,999,890
|
|
Total short-term investments
|
|
$
|
13,626,415
|
|
$
|
2,775
|
|
$
|
(1,247)
|
|
$
|
13,627,943
|
|
Total cash, cash equivalents, and investments
|
|
$
|
29,536,166
|
|
$
|
2,775
|
|
$
|
(1,247)
|
|
$
|
29,537,694
|
|
5. Notes Payable
8% Convertible Senior Notes Due 2019
On June 23, 2014, we issued through a private placement $47.0 million in aggregate principal amount of 8% convertible senior notes due June 15, 2019 (the “8% Notes”), of which $43.75 million remain outstanding as of September 30, 2015. Interest on the 8% Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2014.
The 8% Notes are general unsecured and unsubordinated obligations and will rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to the notes, rank equal in right of payment to our existing and future indebtedness and other liabilities that are not so subordinated, are effectively subordinated to any of our future secured indebtedness to the extent of the value of the assets securing such indebtedness, and rank structurally junior to all indebtedness and other liabilities incurred by our subsidiaries, including trade payables. We may not redeem the 8% Notes at our option prior to maturity based on the terms of the indenture. The 8% Notes are convertible prior to maturity, subject to certain conditions described below, into shares of our common stock at an initial conversion rate of 148.3019 shares per $1,000 principal amount of the 8% Notes (equivalent to an initial conversion price of approximately $6.74 per share of common stock). This conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. We may satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination thereof, at our election.
The Holders of the 8% Notes may surrender their notes for conversion any time prior to the close of business immediately preceding February 15, 2019 only if any of the following conditions is satisfied:
|
·
| |
during any fiscal quarter (and only during such fiscal quarter) commencing after December 31, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock for each such trading day is greater than or equal to 100% of the applicable conversion price on such trading day; |
|
·
| |
during the five consecutive business day period immediately following any 10 consecutive trading day period, or the “measurement period”, in which, for each trading day of such measurement period, the “trading price” per $1,000 principal amount of notes for such trading day was less than 98% of the product of the last reported sale price of our common stock for such trading day and the applicable conversion rate on such trading day; or |
|
·
| |
upon the occurrence of specified corporate events. |
Holders also may surrender their 8% Notes for conversion at any time on or after February 15, 2019 and on or prior to the close of business on the business day immediately prior to the stated maturity date regardless if any of the foregoing conditions have been satisfied. As of December 31, 2014 and September 30, 2015, the 8% Notes were not convertible.
Each $1,000 principal amount of 8% Notes is convertible into shares of our common stock equal to the conversion rate in effect on the conversion date, together with cash in lieu of fractional shares issuable upon conversion. We may deliver upon conversion cash, shares, or a combination thereof, at our election. With respect to any conversions, settlement amounts will be computed as follows:
|
·
| |
if we elect (or are deemed to have elected) physical settlement, we will deliver to the converting holder in respect of each $1,000 principal amount of notes being converted a number of shares of common stock equal to the conversion rate in effect on the conversion date together with cash in lieu of fractional shares issuable upon conversion and the interest make-whole payment, if applicable; |
|
·
| |
if we elect cash settlement, we will pay to the converting holder in respect of each $1,000 principal amount of notes being converted cash in an amount equal to the sum of the daily conversion values for each of the 60 consecutive trading days during the related observation period and the interest make-whole payment, if applicable; and |
|
·
| |
if we elect combination settlement, we will pay or deliver, as the case may be, to the converting holder in respect of each $1,000 principal amount of notes being converted a “settlement amount” equal to the sum of the daily settlement amounts for each of the 60 consecutive trading days during the relevant observation period (plus cash in lieu of any fractional share of our common stock issuable upon conversion) and the interest make-whole payment, if applicable. |
“Daily settlement amount” means, for each of the 60 consecutive trading days in the relevant observation period:
|
·
| |
cash equal to the lesser of (i) the maximum cash amount per $1,000 principal amount of notes to be received upon conversion as specified in the notice specifying our chosen settlement method (the “specified dollar amount”), if any, divided by 60 (such quotient, the “daily measurement value”) and (ii) the daily conversion value; and |
|
·
| |
if the daily conversion value exceeds the daily measurement value, a number of shares equal to (i) the difference between the daily conversion value and the daily measurement value, divided by (ii) the daily volume-weighted average price for such trading day. |
“Daily conversion value” means, for each of the 60 consecutive trading days in the observation period for a note, one sixtieth (1/60th) of the product of (i) the applicable conversion rate on such trading day and (ii) the daily volume-weighted average price on such trading day.
If the 8% Notes are converted in connection with certain fundamental changes that occur prior to maturity of the 8% Notes, we may also be obligated to pay an additional (or “make whole”) premium with respect to the 8% Notes so converted. In addition, if certain fundamental changes occur with respect to TetraLogic, holders of the 8% Notes will have the option to require us to purchase for cash all or a portion of the 8% Notes at a purchase price equal to 100% of the principal amount of the 8% Notes plus accrued and unpaid interest.
On or after December 31, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending within five trading days prior to a conversion date the last reported sale price of our common
stock exceeds the applicable conversion price on each such trading day, we will, in addition to the other consideration payable or deliverable in connection with such conversion, make an interest make-whole payment to the converting holder equal to the present value of all scheduled payments of interest (using a discount rate equal to 2%) through the earlier of (i) the date that is three years after the conversion date and (ii) the maturity date if the notes had not been so converted. We may pay any interest make-whole payment either in cash or in shares of our common stock, at our election. If we pay an interest make-whole payment in shares of our common stock, then the number of shares of common stock a holder will receive will be that number of shares that have a value equal to the amount of the interest make-whole payment to be paid to such holder in shares, divided by the product of the simple average of the daily value weighted average price of our common stock for the 10 trading days immediately preceding the conversion date multiplied by 92.5%. Notwithstanding the foregoing, if in connection with any conversion the conversion rate is adjusted for a make-whole fundamental change, then such holder will not receive the interest make-whole payment with respect to such note.
The indenture for the notes contains certain covenants which limit our and our subsidiaries’ ability to incur certain additional indebtedness except for certain permitted debt, and to incur liens except for certain permitted liens.
