UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 001-38560

 

Aerpio Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

EIN 61-1547850

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

9987 Carver Road

Cincinnati, OH

45242

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (513) 985-1920

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.0001 par value per share

ARPO

Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

Emerging growth company         

 

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

As of November 6, 2020, the registrant had 47,111,659 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

Summary of the Material and Other Risks Associated with Our Business  

Our business is subject to numerous risks and uncertainties that you should be aware of in evaluating our business. These risks include, but are not limited to, the following:

 

The current pandemic of COVID-19 and the future outbreak of other highly infectious or contagious diseases could seriously harm our research, development and potential future commercialization efforts, increase our costs and expenses and have a material adverse effect on our business, financial condition and results of operations.

 

We depend heavily on the success of our lead product candidate, razuprotafib. Even if we obtain favorable clinical results, we may not be able to obtain regulatory approval for, or successfully commercialize, razuprotafib.

 

We may find it difficult to enroll patients in our clinical trials, which could delay or prevent clinical trials of our product candidates.

 

Clinical drug development is a lengthy and expensive process with an uncertain outcome, and positive results from preclinical studies or earlier stage clinical trials are not necessarily predictive of the results of our future clinical trials of razuprotafib. If we cannot replicate the positive results from preclinical studies or earlier stage clinical trials in subsequent clinical trials, we may be unable to successfully develop, obtain regulatory approval for and commercialize our product candidates.

 

We may experience delays in the planned clinical development program for razuprotafib, and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all.

 

If our efforts to protect our proprietary technologies are not adequate, we may not be able to compete effectively in our market.

 

Our patents covering one or more of our products or product candidates could be found invalid or unenforceable if challenged.

 

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop our product candidates, conduct our clinical trials and commercialize our products.

 

We rely on third parties to conduct preclinical studies and clinical trials for our product candidates, and if they do not properly and successfully perform their obligations to us, we may not be able to obtain regulatory approvals for our product candidates.

 

We intend to rely on third parties to conduct some or all aspects of our product manufacturing, and these third parties may not perform satisfactorily.

 

Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

 

We cannot assure you that our exploration of strategic alternatives will result in a transaction or that any such transaction would be successful, and the process of exploring strategic alternatives or its conclusion could adversely impact our business and our stock price.

 

We will require substantial additional financing. A failure to obtain this necessary capital when needed could force us to delay, limit, reduce or terminate our product development or commercialization efforts.

 

Our future commercial success depends upon attaining significant market acceptance of our product candidates, if approved, among physicians, patients, third-party payors and others in the medical community.

 

We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully, than we do.

 

Our product candidates may cause undesirable side effects or have other properties that delay or prevent their regulatory approval or limit their commercial potential.

 

The market price of our common stock may be highly volatile, and may be influenced by numerous factors, some of which are beyond our control.

 

Changes in tax law may adversely affect us or our investors.

The summary risk factors described above should be read together with the text of the full risk factors below, in the section entitled “Risk Factors” and the other information set forth in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the related notes, as well as in other documents that we file with the SEC. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not presently known to us, or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations and future growth prospects.  

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

2

Item 1.

Condensed Consolidated Financial Statements

2

 

Condensed Consolidated Balance Sheets – September 30, 2020 (Unaudited) and December 31, 2019

2

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income – Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)

3

 

Condensed Consolidated Statements of Stockholders’ Equity – Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)

4

 

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2020 and 2019 (Unaudited)

5

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

27

PART II.

OTHER INFORMATION

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

Item 3.

Defaults Upon Senior Securities

62

Item 4.

Mine Safety Disclosures

62

Item 5.

Other Information

62

Item 6.

Exhibits

63

Signatures

64

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

AERPIO PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,281,986

 

 

$

38,524,536

 

Prepaid research and development contracts

 

 

455,855

 

 

 

311,154

 

Other current assets

 

 

1,845,451

 

 

 

734,785

 

Total current assets

 

 

49,583,292

 

 

 

39,570,475

 

 

 

 

 

 

 

 

 

 

Furniture and equipment, net

 

 

137,325

 

 

 

164,187

 

Operating lease right-of-use assets, net

 

 

89,761

 

 

 

162,124

 

Deposits

 

 

20,000

 

 

 

40,000

 

Total assets

 

$

49,830,378

 

 

$

39,936,786

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,417,172

 

 

$

3,231,450

 

Current portion of operating lease liability

 

 

94,787

 

 

 

102,555

 

Total current liabilities

 

 

2,511,959

 

 

 

3,334,005

 

Operating lease liability, net of current portion

 

 

 

 

 

67,438

 

Total liabilities

 

 

2,511,959

 

 

 

3,401,443

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value per share; 300,000,000 shares authorized and 47,111,659 and 40,588,004 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.

