Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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 the unaudited condensed
consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.
Our actual results
and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking
statements. 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 Quarterly Report. In addition, even if our results of operations, financial
condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements
contained in this Quarterly Report, they may not be predictive of results or developments in future periods.
Overview
We are a biopharmaceutical
company that has historically focused on the development of novel, first-in-class pharmaceuticals to address the medical needs
of patients with kidney and vascular disease. Our product candidate, vonapanitase, is a recombinant human elastase that we developed
to improve vascular access outcomes in patients with chronic kidney disease, or CKD, undergoing or preparing for hemodialysis,
a lifesaving treatment that cannot be conducted without a functioning vascular access.
On March
28, 2019, we announced that our second Phase 3 trial, PATENCY-2, for vonapanitase in radiocephalic fistulas did not meet its co-primary
endpoints of fistula use for hemodialysis (p=0.328) and secondary patency (p=0.932). The PATENCY-2 clinical trial was the second
of two randomized, double-blind Phase 3 trials, comparing a 30 microgram dose of investigational vonapanitase to placebo. We reported
top-line results for the first Phase 3 clinical trial, PATENCY-1, in December 2016 and published these results in the Journal of
Vascular Surgery in January 2019. As in PATENCY-1, the PATENCY-2 clinical trial enrolled patients with chronic kidney disease undergoing
surgical creation of a radiocephalic fistula for hemodialysis. Patients were randomized 2:1, vonapanitase to placebo, and were
followed for a period of twelve months. In March 2018, we completed enrollment of a total of 603 treated patients at 39 centers
in the U.S. and Canada. Based on the top-line results of the PATENCY-2 clinical trial, we are no longer planning to submit a Biologics
License Application, or BLA, to the U.S. Food and Drug Administration, or FDA, or a Marketing Authorization Application, or MAA,
to the European Medicines Agency, or EMA, for investigational vonapanitase.
Due to
the results of the PATENCY-2 clinical trial, we started taking steps beginning in April 2019 to reduce operating expenses while
we evaluate our strategic alternatives with a goal to enhance stockholder value. To assist with this process, our Board engaged
a financial advisory firm, H.C. Wainwright & Co. LLC, to help explore its strategic alternatives, including a possible merger
or sale of the Company, a sale of part or all of its assets, and collaboration and licensing arrangements as further discussed
in the section titled “Merger Agreement.” On September 23, 2019, the Company and ArTara announced the signing of the
Merger Agreement. Although we have entered into the Merger Agreement and intend to consummate the Merger, there is no assurance
that it will be able to successfully consummate the Merger on a timely basis, or at all.
We also
began a plan in April 2019 to reduce personnel and expenses to preserve capital and further reduce our operations consistent with
our decision to discontinue research and development activities. As of September 30, 2019, we have terminated all but one of our
employees. In 2019, we expect to incur severance costs of $2.9 million related to these terminations. These severance related expenses
were fully recorded in the three months ending June 30, 2019.
We commenced
business operations in June 2001 and incorporated in March 2006. Our operations to date have been limited to organizing and staffing
our company, business planning, raising capital, undertaking preclinical studies and clinical trials of vonapanitase, protecting
our intellectual property and providing general and administrative support for these operations. To date, we have not generated
any product revenue and have primarily financed our operations through the private placement of our equity securities, business
development activities, convertible note financings, and our initial public offering, or IPO, completed in October 2014.
As of September
30, 2019, we had received an aggregate of $200.1 million in net proceeds comprised of $115.5 million from the issuance of private
equity securities, $7.7 million from the issuance of convertible notes, $10.0 million from business development activities, $0.2
million from government grants, $62.5 million from our IPO and $4.2 million from the sale of Common Stock under our now-terminated
at-the-market, or ATM, program with Cowen and Company, LLC.
We have
never been profitable and have incurred net losses in each year since inception. As of September 30, 2019, we had an accumulated
deficit of $223.9 million and our net loss for the three and nine months ended September 30, 2019 was $1.5 million and $13.4 million,
respectively. While we expect to incur significant expenses for the foreseeable future, we expect our research and development
expenses to decrease significantly as we continue to discontinue research and development activities and focus on evaluating our
strategic alternatives with the goal to enhance stockholder value, including the Merger or, if the Merger is not completed, the
possibility of another merger or sale of the Company.