We account for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) by recording the liability and equity components of the convertible debt separately. The liability component is computed based on the fair value of a similar liability that does not include the conversion option. The liability component includes both the value of the embedded interest make-whole derivative and the carrying value of the 8% Notes. The equity component is computed based on the total debt proceeds less the fair value of the liability component. The equity component is also recorded as debt discount and amortized as interest expense over the expected term of the 8% Notes. The carrying value of our 8% Notes is net of debt discount of $14,938,461 and $18,020,658 at September 30, 2015 and December 31, 2014, respectively.
The liability component of the 8% Notes on the date of issuance was computed as $30.8 million, consisting of the value of the embedded interest make-whole derivative of $3.1 million and the carrying value of the 8% Notes of $27.7 million. Accordingly, the equity component on the date of issuance was $16.2 million. The discount on the 8% Notes is being amortized to interest expense over the term of the Notes, using the effective interest method.
The liability component of our convertible notes will be classified as current liabilities and presented in current portion of long-term debt and the equity component of our convertible debt will be considered a redeemable security and presented as redeemable equity on our consolidated balance sheet if our debt is considered current at the balance sheet date. As of December 31, 2014 and September 30, 2015, the 8% Notes were classified as long-term liabilities.
Transaction costs of $2.9 million related to the issuance of the 8% Notes were allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as deferred financing costs and equity issuance costs, respectively. Approximately $1.0 million of this amount was allocated to equity and the remaining $1.9 million have been capitalized as deferred financing costs and are being amortized over the term of the 8% Notes.
In March 2015, we agreed to exchange $3.25 million aggregate principal amount of our 8% Notes in separately negotiated transactions for cash payments totaling $0.8 million and the issuance of 0.5 million shares of our common stock. We recognized $0.8 million of debt exchange expense for the three months ended March 31, 2015 in connection with these exchanges, which represents the additional consideration (cash and shares) that was provided to these noteholders pursuant to their exchange agreements.
The following table summarizes how the 8% Notes are reflected in our balance sheet at September 30, 2015:
|
|
|
|
|
September 30, 2015
|
|
Face value of outstanding notes
|
$
|
43,750,000
|
|
Conversion option reported in equity
|
|
(15,002,020)
|
|
Interest make-whole derivative
|
|
(2,889,043)
|
|
Cumulative amortization of debt discount
|
|
2,952,602
|
|
Carrying value
|
$
|
28,811,539
|
|
The following table sets forth our interest expense incurred for the three and nine months ended September 30, 2014 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2014
|
|
2015
|
|
2014
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% Convertible Senior Notes due 2019 - coupon
|
|
$
|
941,145
|
|
$
|
875,000
|
|
$
|
1,023,556
|
|
$
|
2,613,445
|
|
8% Convertible Senior Notes due 2019 - amortization of debt discount
|
|
|
560,179
|
|
|
644,788
|
|
|
608,863
|
|
|
1,864,549
|
|
Amortization of deferred financing costs
|
|
|
93,951
|
|
|
86,614
|
|
|
102,302
|
|
|
264,737
|
|
|
|
$
|
1,595,275
|
|
$
|
1,606,402
|
|
$
|
1,734,721
|
|
$
|
4,742,731
|
|
6. Stockholders’ Equity
Common Stock
We are authorized to issue 100,000,000 shares of common stock, with a par value of $0.0001, or Common Stock, of which 22,334,901 and 24,769,083 were issued and outstanding at December 31, 2014 and September 30, 2015, respectively.
At the Market Offering
On March 13, 2015, we entered into a Sales Agreement with Guggenheim Securities, LLC, or Guggenheim, to offer shares of our Common Stock from time to time through Guggenheim, as our sales agent for the offer and sale of the shares. We may offer and sell shares for an aggregate offering price of up to $25 million. We did not make any sales under the Sales Agreement during the nine months ended September 30, 2015.
Purchase Agreement
On August 24, 2015, we entered into a purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we have the right to sell to LPC up to $17,000,000 in shares of our Common Stock, subject to certain limitations and conditions set forth in the Purchase Agreement, over the period from August 24, 2015 to March 1, 2018.
As consideration for entering into the Purchase Agreement, we issued to LPC 103,364 shares of Common Stock on the date of the Purchase Agreement. As consideration for LPC’s purchase of up to an additional $15,000,000 in shares of Common Stock, we will issue up to 34,455 shares of Common Stock to LPC on a pro-rata basis on each purchase date. We will not receive any cash proceeds from the issuance of these shares.
Under the Purchase Agreement, on any business day and as often as every business day over the 30-month term of the Purchase Agreement, and up to an aggregate amount of an additional $15,000,000 (subject to certain limitations) in shares of Common Stock, we have the right at our sole discretion and subject to certain conditions to direct LPC to purchase up to 100,000 shares of Common Stock (with such amounts increasing up to 175,000 shares as the stock price increases, but not to exceed $1,000,000 in total purchase proceeds per purchase date). The purchase price of shares of Common Stock pursuant to the Purchase Agreement will be based on the prevailing market price at the time of sale as set forth in the Purchase Agreement. We will control the timing and amount of any sales of Common Stock to LPC. In addition, we may direct LPC to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the Common Stock is not below the “threshold price” as set forth in the Purchase Agreement. We have the right to terminate the Purchase Agreement at any time, on one business days’ notice, at no cost or penalty. We have agreed with LPC that we will not enter into any “variable rate” transactions with any third party from the date of the Purchase Agreement until the expiration of the 30-month period following the date of the Purchase Agreement, subject to certain exceptions.
From the effective date of the Purchase Agreement through September 30, 2015, we issued a total of 1,435,612 shares of Common Stock to LPC, including 105,379 shares of Common Stock issued to LPC as consideration for entering into the Purchase Agreement and purchasing additional shares, for gross proceeds of $2.9 million.
Stock-based compensation expense
Stock-based payments to employees, including grants of employee stock options, are recognized in the statements of operations and comprehensive loss based on fair value. Stock-based payments to non-employees are recognized at fair value on the date of grant and re-measured at each subsequent reporting date through the settlement of the instrument.
In January 2015, we granted stock options for 600,000 shares of our Common Stock to certain of our executive officers that include both a service condition and a market condition. The awards vest monthly at a rate of 2% per month (service condition) and the vesting is subject to acceleration if, at any time during the vesting period, the closing price of our Common Stock on NASDAQ is equal to or greater than $20.00 per share for 5 consecutive trading days (market condition). Should this market condition occur, all remaining unvested options shall vest immediately at that time. We calculated the fair value of these options using fair value models that consider both the market condition and service condition of the awards, and we will recognize compensation expense over the vesting period using the accelerated attribution method. Should the market condition be reached during the vesting period, all remaining unamortized compensation expense will be recognized at that time. The fair value of all other stock options is calculated using the Black-Scholes valuation model, and is recognized over the vesting period using the straight line method.
