Note 2
–
|
Liquidity Risks and Management
’s Plans
|
As of September 30, 2017, we had cash and cash equivalents of
$1.8 million, current liabilities of $29.5 million (including $12.5 million of long-term debt, current portion) and $12.5 million of long-term debt, non-current portion. Total long-term debt of $25 million was with affiliates of Deerfield Management, L.P. (Deerfield), who held a security interest in substantially all of our assets (Deerfield Loan).
On November 1, we announced that we had completed a series of transactions to generate short-term cash and potentially enable future capital transactions. Effective October 27, 2017,
LPH Investments Limited (LPH), a wholly-owned subsidiary of Lee’s Pharmaceutical Holdings Limited (Lee’s) acquired $10 million of newly issued shares of our common stock, representing a controlling interest in our Company. At the same time, we reached an agreement with Deerfield to restructure and retire the outstanding $25 million long-term debt, and entered into a nonbinding memorandum of understanding with Battelle (Battelle MOU) outlining potential terms to restructure certain accounts payable related to our device development activities with Battelle. In connection with the Battelle MOU, Battelle executed and delivered a waiver of its rights to receive payments under a liquidation preference pursuant to Series A Convertible Preferred Stock held by Battelle and the related Certificate of Designation of Preferences, Rights and Limitations effective February 15, 2017 (the foregoing transactions with LPH, Deerfield and Battelle are collectively referred to in this Quarterly Report on Form 10-Q as the November 2017 Restructuring).
See
, “– Note 10 – Subsequent Events.”
Although we believe that the November 2017 Restructuring has improved our financial position
and
better positions us to raise the capital needed to fund on-going operations and development plans, we expect to incur continuing significant losses and will require significant additional capital to further advance our AEROSURF clinical development program, satisfy our current obligations and support our operations for the next several years. Moreover, we do not have sufficient existing cash and cash equivalents for at least the next year following the date that these financial statements are issued. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that these financial statements are issued.
To potentially alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, management plans to seek additional capital through the following: (i) all or a combination of strategic transactions, and other potential alliances and collaborations focused on markets outside the U.S., as well as potential combinations (including by merger or acquisition) or other corporate transactions; and (ii) through public or private equity offerings. There can be no assurance that these alternatives will be available, or if available, that we will have sufficient cash resources and liquidity to fund our development activities and business operations for at least the next year following the date that these financial statements are issued. Accordingly, management has concluded that substantial doubt exists with respect to our ability to continue as a going concern through one year after the issuance of these financial statements.
As of
November 1, 2017, after closing the November 2017 Restructuring, we had cash and cash equivalents of $5.4 million. While we seek the additional capital that we require, we are working with our vendors and service providers
to extend payment terms of certain obligations and our available cash.
We believe that, before any additional financings, we will have sufficient cash resources to partially satisfy our existing obligations and fund our operations into January 2018.
These
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business, and do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Our ability to secure the capital that we will require through equity financings and other similar transactions is subject to regulatory and other constraints, including: (i)
our common stock is currently quoted
on the OTCQB
®
Market (OTCQB), which is operated by OTC Markets Group Inc., under the symbol WINT and may experience periods of illiquidity; (ii)
our common stock is currently considered a “penny stock,” such that brokers are required to adhere to more stringent market rules, which could result in reduced trading activity and trading levels in our common stock and limited or no analyst coverage; (iii) because we are no longer listed on a national securities exchange, we are not eligible to file a Form S-3 registration statement and our recent Form S-3 has expired; (iv) without a Form S-3, we are not able to use our ATM Program; (v) our controlling stockholder may not approve management proposals to increase the number of shares of common stock authorized under our Amended and Restated Certificate of Incorporation, as amended, which could impair our ability to conduct equity financings or enter into certain strategic transactions (mergers and acquisitions) that require stockholder approval under Delaware law; (vi) our capital structure, which currently consists of common stock, convertible preferred stock, pre-funded warrants and warrants to purchase common stock may make it difficult to conduct equity-based financings; and (vii) negative conditions in the broader financial and geopolitical markets. In light of the foregoing, we expect that we will more likely conduct securities offerings as private placements with registration rights, which we would register under a registration statement on Form S-1, or other transactions, any of which could result in substantial equity dilution of stockholders’ interests.
In the event that we cannot raise sufficient capital, we may be forced to consider transactions on less-than-favorable terms,
or limit or cease our development activities. If we are unable to raise the required capital, we may be forced to curtail all of our activities and, ultimately, cease operations. Even if we are able to raise sufficient capital, such financings may only be available on unattractive terms, or result in significant dilution of stockholders’ interests and, in such event, the market price of our common stock may decline.
We have from time to time collaborated with research organizations and universities to assess the potential utility of our KL
4
surfactant in studies funded in part through non-dilutive grants issued by U.S. Government-sponsored drug development programs, including grants in support of initiatives related to our AEROSURF clinical development program. In late May 2017, we announced that we have been awarded $0.9 million under a previously announced Phase II Small Business Innovation Research Grant (SBIR) valued at up to $2.6 million from the National Heart, Lung, and Blood Institute (NHLBI) of the National Institutes of Health (NIH) to support the AEROSURF phase 2b clinical trial.
We currently are determining whether, as a subsidiary of Lee
’s, we continue to be eligible for SBIR grants.
We also have received from time to time grants that support medical and biodefense-related initiatives under programs that encourage private sector development of medical countermeasures against chemical, biological, radiological and nuclear terrorism threat agents, and pandemic influenza, and provide a mechanism for federal acquisition of such countermeasures. Although there can be no assurance, we expect to pursue potential additional funding opportunities as they arise and expect that we may qualify for similar programs in the future.
As of September 30, 2017
, and November 8, 2017, we had outstanding 0.9 million pre-funded warrants issued in a July 2015 public offering, of which the entire exercise price was prepaid upon issuance, and 3,203 convertible preferred shares issued in the February 2017 private placement offering. Each preferred share is convertible into 1,000 shares of common stock. Upon exercise of the pre-funded warrants and conversion of the convertible preferred shares, we would issue common shares to the holders and receive no additional proceeds.
In addition, as of September 30, 2017, there were 120
million shares of common stock and 5 million shares of preferred stock authorized under our Amended and Restated Certificate of Incorporation, as amended, and approximately 85.0 million shares of common stock and approximately 5 million shares of preferred stock available for issuance and not otherwise reserved.
Note 3
–
|
Basis of Presentation
|
The
se interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP) for interim financial information in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normally recurring accruals) considered for fair presentation have been included. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. There have been no changes to our critical accounting policies since December 31, 2016. For a discussion of our accounting policies,
see
, “– Note 5 – Summary of Significant Accounting Policies” in this Quarterly Report on Form 10-Q, and “– Note 4 – Accounting Policies and Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements in our 2016 Form 10-K. Readers are encouraged to review those disclosures in conjunction with this Quarterly Report on Form 10-Q.