As of September
30, 2019, we had approximately $9.3 million in existing cash and cash equivalents. Although we believe that our cash and cash equivalents
at September 30, 2019 will be sufficient to fund our operating expenses and capital expenditure requirements into 2020 and enable
us to complete the Merger with ArTara, we may not have sufficient cash on hand to fund our current operations for at least the
next 12 months from the filing date of this Quarterly Report on Form 10-Q. However, if there is a delay in completing the Merger,
we will require additional capital to sustain our operations through such completion or we will need to pursue an immediate dissolution.
If we need additional capital, we would need to raise such capital through debt or equity financings, asset sales or other strategic
transactions. However, there can be no assurances that we will be able to complete any such transaction on acceptable terms or
otherwise. The failure to obtain sufficient funds on commercially acceptable terms when needed could have a material adverse effect
on our business, results of operations and financial condition and may prevent us from completing the Merger. Accordingly, these
factors, among others, raise substantial doubt about our ability to continue as a going concern. For more information, refer to
“—Liquidity and Capital Resources” below and Note 1 to our condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q.
We do not expect
to generate revenue from product sales. We have no manufacturing facilities and all of our manufacturing activities were contracted
out to third parties. Additionally, we have used third-party clinical research organizations, or CROs, to carry out its clinical
development activities and we do not yet have a sales organization.
Recent Events
Merger Agreement
After we conducted
a diligent and extensive process of evaluating strategic alternatives and identifying and reviewing potential candidates for a
strategic transaction, which included the careful evaluation and consideration of proposals from interested parties, and following
extensive negotiation with ArTara, on September 23, 2019, we entered into the Merger Agreement with ArTara. Pursuant to the Merger
Agreement, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement,
the Merger sub will merge with and into ArTara, with ArTara surviving as our wholly owned subsidiary.
Subject to the terms
and conditions of the Merger Agreement, at the Effective Time, each share of ArTara common stock outstanding immediately prior
to the Effective Time (excluding certain shares to be canceled pursuant to the Merger Agreement and shares held by stockholders
who have exercised and perfected appraisal rights will be converted into the right to receive a number of shares of our common
stock equal to the exchange ratio, as more fully described below.
The Merger is intended
to qualify for U.S. federal income tax purposes as a reorganization under the provisions of Section 368(a) of the Internal Revenue
Code of 1986, as amended.
Under the exchange
ratio formula in the Merger Agreement and after giving effect to the Reverse Split assuming that the reverse split ratio is equal
to one new share of our common stock for every 40 shares of issued common stock outstanding immediately prior to the split effective
time, as of immediately after the closing of the Merger, but prior to the consummation of the Private Placement, as more fully
described below, the former ArTara equity holders immediately before the Merger are expected to own approximately 73.39% of the
Fully-Diluted Common Stock of the Company, and our equity holders immediately before the Merger are expected to own approximately
26.61% of the Fully-Diluted Common Stock of the Company. The exchange ratio will be adjusted to the extent that our net cash is
greater than $3,550,000 or less than $2,950,000 (collectively, the “Target Parent Net Cash Range”); provided, however,
that (i) if the initial filing of the Registration Statement is made after October 15, 2019, then the lower limit of the Target
Parent Net Cash Range shall be decreased by $200,000, (ii) if the initial filing of the Registration Statement is made by us after
October 30, 2019, then the lower limit of the Target Parent Net Cash Range shall be decreased by an additional $250,000 (with additional
decreases of $250,000 to be made for delayed filings each 16th and 1st of each month, commencing November 1, 2019), (iii) if ArTara
does not provide us with the Company No Divestiture Notice and, if prior to receipt of the Company No Divestiture Notice, we have
not provided to ArTara the Parent Divestiture Notice, then the lower limit of the Target Parent Net Cash Range shall be decreased
by 100% of the costs and expenses that we incur to maintain the divestiture assets through closing and (iv) if ArTara provides
the Company No Divestiture Notice to us, and if, prior to receipt of the Company No Divesture Notice, we have not provided a Parent
Divestiture Notice, then the lower limit of the Target Parent Net Cash Range shall be decreased by $0.4 million. The exchange ratio
formula includes ArTara’s outstanding stock options and our outstanding stock options and the number of shares of our common
stock issuable upon conversion of all outstanding shares of our Series A Preferred Stock. After the consummation of the Merger,
the Private Placement and the Series A Preferred Automatic Conversion, and after giving effect to the Reverse Split assuming that
the reverse split ratio is equal to one new share of our common stock for every 40 shares of issued common stock outstanding immediately
prior to the split effective time, certain institutional investors participating in the Private Placement are expected to own 60.93%
of the Fully-Diluted Common Stock of the Company, the former ArTara equity holders immediately before the Merger are expected to
own approximately 28.67% of the Fully-Diluted Common Stock of the Company, and our equity holders immediately before the Merger
are expected to own approximately 10.39% of the Fully-Diluted Common Stock of the Company, subject to the adjustments described
above.