Stock-based compensation expense recognized by award type is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2014
|
|
2015
|
|
2014
|
|
2015
|
Options awards
|
|
$
|
825,829
|
|
$
|
1,214,856
|
|
$
|
2,419,547
|
|
$
|
3,776,013
|
Restricted stock awards
|
|
|
18,516
|
|
|
196,875
|
|
|
66,930
|
|
|
549,562
|
Total stock-based compensation expense
|
|
$
|
844,345
|
|
$
|
1,411,731
|
|
$
|
2,486,477
|
|
$
|
4,325,575
|
Total compensation cost recognized for all stock-based compensation awards in the statements of operations and comprehensive loss is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2014
|
|
2015
|
|
2014
|
|
2015
|
Research and development
|
|
$
|
226,580
|
|
$
|
385,376
|
|
$
|
690,355
|
|
$
|
1,202,335
|
General and administrative
|
|
|
617,765
|
|
|
1,026,355
|
|
|
1,796,122
|
|
|
3,123,240
|
Total stock-based compensation expense
|
|
$
|
844,345
|
|
$
|
1,411,731
|
|
$
|
2,486,477
|
|
$
|
4,325,575
|
A summary of activity for all options for the nine months ended September 30, 2015 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Weighted Average
|
|
of
|
|
Aggregate
|
|
|
|
|
|
Exercise Price
|
|
Contractual
|
|
Options
|
|
Intrinsic
|
|
|
|
Shares
|
|
Per Share
|
|
Life (In Years)
|
|
Granted
|
|
Value
|
|
Outstanding—December 31, 2014
|
|
3,277,308
|
|
$
|
5.53
|
|
8.5
|
|
|
|
|
$
|
13,575,815
|
|
Granted
|
|
785,900
|
|
|
5.15
|
|
|
|
$
|
2,944,407
|
|
|
|
|
Exercised
|
|
(24,261)
|
|
|
1.35
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(9,814)
|
|
|
4.54
|
|
|
|
|
|
|
|
|
|
Outstanding—September 30, 2015
|
|
4,029,133
|
|
$
|
5.48
|
|
8.1
|
|
|
|
|
$
|
—
|
|
Vested and expected to vest—September 30, 2015
|
|
3,973,355
|
|
$
|
5.48
|
|
8.1
|
|
|
|
|
$
|
—
|
|
Exercisable at September 30, 2015
|
|
2,363,990
|
|
$
|
5.37
|
|
7.7
|
|
|
|
|
$
|
—
|
|
The per-share weighted-average fair value of the options granted to employees and non-employees during the nine months ended September 30, 2015 was estimated at the date of grant utilizing fair value models with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Executive grants
|
|
All others
|
Expected stock price volatility
|
|
|
75
|
%
|
|
|
91
|
%
|
Expected term of options
|
|
|
8
|
years
|
|
|
5.3
|
years
|
Risk‑free interest rate
|
|
|
1.73
|
%
|
|
|
1.33
|
%
|
Expected annual dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Weighted average grant date fair value
|
|
$
|
3.84
|
|
|
$
|
3.44
|
|
In January 2015, we granted 450,000 shares of restricted stock to certain of our executive officers that include both a service and market condition. The awards cliff vest in their entirety 3 years from the date of grant (service condition), and the vesting is subject to acceleration if, at any time during the vesting period, the closing price of our Common Stock on NASDAQ is equal to or greater than $20.00 per share for 5 consecutive trading days (market condition). We calculated the fair value of the awards using fair value models that consider both the market condition and the service condition of the awards, and we will recognize compensation expense over the vesting period using the straight line method. Should the market condition be reached during the vesting period, all remaining unamortized compensation expense will be recognized at that time.
A summary of our restricted stock activity for the six month ended September 30, 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Fair Value
|
|
|
|
Shares
|
|
per Share
|
|
Unvested Balance—December 31, 2014
|
|
11,765
|
|
|
|
|
Granted
|
|
450,000
|
|
$
|
5.25
|
|
Vested
|
|
(11,765)
|
|
|
|
|
Forfeited
|
|
—
|
|
|
|
|
Unvested Balance—September 30, 2015
|
|
450,000
|
|
|
|
|
As of September 30, 2015, there was $6.3 million, net of estimated forfeitures, of total unrecognized compensation expense related to unvested stock options which we expect to recognize as compensation expense over a weighted average attribution period of 2.1 years, subject to acceleration if the market condition is met for those awards that contain a market condition. In addition, there was $1.8 million of total unrecognized compensation expense related to unvested shares of restricted stock which we expect to recognize as compensation expense over a weighted average attribution period of 2.3 years, subject to acceleration if the market condition is met for those awards that contain a market condition.
Warrants
We currently have the following warrants outstanding to purchase shares of our Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Exercise
|
|
|
|
Warrant Series
|
|
Underlying Equity Security
|
|
Issuable
|
|
Price
|
|
Expiration Date
|
|
2007 Warrant
|
|
common stock
|
|
1,961
|
|
$
|
7.65
|
|
May 2017
|
|
2006 Warrants
|
|
common stock
|
|
21,786
|
|
$
|
7.65
|
|
March 2016-May 2016
|
|
2009/2010 Warrants
|
|
common stock
|
|
52,815
|
|
$
|
0.85
|
|
November 2019-March 2020
|
|
Our 2006 Warrants and 2009/2010 Warrants are classified as derivative liabilities on our balance sheets with subsequent changes to fair value recorded through earnings at each reporting period on our statements of operations and comprehensive loss as change in fair value of derivative liabilities. See Note 3 with respect to fair value.
7. Loss Per Share of Common Stock
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive securities outstanding for the period.
In accordance with ASC Topic 260, Earnings per Share, when calculating diluted net loss per common share, the gain associated with the decrease in the fair value of certain warrants classified as derivative liabilities results in an adjustment to the net loss; and the dilutive impact of the assumed exercise of the warrants results in an adjustment to the weighted average common shares outstanding. We utilize the treasury stock method to calculate the dilutive impact of the assumed exercise of the warrants. For the three and nine months ended September 30, 2014 and 2015, the effect of the adjustments for our 2006 Warrants and our 2009/2010 Warrants were dilutive.
