ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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You should read the following discussion of our financial condition and results of operations together with the unaudited interim condensed consolidated financial statements and the notes thereto included elsewhere in this report and other financial information included in this report. The following discussion may contain predictions, estimates and other forward looking statements that involve a number of risks and uncertainties, including those discussed under “
Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Forward Looking Statements
” in this report and under “
Part I — Item 1A. Risk Factors
” in our annual report on Form 10-K for the fiscal year ended December 31, 2017. These risks could cause our actual results to differ materially from any future performance suggested below.
Business Overview
We are a clinical stage biotechnology company focused on extending the life expectancy of cancer patients by improving the effectiveness of current standard-of-care treatments, including radiation therapy and chemotherapy. We are developing our lead product candidate,
transcrocetinate sodium
, also known as
trans sodium crocetinate
(“TSC”), for use in the many cancer types in which tumor oxygen deprivation (“hypoxia”) is known to diminish the effectiveness of current treatments. TSC is designed to target the cancer’s hypoxic micro-environment, re-oxygenating treatment-resistant tissue and making the cancer cells more susceptible to the therapeutic effects of standard-of-care radiation therapy and chemotherapy. Other possible uses of TSC include the treatment of hypoxic conditions such as stroke, cardiovascular disease, neurogenerative disease and emergency medicine.
Our lead development programs target TSC against cancers known to be inherently treatment-resistant, with a focus on brain cancer. A Phase 2 clinical program, completed in the second quarter of 2015, evaluated 59 patients with newly diagnosed glioblastoma multiforme (“GBM”). This open label, historically controlled study demonstrated a favorable safety and efficacy profile for TSC combined with standard of care, including a 37% improvement in overall survival over the control group at two years. A particularly strong efficacy signal was seen in the inoperable patients, where survival of TSC-treated patients at two years was increased by almost four-fold over the controls. In December 2017, the Company initiated the
IN
vestigation of
T
SC
A
gainst
C
ancerous
T
umors (INTACT) Phase 3 trial in the newly diagnosed inoperable GBM patient population. Patient enrollment began in January 2018. The trial will enroll 236 patients in total, with 118 in the treatment arm and 118 in the control arm.
Using its novel mechanism of action, TSC has been shown to safely re-oxygenate a range of tumor types in our preclinical and clinical studies. Diffusion believes its therapeutic potential is not limited to one specific tumor type, thereby making it potentially useful to improve standard-of-care treatments of other life-threatening cancers. Given TSC
’
s safety profile and animal data, we can, with appropriate funding, move directly into Phase 2 studies in other cancers. We also believe that TSC has potential application in other indications involving hypoxia, such as stroke, cardiovascular disease, neurodegenerative diseases and emergency medicine. A program is now being developed in cooperation with UCLA and the University of Virginia, to test TSC in the treatment of acute ischemic stroke, with an in-ambulance Phase 2 trial being planned. This trial, named the PreHospital Acute Stroke Therapy - TSC (PHAST - TSC) is expected to enroll 160 patients, with 80 in the treatment arm and 80 in the control arm.
In addition to the TSC programs, we are exploring alternatives regarding how best to capitalize upon our product candidate RES-529, which may include possible out-licensing and other options. RES-529 is a novel PI3K/Akt/mTOR pathway inhibitor which has completed two Phase 1 clinical trials for age-related macular degeneration and is currently in preclinical development in oncology, specifically GBM. RES-529 has shown activity in both in vitro and in vivo glioblastoma animal models and has been demonstrated to be orally bioavailable and can cross the blood brain barrier.
Financial Summary
In January 2018, we closed our underwritten public offering of 15,000,000 shares of our Common Stock, par value $0.001 per share, and warrants to purchase 15,000,000 shares of Common Stock. At the closing, we also issued warrants to purchase an additional 1,970,625 shares of Common Stock pursuant to the underwriter's partial exercise of its overallotment option. The shares of Common Stock and warrants were sold at a combined public offering price of $0.80 per share and warrant for total gross proceeds of approximately $12.0 million. The warrants have an exercise price of $0.80 per share and a term of five years from the date of issuance. In addition, at the closing, the Company issued to designees of the underwriter of the offering warrants to purchase up to 750,000 shares of Common Stock. The underwriter’s warrants have an exercise price of $1.00, a term of five years from the date of issuance and otherwise substantially similar terms to the form of investor warrant.