 

 

4,711

 

 

 

4,059

 

Additional paid-in capital

 

 

189,146,884

 

 

 

178,766,806

 

Accumulated deficit

 

 

(141,833,176

)

 

 

(142,235,522

)

Total stockholders’ equity

 

 

47,318,419

 

 

 

36,535,343

 

Total liabilities and stockholders’ equity

 

$

49,830,378

 

 

$

39,936,786

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


 

AERPIO PHARMACEUTICALS, INC.

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

(unaudited)

 

License revenue

 

$

 

 

$

 

 

$

15,000,000

 

 

$

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,985,988

 

 

 

2,844,603

 

 

 

9,363,602

 

 

 

10,695,109

 

General and administrative

 

 

1,875,415

 

 

 

2,160,845

 

 

 

6,356,821

 

 

 

8,215,456

 

Restructuring (benefit) expense

 

 

 

 

 

(38,810

)

 

 

 

 

 

876,284

 

Total operating expenses

 

 

5,861,403

 

 

 

4,966,638

 

 

 

15,720,423

 

 

 

19,786,849

 

Loss from operations

 

 

(5,861,403

)

 

 

(4,966,638

)

 

 

(720,423

)

 

 

(19,786,849

)

Grant income

 

 

 

 

 

79,303

 

 

 

79,900

 

 

 

99,574

 

Other income

 

 

897,378

 

 

 

 

 

 

897,378

 

 

 

 

Interest income

 

 

9,002

 

 

 

239,405

 

 

 

145,491

 

 

 

862,904

 

Total other income

 

 

906,380

 

 

 

318,708

 

 

 

1,122,769

 

 

 

962,478

 

Net and comprehensive (loss) income

 

$

(4,955,023

)

 

$

(4,647,930

)

 

$

402,346

 

 

$

(18,824,371

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net and comprehensive (loss) income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.12

)

 

$

(0.11

)

 

$

0.01

 

 

$

(0.46

)

Weighted average number of common shares used

   in computing net and comprehensive (loss) income

   per share basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42,139,493

 

 

 

40,588,004

 

 

 

41,108,942

 

 

 

40,588,004

 

Diluted

 

 

42,139,493

 

 

 

40,588,004

 

 

 

41,477,388

 

 

 

40,588,004

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

3


 

AERPIO PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Stockholders’ Equity 

 

 

 

For the Three and Nine Months Ended September 30, 2020 (unaudited)

 

 

 

Stockholders' Equity

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance at January 1, 2020

 

 

40,588,004

 

 

$

4,059

 

 

$

178,766,806

 

 

$

(142,235,522

)

 

$

36,535,343

 

Issuance of warrants

 

 

 

 

 

 

 

 

62,347

 

 

 

 

 

 

62,347

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

327,467

 

 

 

 

 

 

327,467

 

Net and comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(3,918,663

)

 

 

(3,918,663

)

Balance at March 31, 2020

 

 

40,588,004

 

 

 

4,059

 

 

 

179,156,620

 

 

 

(146,154,185

)

 

 

33,006,494

 

Issuance of warrants

 

 

 

 

 

 

 

 

9,592

 

 

 

 

 

 

9,592

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

308,341

 

 

 

 

 

 

308,341

 

Net and comprehensive income

 

 

 

 

 

 

 

 

 

 

 

9,276,032

 

 

 

9,276,032

 

Balance at June 30, 2020

 

 

40,588,004

 

 

 

4,059

 

 

 

179,474,553

 

 

 

(136,878,153

)

 

 

42,600,459

 

Issuance of common stock, net of issuance costs

   of $402,795

 

 

6,523,655

 

 

 

652

 

 

 

9,340,190

 

 

 

 

 

 

9,340,842

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

332,141

 

 

 

 

 

 

332,141

 

Net and comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(4,955,023

)

 

 

(4,955,023

)

Balance at September 30, 2020

 

 

47,111,659

 

 

$

4,711

 

 

$

189,146,884

 

 

$

(141,833,176

)

 

$

47,318,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three and Nine Months Ended September 30, 2019 (unaudited)

 

 

 

Stockholders' Equity

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance at January 1, 2019

 

 

40,588,004

 

 

$

4,059

 

 

$

177,621,807

 

 

$

(118,959,291

)

 

$

58,666,575

 

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

5,717

 

 

 

(5,717

)

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

621,685

 

 

 

 

 

 

621,685

 

Net and comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(8,492,825

)

 

 

(8,492,825

)

Balance at March 31, 2019

 

 

40,588,004

 

 

 

4,059

 

 

 

178,249,209

 

 

 

(127,457,833

)

 

 

50,795,435

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

604,661

 

 

 

 

 

 

604,661

 

Net and comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(5,683,616

)

 

 

(5,683,616

)

Balance at June 30, 2019

 

 

40,588,004

 

 

 

4,059

 

 

 

178,853,870

 

 

 

(133,141,449

)

 

 

45,716,480

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

645,899

 

 

 

 

 

 

645,899

 

Net and comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(4,647,930

)

 

 

(4,647,930

)

Balance at September 30, 2019

 

 

40,588,004

 

 

$

4,059

 

