ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements, which are based on assumptions about the future of the Company’s business. The actual results could differ materially from those contained in the forward-looking statements. Please read “Forward-Looking Statements” included below for additional information regarding forward-looking statements.
Forward-Looking Statements
This report contains, in addition to historical information, certain information, assumptions and discussions that may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have made these statements in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected or anticipated. Although we believe our assumptions underlying our forward-looking statements are reasonable as of the date of this report, we cannot assure you that the forward-looking statements set out in this report will prove to be accurate. We typically identify these forward-looking statements by the use of forward-looking words such as “expect,” “potential,” “continue,” “may,” “will,” “should,” “could,” “would,” “seek,” “intend,” “plan,” “estimate,” “anticipate” or the negative version of those words or other comparable words. Forward-looking statements contained in this report include, but are not limited to, statements about:
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whether we can obtain approval from the U.S. Food and Drug Administration (“FDA”) and foreign regulatory bodies, to sell, market and distribute our therapeutics and devices under development;
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our ability to successfully complete clinical trials of our pharmaceutical candidates under development, including Endoxifen and our intraductal microcatheter technology to administer therapeutics, including our study using fulvestrant;
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the success, cost and timing of our product and drug development activities and clinical trials, including whether the ongoing clinical study using our intraductal microcatheters to administer fulvestrant and other studies will enroll a sufficient number of subjects or be completed in a timely fashion or at all;
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our ability to contract with third-party suppliers, manufacturers and service providers, including clinical research organizations, and their ability to perform adequately;
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our ability to successfully develop and commercialize new therapeutics currently in development or that we might identify in the future and in the time frames currently expected;
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our ability to establish and maintain intellectual property rights covering our products;
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our expectations regarding, and our ability to satisfy, federal, state and foreign regulatory requirements;
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the accuracy of our estimates of the size and characteristics of the markets that our products and services may address;
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our expectations as to future financial performance, expense levels and capital sources;
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whether the final study results will vary from preliminary study results that we may announce; and
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our ability to attract and retain key personnel.
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These and other forward-looking statements made in this report are presented as of the date on which the statements are made. We have included important factors in the cautionary statements included in this report, particularly in the section titled “ITEM 1A. RISK FACTORS,” that we believe could cause actual results or events to differ materially from the anticipated results as set forth in the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any new information, future events or circumstances that may affect our business after the date of this report. Except as required by law, we do not intend to update any forward-looking statements after the date on which the statement is made, whether as a result of new information, future events or circumstances or otherwise.
Company Overview
We are a clinical-stage biopharmaceutical company focused on developing novel, proprietary therapeutics and delivery methods for the treatment of breast cancer and other breast conditions. We are developing Endoxifen with two routes of delivery: a topical formulation, applied like a lotion, for the treatment of a condition called mammographic breast density (or, MBD) and a breast disorder in men called gynecomastia; and an oral formulation to treat stage 1 or 2 breast cancer in the “window of opportunity” between diagnosis and surgery and for breast cancer survivors who do not benefit from taking oral tamoxifen, a current FDA-approved standard of care. We are also developing our patented intraductal microcatheter technology to potentially target the delivery of therapies, including fulvestrant, immunotherapies and Chimeric Antigen Receptor T-cell therapies (CAR-T therapies), directly to the site of breast cancer.
In 2017, we completed a Phase 1 placebo-controlled clinical study of our proprietary oral and topical formulations of Endoxifen in 48 healthy women. All objectives were met: there were no clinically significant safety signals and no clinically significant adverse events, and both the oral and topical Endoxifen were well tolerated. In the topical arm of the study, low but measurable Endoxifen levels were detected in the blood in a dose-dependent fashion. In the oral arm of the study, participants exhibited dose-dependent Endoxifen levels that met or exceeded the published therapeutic level. The median time for patients in the study to reach the steady-state serum levels of Endoxifen while taking daily doses of oral Endoxifen was 7 days. Published literature indicates that it takes approximately 50-200 days for patients to reach steady-state Endoxifen levels when taking daily doses of oral tamoxifen. In September 2018, we completed a Phase 1 placebo-controlled clinical study of our proprietary topical Endoxifen in 24 healthy men. Preliminary results from that study indicate that all of our objectives of safety, tolerability and pharmakinetics were successfully met. Based on these positive preliminary results, we are advancing our topical Endoxifen into a Phase 2 study to reduce gynecomastia and/or improve quality of life in men starting prostate cancer therapy.
We are currently conducting a Phase 2 study at Montefiore Medical Center, Bronx, New York, using our intraductal microcatheter technology to deliver fulvestrant. Our program to use our intraductal microcatheters to deliver CAR-T and other immunotherapies is in the research and development phase.