At June 30, 2018, we had cash and cash equivalents of $12.9 million. We have incurred operating losses since inception, have not generated any product sales revenue and have not achieved profitable operations. We incurred net losses of $2.8 million and $6.1 million for the three and six months ended June 30, 2018, respectively. Our accumulated deficit as of June 30, 2018 was $67.6 million, and we expect to continue to incur substantial losses in future periods. We anticipate that our operating expenses will increase substantially as we continue to advance our lead, clinical-stage product candidate, TSC. We anticipate that our expenses will substantially increase as we:
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complete regulatory and manufacturing activities and commence our planned Phase II and III clinical trials for TSC;
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continue the research, development and scale-up manufacturing capabilities to optimize products and dose forms for which we may obtain regulatory approval;
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conduct other preclinical and clinical studies to support the filing of a New Drug Application (“NDA”) with the FDA;
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maintain, expand and protect our global intellectual property portfolio;
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•
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hire additional clinical, manufacturing, and scientific personnel; and
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•
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add operational, financial and management information systems and personnel, including personnel to support our drug development and potential future commercialization efforts.
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We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of TSC for use in the treatment of GBM and other hypoxia related indications. We believe that our cash and cash equivalents as of June 30, 2018 will enable us to fund our operating expenses and capital expenditure requirements into September 2019. However, we will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of our planned research and development activities with respect to TSC and our other product candidates.
Financial Operations Overview
Revenues
We have not yet generated any revenue from product sales. We do not expect to generate revenue from product sales for the foreseeable future.
Research and Development Expense
Research and development costs are charged to expense as incurred. These costs include, but are not limited to, expenses related to third-party contract research arrangements, employee-related expenses, including salaries, benefits, stock-based compensation and travel expense reimbursement. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As we advance our product candidates, we expect the amount of research and development costs will continue to increase for the foreseeable future.
General and Administrative Expense
General and administrative expenses consist principally of salaries and related costs for executive and other personnel, including stock-based compensation, expenses associated with investment bank and other financial advisory services, and travel expenses. Other general and administrative expenses include professional fees, facility-related costs, communication expenses and professional fees for legal, patent prosecution and maintenance, and consulting and accounting services.
Interest (Income) Expense, Net
Interest (income) expense, net consists principally of the interest expense recorded in connection with our convertible debt instruments offset by the interest earned from our cash and cash equivalents.
Change in Fair Value of Warrant Liabilities, Warrant Related Expenses, and Other Financing Expenses
In connection with our Series A convertible preferred stock private placement in March 2017, we recorded warrant expense associated with the change in fair value of the common stock warrants from issuance, the excess fair value of the common stock warrants over the gross cash proceeds from such offering, and placement agent commissions and other offering costs. Until their reclassification into stockholders’ equity in November 2017 in connection with the amendment of our certificate of incorporation, the warrants were liability classified and remeasured at each reporting period with changes in fair value recorded through earnings. As a result of the offering of our common stock consummated in January 2018, all outstanding shares of the Company's Series A convertible preferred stock converted into shares common stock.
Income Tax Benefit
As a result of the change in net operating loss carryforward period associated with the 2017 Tax Act, the Company recognized an income tax benefit to reflect indefinite deferred tax liabilities as a source of income against indefinite lived portions of the Company’s deferred tax assets.
Results of Operations for Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
The following table sets forth our results of operations for the three months ended June 30, 2018 and 2017.