As promptly as practicable
after the date of the Merger Agreement (but in no event later than 50 days following the date of the Merger Agreement), the parties
will prepare and we will file with the SEC the Registration Statement to register the shares of our common stock to be issued at
the Effective Time under the Securities Act, and we will seek the approval of its stockholders with respect to certain actions,
including the following:
|
·
|
the issuance of shares of our common stock
to ArTara's stockholders in connection with the transactions contemplated by the Merger Agreement and shares of our capital stock
to the institutional investors in the Private Placement, pursuant to Nasdaq rules;
|
|
·
|
the amendment of our certificate of incorporation
(i) to effect immediately prior to the closing of the Merger the Reverse Split and (ii) to effect immediately after the consummation
of the Private Placement the Series A Preferred Automatic Conversion; and
|
Concurrently with
the execution of the Merger Agreement, we delivered to ArTara the written consent of the holders of 92.7% of the shares of our
Series A Preferred Stock outstanding as of September 23, 2019 approving the Series A Preferred Automatic Conversion.
The consummation of
the Merger is also subject to the satisfaction or waiver of certain conditions, including, among other things, (i) approval by
our stockholders and ArTara’s stockholder (other than with respect to the EIP Amendment), (ii) Nasdaq approval of the listing
of the shares to be issued to ArTara equity holders in connection with the consummation of the Merger, (iii) satisfaction of all
conditions precedent to the closing of the Private Placement (other than the consummation of the Merger and appointment of certain
board members), (iv) absence of a material adverse effect since the date of the Merger Agreement, (v) the accuracy of the representations
and warranties, subject to material adverse effect qualifications, (vi) compliance by the parties with their respective covenants
in all material respects, (vii) the Subscription Agreement (as defined below) being in full force and effect and no less than $40.0
million to be committed thereunder and (viii) us having at least $0 in net cash as of the closing date of the Merger.
The Merger Agreement
contains certain termination rights for both us and ArTara, and further provides that, upon termination of the Merger Agreement
under specified circumstances, we may be required to pay to ArTara a termination fee of $0.8 million or ArTara may be required
to pay to us a termination fee of $0.8 million, and in other circumstances each party may be required to reimburse the other party's
expenses incurred, up to a maximum of $0.4 million.
In accordance with
the terms of the Merger Agreement, (i) certain executive officers, directors and stockholders of ArTara (solely in their respective
capacities as ArTara stockholders) have entered into support agreements with ArTara and us to vote all of their shares of ArTara
capital stock in favor of adoption of the Merger Agreement and (ii) certain of our executive officers, directors and stockholders
(solely in their respective capacities as our stockholders) have entered into support agreements with ArTara and us to vote all
of their shares of our common stock in favor of the our Stockholder Matters. Concurrently with the execution of the Merger Agreement,
our stockholder and certain officers, directors and stockholders of ArTara have entered into lock-up agreements pursuant to which
they accepted certain restrictions on transfer of shares of our common stock for the 180-day period following the closing of the
Merger.
