The accompanying notes are an integral part of these condensed financial statements.
The accompanying notes are an integral part of these condensed financial statements.
The accompanying notes are an integral part of these condensed financial statements.
Notes to Unaudited Condensed Financial Statements
1.
|
Organization and Basis of Presentation
|
Neothetics, Inc. (Neothetics or the Company) was incorporated in Delaware on February 1, 2007, under the name Lipothera, Inc. In September 2008, the Company changed its name to Lithera, Inc. In August 2014, the Company changed its name to Neothetics, Inc. The Company is a clinical-stage specialty pharmaceutical company that has been focused on developing therapeutics for the aesthetic market. In June 2017, the Company announced that its Phase 2 proof-of-concept clinical trial of its lead product candidate LIPO-202 did not demonstrate improvement on any efficacy measurements or separation from placebo. As a consequence of the negative results from the Phase 2 proof-of-concept clinical trial of its lead product candidate LIPO-202, the Company announced its plans to initiate a process to explore and review a range of strategic alternatives focusing on seeking an acquisition, business combination or partnership that will allow for it to maximize shareholder value from its remaining assets and cash resources. Oppenheimer and Co., Inc. has been retained to act as the Company’s exclusive financial advisor for this process. Further related to the negative trial results, the Company announced a reduction of the Company’s current full-time workforce of six employees to two employees in order to reduce operating expenses and conserve cash resources. The Company’s evaluation of potential business alternatives entails numerous significant risks and uncertainties, including the risks and uncertainties set forth in Item 1A under the heading “Risk Factors” of this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K. There can be no assurance that our evaluation of potential business alternatives will result in any transaction.
The accompanying unaudited financial statements of the Company should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K (Annual Report) filed with the Securities and Exchange Commission (SEC). The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The Company has incurred significant net losses from its operations since its inception and has an accumulated deficit of $131.7 million as of June 30, 2017. In the first six months of 2017, the Company used $4.0 million of cash in operations. At June 30, 2017, the Company had cash and cash equivalents of $7.6 million. There is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements for the quarter ended June 30, 2017 are issued.
We cannot predict whether and to what extent we will resume drug development activities and what our future cash needs would be for any such activities. If our process to identify and evaluate a potential merger or sale is not successful, our Board of Directors may decide to pursue a dissolution and liquidation of our Company. In such an event, the amount of cash available for distribution to our shareholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities, in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of 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 financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts.
5
Restricted Cash
Restricted cash as of June 30, 2017 represents a $93,382 restricted money market account used to secure the standby letter of credit issued in connection with a lease amendment. The restriction will lapse when the standby letter of credit expires (see Note 5 “Debt”).
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same such amounts shown in the statement of cash flows.
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash and cash equivalents
|
|
$
|
7,588,571
|
|
|
$
|
21,471,803
|
|
Restricted cash
|
|
|
93,382
|
|
|
|
200,000
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
7,681,953
|
|
|
$
|
21,671,803
|
|
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash due to the financial position of the depository institution in which those deposits are held.
Fair Value of Financial Instruments
The carrying amounts of prepaid and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items.
Property and Equipment
Property and equipment, which primarily consist of office furniture and equipment and computer equipment, are stated at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method.
Impairment of Long-Lived Assets
Long-lived assets consist primarily of property and equipment. An impairment loss is recorded if and when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. While the Company's current and historical operating losses and negative cash flows are indicators of impairment, management believes that future cash flows to be received support the carrying value of its long-lived assets and, accordingly, has not recognized any impairment losses since inception.
Research and Development Costs
Research and development expenses consist primarily of salaries and related overhead expenses, fees paid to consultants and contract research organizations, costs related to acquiring and manufacturing clinical trial materials, and costs related to compliance with regulatory requirements.
All research and development costs are charged to expense as incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are recorded when the realizability of such deferred tax assets is not more likely than not.
The guidance on accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. The Company has not recognized interest and penalties in the balance sheets or statements of operations. The Company is
6
subject to taxation in the U.S. and state jurisdictions. The Company’s tax years from inception are subject to examination by the United States and California authorities du
e to the carryforwards of unutilized net operating losses (NOLs) and research and development credits.
Share-Based Compensation
Share-based compensation expense for stock option grants, restricted stock awards and employee stock purchase plan shares is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the requisite service period of the stock-based award. The estimation of stock options, restricted stock awards and employee stock purchase plan fair value requires management to make estimates and judgments about, among other things, employee exercise behavior, forfeiture rates and volatility of the Company’s common stock. The judgments directly affect the amount of compensation expense that will be recognized.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding during the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities, which include warrants and outstanding stock options and restricted stock awards under the stock compensation plans, have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.
The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive.