 

$

179,499,769

 

 

$

(137,789,379

)

 

$

41,714,449

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


 

AERPIO PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

 

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Operating activities:

 

(unaudited)

 

Net and comprehensive income (loss)

 

$

402,346

 

 

$

(18,824,371

)

Adjustments to reconcile net and comprehensive income (loss)

   to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

45,887

 

 

 

53,692

 

Stock-based compensation

 

 

967,949

 

 

 

1,872,245

 

Consulting expense related to warrants

 

 

71,939

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid research and development contracts

 

 

(144,701

)

 

 

216,092

 

Other current assets

 

 

(1,090,666

)

 

 

(260,811

)

Accounts payable and other current liabilities

 

 

(817,121

)

 

 

(2,044,301

)

Net cash used in operating activities

 

 

(564,367

)

 

 

(18,987,454

)

Investing activities:

 

 

 

 

 

 

 

 

Purchase of furniture and equipment

 

 

(19,025

)

 

 

(236,953

)

Net cash used in investing activities

 

 

(19,025

)

 

 

(236,953

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

9,743,637

 

 

 

 

Cash paid in connection with the sale of common stock

 

 

(402,795

)

 

 

 

Net cash provided by financing activities

 

 

9,340,842

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

8,757,450

 

 

 

(19,224,407

)

Cash and cash equivalents at beginning of year

 

 

38,524,536

 

 

 

62,614,010

 

Cash and cash equivalents, nine months ended

 

$

47,281,986

 

 

$

43,389,603

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Nature of Organization and Operations

 

Aerpio Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company focused on developing compounds that activate Tie2 to treat ocular diseases and diabetic complications, as well as other indications in which the Company believes that activation of Tie2 may have therapeutic potential, including acute respiratory distress syndrome (“ARDS”) associated with a novel strain of coronavirus (“COVID-19”) infections. The Company was incorporated as Zeta Acquisition Corp. II (“Zeta”) in the State of Delaware on November 16, 2007. Zeta was a “shell company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended).   

The Company’s pipeline includes the following programs:  

Glaucoma: Based on the preclinical proof of concept and the results of the Phase 1b trial showing a reduction in intraocular pressure (“IOP”) in patients with ocular hypertension  (“OHT”) and open angle glaucoma (“OAG”), the Company initiated a Phase 2 clinical trial in June 2020 designed to evaluate the safety and efficacy of a topical formulation of razuprotafib (also known as AKB-9778) in approximately 195 patients followed over a 28-day period. Patients enrolled in the trial will be administered a baseline of latanoprost ophthalmic solution 0.005%, and then randomized in a 1:1:1 fashion to receive adjunctive therapy consisting of placebo, 40 mg/ml razuprotafib once-daily, or 40 mg/ml razuprotafib twice-daily. The primary endpoint of the study is mean diurnal IOP at 28 days in the razuprotafib treated groups compared to the latanoprost monotherapy group. The Company expects to report topline results from this study in December or possibly in early January 2021 to coincide with seasonal healthcare industry conferences, subject to potential delays in study completion, including due to delays arising from the ongoing COVID-19 pandemic.

Acute Respiratory Distress Syndrome: Based on results in preclinical studies and observations in patients in the TIME-2 and TIME-2b trials, the Company believes that a vascular endothelial receptor, Tie2, may play a pivotal role in the defense against microvascular breach in ARDS. The Company hypothesizes that razuprotafib, the Company’s lead Tie2 activator, may have therapeutic potential for the treatment of COVID-19 associated ARDS and initiated two Phase 2 trials during 2020.

In May 2020, the Company was selected by Quantum Leap Healthcare Collaborative to participate in the I-SPY COVID-19 Trial (Investigation of Serial studies to Predict Your COVID Therapeutic Response with biomarker Integration and Adaptive Learning) to evaluate subcutaneous razuprotafib for the treatment of COVID-19 related ARDS in adult patients with critical COVID-19. Trial updates are anticipated in the first half of 2021, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic.

In August 2020, the Company initiated a second Phase 2 clinical trial (“RESCUE”) for the treatment of  COVID-19 with the U.S. Government operating through Medical Technology Enterprise Consortium (“MTEC”). This RESCUE trial will evaluate subcutaneous razuprotafib for the prevention and treatment of ARDS in adult patients with moderate to severe COVID-19 as part of MTEC-20-09-COVID-19 Treatment Military Infectious Disease Research Program (“MIDRP”) “Development of Treatments for COVID-19”. MTEC will provide up to $5.1 million of reimbursement related to qualified internal and external spending of the Company, as it relates to the clinical trial. Total anticipated spend of the RESCUE clinical trial is $7.9 million. Aerpio will support the trial with “in kind” spending in the amount of $2.8 million. The Company expects to conduct the trial at approximately 10 clinical sites and expects the trial to be completed in the first half of 2021, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic.