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Three Months Ended June 30,
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2018
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2017
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Change
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Operating expenses:
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|
|
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|
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Research and development
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$
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1,391,113
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$
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1,179,544
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$
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211,569
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General and administrative
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1,660,630
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1,795,886
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(135,256
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)
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Depreciation
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26,709
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5,790
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20,919
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Loss from operations
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3,078,452
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2,981,220
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97,232
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Other expense (income):
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Interest (income) expense, net
|
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(45,339
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)
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18,889
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(64,228
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)
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Change in fair value of warrant liabilities
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—
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(23,387,850
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)
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23,387,850
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(Loss) income before income tax benefit
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(3,033,113
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)
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20,387,741
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(23,420,854
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)
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Income tax benefit
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(267,932
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)
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—
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|
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(267,932
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)
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Net (loss) income
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$
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(2,765,181
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)
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$
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20,387,741
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$
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(23,152,922
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)
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We recognized $1.4 million in research and development expenses during the three months ended June 30, 2018 compared to $1.2 million during the three months ended June 30, 2017. The increase in research and development expense was attributable to a $0.8 million increase in expense related to our Phase 3 GMB trial, offset by a $0.6 million decrease in expense associated with manufacturing costs.
General and administrative expenses were $1.7 million during the three months ended June 30, 2018 compared to $1.8 million during the three months ended June 30, 2017. The decrease in general and administrative expense was primarily due to a $0.3 million decrease in professional fees, partially offset by an increase in salary and wages expense of $0.2 million.
The change in interest (income) expense, net for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 is primarily attributable to having a larger debt principal balance with a higher interest rate outstanding during the three months ended June 30, 2017 compared to the same period in 2018. We also received more interest income during the three months ended June 30, 2018 compared to the three months ended June 30, 2017.
In connection with the private placement of our Series A convertible preferred stock and common stock warrants in March 2017, we determined the warrants to be classified as liabilities and subject to remeasurement at each reporting period. As a result of the liability classification, during the three months ended June 30, 2017, we recorded a $23.4 million gain for the change in fair value of our common stock warrant liabilities which was primarily attributable to the decrease in the market price for our common stock. There were no such charges in 2018 as the warrants were reclassified into equity in November of 2017.
As a result of the change in net operating loss carryforward period associated with the 2017 Tax Act, the Company recognized an income tax benefit of $0.3 million to reflect indefinite deferred tax liabilities as a source of income against indefinite lived portions of the Company’s deferred tax assets.
Results of Operations for Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
The following table sets forth our results of operations for the six months ended June 30, 2018 and 2017.
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Six Months Ended
June 30,
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2018
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2017
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Change
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Operating expenses:
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Research and development
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$
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3,216,681
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$
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2,187,115
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$
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1,029,566
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General and administrative
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3,158,469
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3,349,025
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(190,556
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)
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Depreciation
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54,727
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|
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12,393
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|
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42,334
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Loss from operations
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6,429,877
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5,548,533
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881,344
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Other expense (income):
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Interest (income) expense, net
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(82,803
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)
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74,608
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(157,411
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)
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Change in fair value of warrant liabilities
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—
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(10,468,176
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)
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10,468,176
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Warrant related expenses
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—
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10,225,846
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(10,225,846
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)
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Other financing expenses
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—
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2,870,226
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(2,870,226
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)
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(Loss) income before income tax benefit
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(6,347,074
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)
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(8,251,037
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)
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(1,903,963
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)
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Income tax benefit
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(267,932
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)
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—
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|
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(267,932
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)
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Net loss
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$
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(6,079,142
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)
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$
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(8,251,037
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)
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$
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2,171,895
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We recognized $3.2 million in research and development expenses during the six months ended June 30, 2018 compared to $2.2 million during the six months ended June 30, 2017. The increase in research and development expense was mainly attributable to a $1.9 million increase in expense related to our Phase 3 GBM trial, offset by a $0.9 million decrease in manufacturing costs.
General and administrative expenses were $3.2 million during the six months ended June 30, 2018 compared to $3.3 million during the six months ended June 30, 2017. The decrease in general and administrative expense was primarily due to a $0.6 million decrease in professional fees offset by an increase in salary and other expense of $0.5 million.