At the Effective Time,
we will effect a name change and it is anticipated that trading for our securities will be listed on The Nasdaq Capital Market.
Additionally, at the Effective Time, our board of directors is expected to consist of seven members, with five such members
designated by ArTara, one such member designated by us, and one such member who will be Mr. Jesse Shefferman, the Chief Executive
Officer of the combined company.
Private Placement
In connection with
the Merger, on September 23, 2019, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain
institutional investors (the “Investors”), pursuant to which we have agreed to issue in a private placement (the “Private
Placement”) (i) up to 27,200 shares of our Series 1 Convertible Non-Voting Preferred Stock, par value $0.001 per share (the
“Series 1 Preferred Stock”), at a purchase price equal to 1,000 times the Common Stock Purchase Price (as defined below)
and (ii) up to 15,300 shares of our common stock (together with the Series 1 Preferred Stock, the “Private Placement Shares”),
at a purchase price equal to (x) the Aggregate Valuation (as defined in the Merger Agreement) divided by the (y) the Post-Closing
Parent Shares (as defined in the Merger Agreement) (the “Common Stock Purchase Price”).
Pursuant to the Subscription
Agreement, the holders of Series 1 Preferred Stock have preemptive rights to participate pro rata in our future equity financings,
subject to certain exceptions and limitations. In addition, following the issuance of the Private Placement Shares pursuant to
the Subscription Agreement, certain of the Investors have rights to nominate directors to our board of directors and non-voting
board observers. We have also agreed not to take certain actions related to the business without the consent of the lead investor
for so long as such lead investor continues to hold a minimum amount of the Private Placement Shares purchased under the Subscription
Agreement.
Prior to the issuance
of the Private Placement Shares, we intend to file a Certificate of Designation of Preferences, Rights and Limitations of Series
1 Convertible Non-Voting Preferred Stock (the "Certificate of Designation") with the Delaware Secretary of State. Thereunder,
each share of Series 1 Preferred Stock will be convertible into 1,000 shares of our common stock, at a conversion price initially
equal to the Common Stock Purchase Price, subject to adjustment for any stock splits, stock dividends and similar events, at any
time at the option of the holder, provided that any conversion of Series 1 Preferred Stock by a holder into shares of our common
stock would be prohibited if, as a result of such conversion, the holder, together with its affiliates and any other person or
entity whose beneficial ownership of the common stock would be aggregated with such holder’s for purposes of Section 13(d)
of the Exchange Act would beneficially own more than 9.99% of the total number of shares of our common stock issued and outstanding
after giving effect to such conversion. Upon written notice to us, the holder may from time to time increase or decrease such limitation
to any other percentage not in excess of 19.99% specified in such notice.
Each share of Series
1 Preferred Stock will be entitled to a preference of $10.00 per share upon our liquidation, and thereafter will share ratably
in any distributions or payments on an as-converted basis with the holders of our common stock. In addition, upon the occurrence
of certain transactions that involve our merger or consolidation, an exchange or tender offer, a sale of all or substantially all
of our assets or a reclassification of our common stock, each share of Series 1 Preferred Stock will be convertible into the kind
and amount of securities, cash and/or other property that the holder of a number of shares of our common stock issuable upon conversion
of one share of Series 1 Preferred Stock would receive in connection with such transaction.
The Private Placement
is expected to close immediately following the consummation of the Merger.
Financial Overview
Research and Development Expenses
Research and development
expenses consisted primarily of costs incurred for the development of vonapanitase and costs associated with the discontinuation
of our research and development activities, which include:
|
•
|
employee-related expenses, including salaries, benefits, travel, stock-based compensation expense and severance payments;
|
|
•
|
expenses incurred under agreements with clinical research organizations, or CROs and investigative sites that conducted our clinical trials;
|
|
|
|
|
•
|
the cost of acquiring, developing and manufacturing clinical trial materials;
|
|
•
|
costs associated with regulatory operations; and
|
|
•
|
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.
|
In April 2019, we
initiated plans to discontinue research and development activities to reduce operating expenses. We will continue to expense the
remaining research and development costs to operations as incurred. We recognize costs for certain development activities, such
as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment,
clinical site activations or information provided to us by our vendors.