Diabetic Kidney Disease: In two consecutive trials, TIME-2 and TIME-2b, subcutaneous razuprotafib showed reduction in Urine Albumin-Creatinine Ratio (“UACR”), a measure of progression of diabetic kidney disease. The Company believes that systemic treatment with razuprotafib could have the potential to change the treatment paradigm for diabetics in the future and potentially address a major societal problem by lowering the cost of care associated generally with diabetes.

ARP-1536: The humanized monoclonal antibody, ARP-1536, directed at the same target as subcutaneous razuprotafib, is in preclinical development. The Company is evaluating development options for ARP-1536, including subcutaneous injection for the treatment of diabetic vascular complications, e.g., diabetic nephropathy and intravitreal injection as an adjunctive therapy for diabetic macular edema.  

The Company is also developing a bispecific antibody that binds both vascular endothelial growth factor (“VEGF”) and vascular endothelial protein tyrosine phosphatase (“VE-PTP”) which is designed to inhibit VEGF activation and activate Tie2. The Company believes this bispecific antibody has the potential to be an improved treatment for wet aged-related macular degeneration (“AMD”) and diabetic macular edema via intravitreal injection.

In June 2018, the Company licensed AKB-4924 (now GB004), a selective stabilizer of hypoxia-inducible factor-1 alpha (“HIF-1 alpha”) to a wholly-owned subsidiary of Gossamer Bio, Inc., GB004, Inc. (collectively “Gossamer”), which is being developed for the treatment of inflammatory bowel disease (“IBD”). HIF-1 alpha is involved in mucosal wound healing and the reduction of inflammation in the gastrointestinal tract. Gossamer completed the Phase 1b clinical trial in ulcerative colitis (“UC”) patients and reported results during the second quarter of 2020. Gossamer has announced that, subject to developments in the ongoing COVID-19 pandemic, it plans to initiate a 12-week Phase 2 study of GB004 in patients with mild-to-moderate UC in the second half of 2020.

6


 

In May 2020, the Company received a one-time payment of $15.0 million pursuant to an amendment to its license agreement with Gossamer resulting in a reduction in future potential milestone payments and tiered royalty rates over the life of the license agreement. Gossamer is responsible for all remaining development and commercial activities for GB004.  

In February 2018, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) which was declared effective by the SEC on April 11, 2018 (the “Form S-3”). On February 21, 2018, and pursuant to the Form S-3, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), pursuant to which it may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to $75.0 million through Cantor as the  sales agent. Cantor may sell the Company’s common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act, including sales made directly on or through the Nasdaq Capital Market or any other existing trade market for the Company’s common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to prevailing market prices, or any other method permitted by law. During the three months ended September 30, 2020, 6,523,655 shares of the Company’s common stock were sold under the Sales Agreement, pursuant to the Form S-3, the related prospectus, and the prospectus supplement. The net proceeds received from this transaction were $9.3 million, after deducting expenses of approximately $403,000 (including sales agent compensation of approximately $292,000) that were direct and incremental to the sale of the Company’s common stock.

The Company’s operations to date have been limited to organizing and staffing the Company, business planning, raising capital, acquiring and developing its technology, identifying potential product candidates and undertaking preclinical and clinical studies. The Company’s revenue has been primarily limited to license revenue from Gossamer described in Note 11. The Company’s product candidates are subject to long development cycles and there is no assurance the Company will be able to successfully develop, obtain regulatory approval for, or market its product candidates.

The Company is subject to a number of risks similar to other life science companies in the current stage of its life cycle including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, the need to obtain marketing approval for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of any of the Company’s pipeline products that are approved, and protection of proprietary technology. If the Company does not successfully commercialize any of its pipeline products or mitigate any of these other risks, it will be unable to generate revenue or achieve profitability.

Excluding the one-time payments from Gossamer, the Company incurred losses from operations and had negative cash flows from operating activities for the nine months ended September 30, 2020 and 2019 (and since inception). The Company’s current operating plan indicates that it will continue to incur losses from operations and generate negative cash flows from operating activities given ongoing expenditures related to the completion of its ongoing clinical trials and the Company’s lack of product revenue generating activities. However, the Company believes it has the ability to control its current operating plan and that existing cash and cash equivalents of approximately $47.3 million at September 30, 2020, will be sufficient to allow the Company to fund its current operating plan through the fourth quarter of 2022.  

There can be no assurance, however, that the current operating plan will be achieved in the time frame anticipated by the Company, or that its cash resources will fund the Company’s operating plan for the period anticipated by the Company or that additional funding will be available on terms acceptable to the Company, or at all. The Company will need to raise additional funds in order to further advance its clinical research programs, commence additional clinical trials, and operate its business and meet its obligations as they come due. The Company is pursuing financing alternatives, which include permanent equity financing, business development arrangements, and licensing arrangements. However, financing may not be available to the Company in the necessary time frame, in amounts that the Company requires, on terms that are acceptable to the Company, or at all. If the Company raises additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to its potential products or proprietary technologies or grant licenses on terms that are not favorable to the Company. If the Company is unable to raise the necessary funds when needed or reduce spending on currently planned activities, it may not be able to continue the development of its product candidates or the Company could be required to delay, scale back, or eliminate some or all of its development programs and other operations and will materially harm its business, financial position and results of operations.  