The change in interest (income) expense, net for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 is primarily attributable to having a larger debt principal balance with a higher interest rate outstanding during the six months ended June 30, 2017 compared to the same period in 2018.
For the six months ended June 30, 2017, we recorded a $10.5 million gain for the change in fair value of our common stock warrant liabilities which was primarily attributable to the decrease in the market price for our common stock. We also recognized $10.2 million in excess fair value of the common stock warrants over the gross proceeds from our private placement and $2.9 million in placement agent commissions and other offering costs. There were no such charges in 2018 as the warrants were reclassified into equity in November of 2017.
As a result of the change in net operating loss carryforward period associated with the 2017 Tax Act, the Company recognized an income tax benefit of $0.3 million to reflect indefinite deferred tax liabilities as a source of income against indefinite lived portions of the Company’s deferred tax assets.
Liquidity and Capital Resources
Working Capital
To date, we have funded our operations primarily through the sale and issuance of preferred stock, common stock and convertible debt. In January 2018, the Company closed an underwritten public offering of 15,000,000 shares of Common Stock and warrants to purchase 15,000,000 shares of Common Stock and received approximately $10.6 million aggregate net proceeds. As of June 30, 2018, we had $12.9 million in cash and cash equivalents, working capital of $13.0 million and an accumulated deficit of $67.6 million. We expect to continue to incur net losses for the foreseeable future. We intend to use our existing cash and cash equivalents to fund our working capital and research and development of our product candidates.
Cash Flows
The following table sets forth our cash flows for the six months ended June 30, 2018 and 2017:
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Six Months Ended June 30,
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Net cash (used in) provided by:
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2018
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2017
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Operating activities
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$
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(5,829,285
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)
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$
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(6,161,914
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)
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Investing activities
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—
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|
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(10,064,002
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)
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Financing activities
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9,867,520
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22,086,463
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Net increase in cash and cash equivalents
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$
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4,038,235
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$
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5,860,547
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Operating Activities
Net cash used in operating activities of $5.8 million during the six months ended June 30, 2018 was primarily attributable to our net loss of $6.1 million and our net change in operating assets and liabilities of $0.2 million. This amount was offset by $0.6 million in stock-based compensation expense and $0.1 million of depreciation expense. The net change in our operating assets and liabilities is primarily attributable to the decrease in our accounts payable due to the timing of payments to our vendors.
Net cash used in operating activities of $6.2 million during the six months ended June 30, 2017 was primarily attributable to our net loss of $8.3 million and our net change in operating assets and liabilities of $1.3 million. This amount was offset by $2.6 million in non-cash, warrant related and other financing expenses and $0.7 million in stock-based compensation expense. The net change in our operating assets and liabilities is primarily attributable to the decrease in our accounts payable due to the timing of payments to our vendors, offset by an increase in accrued expenses due to additional accrued interest as well as an increase in prepaid expenses, mainly related to insurance costs.
Investing Activities
During the six months ended June 30, 2017, we purchased a certificate of deposit in the amount of $10.0 million and had approximately $64,000 in fixed asset purchases. We had no such purchases in 2018.
Financing Activities
Net cash provided by financing activities was $9.9 million during the six months ended June 30, 2018, which was attributable to the $10.8 million in proceeds received upon the sale of our Common Stock, offset by approximately $0.4 million in payments for additional related offering costs. During the six months ended June 30, 2018, we repaid the outstanding balance of our convertible debt in the amount of approximately $0.6 million. Net cash provided by financing activities was $22.1 million during the six months ended June 30, 2017, which was attributable to the $22.1 million in proceeds received upon the initial closing of our Series A private placement offset by approximately $43,000 in payments for related offering costs.