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants for common stock
|
|
|
71,257
|
|
|
|
71,257
|
|
Common stock options and restricted stock awards issued and outstanding
|
|
|
1,654,348
|
|
|
|
1,372,861
|
|
|
|
|
1,725,605
|
|
|
|
1,444,118
|
|
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (or ASU) 2016-02, Leases. ASU 2016-02 requires that lessees recognize assets and liabilities for the rights and obligations for leases with a lease term of more than one year. The amendments in this ASU are effective for annual periods ending after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of adoption on its financial statements.
3. Fair Value Measurements
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts payable, accrued expenses, including warrants issued in connection with financing arrangements, and long-term debt. Fair value estimates of these instruments are made at a specific point in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of cash and cash equivalents, accounts payable, and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of these instruments. The Company believes that the fair value of long-term debt approximates its carrying value based on the borrowing rates currently available to the Company for loans with similar terms.
The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers or sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance prioritizes three levels of inputs into the following hierarchy:
Level 1
— Quoted prices in active markets for identical assets or liabilities.
7
Level 2
— Inputs other than Level 1 that are observable, either directly or indirectly, such as
quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Balance as of
June 30,
2017
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund
(1)
|
|
$
|
7,588,571
|
|
|
$
|
7,588,571
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
7,588,571
|
|
|
$
|
7,588,571
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
Included as a component of cash and cash equivalents on accompanying balance sheet.
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Balance as of
December 31,
2016
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund
(1)
|
|
$
|
11,477,852
|
|
|
$
|
11,477,852
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
11,477,852
|
|
|
$
|
11,477,852
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
Included as a component of cash and cash equivalents on accompanying balance sheet.
|
4. Property and Equipment
Property and equipment consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Office furniture and equipment
|
|
$
|
100,577
|
|
|
$
|
254,049
|
|
Less accumulated depreciation and amortization
|
|
|
(71,120
|
)
|
|
|
(144,729
|
)
|
|
|
$
|
29,457
|
|
|
$
|
109,320
|
|
5. Debt
Loans
In February 2010, and as amended during 2012, the Company entered into a loan and security agreement (2010 Loan and Security Agreement) with Silicon Valley Bank (SVB), for borrowings of $3,750,000, collateralized by all assets of the Company. In connection with the borrowings, the Company issued warrants to the bank for the purchase of a total of 64,865 shares of Series B convertible preferred stock and warrants to purchase 75,000 shares of Series C convertible preferred stock. Effective upon the IPO, this was converted to a warrant to purchase 24,419 shares of common stock at a weighted average exercise price of $9.90 and expire ten years from the date of issuance. The 2010 Loan and Security Agreement was paid in full in June 2014.
In June 2014, the Company entered into a Loan and Security Agreement (Loan Agreement) with Hercules Technology Growth Capital Inc. that provided for borrowings up to $10.0 million available to the Company in two tranches. Upon closing of the Loan Agreement, the Company borrowed $4.0 million. In October 2014, the Company entered into the first amendment of the Loan Agreement and borrowed the remaining $6.0 million available under the agreement.
8
In connection with the Loan Agreement, in June 2014, the Company issued warrants to purch
ase shares of Series C convertible preferred stock equal to 4% of the amount advanced under the loan. Effective upon the IPO, this was converted to a warrant to purchase 46,838 shares of common stock at $8.54, which expires eight years after the date of is
suance. The fair value of the warrants issued was $207,429, based on the fair value of such Series C warrants at the date of issuance. The warrants’ fair value and financing fees of approximately $133,000 were recorded as a debt discount.
In March 2016, the Company entered into the second amendment of the Loan Agreement that provided for a prepayment of the outstanding loan carrying amount of $5.5 million with a prepayment fee of $110,000. In connection with the second amendment, the Company re-priced the outstanding warrants to purchase 46,838 shares of common stock at a new exercise price of $0.62, which expire in September 2022 unless exercised prior to such expiration date. The Company recorded a debt discount of $9,417 associated with the fair value of the warrants issued in connection with the amendment. In addition, the Company incurred loan amendment fees and legal fees of $52,400, which the Company recorded as a debt discount.
In September 2016, the Company prepaid the remaining outstanding balance under the Loan Agreement at a carrying amount of $4.0 million with a prepayment fee of $120,000 and an end of term fee of $300,000. Accordingly, the Loan Agreement was terminated on September 23, 2016. Upon termination of the Loan Agreement, the prepayment fees of $230,000 and unamortized end of term fee of $260,000 were recorded as interest expense.
From June 2014 through payoff in September 2016, the Company paid interest equal to the greater of either 9.0%, plus the Prime Rate as reported in The Wall Street Journal, less 3.25% or 9.0%. The Company recorded total interest expense of $0 and $154,057 related to the Loan Agreement for the three months ended June 30, 2017 and 2016, respectively.