COVID-19 has resulted, and will likely continue to result, in significant governmental measures being implemented to control the spread of the virus through quarantines, travel restrictions, heightened border security and other measures. While the Company cannot predict the scope and severity, these developments and measures could materially and adversely affect its business, including its planned Phase 2 clinical trials for the glaucoma and ARDS programs, results of operations and financial condition. In addition, in response to the continuing spread of COVID-19, the Company has kept its executive offices closed with its employees continuing their work outside of the office. The Company is closely monitoring the impact of COVID-19 on all aspects of its business and is taking steps to minimize the impact on its business. However, the extent to which COVID-19 ultimately impacts the Company’s business, results of operations or financial condition will depend on future developments, which remain highly uncertain and cannot be predicted with confidence, such as the duration of the COVID-19 pandemic, new information that may emerge concerning the severity of COVID-19 and the effectiveness of actions taken to contain the COVID-19 pandemic or treat its impact, among others. While some states and jurisdictions have started to rollback stay-at-home and quarantine orders and reopened in phases, it is difficult

7


 

to predict what the lasting impact of the COVID-19 pandemic will be, and if the Company or any of the third parties with whom it engages were to experience additional shutdowns or other prolonged business disruptions, the Company’s ability to conduct its business in the manner and on the timelines presently planned could have a material adverse impact on the Company’s business, results of operation and financial condition. In addition, a recurrence of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. The Company will continue to monitor developments as it deals with the disruptions and uncertainties relating to the COVID-19 pandemic.

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with SEC regulations and include all of the information and disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP” or “GAAP”) for interim financial reporting, and, in the opinion of management include all adjustments necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity and cash flows for each period presented. Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). All adjustments are of a normal and recurring in nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company as of and for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2020. The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. The Company’s condensed consolidated financial statements are stated in U.S. Dollars.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment, which is the business of developing and commercializing proprietary therapeutics. All the assets and operations of the Company’s sole operating segment are located in the United States.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these condensed consolidated financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following areas, among others: prepaid and accrued research and development expense, stock-based compensation expense, revenue recognition and income taxes.

 

The Company’s results can also be affected by economic conditions, global health concerns, such as COVID-19, and political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies, and changes in the prices of research studies, can have a significant effect on operations. While the Company maintains reserves for anticipated liabilities and carries various levels of insurance, the Company could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings.

Cash and Cash Equivalents

Cash and cash equivalents consist of all cash on hand and $100,000 invested in short-term certificates of deposits with original maturities of three months or less at the time of purchase. At September 30, 2020 and December 31, 2019, the Company’s cash equivalents are primarily held in money market funds. The Company maintains balances with its banks in excess of federally insured limits.

Revenue Recognition

At the inception of an arrangement, the Company evaluates if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance and the term of the contract. The Company recognizes revenue when its customer obtains control of promised goods or services in a contract for an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. For contracts with customers, the Company applies the following five-step

8


 

model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. As part of the accounting for contracts with customers, the Company must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. The Company then allocates the total transaction price to each performance obligation based on the estimated standalone selling prices of each performance obligation. The Company recognizes the amount of the transaction price as revenue that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied.

The Company enters into collaboration arrangements, under which it licenses certain rights to its intellectual property to third parties. The terms of these agreements may include payment to the Company of one or more of the following: nonrefundable upfront license fees; development, sale and commercial milestone payments and royalties on net sales of licensed products. Each of these types of payments are classified as license revenue except for revenue from royalties on net sales of licensed products, which are classified as royalty revenue.

For each collaboration agreement that results in revenues, the Company identifies all material promised goods and services, which may include a license to intellectual property, research and development activities and/or transition activities. Promised goods or services are considered to be separate performance obligations if they are distinct. In order to determine the transaction price to be allocated to each performance obligation, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.

Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction price is generally allocated to each separate performance obligation on a relative standalone selling price basis. The Company must develop assumptions that require judgment to determine the standalone selling price (“SSP”) in order to account for these agreements. To determine the standalone selling price the Company’s assumptions may include (i) assumptions regarding the probability of obtaining marketing approval for the drug candidate; (ii) estimates regarding the timing of and the expected costs to develop and commercialize the drug candidate; (iii) estimates of future cash flows from potential product sales with respect to the drug candidate; and (iv) appropriate discount and tax rates. Standalone selling prices used to perform the initial allocation are not updated after contract inception. The Company does not include a financing component to its estimated transaction price at contract inception unless it estimates that certain performance obligations will not be satisfied within one year.