We are currently conducting two Phase 2 studies of our proprietary Endoxifen: one in Stockholm, Sweden using our topical Endoxifen for MBD and another in Australia using our oral Endoxifen for patients in the window of opportunity between diagnosis of breast cancer and surgery. In October 2018, the MBD study in Sweden was fully-enrolled with all 90 participants: 60 participants on two different dose levels and 30 participants on placebo. Some participants have reported skin rashes and irritation and have withdrawn from the study. Skin reactions were also reported in the Phase 1 studies of the same product. We are evaluating approaches to reduce skin reactions and maximize participation in the study; however, additional study participants could experience these and other more serious side effects and the study may not be successfully completed for these or other reasons.
Our key objectives are to advance our programs through Phase 2 trials and then evaluate further development independently or with partners.
Research and Development Phase
We are in the research and development phase and are not currently marketing any products or services. We do not anticipate generating revenue unless and until we develop and launch our pharmaceutical programs.
Critical Accounting Policies and Estimates
In our Annual Report on Form 10-K for the year ended December 31, 2017, we disclosed our critical accounting policies and estimates upon which our financial statements are derived. There have been no changes to these policies since December 31, 2017. Readers are encouraged to review these disclosures in conjunction with the review of this report.
Results of Operations
Three and
Nine months
Ended
September 30, 2018
and 2017
Revenue and Cost of Revenue:
For the three and nine months ended September 30, 2018 and 2017, we had no revenue and no associated cost of revenue.
Operating Expenses:
Total operating expenses were approximately $3.3 million and $9.3 million for the three and nine months ended September 30, 2018, respectively, consisting of research and development (R&D) expenses of approximately $1.4 million and $3.4 million, respectively, and general and administrative (G&A) expenses of approximately $1.9 million and $6.0 million, respectively. Total operating expenses were approximately $2.1 million and $5.7 million for the three and nine months ended September 30, 2017, respectively, consisting of R&D expenses of $0.7 million and $2.1 million, respectively, and G&A expense of approximately $1.3 million and $3.5 million, respectively.
Total operating expenses for the three and nine months ended September 30, 2018 as compared to the same periods of 2017 increased approximately $1.3 million, or 61%, and increased $3.7 million, or 65%, respectively.
Research and Development Expenses
: R&D expenses for the three months ended September 30, 2018 were approximately $1,422,000, an increase of $680,000, or 92%, from approximately $742,000, for the same period in 2017. R&D expenses for the nine months ended September 30, 2018 were approximately $3,361,000, an increase of $1,250,000 or 59%, from approximately $2,111,000 for the same period in 2017. The increase in R&D expenses is mainly attributable to an increase in stock-based compensation expense. R&D expenses primarily consist of salaries, manufacturing and clinical trial expenses associated with our Endoxifen program. Our R&D expenses have increased over the same periods in 2017 because of a 2018 increase in stock-based compensation of $0.9 million and because we commenced two Phase 2 studies of our proprietary Endoxifen in 2018 (one of which enrollment was fully completed in 2018) as compared to no Phase 2 studies of Endoxifen in the prior year.
General and Administrative Expenses
: G&A expenses for the three months ended September 30, 2018 were approximately $1,888,000, an increase of $575,000 or 44%, from approximately $1,313,000, for the same period in 2017. G&A expenses for the nine months ended September 30, 2018 were approximately $5,967,000, an increase of $2,422,000 or 68%, from approximately $3,545,000 for the same period in 2017. G&A expenses consist primarily of personnel and related benefit costs, facilities, professional services, insurance, and public company related expenses. The increase in G&A expenses for the nine months ended September 30, 2018 is mainly attributed to an increase in stock-based compensation expense of $1.4 million, payroll expenses resulting from salary increases, bonus payments of $350,000 and increased legal and professional consulting expenses of $550,000 over the prior year.
Warrant Financing Costs and Change in Fair Value of Common Stock Warrants:
The April 2017 financing included the issuance of common stock liability warrants. The Company incurred financing costs associated with these common stock liability warrants of $192,817 upon issuance. The Company also recorded changes in the fair value of the liability warrants during the three months and nine months ended September 30, 2017 of $128,300 and $280,747, respectively. There were no common stock liability warrants issued during the three and nine months ended September 30, 2018.