Capital Requirements
We expect to continue to incur substantial expenses and generate significant operating losses as we continue to pursue our business strategy of developing our lead product candidate, TSC, for use in the treatment of GBM and other hypoxia related indications. Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts of cash to advance the clinical development of our product candidates and to commercialize any product candidates for which we receive regulatory approval. At the current time, the bulk of our cash resources for clinical development is dedicated to the Phase 3 trial for TSC in inoperable GBM. While we believe we have adequate cash resources to continue operations into September 2019, we will need to raise additional funds in order to complete this trial. We do not expect to commence any clinical trials beyond the inoperable GBM trial unless we are able to raise additional capital or make alternative financing arrangements for any such trial.
To date, we have funded our ongoing business operations and short-term liquidity needs, primarily through the sale and issuance of preferred stock, common stock and convertible debt. We expect to continue this practice for the foreseeable future. We believe our cash and cash equivalents as of June 30, 2018 will be sufficient to fund our planned operations into September 2019.
As of June 30, 2018, we did not have credit facilities under which we could borrow funds or any other sources of committed capital. We may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or be on terms acceptable to us. This risk may increase if economic and market conditions deteriorate. If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify or delay the development of our product candidates and our operations, or we may need to obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. If we are unable to raise any additional capital in the near-term and/or we cannot significantly reduce our expenses and are forced to terminate our operations, investors may experience a complete loss of their investment.
To the extent that we raise additional capital through the sale of our common stock, the interests of our current stockholders may be diluted. If we issue additional preferred stock or convertible debt securities, it could affect the rights of our common stockholders or reduce the value of our common stock or any outstanding classes of preferred stock. In particular, specific rights granted to future holders of preferred stock or convertible debt securities may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
On March 2, 2018, we received a written notice from NASDAQ indicating we were not in compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for our Common Stock had closed below $1.00 per share for the previous 30 consecutive business days. See Note 2 of our unaudited interim condensed consolidated statements for further details. At the Company’s 2018 Annual Meeting of Stockholders on June 14, 2018, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation to effect a reverse stock split of the shares of the Company’s common stock at a ratio of not less than 1-to-2 and not greater than 1-to-15, with the exact ratio and effective time of the reverse stock split to be determined by the Company’s Board of Directors, if at all.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.
Critical Accounting Policies
The Critical Accounting Policies included in our Form 10-K for the year ended December 31, 2017, filed with the SEC pursuant to Section 13 or 15(d) under the Securities Act on April 2, 2018, as amended to this date, have not changed.
Special Note Regarding Forward-Looking Statements
This report includes forward-looking statements. We may, in some cases, use terms such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements appear in a number of places throughout this Quarterly Report and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned preclinical development and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, our intellectual property position, the degree of clinical utility of our products, particularly in specific patient populations, our ability to develop commercial functions, expectations regarding clinical trial data, our results of operations, cash needs, financial condition, liquidity, prospects, growth and strategies, the industry in which we operate and the trends that may affect the industry or us.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change, and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.
Actual results could differ materially from our forward-looking statements due to a number of factors, including risks related to:
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our ability to obtain additional financing;
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our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;
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the success and timing of our preclinical studies and clinical trials;
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the difficulties in obtaining and maintaining regulatory approval of our products and product candidates, and the labeling under any approval we may obtain;
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our plans and ability to develop and commercialize our product candidates;
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our failure to recruit or retain key scientific or management personnel or to retain our executive officers;
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the accuracy of our estimates of the size and characteristics of the potential markets for our product candidates and our ability to serve those markets;
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regulatory developments in the United States and foreign countries;
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the rate and degree of market acceptance of any of our product candidates;
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obtaining and maintaining intellectual property protection for our product candidates and our proprietary technology;
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our ability to operate our business without infringing the intellectual property rights of others;
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recently enacted and future legislation regarding the healthcare system;
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our ability to maintain our listing on the NASDAQ Capital Market;
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the success of competing products that are or may become available; and
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the performance of third parties, including contract research organizations and manufacturers.
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You should also read carefully the factors described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on April 2, 2018, as amended, and elsewhere in our public filings to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
Any forward-looking statements that we make in this Quarterly Report speak only as of the date of such statement, and, except as required by applicable law, we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.