License Fees: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, upfront (or one-time) license fees based on the relative value prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the cash is received or when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company applies an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, license fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Development Milestone Payments: Depending on facts and circumstances, the Company may conclude it is appropriate to include the milestone in the estimated transaction price using the most likely amount method or it is appropriate to fully constrain the milestone. A milestone payment is included in the transaction price in the reporting period the Company concludes that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods. The Company may record revenues from certain milestones in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. The Company records a corresponding contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. These milestones remain fully constrained until the Company concludes that achievement of the milestone is probable and recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period. The Company adjusts its estimate of the overall transaction price, including the amount of collaborative revenue that it has recorded, if necessary.  

9


 

Sales-based Milestone and Royalty Payments: The Company’s collaborators may be required to pay the Company sales-based milestone payments or royalties on future sales of commercial products. The Company recognizes revenues related to sales-based milestone and royalty payments upon the later to occur of (i) achievement of the collaborator’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license to the Company’s intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate. 

Grant Income

Grant income is recognized as earned based on contract work performed.

Other Income

Other income represents reimbursed internal and external qualified expenses, per the terms of the MTEC arrangement, related to the ARDS clinical trial. Other income is recorded, and generally received, in the period the internal or external qualified clinical trial expenses are incurred, and paid, by the Company.

Research and Development

Research and development costs are expensed as incurred. Research and development expense consists of (i) employee-related expenses, including salaries, benefits, travel and stock-based compensation expense, (ii) external research and development expenses incurred under arrangements with third parties, such as contract research organizations and consultants, (iii) the cost of acquiring, developing and manufacturing clinical study materials, and (iv) costs associated with clinical, preclinical and regulatory activities.

The Company enters into consulting, research and other agreements with commercial firms, researchers, universities and others for the provision of goods and services. Under such agreements, the Company may pay for services on a monthly, quarterly, project, or other basis. Such arrangements are generally cancellable upon reasonable notice and payment of costs incurred. Costs are considered incurred based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided to the Company by its clinical sites and vendors. These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company.

 

Patents

Costs incurred in connection with the application for and issuances of patents are expensed as incurred.

Income Taxes

Income taxes are recorded in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the condensed consolidated financial statement and tax bases of assets and liabilities and for loss and credit carryforwards using enacted tax rates anticipated to be in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position, as well as consideration of the available facts and circumstances. As of September 30, 2020 and December 31, 2019, the Company does not have any uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions, if any exist, in income tax expense.

Net and Comprehensive (Loss) Income per Share Attributable to Common Stockholders

The Company’s basic net and comprehensive (loss) income per share attributable to common stockholders is calculated by dividing the net and comprehensive (loss) income by the weighted average number of shares of common stock outstanding for the period. The diluted net and comprehensive (loss) income per share attributable to common stockholders is computed by adjusting the weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method.

10


 

Stock-Based Compensation

The Company accounts for its stock-based compensation awards in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated statements of operations and comprehensive (loss) income based on their fair values. All the Company’s stock-based awards are subject only to service-based vesting conditions. The Company estimates the fair value of its stock-based awards using the Black-Scholes option pricing model, which requires the input of assumptions, including (a) the expected stock price volatility, (b) the calculation of expected term of the award, (c) the risk-free interest rate, and (d) expected dividends.

Due to the historical lack of public market for trading of the Company’s common stock and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and life science industry focus. The Company believes the group selected has sufficient similar economic and industry characteristics and includes companies that are most representative of the Company.

The Company uses the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted to employees, and utilizes the contractual term for options granted to non-employees. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options.

Compensation expense related to awards to employees is calculated on a straight-line basis by recognizing the grant date fair value over the associated service period of the award, which is generally the vesting term.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts payable and accrued expenses. The Company values cash equivalents using quoted market prices. The fair value of accounts payable and accrued expenses approximates its carrying value because of its short-term nature.

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available.

Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The three levels of the fair value hierarchy are described below:

 

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date

 

Level 2 – Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly

 

Level 3 – Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable

11


 

To the extent that a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There were no transfers within the fair value hierarchy during the nine months ended September 30, 2020 or 2019. The assets of the Company measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, are summarized below:  

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,281,986

 

 

$

 

 

$

 

 

$

47,281,986

 

Total assets

 

$

47,281,986

 

 

$

 

 

$

 

 

$

47,281,986

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,524,536

 

 

$

 

 

$

 

 

$

38,524,536

 

Total assets

 

$

38,524,536

 

 

$

 

 

$

 

 

$

38,524,536

 

 

Concentrations of Credit Risk and Off-Balance Sheet Risk

Cash and cash equivalents are the only financial instruments that potentially subject the Company to concentrations of credit risk. At September 30, 2020 and December 31, 2019, the Company maintains its cash and cash equivalents with high-quality, accredited financial institutions and, accordingly, such funds are subject to minimal credit risk. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.

Comprehensive (Loss) Income

Comprehensive (loss) income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, if any. Comprehensive (loss) income equaled net (loss) income for all periods presented.