Note 4
–
|
Stockholders
’ Equity
|
February 2017 Private Placement
On February 15, 2017, we completed a private placement offering of 7,049 Series A Convertible Preferred Stock units
at a price per unit of $1,495, for an aggregate purchase price of approximately $10.5 million, including $1.6 million of non-cash consideration representing a reduction in amounts due and accrued as of December 31, 2016 for current development services that otherwise would have become payable in cash in the first and second quarters of 2017. Each unit consists of: (i) one share of Series A Convertible Preferred Stock, par value $0.001 per share (Preferred Shares); and (ii) 1,000 Series A-1 Warrants (Warrants) to purchase one share of common stock at an exercise price equal to $1.37 per share. Each Preferred Share may be converted at the holder's option at any time into 1,000 shares of common stock at a conversion price of $1.37 per share. The Warrants may be exercised beginning August 15, 2017 and through February 15, 2024. The Preferred Shares and the Warrants may not be converted or exercised to the extent that the holder would, following such exercise or conversion, beneficially own more than 9.99% (or other lesser percent as designated by each holder) of our outstanding shares of common stock. In the event of a liquidation, including without limitation, the sale of substantially all of our assets and certain mergers and other corporate transactions (as defined in the Certificate of Designation of Preferences, Rights and Limitations relating to the Preferred Shares), the holder of Preferred Shares will have a liquidation preference that could result in the holder receiving a return of its initial investment before any payments are made to holders of common stock, and then participating with other equity holders until it has received in the aggregate up to three times its original investment.
In addition to the offering, the securities purchase agreement also provides that, until February 13, 2018, the investors are entitled to participate in subsequent bona fide capital raising transactions that we may conduct.
As of November
8, 2017, 3,846 Preferred Shares have been converted into 3,846,000 shares of common stock and 3,203 Preferred Shares remain outstanding.
At-the-Market (ATM) Program
During the
nine months ended September 30, 2017, we completed offerings of our common stock under our ATM Program of 847,147 shares. This resulted in an aggregate purchase price of approximately $1,082,000 ($1,036,000 net) for the nine month period ended September 30, 2017. During the three and nine months ended September 30, 2016, we completed offerings of our common stock under our ATM Program of 159,051 shares and 187,022 shares, respectively. This resulted in an aggregate purchase price of approximately $432,000 ($402,000 net) and $503,000 ($471,000 net), respectively, for the three and nine month periods ended September 30, 2016.
Effective May 5, 2017, we
were no longer able to make use of our ATM Program (
see
, “– Note 2 – Liquidity Risks and Management’s Plans”).
Note 5
–
|
Summary of Significant Accounting Policies
|
Use of Estimates
The preparation of financial statements, in conformity with U.S.
GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Severance
Effective February 1, 2016, we terminated the Employment Agreement
between ourselves and our then-President and Chief Executive Officer (Former CEO). During the first quarter of 2016, we incurred a severance charge of $1.2 million in general and administrative expense under the terms of the Former CEO’s employment agreement, including $0.2 million related to stock option expense for certain options that continued to vest through August 1, 2017. Of the $1.0 million in severance not related to stock-based compensation, $0.9 million was paid as of September 30, 2017.
During the second quarter of 2016, we incurred a severance charge of
$0.4 million related to a May 2016 workforce reduction that was a component of a broader effort to initiate cash conservation and other cost reduction measures.
On July 13, 2017,
we implemented a reduction in workforce by 20 employees, representing approximately 42% of our total workforce, from 48 to 28 employees. The reduction was across all functions of the Company and affected employees were eligible for certain severance and other benefits resulting in a severance charge of $0.2 million in the third quarter of 2017.
Deferred Revenue
Deferre
d revenue represents amounts collected but not yet earned and includes $1.0 million received in July 2017 for an upfront license fee in connection with the License Agreement with Lee’s. The License Agreement constitutes a multiple-element arrangement and revenue will be recognized as deliverables are completed and all revenue recognition criteria have been met.
Research and Development Expense
We account for research and development expense by the following categories: (a) product development and manufacturing, (b)
medical and regulatory operations, and (c) direct preclinical and clinical programs. Research and development expense includes personnel, facilities, manufacturing and quality operations, pharmaceutical and device development, research, clinical, regulatory, other preclinical and clinical activities and medical affairs. Research and development costs are charged to operations as incurred.
Net Loss
p
er Common Share
Basic net loss per 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.
As of
September 30, 2017 and 2016, the number of shares of common stock potentially issuable upon the conversion of preferred stock or exercise of stock options and warrants was 18.2 million and 9.4 million shares, respectively. For the three and nine months ended September 30, 2017 and 2016, all potentially dilutive securities were anti-dilutive and therefore have been excluded from the computation of diluted net loss per share.
In accordance with Accounting Standards Codification Topic 260,
Earnings per Share,
when calculating diluted net loss per common share, a gain associated with the decrease in the fair value of warrants classified as derivative liabilities results in an adjustment to the net loss; and the dilutive impact of the assumed exercise of these 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 warrants classified as derivative liabilities. For the three and nine months ended September 30, 2017 and 2016, the effect of the adjustments for warrants classified as derivative liabilities was anti-dilutive.
We do not have any components of other comprehensive income (loss).
Beneficial Conversion Feature
The issuance of
our Preferred Shares in the first quarter of 2017 (
see
, “– Note 4 – Stockholders’ Equity”) resulted in a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor (or in the money) at inception due to the conversion option having an effective conversion price that is less than the fair value of the underlying stock at the commitment date. We recognized the beneficial conversion feature by allocating the relative fair value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the Preferred Shares. As the Preferred Shares are immediately convertible by the holders, the discount allocated to the beneficial conversion feature was immediately accreted and recognized as a $3.6 million one-time, non-cash deemed dividend to the preferred shareholders during the first quarter of 2017.
An additional discount to the Preferred Shares
of $4.5 million was created due to the allocation of proceeds to the Warrants which were issued with the Preferred Shares. This discount is amortized proportionately as the Preferred Shares are converted. For the three and nine month periods ended September 30, 2017, we recognized a non-cash deemed dividend to the preferred shareholders of $1.9 million and $2.4 million, respectively, related to the Preferred Shares converted during the periods.
Rece
nt
ly
Adopted
Accounting
Standards
In August 2014, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15,
Presentation of Financial Statements
–
Going Concern
(Subtopic 205-40):
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
, which defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. Substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or are available to be issued). We adopted ASU 2014-15 effective December 31, 2016. Management has concluded that substantial doubt exists with respect to our ability to continue as a going concern through one year after the issuance of these financial statements (s
ee
, “ – Note 2 – Liquidity Risks and Management's Plans”).
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This update addresses the income tax effects of stock-based payments and eliminates the windfall pool concept, as all of the tax effects related to stock-based payments will now be recorded at settlement (or expiration) through the income statement. The new guidance also permits entities to make an accounting policy election for the impact of forfeitures on the recognition of expense for stock-based payment awards. Forfeitures can be estimated or recognized when they occur. We adopted ASU 2016-09 during the three months ended March 31, 2017 and will continue to recognize stock compensation expense with estimated forfeitures. The adoption did not have a material impact on our unaudited condensed consolidated financial statements and is not expected to have an impact on the annual 2017 financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. We adopted ASU 2016-18 on March 31, 2017 on a retrospective basis. As a result, beginning-of-period cash, cash equivalents and restricted cash in the statement of cash flows increased by $0.2 million for each of the nine-month periods ended September 30, 2017 and 2016.
Recent Accounting Pronouncements
In May 2014, the FASB
issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which requires an entity to recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the annual period ending December 31, 2018 and interim periods within that annual period. An entity can elect to apply the guidance under one of the following two methods: (i) retrospectively to each prior reporting period presented, referred to as the full retrospective method or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings, referred to as the modified retrospective method. The Company has not yet completed its final review of the impact of this guidance including the new disclosure requirements, as it is continuing to evaluate the impacts of adoption and the implementation approach to be used. The Company plans to adopt the new standard effective January 1, 2018 using the modified retrospective method. The Company continues to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact its current conclusions.