The following table sets forth the computation of diluted net loss per share for the three and nine months ended September 30, 2014 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2014
|
|
2015
|
|
2014
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,330,118)
|
|
$
|
(10,895,958)
|
|
$
|
(24,018,623)
|
|
$
|
(35,451,987)
|
|
Less: income from change in fair value of warrant liability
|
|
|
(144,501)
|
|
|
(26,358)
|
|
|
(482,381)
|
|
|
(184,538)
|
|
Numerator for diluted net loss per common share
|
|
$
|
(9,474,619)
|
|
$
|
(10,922,316)
|
|
$
|
(24,501,004)
|
|
$
|
(35,636,525)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
22,307,138
|
|
|
23,830,978
|
|
|
22,280,232
|
|
|
23,329,464
|
|
Dilutive common shares from assumed warrant exercises
|
|
|
57,093
|
|
|
33,953
|
|
|
63,897
|
|
|
39,878
|
|
Diluted weighted average shares of common stock outstanding
|
|
|
22,364,231
|
|
|
23,864,931
|
|
|
22,344,129
|
|
|
23,369,342
|
|
Diluted net loss per share of common stock
|
|
$
|
(0.42)
|
|
$
|
(0.46)
|
|
$
|
(1.10)
|
|
$
|
(1.52)
|
|
The following potentially dilutive securities outstanding for the three and nine months ended September 30, 2014 and 2015 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2014
|
|
2015
|
|
2014
|
|
2015
|
Warrants
|
|
24,482
|
|
23,747
|
|
24,482
|
|
23,747
|
Stock options
|
|
3,236,615
|
|
4,030,132
|
|
3,251,666
|
|
3,653,221
|
Unvested restricted stock
|
|
23,530
|
|
450,000
|
|
23,530
|
|
450,000
|
Common shares issuable upon conversion of the 8% Notes
|
|
7,137,031
|
|
8,058,271
|
|
7,137,031
|
|
8,058,271
|
|
|
10,421,658
|
|
12,562,150
|
|
10,436,709
|
|
12,185,239
|
|
|
|
|
|
|
|
|
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing in this report, and in conjunction with financial statements included in the Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage biopharmaceutical company focused on discovering and developing novel small molecule therapeutics in oncology, infectious diseases, and autoimmune diseases. We currently have two clinical-stage product candidates in development: birinapant and suberohydroxamic acid 4-methoxycarbonyl phenyl ester, or SHAPE.
Birinapant is a novel small molecule therapeutic that mimics Second Mitochondrial Activator of Caspases, or SMAC-mimetic, which leads to apoptosis, or cell-death, in damaged cells. We have treated over 390 oncology subjects with birinapant, and in non-randomized clinical trials to date, we have seen activity in subjects with (i) higher risk myelodysplastic syndromes, or MDS, where we have observed complete responses with birinapant administered with azacitidine (Vidaza®); (ii) end-stage acute myeloid leukemia, where birinapant was administered as a single-agent and subjects who have previously relapsed or were refractory to standard therapy experienced declines in blast counts; (iii) ovarian cancer, where birinapant was administered with conatumumab (AMG 655), we have observed disease stabilization and a partial response, or PR, in women who previously relapsed or were refractory to standard therapy; and (iv) colorectal cancer, or CRC, where birinapant was administered with irinotecan, we have observed evidence of anti-tumor activity or prolonged disease stabilization in subjects who have progressed after multiple prior therapies, including irinotecan.
In June 2014, we commenced a randomized, double-blind placebo-controlled Phase 2 clinical trial of birinapant administered with azacitidine in subjects with previously untreated, higher risk MDS. Interim data is expected in early January 2016. This clinical trial follows our Phase 1b/2a open-label clinical trial of birinapant administered with azacitidine.
In June 2015, we announced preliminary data from the ongoing Phase 2a study of birinapant in combination with azacitidine in first line higher risk MDS. The study is being conducted as a precursor to the ongoing randomized Phase 2b study. In this study, birinapant was administered, at 13 mg/m2 twice a week, three weeks out of four, during a four week cycle in combination with the approved dose of azacitidine. The primary assessment of efficacy was the response rate using the modified International Working Group criteria (Cheson 2006) at the end of cycle four. Of the nine patients who entered the study, six completed four cycles of therapy and underwent a repeat bone marrow assessment. Three patients experienced a complete response, one patient experienced a bone marrow complete response, one patient experienced a partial response and underwent a stem cell transplant and one patient had stable disease. Three patients discontinued the study prior to receiving four cycles of treatment. The regimen was generally well tolerated, the most common side effects being fatigue, neutropenia and thrombocytopenia.
We have generated pre-clinical data indicating that birinapant induces apoptosis in-vivo in mouse hepatocytes infected with human hepatitis B virus, or HBV. In a mouse model, we have seen clearance of HBV surface antigen, or HBsAg, and the appearance of antibodies directed against HBsAg, a clinical finding considered equivalent to a functional cure. We have also seen activity of birinapant in other infectious disease models, including human mononuclear cells infected with human immunodeficiency virus, or HIV, in-vitro, and in-vivo in mouse models of Mycobacterium tuberculosis and Legionella pneumophila.
In May 2015, we discontinued the birinapant chronic HBV multiple ascending dose trial being conducted in Australia due to cranial nerve palsies observed in the first cohort. In July 2015, we announced that we intend to initiate a combination single ascending dose/multiple ascending dose clinical trial, with birinapant as a single agent, in chronic
HBV subjects. These subjects will not be taking any antiviral medication. In the single ascending dose phase of the trial, subjects will be given a single dose of birinapant. The dose of birinapant will be escalated until at least one of the subjects shows evidence of activity, defined as a transient increase in liver transaminases and/or a decline in circulating viral DNA. At that point the cohort will be expanded and additional subjects will each receive four weekly administrations, at that dose, of birinapant. The starting dose of birinapant will be 2.8 mg/m2. We have retained a clinical research organization to initiate this trial at multiple sites in India in the first half of 2016. The application to commence the clinical trial is currently under review by the Indian regulatory authority, and there is no assurance that approval will be forthcoming. Timing of results will depend upon receiving approval to proceed, enrollment rates and the cohort in which activity, if any, is seen.