Furniture and Equipment

Furniture and equipment is stated at cost, less accumulated depreciation. Furniture and equipment is depreciated using the straight-line method over the estimated useful lives of the assets, generally three to seven years. Such costs are periodically reviewed for recoverability when impairment indicators are present. Such indicators include, among other factors: operating losses, unused capacity, market value declines, and technological obsolescence. Recorded values of asset groups of furniture and equipment that are not expected to be recovered through undiscounted future net cash flows are written down to current fair value, which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).

Leases

At the inception of an arrangement the Company determines whether the arrangement is or contains a lease based on the circumstances present. All leases with a term greater than one year are recognized on the condensed consolidated balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the condensed consolidated balance sheet leases with terms of one-year or less if entered into. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

 

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

12


 

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 improves financial reporting for share-based payments issued to nonemployees under ASC 718 by expanding the scope of the employee share-based payments guidance to include share-based payments issued to nonemployees. The amendments in ASU 2018-07 are effective for public companies for fiscal years beginning after December 31, 2018, including interim periods within that fiscal year. The Company adopted ASU 2018-07 as of January 1, 2019 and recorded a one-time cumulative adjustment of $5,717 upon adoption.

No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on the Company’s condensed consolidated financial statements.

3. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses are as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accrued project costs

 

$

850,330

 

 

$

382,131

 

Accounts payable

 

 

709,272

 

 

 

439,785

 

Accrued bonus

 

 

480,324

 

 

 

689,830

 

Professional fees

 

 

234,151

 

 

 

346,999

 

Accrued vacation

 

 

83,402

 

 

 

43,470

 

Restructuring accrual (see Note 12)

 

 

38,114

 

 

 

793,913

 

Other

 

 

21,579

 

 

 

13,463

 

Accrued retention bonus

 

 

 

 

 

521,859

 

Total accounts payable and accrued expenses

 

$

2,417,172

 

 

$

3,231,450

 

 

 

4. Common Stock

As of September 30, 2020 and December 31, 2019, the Company had 300,000,000 shares of authorized common stock with par value of $0.0001 per share. 

The common stock has the following characteristics:  

Voting

The holders of common stock are entitled to one vote for each share of common stock held at all meetings of stockholders and written actions in lieu of meetings.

Dividends

The holders of common stock are entitled to receive dividends, if and when declared by the board of directors of the Company (the “Board of Directors”). Since the Company’s inception, no dividends have been declared or paid to the holders of common stock.

Liquidation

In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the Company, the holders of common stock are entitled to share ratably in the Company’s assets.  

Warrants to Purchase Common Stock

At September 30, 2020 and December 31, 2019, the Company had warrants outstanding for the purchase of 600,000 and 917,562 shares, respectively, of the Company’s common stock. In October 2019, the Company issued warrants for the purchase of 600,000 shares of the Company’s common stock at an exercise price of $0.486 per share in connection with the hiring of a strategic advisor consultant for a six-month period. These warrants vested in equal monthly installments over a six-month period beginning October 14, 2019 and expire on October 24, 2024. At the date of grant the fair value of these awards were determined using a Black-Scholes Merton pricing model. Included at December 31,2019 are warrants for the purchase of 317,562 shares of the Company’s common stock at an exercise price of $5.00 per share that were issued in connection with the 2017 Offering and have a three-year term. The 317,562 warrants expired on March 15, 2020, and none were exercised or settled as the fair value of the Company’s common stock was below the exercise price.

13


 

The number of shares and the exercise price shall be adjusted for standard anti-dilution events such as stock splits, combinations, reorganizations, or issue shares as part of a stock dividend. Upon a change of control, the warrant holder will have the right to receive securities, cash or other properties it would have been entitled to receive had the warrant been exercised. The warrants are equity classified instruments and do not contain contingent exercise provisions, or other features, that would preclude the Company from concluding that the warrants are indexed solely to the Company’s common stock.  

5. Preferred Stock

As of September 30, 2020 and December 31, 2019, the Company had 10,000,000 shares of preferred stock, par value $0.0001 per share, in authorized capital. No preferred stock was issued and outstanding at September 30, 2020 and December 31, 2019.

6. Stock-Based Compensation

In March 2017, the Company’s Board of Directors adopted, and the stockholders approved, the 2017 Stock Option and Incentive Plan (the “2017 Plan”), that became effective in April 2017. The 2017 Plan provides for the issuance of incentive awards up to 4,600,000 shares of common stock to officers, employees, consultants and directors, less the number of shares subject to issued and outstanding awards under the 2011 Plan that were assumed in the Merger. The 2017 Plan also provides that the number of shares reserved for issuance thereunder will be increased annually on the first day of each year beginning in 2018 by four percent (4%) of the shares of our common stock outstanding on the last day of the immediately preceding year or such smaller increase as determined by our Board of Directors. In March 2020, the Company’s Board of Directors approved a 4% increase adding 1,623,520 shares to the 2017 Plan, which was effective as of January 1, 2020.