In
May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
. This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The ASU is effective prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. Early adoption is permitted. We are currently evaluating the effect that ASU 2017-09 may have on our consolidated financial statements and related disclosures.
Note 6 –
|
Fair Value of Financial Instruments
|
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
|
●
|
Level 1
– Quoted prices in active markets for identical assets and liabilities.
|
|
●
|
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.
|
Fair Value on a Recurring Basis
The tables below categorize assets and liabilities measured at fair value on a recurring basis for the periods presented:
|
|
Fair Value
|
|
|
Fair value measurement using
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,752
|
|
|
$
|
1,752
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Certificate of deposit
|
|
|
225
|
|
|
|
225
|
|
|
|
-
|
|
|
|
-
|
|
Total Assets
|
|
$
|
1,977
|
|
|
$
|
1,977
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Fair Value
|
|
|
Fair value measurement using
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,588
|
|
|
$
|
5,588
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Certificate of deposit
|
|
|
225
|
|
|
|
225
|
|
|
|
-
|
|
|
|
-
|
|
Total Assets
|
|
$
|
5,813
|
|
|
$
|
5,813
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table summarizes changes in the fair value of common stock warrant liability
measured on a recurring basis using Level 3 inputs for the nine months ended September 30, 2016 representing the write-off of the remaining liability upon expiration of the underlying warrants in February 2016.
Balance at January 1, 2016
|
|
$
|
223
|
|
Change in fair value of common stock warrant liability
|
|
|
(223
|
)
|
Balance at September 30, 2016
|
|
$
|
-
|
|
Fair Value of Long-Term Debt
At
September 30, 2017, the estimated fair value of the Deerfield Loan (
see,
“– Note 8 – Long-term Debt”) was $23.0 million, compared to a carrying value for current and non-current portions of $25.0 million. The estimated fair value of the Deerfield Loan is based on discounting the future contractual cash flows to the present value at the valuation date. This analysis utilizes certain Level 3 unobservable inputs, including current cost of capital. Considerable judgment is required to interpret market data and to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts that could be realized in a current market exchange. The use of alternative market assumptions and estimation methodologies could have a material effect on these estimates of fair value. The methodology and assumptions do not take into consideration the restructuring and retirement of the Deerfield Loan effective November 1, 2017 (
see
, “– Note 10 – Subsequent Events”).
Loan Payable consists solely of amounts due under a loan agreement with
Lee’s (HK).
On
August 14, 2017, we entered into a loan agreement (Loan Agreement) with Lee’s (HK). Under the Loan Agreement, Lee’s (HK) agreed to lend us up to $3.9 million (Loan), to be funded at Lee’s (HK)’s sole discretion in three equal installments on August 15, September 10 and October 10, 2017. The Loan was to be used to support AEROSURF development activities and sustain our operations through October 31, 2017, while we and Lee’s (HK) negotiated the SPA and related agreements. The Loan accrued interest at a rate of 12% per annum. We received the three installments of $1.3 million from Lee's (HK) in accordance with the schedule. As partial consideration for the SPA, the outstanding principal balance of the Loan was applied in full satisfaction of a like amount of cash consideration payable by Lee’s (HK) at the closing of the SPA, and the Loan was discharged in full (
see
, “– Note 10 – Subsequent Events”).
As of September 30, 2017, accrued interest on the Loan was $
28,000.
As partial consideration for the Loan, the Company and Lee
’s (HK) also agreed to amend the License, Development and Commercialization Agreement dated as of June 12, 2017 between the parties (License Agreement) and have entered into Amendment No. 1 to the License Agreement (the Amendment). Under the terms of the Amendment, reductions have been made to certain of the milestone and royalty payments. As a result, the Company may receive up to $35.8 million (previously, $37.5 million) in potential clinical, regulatory and commercial milestone payments. The options to add Japan to the Licensed Territory (as defined in the License Agreement) and to manufacture the Company’s aerosol delivery device in and for the Licensed Territory are made effective immediately. In addition, Zhaoke Pharmaceutical (Hefei) Co. Ltd. an affiliate of Lee’s (HK), has been made a party to the License Agreement. Except as set forth in the Amendment, all other terms and conditions of the License Agreement remain in full force and effect.
Long-term debt consists solely of amounts due under the Deerfield Loan for the periods presented:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
12,500
|
|
|
$
|
-
|
|
Non-current portion
|
|
|
12,500
|
|
|
|
25,000
|
|
Total Deerfield Loan
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
The principal amount of the loan is payable in two equal annual installments of $12.5 million, payable in each of February 2018 and 2019.
See
, “Note 10 – Subsequent Events”.
The following amounts comprise the Deerfield Loan interest expense for the periods presented:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prepaid interest expense
|
|
$
|
276
|
|
|
$
|
347
|
|
|
$
|
819
|
|
|
$
|
1,435
|
|
Cash interest expense
|
|
|
260
|
|
|
|
191
|
|
|
|
771
|
|
|
|
191
|
|
Total interest expense
|
|
$
|
536
|
|
|
$
|
538
|
|
|
$
|
1,590
|
|
|
$
|
1,626
|
|
Amortization of prepaid interest expense represents non-cash amortization of $5 million of units
purchased by Deerfield in our July 2015 public offering and accepted in satisfaction of $5 million of future interest payments calculated at an interest rate of 8.75% under the Deerfield Loan. Cash interest expense represents interest at an annual rate of 8.25% on the outstanding principal amount, paid in cash on a quarterly basis.
Note
9
–
|
Stock Options and Stock-Based Employee Compensation
|
We recognize in our condensed consolidated financial statements all stock-based awards to employees and non-employee directors based on their fair value on the date of grant, calculated using the Black-Scholes option-pricing model. Compensation expense related to stock-based awards is recognized ratably over the vesting period, which for employees is typically three years.