Liquidity and Capital Resources
We have a history of operating losses as we have focused our efforts on raising capital and building our products and services in our pipeline. The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses and negative operating cash flows since inception. For the nine months ended September 30, 2018, the Company recorded a net loss of approximately $9.3 million, and used approximately $6.5 million of cash in operating activities. As of September 30, 2018, the Company had approximately $12.9 million in cash and cash equivalents and working capital of approximately $10.4 million. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. The Company can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any such financing will be obtainable on acceptable terms. If the Company is unable to obtain adequate capital, it could be forced to cease operations or substantially curtail its commercial activities. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities should the Company be unable to continue as a going concern.
As of the date of filing this quarterly report, we expect that our existing resources will be sufficient to fund our planned operations for the next 9 to 15 months; however, additional capital resources will be needed to fund operations longer-term.
Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or by selling debt securities, if convertible, further dilution to our existing stockholders would result. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, collaboration agreements, debt financings or licensing arrangements.
If adequate funds are not available, we may be required to terminate, significantly modify or delay our development programs, reduce our planned commercialization efforts, or 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. Further, we may elect to raise additional funds even before we need them if we believe the conditions for raising capital are favorable.
Cash Flows
As of September 30, 2018, the Company had cash and cash equivalents and restricted cash of approximately $13.0 million.
Net Cash Flows from Operating Activities
: Net cash used in operating activities was approximately $6.5 million for the nine months ended September 30, 2018, compared with approximately $4.9 million for the nine months ended September 30, 2017. The increase in the 2018 period as compared to 2017 results primarily from 2018 increases in clinical study costs, compensation expenses, consulting fees, and patent expenses.
Net Cash Flows from Investing Activities
: Net cash used in investing activities was approximately $54,000 for the nine months ended September 30, 2018, compared with no cash used for the nine months ended September 30, 2017. The increase in 2018 was attributable to the purchases of fixed asset equipment in 2018 for R&D activities. There were no corresponding purchases during the corresponding 2017 period.
Net Cash Flows from Financing Activities:
Net cash provided by financing activities generated proceeds of $12.3 million for the nine months ended September 30, 2018, as compared with $4.6 million for the nine months ended September 30, 2017. The increase is mainly attributed to our larger completed rights offering in 2018 as compared to the same period in 2017.
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.
Recent Accounting Pronouncements
In February 2016, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
Lease Accounting Topic 842.
This ASU requires a lessee to recognize lease assets and liabilities on the balance sheet for all arrangements with terms longer than 12 months. The new standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset for the lease term and a liability to make lease payments. The lease term is the non-cancellable period of the lease, and includes both periods covered by an option to extend the lease, if the lessee is reasonably certain to exercise that option, and periods covered by an option to terminate the lease, if the lessee is reasonably certain not to exercise that termination option. For leases with a lease term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. A lessee making this accounting policy election would recognize lease expense over the term of the lease, generally in a straight-line pattern. The lessor accounting remains largely consistent with existing GAAP. The new standard takes effect in 2019 for public entities. The Company has not currently adopted the provisions of ASU No. 2016-02 and believes that the impact of adopting ASU 2016-02 will not be material to its consolidated financial statements, though will require the recognition of an operating lease liability and right-of-use asset upon adoption, based on the lease composition disclosed in Footnote 11.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows
, amending the presentation of restricted cash within the statement of cash flows. The new guidance requires that restricted cash be included within cash and cash equivalents on the statement of cash flows. The Company adopted the provisions of ASU No. 2016-18 as of January 1, 2018 and has included restricted cash within cash and cash equivalents in the statements of cash flows. For the three and nine months ended September 30, 2018 and September 30, 2017, we included $55,000 of restricted cash in cash and cash equivalents on the statement of cash flows. The restricted cash represents a required deposit for the Company credit card and is restricted until the Company no longer has the credit card or the limit changes on the credit card.
In July 2017, the FASB issued ASU 2017-11,
Accounting for Certain Financial Instruments with Down Round Features and Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
. Part I of this ASU addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of future equity offerings. Current accounting guidance requires financial instruments with down round features to be accounted for at fair value. Part II of the Update applies only to nonpublic companies and is therefore not applicable to the Company. The amendments in Part I of the Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. This Update is effective for public entities for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company early adopted the provisions of ASU No. 2017-11 as of January 1, 2018. As the Company does not have any financial instruments with down round features, this ASU and it did not have a material impact on the financial statements upon adoption.
In June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation Improvements to Nonemployee Share Based Payment Accounting.
This ASU simplifies several aspects of the accounting for non-employee share-based payment transactions resulting from expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or was granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606,
Revenue from Contracts with customers
. This update is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoptions is permitted. The Company early adopted the provisions of ASU No. 2018-07 as of April 1, 2018 and it did not have a material impact on the financial statements upon adoption.