In April 2015, we entered into a clinical study collaboration agreement with Merck & Co. (“Merck”) to perform a Phase 1 dose-escalation study to evaluate the safety and efficacy of birinapant in combination with KEYTRUDA® (pembrolizumab), Merck’s anti-PD-1 therapy, in patients with relapsed or refractory solid tumors. We will sponsor and fund the clinical trial and Merck will supply KEYTRUDA®. Results from the clinical trial will be used to determine the path for further clinical development of the combination. The study is expected to begin in December 2015.
We discovered birinapant, and its composition of matter patent in the U.S. extends until at least 2030. We have retained worldwide development and commercialization rights for all indications.
SHAPE, our second clinical-stage product candidate, is a histone deacetylase, or HDAC, inhibitor that we are developing for topical use for the treatment of early-stage cutaneous T-cell lymphoma, or CTCL. CTCL is a form of non-Hodgkin T-cell lymphoma which primarily manifests in the skin. The majority of CTCL cases are indolent; however, there are rare cases of CTCL that are aggressive and life-threatening. HDAC is a validated cancer target, and HDAC inhibitors, or HDACi, are a proven class of anti-cancer drugs for CTCL. SHAPE is a novel therapeutic, designed to maximize HDAC inhibition locally in the skin with limited systemic exposure, and it has characteristics that could allow its topical use over large body surface areas with minimal systemic absorption. By potentially avoiding toxicities typical of systemically-administered HDACi’s, SHAPE may provide a more favorable safety profile than current HDACi’s delivered orally or intravenously. SHAPE has been evaluated in a randomized, placebo-controlled dose escalation Phase 1 clinical trial in early-stage CTCL. SHAPE was well-tolerated, and it demonstrated evidence of clinical activity with PRs observed in certain subjects after 28 days of application. We commenced a randomized Phase 2 clinical trial of SHAPE in subjects with early-stage CTCL in December 2014, which will assess clinical activity after six months of application, and we have achieved our enrollment target in this clinical trial. Data from this clinical trial is expected in early January 2016.
On November 2, 2015, we announced that we have an open U.S. Investigational New Drug application in support of a Phase 2 clinical trial of SHAPE in approximately forty subjects with alopecia areata. Alopecia areata is an autoimmune skin disease resulting in the loss of hair on the scalp and elsewhere on the body. Alopecia areata occurs in males and females of all ages, but onset often occurs in childhood. Over 6.6 million people in the United States have or will develop alopecia areata at some point in their lives. The FDA has identified alopecia areata to be one of the few disease states to be developed under the Patient-Focused Drug Development initiative based on multiple criteria including disease severity and unmet medical needs.
SHAPE’s composition of matter patent in the U.S. extends until at least 2028. In addition, SHAPE has been granted U.S. orphan drug designation for CTCL. We have acquired worldwide development and commercialization rights to SHAPE for all indications.
In July 2015, we licensed our worldwide patents for birinapant and SHAPE to two wholly-owned subsidiaries domiciled in the United Kingdom (“UK”), in consideration for installment payments to be recognized over a 10 year period. Although the license of the intellectual property rights did not result in any gain or loss in our consolidated financial statements, the transaction did result in a taxable gain in the United States and we are utilizing available federal and state net operating loss carryforwards to offset this taxable gain. The UK subsidiaries will be responsible for the future development and commercialization of birinapant and SHAPE, and will recognize the net profits or losses generated from those activities.
We have incurred operating losses since inception, have not generated any product sales revenues and have not achieved profitable operations. Our accumulated deficit through September 30, 2015 was $161.3 million, and we expect to continue to incur substantial losses in future periods.
We incurred research and development expenses of $6.0 million, $6.1 million, $14.0 million and $20.3 million during the three months ended September 30, 2014 and 2015, and the nine months ended September 30, 2014 and 2015, respectively. We anticipate that a significant portion of our operating expenses will continue to be related to research and development as we continue to advance our clinical-stage product candidates, birinapant and SHAPE. We funded our operations as a private company primarily through the sale of preferred stock and the issuance of convertible notes for gross proceeds totaling $85.4 million, which have been converted into shares of our Common Stock in connection with our initial public offering. We also received amounts under collaboration and grant arrangements totaling $13.7 million. In December 2013 we sold 8,222,115 shares of Common Stock in our initial public offering for net proceeds of $49.1 million after payment of underwriting fees and other expenses, and in June 2014 we issued convertible notes for proceeds of $44.1 million, net of underwriting fees and other expenses. In 2015 we sold 1,435,612 shares of Common Stock under a purchase agreement with Lincoln Park Capital Fund, LLC (“LPC”) for net proceeds of $2.6 million. As of December 31, 2014 and September 30, 2015, we had $53.7 million and $29.5 million in cash, cash equivalents and investments, respectively.
We are highly dependent on the success of our research, development and licensing efforts and, ultimately, upon regulatory approval and market acceptance of birinapant and SHAPE. Our short- and long-term capital requirements depend upon a variety of factors, including our clinical development plan and various other factors discussed below. We believe that our existing cash, cash equivalents and investments as of September 30, 2015 will enable us to fund our operating expenses and capital expenditure requirements through the first quarter of 2016. However, we will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of our planned research and development activities with respect to our product candidates.
Our future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to the:
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initiation, progress, timing, costs and results of pre-clinical studies and clinical trials for birinapant, SHAPE or any other future product candidates; |
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clinical development plans we establish for birinapant, SHAPE and any other future product candidates; |
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our obligation to make royalty and non-royalty sublicense receipt payments to third-party licensors, if any, under our licensing agreements; |
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number and characteristics of product candidates that we discover or in-license and develop; |
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outcome, timing and cost of regulatory review by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies than those that we currently expect; |
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costs of filing, prosecuting, defending and enforcing any patent claims and maintaining and enforcing or defending other intellectual property rights; |
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effect of competing technological and market developments; |
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costs and timing of the implementation of commercial-scale manufacturing activities; and |
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costs and timing of establishing sales, marketing and distribution capabilities for birinapant, SHAPE and any other future product candidates for which we may receive regulatory approval. |
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations for the three and nine months ended September 30, 2014 and 2015, and our financial condition as of December 31, 2014 and September 30, 2015.