Our efforts to discontinue
development activities include the following:
|
•
|
we closed the 39 clinical sites that participated in our second Phase 3 trial, PATENCY-2, and terminated the long-term follow-up patient registry;
|
|
•
|
we had planned to enroll up to an additional 16 patients in a Phase 1 clinical trial of vonapanitase in
patients with peripheral artery disease, or PAD before the end of 2019 and to follow each of these patients for period of up to
seven months. However, based on our current operating plan, we have decided not to continue patient enrollment in the Phase 1 trial
evaluating vonapanitase in PAD; and
|
|
•
|
we have discontinued all activities relating to the manufacture of clinical trial materials in support of our clinical trials and process validation activities that were undertaken in anticipation of a potential BLA submission.
|
General and Administrative Expenses
General and administrative
expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses,
in executive and other administrative functions. Other general and administrative expenses also include professional fees for legal,
patent review, consulting and accounting services as well as facility related costs, as well as expenses related to audit, legal,
regulatory and tax-related services associated with maintaining compliance with our NASDAQ listing and SEC requirements, director
and officer liability insurance premiums and investor relations costs associated with being a public company.
Investment Income
Investment income
consists of interest income earned on our cash, cash equivalents and marketable securities.
Other Income (Expense), Net
Other income (expense),
net consists of the gain realized from non-cash gains and losses from currency exchange rate fluctuations on transactions or balances
denominated in a foreign currency.
Critical Accounting Policies and Significant
Judgments and Estimates
Our management’s
discussion and analysis of our financial position and results of operations is based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation
of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. On an ongoing basis, we evaluate estimates, which include estimates related
to clinical trial accruals, stock-based compensation expense, and reported amounts of revenues and expenses during the reported
period. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe
to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions.
There have been no
material changes to our accounting policies from those described in our Annual Report on Form 10-K for the year ended December
31, 2018, as filed with the SEC on March 13, 2019. It is important that the discussion of our operating results that follows be
read in conjunction with the critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December
31, 2018, as filed with the SEC on March 13, 2019.
Results of Operations
Comparison of the Three Months Ended
September 30, 2019 and 2018
The following table
summarizes our results of operations for the three months ended September 30, 2019 and 2018 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Period-to-Period Change
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
206
|
|
|
$
|
2,354
|
|
|
$
|
(2,148
|
)
|
General and administrative
|
|
|
1,385
|
|
|
|
2,268
|
|
|
|
(883
|
)
|
Total operating expenses
|
|
|
1,591
|
|
|
|
4,622
|
|
|
|
(3,031
|
)
|
Loss from operations
|
|
|
(1,591
|
)
|
|
|
(4,622
|
)
|
|
|
3,031
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
53
|
|
|
|
113
|
|
|
|
(60
|
)
|
Other income (expense), net
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
3
|
|
Total other income
|
|
|
55
|
|
|
|
112
|
|
|
|
(57
|
)
|
Net Loss
|
|
$
|
(1,536
|
)
|
|
$
|
(4,510
|
)
|
|
$
|
2,974
|
|
Research and Development
Expenses. The following table identifies research and development expenses on both an external and internal basis for the three
months ended September 30, 2019 and 2018 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Period-to-Period Change
|
|
|
|
|
|
|
|
External vonapanitase research and development expenses
|
|
$
|
171
|
|
|
$
|
1,269
|
|
|
$
|
(1,098
|
)
|
Internal research and development expenses
|
|
|
35
|
|
|
|
1,085
|
|
|
|
(1,050
|
)
|
Total research and development expenses
|
|
$
|
206
|
|
|
$
|
2,354
|
|
|
$
|
(2,148
|
)
|
During the three
months ended September 30, 2019, our total research and development expenses decreased by $2.1 million compared to the three months
ended September 30, 2018 primarily due to $1.1 million in decreased external research and development expenses and $1.0 million
in decreased internal research and development expenses. The decrease of $1.1 million in external expenses was primarily driven
by $0.7 million in decreased expenses for our completed clinical trials and $0.3 million in decreased expenses in our manufacturing
expenses. The decrease of our internal research and development expenses of $1.0 million in the three months ended September 30,
2019 as compared to the three months ended September 30, 2018 was primarily due to our reduction in force.