A summary of activity under our long-term incentive plans is presented below:
(in thousands, except for weighted-average data)
Stock Options
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (In Yrs)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
1,142
|
|
|
$
|
14.66
|
|
|
|
|
|
Granted
|
|
|
822
|
|
|
|
1.23
|
|
|
|
|
|
Forfeited or expired
|
|
|
(258
|
)
|
|
|
9.43
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
1,706
|
|
|
$
|
8.98
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at September 30, 2017
|
|
|
612
|
|
|
$
|
21.55
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2017
|
|
|
1,597
|
|
|
$
|
9.13
|
|
|
|
7.9
|
|
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula based on the following weighted average assumptions:
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Weighted average expected volatility
|
|
|
79
|
%
|
|
|
78
|
%
|
Weighted average expected term (in years)
|
|
|
6.6
|
|
|
|
5.7
|
|
Weighted average risk-free interest rate
|
|
|
2.22
|
%
|
|
|
1.4
|
%
|
Expected dividends
|
|
|
-
|
|
|
|
-
|
|
The table below summarizes the total stock-based compensation expense included in the statements of operations for the periods presented:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
77
|
|
|
$
|
140
|
|
|
$
|
360
|
|
|
$
|
462
|
|
General and administrative
|
|
|
101
|
|
|
|
133
|
|
|
|
372
|
|
|
|
664
|
|
Total
|
|
$
|
178
|
|
|
$
|
273
|
|
|
$
|
732
|
|
|
$
|
1,126
|
|
Note
10
–
|
Subsequent Events
|
Effective October 27, 2017,
we entered into the SPA with LPH Investments Limited (LPH), a company incorporated in the Cayman Islands with limited liability. LPH is a wholly-owned subsidiary of Lee’s. Under the SPA, LPH invested $10 million (the Investment) in our Company and acquired 46,232,085 shares of our common stock (the Shares), at a price of $0.2163 per share, which represents a 15% premium over the average of the daily volume-weighted average price per share (VWAP) over the 10-day trading period ending on and including the date of the SPA. Following the transactions described in the SPA, LPH beneficially owned 73% of our issued and outstanding shares of common stock. The Investment includes cancellation of $3.9 million in outstanding loans
($2.6 million of which was recorded as loan payable as of September 30, 2017)
that we borrowed from Lee’s (HK) under the Loan Agreement, effective August 14, 2017, between ourselves and Lee's (HK). Pursuant to the SPA, we granted LPH the right to appoint up to two individuals to serve on our Board of Directors, and LPH may designate such individuals on or prior to the 30th day following the closing of the transactions contemplated by the SPA (the Closing). In addition, the SPA also amends the executive employment agreement of each of our President and Chief Executive Officer (Craig Fraser), Senior Vice President and Chief Financial Officer (John A. Tattory) and Senior Vice President and Chief Medical Officer (Steven G. Simonson, M.D.), such that in lieu of the Annual Bonuses (as defined in each executive's employment agreement) that would have been payable to the executives during the 24-month period following the Closing, the executives are entitled to an award of equity under our 2011 Long-Term Incentive Plan, as amended, having a value when issued equal to the combined total value of the 2017 and 2018 Target Bonus Amounts (as defined in each executive's employment agreement) and vesting in two equal installments on March 15, 2018 and March 15, 2019. Under the terms of the SPA, we also granted to LPH a preemptive right to purchase in future offerings of equity securities up to that number of shares of the Company's equity securities needed to maintain LPH's percentage of beneficial ownership of the Company's outstanding voting stock immediately prior to each such offering, subject to certain limitations and exclusions.
Contemporaneously with the execution of the SPA,
we and LPH entered into a registration rights agreement pursuant to which we agreed to provide certain registration rights with respect to the Shares under the SPA, which rights are limited to registration of up to 25% of the Shares during the initial 18-month period following the closing of the SPA. We issued the Shares to LPH pursuant to Rule 506(b) of Regulation D and Regulation S under, and Section 4(a)(2) of, the Securities Act of 1933.
Contemporaneously with the execution of the SPA,
we and Deerfield entered into an Exchange and Termination Agreement (the Exchange and Termination Agreement). Under the Exchange and Termination Agreement, (i) promissory notes evidencing an aggregate principal amount of $25 million that we owed to Deerfield under a Facility Agreement dated as of February 13, 2013 (Facility Agreement), as amended from time to time, and (ii) warrants to purchase up to 500,000 shares of our common stock at an exercise price of $39.34 per share held by Deerfield (the Deerfield Warrants) were cancelled in consideration for (i) a cash payment in the aggregate amount of $2.5 million, (ii) an aggregate of 1,422,250 shares of common stock and (iii) the right to receive certain milestone payments (Milestone Payments) based on achievement of specified development and commercial milestones related to the Company's AEROSURF
®
development program, which, if achieved, could potentially total up to $15 million.
Contemporaneously with the execution of the Exchange and Termination Agreement,
we and Deerfield entered into a registration rights agreement pursuant to which we agreed to provide certain registration rights with respect to the shares of common stock issued to Deerfield under the Exchange and Termination Agreement. We issued the shares of common stock to Deerfield pursuant to Rule 506(b) of Regulation D under, and Section 4(a)(2) of, the Securities Act of 1933.
On November 1, 2017 (the Closing Date),
we, Lee's and Deerfield consummated the transactions contemplated by the SPA and the Exchange and Termination Agreement. Effective upon the Closing Date, (i) the Facility Agreement, including the outstanding promissory notes thereunder, and (ii) that certain Security Agreement, dated as of February 13, 2013, among Deerfield and us were cancelled and terminated.
To facilitate consummation of the SPA, effective upon the Closing, Battelle, holder of an aggregate of 1,095 shares of Series A Convertible Preferred Stock, par value $0.001 per share, of the Company (Preferred Shares), executed a waiver wherein Battelle waived its right to the Liquid
ity Preference (as defined in the Designation of Preferences, Rights and Limitations for the Preferred Shares) with respect to their Preferred Shares. In addition, we and Battelle entered into a non-binding memorandum of understanding outlining the key terms for a potential restructuring of the amounts due to Battelle under development and collaboration agreements between ourselves and Battelle.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing activities, includes forward-looking statements that involve risks and uncertainties. The reader should review the “Forward-Looking Statements” section, and risk factors discussed elsewhere in this Quarterly Report on Form 10-Q, which are in addition to and supplement the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 201
6
that we filed with the Securities and Exchange Commission (SEC) on March
31
, 201
7
(201
6
Form 10-K,) and our other filings with the SEC, and any amendments thereto, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis or elsewhere in this Quarterly Report on Form 10-Q.
The disclosure in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) of this Quarterly Report on Form 10-Q includes information on preclinical studies supported in part from funds from the National Institutes of Health (NIH). Such information is solely our responsibility and does not necessarily represent the official views of the NIH.
This
MD&A is provided as a supplement to the accompanying unaudited condensed consolidated financial statements and footnotes to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. This item should be read in connection with our accompanying interim unaudited Condensed Consolidated Financial Statements (including the notes thereto). Unless otherwise specified, references to Notes in this MD&A shall refer to the Notes to Condensed Consolidated Financial Statements (unaudited) in this Quarterly Report on Form 10-Q.
OVERVIEW
Windtree Therapeutics, Inc. (referred to as “we,” “us,” or the “Company”) is a biotechnology company focused on developing novel KL
4
surfactant therapies for respiratory diseases and other potential applications. Surfactants are produced naturally in the lung and are essential for normal respiratory function and survival. Our proprietary technology platform includes a synthetic, peptide-containing surfactant (KL
4
surfactant) that is structurally similar to endogenous pulmonary surfactant, and novel drug delivery technologies being developed to enable noninvasive administration of aerosolized KL
4
surfactant. We believe that our proprietary technology platform may make it possible to develop a pipeline of surfactant products to address a variety of respiratory diseases for which there are few or no approved therapies.
Our lead development program is AEROSURF
®
(lucinactant for inhalation), an investigational combination drug/device product that combines our KL
4
surfactant with our novel aerosol delivery system (ADS). We are developing AEROSURF to improve the management of respiratory distress syndrome (RDS) in premature infants. RDS is a serious respiratory condition caused by a deficiency of natural lung surfactant in lungs of premature infants, and the most prevalent respiratory disease in the neonatal intensive care unit. By enabling administration of aerosolized KL
4
surfactant, AEROSURF may reduce or eliminate the need for invasive endotracheal intubation and mechanical ventilation, which currently are required to administer life-saving surfactant therapy, but which are associated with serious respiratory conditions and other complications. To avoid the risks of surfactant administration, many neonatologists initially delay surfactant therapy and treat premature infants with noninvasive respiratory support (such as nasal continuous positive airway pressure (nCPAP)). We believe that AEROSURF, if approved, has the potential to address a serious unmet medical need by enabling earlier KL
4
surfactant therapy for infants receiving nCPAP alone, reducing the number of premature infants who are subjected to invasive surfactant administration, and potentially providing transformative clinical and pharmacoeconomic benefits.