Letter of Credit
In January 2015, the Company executed a lease amendment with LJ Gateway, LLC for new office space. In connection with this lease amendment the Company issued a stand-by letter of credit in the amount of $200,000 in lieu of a security deposit. Pursuant to the terms set forth in the lease amendment, as of March 31, 2017, the stand-by letter of credit was reduced to $93,382. The standby letter of credit is secured by a restricted money market account. The terms of the standby letter of credit expire in May 2020, which is subject to automatic yearly renewal prior to this date.
6. Stockholders’ Equity
Warrants
As of June 30, 2017, warrants to purchase 71,257 shares of common stock remain outstanding, of which 24,419 warrants to purchase shares of common stock are at a weighted average exercise price of $9.90 and 46,838 warrants to purchase shares of common stock are at an exercise price of $0.62.
Common Stock
On December 1, 2015, the Company entered into a Controlled Equity Offering Sales Agreement, or Sales Agreement, with Cantor Fitzgerald, as a sales agent pursuant to which the Company may offer and sell from time to time, through Cantor Fitzgerald shares of Neothetics common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. The minimum share price for this Controlled Equity Offering is selected at the discretion of the board of directors. Through June 30, 2017, no shares of common stock have been sold pursuant to this Sales Agreement
.
Stock Compensation Plans
The following table summarizes the Company’s stock compensation plan activity for the six months ended June 30, 2017:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
871,203
|
|
|
$
|
2.95
|
|
Granted
|
|
|
875,300
|
|
|
$
|
1.88
|
|
Exercised
|
|
|
(3,251
|
)
|
|
$
|
1.06
|
|
Forfeited
|
|
|
(88,904
|
)
|
|
$
|
1.35
|
|
Outstanding and exercisable at June 30, 2017
|
|
|
1,654,348
|
|
|
$
|
2.47
|
|
9
The Company recognized non-cash share-based compensation expense related to its 2014 Employee Stock Purchase Plan, restricted stock awards and stock options granted to employees and directors as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
General and administrative
|
|
$
|
176,394
|
|
|
$
|
111,840
|
|
|
$
|
254,580
|
|
|
$
|
784,150
|
|
Research and development
|
|
|
114,579
|
|
|
|
60,836
|
|
|
|
167,489
|
|
|
|
103,213
|
|
|
|
$
|
290,973
|
|
|
$
|
172,676
|
|
|
$
|
422,069
|
|
|
$
|
887,363
|
|
Common Stock Reserved for Future Issuance
The following shares of common stock are reserved for future issuance at June 30, 2017:
Warrants issued and outstanding
|
|
|
71,257
|
|
Stock options issued and outstanding
|
|
|
1,654,348
|
|
Authorized for future awards under stock compensation plans
|
|
|
2,042,823
|
|
Employee Stock Purchase Plan
|
|
|
574,460
|
|
|
|
|
4,342,888
|
|
7. Commitments
Operating Leases
The Company entered into a noncancelable operating lease for its facilities on January 20, 2015. The lease expires in March 2020.
On January 31, 2017, the Company entered into an Eleventh Amendment to the Lease with LJ Gateway Office LLC. Concurrent with entering into the Lease Amendment, the Company entered into a Sublease with Abacus Data Systems, Inc. (“Abacus”) providing for the sublease of approximately 11,107 rentable square feet. This Lease Amendment provides for additional space consisting of approximately 3,580 square feet located at Suite No. 250, 9171 Towne Centre Drive, San Diego California, which the Company occupies as its headquarters.
Upon occurrence of Abacus retaining possession of the original premises in February 2017, Abacus received rent abatement for months one, three, and four as well as a discount of 50% off the base rent for months five through nine. Abacus paid the Company a base rent of $27,768 for the second month’s rent and $30,317 security deposit. The base rent will increase by three percent on each annual anniversary. In February 2017, the Company recorded $353,000 of sublease liability. The Company has recorded the rental income collected or accrued under the sublease as a reduction of rent expense. Rent expense and sublease rental income under the Lease Amendment and Sublease for the three months ended June 30, 2017 were $49,000 and $74,900, respectively, and for the six months ended June 30, 2017 were $142,300 and $114,100 respectively.
The following table summarizes the minimum lease payments and sublease receipts under the lease agreements:
|
|
Lease Payments
|
|
|
Sublease Receipts
|
|
2017
|
|
$
|
261,144
|
|
|
$
|
111,072
|
|
2018
|
|
|
410,848
|
|
|
|
342,374
|
|
2019
|
|
|
431,507
|
|
|
|
352,645
|
|
2020
|
|
|
109,293
|
|
|
|
90,143
|
|
2021
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,212,792
|
|
|
$
|
896,234
|
|
10