Critical Accounting Policies and Significant Judgments and Estimates
Our critical accounting policies and significant judgments and estimates are disclosed in our annual report on Form 10-K for the year ended December 31, 2014. Since the date of those financial statements, there have been no changes to our critical accounting policies and significant judgments and estimates.
Financial Overview
Revenue
We have not generated any revenue from commercial product sales since we commenced operations. In the future, if either birinapant or SHAPE is approved for commercial sale, we may generate revenue from product sales, or alternatively, we may choose to select a collaborator or licensee to commercialize birinapant or SHAPE.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs for executive and other administrative personnel, including stock-based compensation and travel expenses. Other general and administrative expenses include professional fees for legal, patent review, consulting and accounting services. General and administrative expenses are expensed when incurred.
For the three months ended September 30, 2014 and 2015, and the nine months ended September 30, 2014 and 2015, our general and administrative expenses totaled $2.6 million, $2.5 million, $8.1 million and $8.5 million, respectively. General and administrative expenses remained relatively flat for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014, as the increase in stock compensation expense was offset by decreases in legal, personnel, and investor relations expenses. The increase in general and administrative expenses for the nine months ended September 30, 2015 is due primarily to the increase in stock compensation expense of $1.3 million, offset by a decrease in legal and consulting expenses of $0.8 million due to costs incurred for the acquisition of Shape Pharmaceuticals in 2014.
Research and Development Expenses
Our research and development expenses have consisted primarily of costs incurred for the development of our product candidates, which include:
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employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; |
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expenses incurred under agreements with CROs and investigative sites that conduct our clinical trials and pre-clinical studies; |
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the cost of acquiring, developing and manufacturing clinical trial materials; |
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facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies; and |
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costs associated with pre-clinical activities and regulatory operations. |
Research and development costs are expensed when incurred. We record costs for some development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information provided to us by our vendors.
During the three months ended September 30, 2014 and 2015, and the nine months ended September 30, 2014 and 2015, we incurred $6.0 million, $6.1 million, $14.0 million and $20.3 million, respectively, in research and development expenses. Research and development expenses remained relatively flat for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014, as the increased spending in the MDS and SHAPE clinical trials and increased stock compensation expenses were offset by decreases in spending on the ovarian and HBV clinical trials and in external research and non-clinical development. Research and development expenses increased during the nine months ended September 30, 2015, compared to the comparable prior periods, primarily due to increased expenses relating to our MDS, HBV and SHAPE clinical trials, increased headcount and personnel related costs, increased stock based compensation costs, and increased spending in external research and non-clinical development.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We do not currently utilize a formal time allocation system to capture expenses on a project-by-project basis as the majority of our past expenses have been in support of birinapant, and our future expenses will be in support of birinapant and SHAPE. However, we do allocate some portion of our research and development expenses by functional area, as shown below.
The following table summarizes our research and development expenses for the three and nine months ended September 30, 2014 and 2015:
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2014
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2015
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2014
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2015
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Clinical development
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$
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3,289,168
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$
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3,396,136
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$
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6,789,577
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$
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9,898,209
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Manufacturing and formulation
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483,141
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690,388
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1,553,356
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2,607,049
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Personnel related
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1,374,398
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1,399,265
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3,780,275
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4,878,750
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Stock-based compensation
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226,580
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385,376
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690,355
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1,202,335
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Consulting
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170,681
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87,573
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446,735
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430,785
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Other research and non-clinical development
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424,213
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137,686
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694,821
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1,235,287
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$
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5,968,181
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$
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6,096,424
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$
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13,955,119
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$
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20,252,415
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The following table summarizes our research and development expenses by targeted indication for the three and nine months ended September 30, 2014 and 2015:
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2014
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2015
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2014
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2015
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Blood cancers (MDS)
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$
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3,516,214
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$
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4,790,292
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$
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8,071,375
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$
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12,244,848
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Solid tumors (CRC and ovarian)
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456,541
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370,531
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1,684,016
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1,734,392
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Infectious diseases (HBV)
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221,344
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(57,888)
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291,875
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1,090,567
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Shape (CTCL)
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502,076
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795,604
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719,869
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3,343,546
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Other pre-clinical and non-indication specific
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1,272,006
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197,885
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3,187,984
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1,839,062
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$
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5,968,181
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$
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6,096,424
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$
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13,955,119
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$
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20,252,415
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We will need to secure additional funding in the future in order to carry out all of our planned research and development activities with respect to our product candidates. We will incur substantial costs beyond our present and planned clinical trials in order to file NDAs in target indications for both birinapant and SHAPE, and in each case, the nature, design, size and cost of further studies and trials will depend in large part on the outcome of preceding studies and trials and discussions with regulators.
It is difficult to determine with certainty the costs and duration of our current or future clinical trials and pre-clinical studies, or if, when or to what extent we will generate revenues from the commercialization and sale of our product candidates if we obtain regulatory approval. We may never succeed in achieving regulatory approval for our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical trials and pre-clinical studies, uncertainties in clinical trial enrollment rate and significant and changing government regulation.
In addition, the probability of success for our product candidates will depend on numerous factors, including competition, manufacturing capability and commercial viability. See Risk Factors below and in our Annual Report.
Market acceptance of our product candidates, if we receive approval, depends on a number of factors, including the:
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efficacy and safety of our product candidates administered alone or with other drugs, and post-marketing experience of the drugs; |
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clinical indications for which our product candidates are approved; |
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acceptance by physicians, major operators of cancer or infectious disease clinics and patients of our product candidates as safe and effective treatments; |
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potential and perceived advantages of our product candidates over alternative treatments; |
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prevalence and severity of any side effects; |
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product labeling or package insert requirements of the FDA or other regulatory authorities; |
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timing of market introduction of our product candidates as well as competitive products; |
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cost of treatment in relation to alternative treatments; |
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availability of coverage and adequate reimbursement and pricing by third-party payors and government authorities; |
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relative convenience and ease of administration; and |
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effectiveness of our sales and marketing efforts. |
We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of our product candidates, as well as an assessment of their commercial potential.
Change in fair value of contingent consideration
The acquisition of Shape includes a contingent consideration arrangement that may require us to pay additional consideration in the form of milestone payments and tiered royalties. We recorded the liability for the contingent consideration based on its fair value on the date of the acquisition, and we record any change in fair value of the contingent consideration in our consolidated statements of operations and comprehensive loss as a change in fair value of contingent consideration included in loss from operations. The change in fair value of the contingent consideration of $1.0 million and $1.9 million recorded for the three and nine months ended September 30, 2014, respectively, and $1.1 million and $3.3 million recorded for the three and nine months ended September 30, 2015, respectively, was due to the accretion of the liability to its estimated value at each valuation date due to the passage of time, as there were no other significant changes in the underlying assumptions within the fair value model during these periods.