General and Administrative
Expenses. During the three months ended September 30, 2019, our total general and administrative expenses were $0.9 million
lower as compared to the three months ended September 30, 2018 primarily due to our reduction in force in the three months ended
September 30, 2019 as compared to the three months ended September 30, 2018.
Investment Income.
During the three months ended September 30, 2019, investment income decreased by an immaterial amount.
Other Income (Expense),
Net. During the three months ended September 30, 2019, other expense, net, increased by an immaterial amount.
Comparison of the Nine Months Ended
September 30, 2019 and 2018
The following table summarizes our results
of operations for the nine months ended September 30, 2019 and 2018 (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Period-to-Period Change
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
6,374
|
|
|
$
|
9,185
|
|
|
$
|
(2,811
|
)
|
General and administrative
|
|
|
7,240
|
|
|
|
6,802
|
|
|
|
438
|
|
Total operating expenses
|
|
|
13,614
|
|
|
|
15,987
|
|
|
|
(2,373
|
)
|
Loss from operations
|
|
|
(13,614
|
)
|
|
|
(15,987
|
)
|
|
|
2,373
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
231
|
|
|
|
311
|
|
|
|
(80
|
)
|
Other income, net
|
|
|
1
|
|
|
|
206
|
|
|
|
(205
|
)
|
Total other income
|
|
|
232
|
|
|
|
517
|
|
|
|
(285
|
)
|
Net Loss
|
|
$
|
(13,382
|
)
|
|
$
|
(15,470
|
)
|
|
$
|
2,088
|
|
Research and Development Expenses.
The following table identifies research and development expenses on both an external and internal basis for the nine months ended
September 30, 2019 and 2018 (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Period-to-Period Change
|
|
|
|
|
|
|
|
External vonapanitase research and development expenses
|
|
$
|
3,764
|
|
|
$
|
5,821
|
|
|
$
|
(2,058
|
)
|
Internal research and development expenses
|
|
|
2,610
|
|
|
|
3,364
|
|
|
|
(753
|
)
|
Total research and development expenses
|
|
$
|
6,374
|
|
|
$
|
9,185
|
|
|
$
|
(2,811
|
)
|
During the nine months ended September
30, 2019, our total research and development expenses decreased by $2.8 million compared to the nine months ended September 30,
2018 primarily due to $2.0 million in decreased external research and development expenses and $0.8 million in decreased internal
research and development expenses. The decrease of $2.0 million in external expenses was primarily driven by $1.5 million in decreased
expenses for our completed clinical trials and $0.5 million in decreased expenses in our manufacturing expenses. Internal research
and development expenses decreased by $0.8 million in the nine months ended September 30, 2019 as compared to the nine months ended
September 30, 2018 primarily due to our reduction in force.
General and
Administrative Expenses. During the nine months ended September 30, 2019, our total general and administrative expenses were
$0.4 million higher as compared to the nine months ended September 30, 2018 primarily due to increased expenses to support our
ongoing corporate activities, including expenses related to the Merger, in the nine months ended September 30, 2019.
Investment Income.
During the nine months ended September 30, 2019 investment income decreased by an immaterial amount.
Other Income, Net.
During the nine months ended September 30, 2019, other income, net, decreased by $0.2 million as compared to the nine months ended
September 30, 2018 primarily due to foreign currency remeasurement gain for cash denominated in Swiss Francs.
Liquidity and Capital Resources
Overview
Since our inception
and through the nine months ended September 30, 2019, we had received $200.1 million in net proceeds comprised of $115.5 million
from the issuance of private equity securities, $7.7 million from the issuance of convertible notes, $10.0 million from business
development activities, $0.2 million from government grants, $62.5 million from our IPO and $4.2 million from the sale of Common
Stock under our now-terminated at-the-market, or ATM, program with Cowen and Company, LLC. As of September 30, 2019, our cash and
cash equivalents totaled $9.3 million.