In June 2017, we announced that w
e had completed an AEROSURF phase 2b clinical trial that was designed to evaluate aerosolized KL
4
surfactant administered to premature infants 28 to 32 week gestational age receiving nCPAP, in two dose groups (25 and 50 minutes) with up to two potential repeat doses, compared to infants receiving nCPAP alone. This trial was conducted in approximately 50 clinical sites in the U.S., Canada, the European Union and Latin America. Based on the planned top-line results, data show that AEROSURF did not meet the primary endpoint of a reduction in nCPAP failure at 72 hours, which we believe was due in large part to an unexpected rate of treatment interruptions. Such interruptions occurred in about 24% of active enrollments, predominantly in the 50 minute dose group, and we believe were primarily related to specific lots of disposable cartridge filters with a higher tendency to clog. After excluding the patients whose dose was interrupted in the 50 minute dose group, the data show an nCPAP failure rate of 32% compared to 44% in the control group which is a 12% absolute reduction or a 27% relative reduction in nCPAP failure compared to control. These data suggest a meaningful treatment effect in line with our targeted outcome.
We are currently focused on our project with Battelle Memorial Institute (Battelle) to complete development of our next generation aerosol delivery device (NextGen ADS), which is intended to replace the prototype device used in our phase 2 clinical trials. The NextGen ADS
combines the same aerosolization technology used during the phase 2 clinical program, but with improved ergonomics, interface, controls, and dose monitoring in a modular design. Design verification and validation are underway. Within this process, we are assessing whether the design of the NextGen ADS successfully mitigates the risk of clogging and related treatment interruptions that occurred during the Phase 2b clinical trial. To verify the design and confirm the performance of the NextGen ADS,
including with respect to device-related treatment interruptions experienced with the phase 2 prototype ADS,
we are planning to conduct a device bridging and confirmation clinical study
(i) to gain experience with the next generation ADS (NextGen ADS), (ii) to confirm whether our development objectives have been met and (iii) to generate additional higher dose treatment data to augment the higher dose data obtained in the phase 2b clinical trial, which was adversely affected by treatment interruptions.
We currently are assessing the potential design elements and requirements for this trial.
In addition, in June 2017, we and a Hong Kong company, Lee
’s Pharmaceutical (HK), Ltd. (Lee’s (HK)), entered into an exclusive license and collaboration agreement (License Agreement) for the development and commercialization of KL
4
surfactant products in China, Hong Kong and other select Asian markets, with a future option to potentially add Japan. The agreement includes AEROSURF as well as the non-aerosol products, SURFAXIN
®
(approved in the U.S. in 2012) and SURFAXIN LS™ (an improved lyophilized formulation of SURFAXIN). We also granted Lee’s (HK) an exclusive license to manufacture KL
4
surfactant in China for use in non-aerosol surfactant products in the licensed territory and a future option to manufacture the device in the licensed territory. In connection with the August 2017 Loan Agreement with Lee's (HK) (
see,
“– Business and Pipeline Program Updates”), we amended the License Agreement to expand certain of Lee’s (HK) rights, including by immediately adding Japan to the licensed territory, accelerating the right to manufacture the ADS in and for the licensed territory, reducing or eliminating certain of the milestone and royalty payments and adding an affiliate of Lee’s (HK) as a party to the License Agreement. We are presently engaged in a technology transfer of our KL
4
surfactant manufacturing process to Lee’s (HK).
Business and Pipeline Program Updates
The reader is referred to, and encouraged to read in its entirety
, “Item 1 – Business – Company Overview” and “– Business Strategy,” in the 2016 Form 10-K, which contains a discussion of our Business and Business Strategy, as well as information concerning our proprietary technologies and our current and planned KL
4
pipeline programs. In addition, our Quarterly Reports on Form 10-Q for the first and second quarters of 2017 contain business and development program updates for the applicable quarter.
The following are updates to our
business and development programs for the third quarter ending September 30, 2017:
●
|
On August 14, 2017, we announced that we entered into a Loan Agreement with Lee
’s Pharmaceutical (HK), Ltd. (Lee’s (HK)) under which Lee’s agreed to lend us up to $3.9 million (Lee’s Loan) to be paid in Lee’s sole discretion in three equal installments on August 15, September 10 and October 10, 2017. We received all three installments as scheduled. The loan was used to support our activities through October 31, 2017, while we and Lee’s negotiated a $10 million securities purchase agreement (SPA) pursuant to which Lee’s acquired a controlling interest in our Company. In addition, we negotiated with affiliates of Deerfield Management Company L.P. (Deerfield) to restructure (Loan Restructuring) the outstanding $25 million long-term loan (Deerfield Loan) effective as of the closing of the SPA. Under the Loan Restructuring the notes and the warrants issued in connection with the Deerfield Loan were retired in exchange for $2.5 million in cash, common stock equal to 2% of our outstanding shares, plus potential future milestones payments of up to $15 million. (
See,
“
Note 10 –
Subsequent Events”).
|
●
|
During this period, we continued implementing cost-cutting measures and further evaluated the needs of our Company going forward. On July 13, 2017, following completion of our AEROSURF phase 2b clinical trial, we implemented a reduction in our workforce from 48 to 28 employees affecting all functions of our Company. Affected employees were eligible for certain severance and other benefits. As a result, we recorded a one-time charge of approximately $0.2 million in the third quarter of 2017.
|
|
|
●
|
During this period, we
completed the analysis of results from the AEROSURF phase 2a clinical trial in premature infants 26 to 28 week gestational age receiving nCPAP for RDS. The FDA requested that we conduct a separate safety study in smaller premature infants before including them in a phase 2b study. The clinical trial was a multicenter, randomized, open-label, controlled study in premature infants 26 to 28 weeks gestational age receiving nCPAP for RDS, and designed to evaluate the safety and tolerability of aerosolized KL4
surfactant administered in three escalating doses (30, 45, and 60 minute), with potential repeat doses, compared to infants receiving nCPAP alone. A total of 48 premature infants, including 24 in three AEROSURF dose groups, and 24 on nCPAP alone (control), were enrolled in this clinical trial. Key observations include:
|
|
•
|
Overall, the safety
and tolerability profile of AEROSURF was generally comparable to the control group. All reported adverse events and serious adverse events were those that are common and expected among premature infants with RDS. Based on an interim safety committee review after the first two dose groups (30 and 45 minutes), 28 week gestational age premature infants were enrolled in the phase 2b clinical trial.
|
|
•
|
The overall nCPAP failure rate obse
rved in the previous phase 2a clinical trial in 29 – 34 week gestational age premature infants was 53% and in the recently completed phase 2b clinical trial in 28 – 32 week gestational age premature infants, 44%, compared to 67% in the control group.
|
|
•
|
Early nCPAP failures within 6 hours after randomization were less frequently observed in the AEROSURF treated groups
compared to control group. Similar to the phase 2a study in 29 – 34 week gestational age premature infants and phase 2b study in 28 – 32 week gestational age premature infants, the data suggest that AEROSURF may have an early effect and may be prolonging the time to nCPAP failure compared to control; however, the overall rate of nCPAP failure was comparable at 72 hours between control and treatment groups. At 72 hours, nCPAP failure rates were 63%, 88% and 63% in the 30, 45 and 60 minute AEROSURF dose groups, respectively, compared to 67% in the control group.
|
|
•
|
As
was observed in the AEROSURF phase 2b clinical trial, some treatments were interrupted
. Such interruptions occurred in one-third of active enrollments, and we believe were primarily related to specific lots of disposable cartridge filters with a higher tendency to clog. Although complicated by small numbers, analysis of data of patients whose dose was not impacted by device-related treatment interruptions (n=16) resulted in nCPAP failure rates of 57%, 100% and 50% in the 30 (n=7), 45 (n=3) and 60 (n=6) minute AEROSURF dose groups, respectively compared to 67% in the control group
.
|
|
•
|
An important observation that has emerged from this trial is a significantly
lower rate of neonatal bronchopulmonary dysplasia (BPD) or chronic lung disease of the newborn in AEROSURF treated patients compared to control. BPD rates were 0% (0 of 24) in the AEROSURF treated patients compared to 25% (6 of 24) in the control group.
|
The results observed in this trial
met the objective of demonstrating an acceptable safety and risk profile to allow inclusion of 26 – 28 week gestational age premature infants in any future studies in the AEROSURF development program.