Change in fair value of derivative liabilities
Certain of our warrants to purchase our Common Stock are classified as derivative liabilities and recorded at fair value. These derivative liabilities are subject to re-measurement at each balance sheet date and we recognize any change in fair value in our consolidated statements of operations and comprehensive loss as a change in fair value of the derivative liability. The change in the fair value of these derivative liabilities of $0.1 million and $0.5 million for the three and nine months ended September 30, 2014, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2015, respectively, is due primarily to the decrease in the value of our Common Stock during those periods.
We have classified the interest make-whole provision of our 8% Notes due 2019 issued in June 2014 as a derivative liability that is recorded at fair value. This derivative liability is subject to re-measurement at each balance sheet date and we recognize any change in fair value in our consolidated statements of operations and comprehensive loss as a change in fair value of the derivative liability. The change in the fair value of this derivative liability of $1.7 million and $1.2 million for the three and nine months ended September 30, 2014, respectively, and $0.4 million and $1.9 million for the three and nine months ended September 30, 2015, respectively, is due primarily to the change in the value of our Common Stock during those periods.
Interest and Other Income
Interest and other income consist principally of interest income earned on cash, cash equivalents and investments.
Interest Expense
Interest expense of $1.6 million and $1.7 million recognized for the three and nine months ended September 30, 2014, respectively, and $1.6 million and $4.7 million for the three and nine months ended September 30, 2015, respectively, is attributable to coupon interest, to non-cash interest expense resulting from the accretion of debt discount, and to the amortization of deferred financing costs related to our 8% Notes issued on June 23, 2014.
Cash Flows
Operating Activities. Cash used in operating activities during the nine months ended September 30, 2015 increased to $25.7 million as compared to $21.1 million used in the nine months ended September 30, 2014. This increase was driven primarily by increased costs for research and development and by the increase in prepaid expenses and other assets during the first nine months of 2014 as compared to the decrease during the first nine months of 2015.
Investing Activities. Cash provided by investing activities was $26.9 million for the nine months ended September 30, 2015 as compared to cash used in investing activities of $61.3 million for the nine months ended September 30, 2014. Cash provided by investing activities for the nine months ended September 30, 2015 is attributable primarily to the excess of maturities over purchases of short-term investments during the period. Cash used in investing activities for the nine months ended September 30, 2014 is due primarily to the purchase of Shape Pharmaceuticals in April 2014 and to the purchase of short-term investments during the period with the proceeds from the issuance of our 8% Notes in June 2014.
Financing Activities. Cash provided by financing activities was $1.8 million for the nine months ended September 30, 2015 as compared to cash provided by financing activities of $44.3 million for the nine months ended September 30, 2014. Cash provided by financing activities for the nine months ended September 30, 2015 is attributable to the sale of Common Stock to LPC for net proceeds of $2.6 million, offset by payments made to retire convertible notes during the period. Cash provided by financing activities for the nine months ended September 30, 2014 is attributable to the issuance of our 8% Notes and to proceeds from the exercise of stock options during the period.
JOBS Act
We are an “emerging growth company” under Section 107 of the JOBS Act. As an emerging growth company, we 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 irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Liquidity and Capital Resources
Since our inception, we have incurred net losses and negative cash flows from our operations. We incurred net losses of $9.3 million, $10.9 million, $24.0 million and $35.5 million for the three months ended September 30, 2014 and 2015, and the nine months ended September 30, 2014 and 2015, respectively. Our operating activities used $21.1 million and $25.7 million of cash flows during the nine months ended September 30, 2014 and 2015, respectively. At September 30, 2015, we had an accumulated deficit of $161.3 million, working capital of $26.1 million and cash, cash equivalents and investments of $29.5 million. We funded our operations as a private company primarily through the sale of preferred stock and the issuance of convertible notes for gross proceeds totaling $85.4 million, which were converted into shares of our Common Stock in connection with our initial public offering. We also received amounts under collaboration and grant arrangements totaling $13.7 million. In December 2013 we sold 8,222,115 shares of Common Stock in our initial public offering for net proceeds of $49.1 million after payment of underwriting fees and other expenses, and in June 2014 we issued our 8% Notes for proceeds of $44.1 million, net of underwriting fees and other expenses. In 2015 we sold 1,435,612 shares of Common Stock under a purchase agreement with LPC for net proceeds of $2.6 million. As of December 31, 2014 and September 30, 2015, we had $53.7 million and $29.5 million in cash, cash equivalents and investments, respectively.
Similar to other clinical-stage biopharmaceutical companies, our access to traditional bank credit is limited. Although we have had a revolving line of credit in the past, we do not currently have an open revolving line of credit or access to bank finance. We have limited assets which can be used as collateral to secure potential indebtedness. Moreover, as noted above, we have not received any material revenues since inception. Therefore, our ability to fund our operations and sustain our clinical development programs is dependent on equity and equity-linked investments. None of our current investors is required to invest any additional capital in us. Thus, there can be no assurances that we will be able to raise sufficient capital in the future from these or other similar sources or the public markets to fund our operations, and failure to do so could have a material adverse effect on our operations. In addition, the need to raise capital is expected to consume management resources, time and attention and, to a lesser extent, the time and attention of our scientific staff.
Operating and Capital Expenditure Requirements
We have not achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future. We expect our cash expenditures to increase in the near term as we fund our planned clinical trials for birinapant and SHAPE.