Stock Options

The options granted generally vest over 48 months. Under the 2017 Plan, options vest in installments of 25% at the one-year anniversary and thereafter in 36 equal monthly installments beginning on the 1st of the month after the one-year anniversary date, subject to the employee’s continuous service with the Company. In May 2019, the Company issued a special retention grant of options to purchase an aggregate of 2,419,050 shares of common stock which vest in installments of 50% at June 30, 2020 and 50% at June 30, 2021, subject to the employee’s continuous service with the Company. The options generally expire ten years after the date of grant. The fair value of the options at the date of grant is recognized as an expense over the requisite service period. No option awards to purchase common stock were granted during the three months ended September 30, 2020 and 2019. Option awards to purchase an aggregate of 962,720 and 4,622,428 shares of common stock were granted in the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020 and December 31, 2019, 3,570,705 and 1,983,093 shares were reserved for issuance under the 2017 Plan, respectively.

The following table summarizes the stock option activity during the nine months ended September 30, 2020:

 

 

 

Stock

Option

Shares

 

 

Weighted Average

Exercise

Price

 

 

Weighted Average

Remaining

Contractual

Term (in Years)

 

 

Aggregate

Intrinsic

Value

 

Outstanding, January 1, 2020

 

 

5,335,850

 

 

$

2.60

 

 

 

6.23

 

 

$

2,866

 

Granted

 

 

962,720

 

 

 

0.71

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired/cancelled

 

 

(1,452,470

)

 

 

4.01

 

 

 

 

 

 

 

 

 

Outstanding, September 30, 2020

 

 

4,846,100

 

 

$

1.80

 

 

 

7.14

 

 

$

1,789,867

 

Expected to vest, September 30, 2020

 

 

2,219,001

 

 

$

1.51

 

 

 

8.76

 

 

$

1,086,038

 

Options exercisable, September 30, 2020

 

 

2,627,099

 

 

$

2.05

 

 

 

5.78

 

 

$

703,829

 

 

Aggregate intrinsic value represents the estimated fair value of the Company’s common stock in excess of the weighted average exercise price multiplied by the number of options outstanding or exercisable.  

As of September 30, 2020, there was $1,776,807 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 1.80 years.

14


 

Compensation Expense Summary

The Company recognized the following compensation cost related to stock-based compensation activity for the periods presented:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Research and development

 

$

139,544

 

 

$

153,997

 

 

$

403,453

 

 

$

386,791

 

General and administrative

 

 

192,597

 

 

 

491,902

 

 

 

564,496

 

 

 

1,485,454

 

Total

 

$

332,141

 

 

$

645,899

 

 

$

967,949

 

 

$

1,872,245

 

 

The Company uses the Black-Scholes option pricing model to determine the estimated fair value for stock-based awards. Option pricing and models require the input of various assumptions, including the option’s expected life, expected dividend yield, price volatility and risk-free interest rate of the underlying stock. Accordingly, the weighted-average fair value of the options granted during the three and nine months ended September 30, 2020 and 2019 was $0.43 and $1.11 per share, respectively. No options were granted during the three months ended September 30, 2020 and September 30, 2019. The calculation was based on the following assumptions.

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Expected term (years)

 

5.92

 

 

5.77

 

Risk-free interest rate

 

0.53%

 

 

2.32%

 

Expected volatility

 

69.36%

 

 

65.83%

 

Expected dividend yield

 

0.00%

 

 

0.00%

 

 

7. Income Taxes

The Company did not record a current or deferred income tax expense or benefit for the three and nine months ended September 30, 2020 and 2019, due to the Company’s net and comprehensive (loss) income and increases in its deferred tax asset valuation allowance.

8. Net and Comprehensive (Loss) Income per Share Attributable to Common Stockholders

The following table sets forth the computation of the Company’s basic and diluted net and comprehensive (loss) income per share (“EPS”) attributable to common stockholders for the periods presented:  

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net and comprehensive (loss) income per share

 

$

(4,955,023

)

 

$

(4,647,930

)

 

$

402,346

 

 

$

(18,824,371

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares used in

   computing EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42,139,493

 

 

 

40,588,004

 

 

 

41,108,942

 

 

 

40,588,004

 

Diluted

 

 

42,139,493

 

 

 

40,588,004

 

 

 

41,477,388

 

 

 

40,588,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted EPS

 

$

(0.12

)

 

$

(0.11

)

 

$

0.01

 

 

$

(0.46

)

 

Holders of non-vested stock-based compensation awards do not have voting rights.

The following weighted average common stock equivalents were excluded from the calculation of basic and diluted net and comprehensive loss per share for the three months ended September 30, 2020 and 2019 because including them would have had an anti-dilutive effect. The following weighted average common stock equivalents were excluded from the calculation of diluted net and comprehensive income per share for the nine months ended September 30, 2020 and basic and diluted net and comprehensive loss per share for the nine months ended September 30, 2020 and 2019 because including them would have had an anti-dilutive effect:

 

 

 

Three Months Ended September 30,