CRITICAL ACCOUNTING POLICIES
There have been no changes to our critical accounting policies since December 31, 201
6. For a discussion of our accounting policies,
see
, “Note 5 – Summary of Significant Accounting Policies” and “Note 4 – Accounting Policies and Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements (Notes) in
our 2016 Form 10-K. Readers are encouraged to review those disclosures in conjunction with this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Operating Loss
and Net Loss
The operating loss for the three months ended
September 30, 2017 and 2016 was $4.8 million and $7.7 million, respectively. The decrease in operating loss from 2016 to 2017 was due to a $3.9 million decrease in operating expenses, partially offset by a $0.9 million decrease in grant revenue.
The operating loss for the
nine months ended September 30, 2017 and 2016 was $19.1 million and $31.7 million, respectively. The decrease in operating loss from 2016 to 2017 was due to a $12.4 million decrease in operating expenses.
The net
loss for the three months ended September 30, 2017 and 2016 was $5.4 million and $8.4 million, respectively. Included in the net loss is (i) interest expense of $0.6 million in both 2017 and 2016; and (ii) for 2017, $0.2 million for a severance charge related to July 2017 workforce reduction (
see
, “Note 5 – Summary of Significant Accounting Policies”).
The net loss for th
e nine months ended September 30, 2017 and 2016 was $20.9 million and $32.9 million, respectively. Included in the net loss is (i) interest expense of $1.9 million in both 2017 and 2016; (ii) a severance charge of $0.2 million and $1.6 million, respectively, for 2017 and 2016 (
see
, “Note 5 – Summary of Significant Accounting Policies”); and (iii) for 2016, $0.4 million in proceeds from the sale of Commonwealth of Pennsylvania research and development tax credits and $0.2 million in non-cash income related to the change in fair value of certain common stock warrants classified as derivative liabilities.
The net loss
attributable to common stockholders for the three and nine months ended September 30, 2017 was $7.3 million (or $0.69 basic net loss per common share) and $26.9 million (or $2.76 basic net loss per common share), respectively. The net loss attributable to common stockholders for the three and nine months ended September 30, 2016 was $8.4 million (or $1.00 basic net loss per common share) and $32.9 million (or $3.98 basic net loss per common share), respectively. Included in the net loss attributable to common stockholders for the three and nine months ended September 30, 2017 is a $1.9 million and a $6.1 million non-cash deemed dividend on preferred stock, respectively (
see,
“Note 5 – Summary of Significant Accounting Policies”).
Grant Revenue
We recognize grant revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.
For the three months ended
September 30, 2016, we recognized grant revenue of $1.0 million. For the nine months ended September 30, 2017 and 2016, we recognized grant revenue of $1.4 million and $1.1 million, respectively.
Grant revenue for the nine
months ended September 30, 2017 includes $1.1 million of funds received and expended under a Phase II Small Business Innovation Research Grant (SBIR) from the National Heart, Lung, and Blood Institute (NHLBI) of the NIH to support the AEROSURF phase 2b clinical trial (AEROSURF Grant), and $0.3 million of funds under a Phase II SBIR grant from the National Institute of Allergy and Infectious Diseases (NIAID) to support continued development of our aerosolized KL
4
surfactant as a potential medical countermeasure to mitigate acute and chronic/late-phase radiation-induced lung injury (Radiation Grant).
Grant revenue for
the three and nine months ended September 30, 2016 includes $0.7 million of funds received and expended under the AEROSURF Grant, $0.1 million under the Radiation Grant, and $0.1 million under a fixed-price contract to support development of our aerosolized KL
4
surfactant to mitigate influenza-related lung injury (Influenza Grant).
As of September 30, 2017
, all funding under the AEROSURF Grant, the Radiation Grant, and the Influenza Grant has been received and $0.1 million related to the Radiation Grant is currently recorded as deferred revenue and will be recognized as grant revenue when the funds are expended.
Research and Development Expenses
Our research and development expenses are charged to operations as incurred and we account for such costs by category rather than by project. As many of our research and development activities form the foundation for the development of our KL
4
surfactant and drug delivery technologies, they are expected to benefit more than a single project. For that reason, we cannot reasonably estimate the costs of our research and development activities on a project-by-project basis. We believe that tracking our expenses by category is a more accurate method of accounting for these activities. Our research and development costs consist primarily of expenses associated with (a) product development and manufacturing, (b) medical and regulatory operations, and (c) direct preclinical and clinical development programs. We also account for research and development and report by major expense category as follows: (i) salaries and benefits, (ii) contracted services, (iii) raw materials, aerosol devices and supplies, (iv) rents and utilities, (v) depreciation, (vi) contract manufacturing, (vii) travel, (viii) stock-based compensation and (ix) other.
Research and development expenses by category for the three
and nine months ended September 30, 2017 and 2016 are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development and manufacturing
|
|
$
|
1,306
|
|
|
$
|
2,081
|
|
|
$
|
5,013
|
|
|
$
|
8,215
|
|
Clinical, medical and regulatory operations
|
|
|
1,277
|
|
|
|
1,715
|
|
|
|
4,654
|
|
|
|
5,778
|
|
Direct preclinical and clinical programs
|
|
|
479
|
|
|
|
3,285
|
|
|
|
5,291
|
|
|
|
11,764
|
|
Total Research and Development Expenses
|
|
$
|
3,062
|
|
|
$
|
7,081
|
|
|
$
|
14,958
|
|
|
$
|
25,757
|
|
Research and development expenses include non-cash charges associated with stock-based compensation and depreciation of $
0.1 and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and of $0.5 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively.
Product Development and Manufacturing
Product development and manufacturing includes (i) manufacturing operations, both in-house and with
contract manufacturing organizations (CMOs), validation activities, quality assurance and analytical chemistry capabilities that support the manufacture of our KL
4
surfactant used in research and development activities and our medical devices, including our ADS; (ii) design and development activities related to our NextGen ADS for use in our AEROSURF clinical development program; and (iii) pharmaceutical and manufacturing development activities, including development of a lyophilized dosage form of our KL
4
surfactant. These costs include employee expenses, facility-related costs, depreciation, costs of drug substances (including raw materials), supplies, quality control and assurance activities, analytical services, and expert consultants and outside services to support pharmaceutical and device development activities.
Product development and manufacturing expenses decreased $
0.8 million for the three months ended September 30, 2017 compared to the same period in 2016 due to
(i) a $0.5 million decrease in costs related to development activities under our collaboration agreement with Battelle, and (ii) our ongoing efforts, initiated in the second quarter of 2016, to conserve cash and reduce costs.