We believe that our existing cash and cash equivalents will enable us to fund our currently expected operating expenses and capital expenditure requirements through the first quarter of 2016. However, we will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of our planned research and development activities with respect to birinapant and SHAPE. In order to meet these additional cash requirements, we may seek to sell additional equity or convertible debt securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our Common Stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a negative impact on our business, results of operations, and financial condition. Our future capital requirements will depend on many factors, including:
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the results of our pre-clinical studies and clinical trials; |
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the development and commercialization of birinapant and SHAPE; |
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the scope, progress, results and costs of researching and developing birinapant, SHAPE or any other future product candidates, and conducting pre-clinical studies and clinical trials; |
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the timing of, and the costs involved in, obtaining regulatory approvals for birinapant, SHAPE or any other future product candidates; |
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the cost of commercialization activities if birinapant, SHAPE or any other future product candidates are approved for sale, including marketing, sales and distribution costs; |
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the cost of manufacturing birinapant, SHAPE or any other future product candidates in pre-clinical studies, clinical trials and, if approved, in commercial sale; |
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our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements; |
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any product liability infringement or other lawsuits related to our products; |
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·
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the expenses needed to attract and retain skilled personnel; |
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the costs associated with being a public company; |
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the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; |
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the timing, receipt and amount of sales of, or royalties on, future approved products, if any; and |
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the costs associated with any future acquisitions or in-licensing of additional assets or companies to further expand our technology base. |
We may in-license or acquire additional assets or companies in the future to further expand our technology base. However, we may not have sufficient cash reserves or other liquid assets to consummate such acquisitions and it may be necessary for us to raise additional funds to complete future transactions.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable SEC regulations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the 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 the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2015. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of September 30, 2015, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings.
ITEM 1A. RISK FACTORS
There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” in Part I of the Form 10-K and Item 1A “Risk Factors” in Part II of our quarterly report on Form 10-Q for the quarter ended March 31, 2015 filed on May 14, 2015, or the First Quarter 2015 Form 10-Q. In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part 1, Item 1A “Risk Factors” of the Form 10-K and the First Quarter 2015 Form 10-Q. The risks described in the Form 10-K and the First Quarter 2015 Form 10-Q are not the only risks that we face. Additional risks not presently known to us or that we do not currently consider significant may also have an adverse effect on us. If any of the risks actually occur, our business, results of operations, cash flows or financial condition could suffer. We cannot assure you that any of the events discussed in the risk factors in the Form 10-K and the First Quarter 2015 Form 10-Q will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition and cash flows and if so our future prospects would likely be materially and adversely affected. If any of such events were to happen, the trading price of our Common Stock could decline, and you could lose all or part of your investment. You should understand that it is not possible to predict or identify all such risks. Consequently, you should not consider the risk factors in the Form 10-K and the First Quarter 2015 Form 10-Q to be a complete discussion of all potential risks or uncertainties.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Use of Proceeds
None.
Issuer Purchases of Equity Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Company Website
From time to time we will post updated versions of our corporate presentation slides on our website. Such updates may include information regarding our pipeline, including adjustments of expected timing of certain events, and other information about the progress of our business.
ITEM 6. EXHIBITS
Reference is made to the Exhibit Index to this quarterly report for a list of exhibits required by Item 601 of Regulation S-K to be filed as part of this quarterly report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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TETRALOGIC PHARMACEUTICALS CORPORATION
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Date: November 4, 2015
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By:
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/s/ J. KEVIN BUCHI
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J. Kevin Buchi
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President and Chief Executive Officer
(Principal Executive Officer)
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Date: November 4, 2015
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By:
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/s/ PETE A. MEYERS
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Pete A. Meyers
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Chief Financial Officer and Treasurer
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(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
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Exhibit Number
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Exhibit Description
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10.1
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Purchase Agreement, dated as of August 24, 2015, by and between TetraLogic Pharmaceuticals Corporation and Lincoln Park Capital Fund, LLC, incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on August 25, 2015.
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31.1
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Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code.
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32.2
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Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title 18 of the United States Code.
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101
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The following financial information from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL: (i) Consolidated Balance Sheets as of December 31, 2014 and September 30, 2015, (ii) Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2014 and 2015, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2015, and (iv) Notes to Consolidated Financial Statements.
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Exhibit 31.1
Certification of Chief Executive Officer of TetraLogic Pharmaceuticals Corporation
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, J. Kevin Buchi, certify that:
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1.
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I have reviewed this quarterly report on Form 10-Q of TetraLogic Pharmaceuticals Corporation; |
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2.
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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; |
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3.
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Based on my knowledge, the consolidated 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; |
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4.
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The registrant’s other certifying officer 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 controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a.
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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; |
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b.
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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 consolidated financial statements for external purposes in accordance with generally accepted accounting principles; |
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c.
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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; and |
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d.
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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 |
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5.
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The registrant’s other certifying officer 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): |
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a.
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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 |
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b.
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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. |
November
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Date: November 4, 2015
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/s/ J. KEVIN BUCHI
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J. Kevin Buchi
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President and Chief Executive Officer
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Exhibit 31.2
Certification of Chief Financial Officer of TetraLogic Pharmaceuticals Corporation
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Pete A. Meyers, certify that:
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1.
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I have reviewed this quarterly report on Form 10-Q of TetraLogic Pharmaceuticals Corporation; |
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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; |
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3.
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Based on my knowledge, the consolidated 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; |
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4.
| |
The registrant’s other certifying officer 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 controls 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; |
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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 consolidated financial statements for external purposes in accordance with generally accepted accounting principles; |
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c.
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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; and |
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d.
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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 |
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5.
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The registrant’s other certifying officer 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): |
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a.
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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 |
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b.
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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. |
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Date: November 4, 2015
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/s/ PETE A. MEYERS
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Pete A. Meyers
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Chief Financial Officer and Treasurer
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Exhibit 32.1
Statement of Chief Executive Officer
Pursuant to Section 1350 of Title 18 of the United States Code
Pursuant to Section 1350 of Title 18 of the United States Code as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, J. Kevin Buchi, the President and Chief Executive Officer of TetraLogic Pharmaceuticals Corporation (the “Company”), hereby certifies that based on the undersigned’s knowledge:
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1)
| |
The Company’s quarterly report on Form 10-Q for the period ended September 30, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: November 4, 2015
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/s/ J. KEVIN BUCHI
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J. Kevin Buchi
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President and Chief Executive Officer
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Exhibit 32.2
Statement of Chief Financial Officer
Pursuant to Section 1350 of Title 18 of the United States Code
Pursuant to Section 1350 of Title 18 of the United States Code as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Pete A. Meyers, the Chief Financial Officer and Treasurer of TetraLogic Pharmaceuticals Corporation (the “Company”), hereby certifies that based on the undersigned’s knowledge:
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1)
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The Company’s quarterly report on Form 10-Q for the period ended September 30, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: November 4, 2015
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/s/ PETE A. MEYERS
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Pete A. Meyers
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Chief Financial Officer and Treasurer
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