Operating Capital
Requirements
We expect to incur
ongoing operating losses for the foreseeable future as we evaluate our strategic alternatives, including the Merger or, if the
Merger is not completed, the possibility of another merger or sale of the Company. Even if we consummate the Merger, or another
strategic transaction, the combined company may not be able to complete the clinical development of vonapanitase and obtain approval
of vonapanitase from the FDA or EMA.
Although we believe
that our cash and cash equivalents as of September 30, 2019 will be sufficient to fund our operations into 2020 and enable us to
complete the Merger with ArTara, we may not have sufficient cash on hand to fund our current operations for at least the next 12
months from the filing date of this Quarterly Report on Form 10-Q. However, if there is a delay in completing the Merger, we will
require additional capital to sustain our operations through such completion or we will need to pursue an immediate dissolution.
If we need additional capital, we would need to raise such capital through debt or equity financings, asset sales or other strategic
transactions. However, there can be no assurances that we will be able to complete any such transaction on acceptable terms or
otherwise. The failure to obtain sufficient funds on commercially acceptable terms when needed could have a material adverse effect
on our business, results of operations and financial condition and may prevent it from completing the Merger. Accordingly, these
factors, among others, raise substantial doubt about our ability to continue as a going concern.
Pursuant to the requirements
of Accounting Standards Codification (ASC) 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a
Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial
doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.
This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have
not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology,
management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about our ability to
continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable
that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2)
it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about
the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
See Note 1 to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion
of our liquidity and the conditions and events which raise substantial doubt regarding our ability to continue as a going concern.
Our forecast of the
period of time through which our financial resources will be adequate to support our operations is a forward-looking statement
and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate
on assumptions that may prove to be wrong and we could exhaust our available capital resources sooner than we currently expect.
Our future funding requirements, both near and long-term, will depend on many factors, including:
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•
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our ability to identify and consummate a strategic transaction for the Company;
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•
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the timing and nature of any strategic transactions that we undertake;
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•
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whether we enter into a partnership or business combination;
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•
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the terms and timing of any future collaborations, licensing, consulting or other arrangements that we may establish; and
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•
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the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims.
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Cash Flows
The following table
summarizes our sources and uses of cash for the nine months ended September 30, 2019 and 2018 (in thousands):
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Nine Months Ended September 30,
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2019
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2018
|
|
|
|
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Net cash used in operating activities
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$
|
(12,506
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)
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$
|
(18,920
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)
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Net cash provided by investing activities
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|
|
2,484
|
|
|
|
13,014
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
2,937
|
|
Effect of exchange rate changes on cash
|
|
|
-
|
|
|
|
24
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Net decrease in cash, cash equivalents, and restricted cash
|
|
$
|
(10,022
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)
|
|
$
|
(2,945
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)
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Comparison of the Nine
Months Ended September 30, 2019 and 2018
Net cash used in operating
activities was $12.5 million for the nine months ended September 30, 2019 compared to $18.9 million for the nine months ended September
30, 2018. The decrease of $6.4 million in cash used in operating activities was primarily driven by a $4.3 million decrease in
cash outflows related to changes in the components of working capital combined with a decrease in our net loss of $2.1 million,
as compared to the nine months ended September 30, 2018.
Net cash provided by
investing activities was $2.5 million for the nine months ended September 30, 2019 compared to $13.0 million provided in the nine
months ended September 30, 2018. The change of $10.5 million in cash provided by investing activities was driven by a decrease
in cash inflows of $23.5 million due to lower proceeds from maturities and sales of available-for-sale investments offset by $13.0
million decrease in cash outflows in the nine months ended September 30, 2019 as compared to the nine months ended September 30,
2018.
Off-Balance Sheet Arrangements
We did not have during
the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the applicable regulations
of the SEC.
Contractual Obligations
As of September 30,
2019 there are no outstanding contractual obligations.
JOBS Act
In April 2012, the
Jumpstart Our Business Startups Act, or JOBS Act was enacted in the United States. Section 107 of the JOBS Act provides that an
“emerging growth company,” or EGC, 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. Thus, an emerging growth company can delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not
to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the
relevant dates on which adoption of such standards is required for non-emerging growth public companies.