Product development and manufacturing expenses decreased
$3.2 million for the nine months ended September 30, 2017 compared to the same period in 2016 due to (i) our efforts in the second quarter of 2016 to initiate cash conservation and other cost reduction measures, (ii) a $1.3 million decrease in costs related to development activities under our collaboration agreement with Battelle, (iii) a $0.6 million decrease in costs associated with the technology transfer of our lyophilized surfactant manufacturing facility process to a new facility at our CMO, and (iv) the July 2017 workforce reduction.
Clinical, Medical and Regulatory Operations
Clinical, medical and regulatory operations includes (i) medical, scientific, preclinical and clinical, regulatory, data management and biostatistics activities in support of our research and development programs; and (ii) medical affairs activities to provide scientific and medical education support for our KL
4
surfactant and aerosol delivery systems under development. These costs include personnel, expert consultants, outside services to support regulatory and data management, symposiums at key medical meetings, facilities-related costs, and other costs for the management of clinical trials.
Clinical, medical and r
egulatory operations expenses decreased $0.4 million and $1.1 million, respectively, for the three and nine months ended September 30, 2017 compared to the same periods in 2016 due to (i)
our ongoing efforts, initiated in the second quarter of 2016, to conserve cash and reduce costs;
and (ii) the July 2017 workforce reduction.
Direct Preclinical and Clinical Development Programs
Direct preclinical and clinical development programs include: (i) development activities, toxicology studies and other preclinical studies; and (ii) activities associated with conducting clinical trials, including patient enrollment costs, clinical site costs, clinical device and drug supply, and related external costs, such as consultant fees and expenses.
Direct preclinical and clinical development programs expenses
decreased $2.8 million for the three months ended September 30, 2017 compared to the same period in 2016 due to a decrease
in AEROSURF phase 2 clinical development program costs during the second quarter of 2017.
.
Direct preclinical and clinical development programs expenses de
creased $6.5 million for the nine months ended September 30, 2017 compared to the same period in 2016 due to a decrease in AEROSURF phase 2 clinical development program costs as many upfront site initiation costs and manufacturing costs related to ADS delivery, site set-up and training were completed during the three and nine months ended September 30, 2016 and are not ongoing clinical trial costs.
General and Administrative Expenses
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses
|
|
$
|
1,749
|
|
|
$
|
1,613
|
|
|
$
|
5,475
|
|
|
$
|
7,053
|
|
G
eneral and administrative expenses consist of costs for executive management, business development, intellectual property, finance and accounting, legal, human resources, information technology, facility, and other administrative costs.
General and administrative expenses dec
reased $1.6 million for the nine months ended September 30, 2017 compared to the same period in 2016 due to (i) our efforts in the second quarter of 2016 to initiate cash conservation and other cost reduction measures and (ii) $1.6 million of severance charges during the nine months ended September 30, 2016 compared to severance charges of $0.2 million for the nine months ended September 30, 2017 (
see
, “Note 5 – Summary of Significant Accounting Policies”).
Other Income and (Expense)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
9
|
|
|
$
|
15
|
|
Interest expense
|
|
|
(652
|
)
|
|
|
(648
|
)
|
|
|
(1,878
|
)
|
|
|
(1,907
|
)
|
Other income
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
449
|
|
Other income / (expense), net
|
|
$
|
(649
|
)
|
|
$
|
(630
|
)
|
|
$
|
(1,869
|
)
|
|
$
|
(1,443
|
)
|
Interest expense consists of interest expense associated with the Deerfield Loan (
see,
“Note 8 – Long-term Debt”) and under our collaboration agreement with Battelle (
see
, “Note 7 – Collaboration Payable and Accrued Expenses” in the Notes to Consolidated Financial Statements in our 2016 Form 10-K).
Other income / (expense) primarily consists of proceeds from the sale of Commonwealth of Pennsylvania research and development tax credits.
The decrease in tax credits for the nine months ended September 30, 2017 to the same period in 2016 is due to the timing of the sale of the tax credits. The 2015 tax credits were sold in the first quarter of 2016 while the 2016 tax credits were sold in the fourth quarter of 2016.
The following amounts comprise the Deerfield Loan interest expense for the periods presented:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prepaid interest expense
|
|
$
|
276
|
|
|
$
|
347
|
|
|
$
|
819
|
|
|
$
|
1,435
|
|
Cash interest expense
|
|
|
260
|
|
|
|
191
|
|
|
|
771
|
|
|
|
191
|
|
Total interest expense
|
|
$
|
536
|
|
|
$
|
538
|
|
|
$
|
1,590
|
|
|
$
|
1,626
|
|
Amortization of prepaid interest expense represents non-cash amortization of $5 million of units that Deerfield purchased in our July 2015 public offering and accepted in satisfaction of $5 million of future interest payments calculated at an interest rate of 8.75% under the Deerfield
Loan. Cash interest expense represents interest at an annual rate of 8.25% on the outstanding principal amount, paid in cash on a quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2017, we had cash and cash equivalents of
$1.8 million, current liabilities of $29.5 million (including $12.5 million of long-term debt, current portion) and $12.5 million of long-term debt, non-current portion. Total long-term debt of $25 million was with affiliates of Deerfield Management, L.P. (Deerfield), who held a security interest in substantially all of our assets (Deerfield Loan).
On November 1, we announced that we had completed a series of transactions to generate short-term cash and potentially enable future capital transactions. Effective October 27, 2017,
LPH Investments Limited (LPH), a wholly-owned subsidiary of Lee’s Pharmaceutical Holdings Limited (Lee’s) acquired $10 million of newly issued shares of our common stock, representing a controlling interest in our Company. At the same time, we reached an agreement with Deerfield to restructure and retire the outstanding $25 million long-term debt, and entered into a nonbinding memorandum of understanding with Battelle (Battelle MOU) outlining potential terms to restructure certain accounts payable related to our device development activities with Battelle. In connection with the Battelle MOU, Battelle executed and delivered a waiver of its rights to receive payments under a liquidation preference pursuant to Series A Convertible Preferred Stock held by Battelle and the related Certificate of Designation of Preferences, Rights and Limitations effective February 15, 2017 (the foregoing transactions with LPH, Deerfield and Battelle are collectively referred to in this Quarterly Report on Form 10-Q as the November 2017 Restructuring).
See
, “Note 10 – Subsequent Events”.
Although we believe that the November 2017 Restructuring has improved our financial position
and
better positions us to raise the capital needed to fund on-going operations and development plans, we expect to incur continuing significant losses and will require significant additional capital to further advance our AEROSURF clinical development program, satisfy our current obligations and support our operations for the next several years. Moreover, we do not have sufficient existing cash and cash equivalents for at least the next year following the date that these financial statements are issued. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that these financial statements are issued.
To potentially alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, management plans to seek additional capital through the following: (i) all or a combination of strategic transactions, and other potential alliances and collaborations focused on markets outside the U.S., as well as potential combinations (including by merger or acquisition) or other corporate transactions; and (ii) through public or private equity offerings. There can be no assurance that these alternatives will be available, or if available, that we will have sufficient cash resources and liquidity to fund our development activities and business operations for at least the next year following the date that these financial statements are issued. Accordingly, management has concluded that substantial doubt exists with respect to our ability to continue as a going concern through one year after the issuance of these financial statements.
As of
November 1, 2017, after closing the November 2017 Restructuring, we had cash and cash equivalents of $5.4 million. While we seek the additional capital that we require, we are working with our vendors and service providers to
extend payment terms of certain obligations and
our available cash. We believe that, before any additional financings, we will have sufficient cash resources to
partially satisfy our existing obligations and f
und our operations into January 2018.
These
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business, and do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Our ability to secure the capital that we will require through equity financings and other similar transactions is subject to regulatory and other constraints, including: (i)
our common stock is currently quoted
on the OTCQB
®
Market (OTCQB), which is operated by OTC Markets Group Inc., under the symbol WINT and may experience periods of illiquidity; (ii)
our common stock is currently considered a “penny stock,” such that brokers are required to adhere to more stringent market rules, which could result in reduced trading activity and trading levels in our common stock and limited or no analyst coverage; (iii) because we are no longer listed on a national securities exchange, we are noteligible to file a Form S-3 registration statement and our recent Form S-3 has expired; (iv) without a Form S-3, we are not able to use our ATM Program; (v) our controlling stockholder may not approve management proposals to increase the number of shares of common stock authorized under our Amended and Restated Certificate of Incorporation, as amended, which could impair our ability to conduct equity financings or enter into certain strategic transactions (mergers and acquisitions) that require stockholder approval under Delaware law; (vi) our capital structure, which currently consists of common stock, convertible preferred stock, pre-funded warrants and warrants to purchase common stock may make it difficult to conduct equity-based financings; and (vii) negative conditions in the broader financial and geopolitical markets. In light of the foregoing, we expect that we will more likely conduct securities offerings as private placements with registration rights, which we would register under a registration statement on Form S-1, or other transactions, any of which could result in substantial equity dilution of stockholders’ interests.
In the event that we cannot raise sufficient capital, we may be forced to consider transactions on less-than-favorable terms,
or limit or cease our development activities. If we are unable to raise the required capital, we may be forced to curtail all of our activities and, ultimately, cease operations. Even if we are able to raise sufficient capital, such financings may only be available on unattractive terms, or result in significant dilution of stockholders’ interests and, in such event, the market price of our common stock may decline.
We have from time to time collaborated with research organizations and universities to assess the potential utility of our KL
4
surfactant in studies funded in part through non-dilutive grants issued by U.S. Government-sponsored drug development programs, including grants in support of initiatives related to our AEROSURF clinical development program. In late May 2017, we announced that we have been awarded $0.9 million under a previously announced Phase II Small Business Innovation Research Grant (SBIR) valued at up to $2.6 million from the National Heart, Lung, and Blood Institute (NHLBI) of the National Institutes of Health (NIH) to support the AEROSURF phase 2b clinical trial.
We currently are determining whether, as a subsidiary of Lee
’s, we continue to be eligible for SBIR grants.
We also have received from time to time grants that support medical and biodefense-related initiatives under programs that encourage private sector development of medical countermeasures against chemical, biological, radiological and nuclear terrorism threat agents, and pandemic influenza, and provide a mechanism for federal acquisition of such countermeasures. Although there can be no assurance, we expect to pursue potential additional funding opportunities as they arise and expect that we may qualify for similar programs in the future.
As of September 30, 2017, and November 8, 2017, we had outstanding 0
.9 million pre-funded warrants issued in a July 2015 public offering, of which the entire exercise price was prepaid upon issuance, and 3,203 convertible preferred shares issued in the February 2017 private placement offering. Each preferred share is convertible into 1,000 shares of common stock. Upon exercise of the pre-funded warrants and conversion of the convertible preferred shares, we would issue common shares to the holders and receive no additional proceeds.
In addition, as of September 30, 2017, there were 120
million shares of common stock and 5 million shares of preferred stock authorized under our Amended and Restated Certificate of Incorporation, as amended, and approximately 85.0 million shares of common stock and approximately 5 million shares of preferred stock available for issuance and not otherwise reserved.
Cash Flows
As of
September 30, 2017, we had cash and cash equivalents of $1.8 million compared to $5.6 million as of December 31, 2016. Cash outflows for the nine months ended September 30, 2017 consist of $16.2 million used for ongoing operating and investing activities offset by cash inflows for the nine months ended September 30, 2017 of $12.4 million for financing activities.
Operating Activities
Net cash used in operating activities for the
nine months ended September 30, 2017 and 2016 was $16.2 million and $26.6 million, respectively. Net cash used in operating activities is a result of our net losses for the period, adjusted for non-cash items and changes in working capital. The decrease in net cash used in operating activities is due to our ongoing efforts, initiated in the second quarter of 2016, to conserve cash
as well as a decrease in AEROSURF phase 2 clinical development program costs.
Investing Activities
Net cash used in investing activities for
the nine months ended September 30, 2017 and 2016 represents capital expenditures of $24,000 and $193,000, respectively, partially offset in 2016 by $27,000 in proceeds from sale of property and equipment.
Financing Activities
Net cash provided by financing activities for
nine months ended September 30, 2017 was $12.4 million and represents net cash proceeds from (i) the February 2017 private placement of $8.8, (ii) the use of the ATM Program of $1.0 million, and (iii) $2.6 million in proceeds from a loan payable in connection with our loan agreement with Lee’s (HK).
Net cash provided by financing activities for the
nine months ended September 30, 2016 was $0.5 million and represents proceeds from the use of the ATM Program.
The following sections provide a more detailed discussion of our available financing facilities.
Private Placement Offering
On February 15, 2017, we completed a private placement offering of 7,049 Series A Convertible Preferred Stock units
at a price per unit of $1,495, for an aggregate purchase price of approximately $10.5 million, including $1.6 million of non-cash consideration representing a reduction in amounts due and accrued as of December 31, 2016 for current development services that otherwise would have become payable in cash in the first and second quarters of 2017. Each unit consists of: (i) one share of Series A Convertible Preferred Stock, par value $0.001 per share (Preferred Shares); and (ii) 1,000 Series A-1 Warrants ("Warrants") to purchase one share of common stock at an exercise price equal to $1.37 per share. Each Preferred Share may be converted at the holder's option at any time into 1,000 shares of common stock at a conversion price of $1.37 per share. The Warrants may be exercised beginning August 15, 2017 and through February 15, 2024. The Preferred Shares and the Warrants may not be converted or exercised to the extent that the holder would, following such exercise or conversion, beneficially own more than 9.99% (or other lesser percent as designated by each holder) of our outstanding shares of common stock.
In the event of a liquidation, including without limitation, the sale of substantially all of our assets and certain mergers and other corporate transactions (as defined in the Certificate of Designation of Preferences, Rights and Limitations relating to the Preferred Shares), the holder of Preferred Shares will have a liquidation preference that could result in the holder receiving a return of its initial investment before any payments are made to holders of common stock, and then participating with other equity holders until it has received in the aggregate up to three times its original investment.
In addition to the offering, the securities purchase agreement also provides that, until February 13, 2018, the investors are entitled to participate in subsequent bona fide capital raising transactions that we may conduct.
As of
November 8, 2017, 3,846 Preferred Shares have been converted into 3,846,000 shares of common stock and 3,203 Preferred Shares remain outstanding.
At-the-Market Program (ATM Program)
ATM Program
During the nine months ended September 30, 2017, we completed offerings of our common stock under our ATM Program of 847,147 shares. This resulted in an aggregate purchase price of approximately $1,082,000 ($1,036,000 net) for the nine month period ended September 30, 2017. During the three and nine months ended September 30, 2016, we completed offerings of our common stock under our ATM Program of 159,051 shares and 187,022 shares, respectively. This resulted in an aggregate purchase price of approximately $432,000 ($402,000 net) and $503,000 ($471,000 net), respectively, for the three and nine month periods ended September 30, 2016.
Effective
May 5, 2017, we were no longer able to make use of our ATM Program (
see
, “Liquidity and Capital Resources”).