NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1. DESCRIPTION OF BUSINESS
Tenax
Therapeutics, Inc. (the “Company”) was originally
formed as a New Jersey corporation in 1967 under the name Rudmer,
David & Associates, Inc., and subsequently changed its
name to Synthetic Blood International, Inc. On June 17, 2008,
the stockholders of Synthetic Blood International approved the
Agreement and Plan of Merger dated April 28, 2008, between
Synthetic Blood International and Oxygen Biotherapeutics, Inc., a
Delaware corporation. Oxygen Biotherapeutics was formed on
April 17, 2008 by Synthetic Blood International to participate
in the merger for the purpose of changing the state of domicile of
Synthetic Blood International from New Jersey to Delaware.
Certificates of Merger were filed with the states of New Jersey and
Delaware and the merger was effective June 30, 2008. Under the
Plan of Merger, Oxygen Biotherapeutics was the surviving
corporation and each share of Synthetic Blood International common
stock outstanding on June 30, 2008 was converted to one share
of Oxygen Biotherapeutics common stock. On September 19, 2014, the
Company changed its name to Tenax Therapeutics, Inc.
On October 18, 2013, the Company created a wholly owned subsidiary,
Life Newco, Inc., a Delaware corporation (“Life
Newco”), to acquire certain assets of Phyxius Pharma, Inc., a
Delaware corporation (“Phyxius”) pursuant to an Asset
Purchase Agreement, dated October 21, 2013 (the “Asset
Purchase Agreement”), by and among the Company, Life Newco,
Phyxius and the stockholders of Phyxius (the “Phyxius
Stockholders”). As further discussed in Note 5 below, on
November 13, 2013, under the terms and subject to the conditions of
the Asset Purchase Agreement, Life Newco acquired certain assets,
including a license granting Life Newco an exclusive,
sublicenseable right to develop and commercialize pharmaceutical
products containing levosimendan, 2.5 mg/ml concentrate for
solution for infusion / 5ml vial in the United States and
Canada
.
NOTE 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements include all adjustments (consisting of normal and
recurring adjustments) necessary for a fair presentation of these
financial statements. The condensed consolidated balance sheet at
December 31, 2017 has been derived from the Company’s audited
consolidated financial statements included in its Annual Report on
Form 10-K for the period ended December 31, 2017. Certain footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the
United States (“GAAP”) have been condensed or omitted
pursuant to Article 8 of Regulation S-X of the Securities and
Exchange Commission (“SEC”) rules and regulations.
Operating results for the three- and nine-month periods ended
September 30, 2018 are not necessarily indicative of results for
the full year or any other future periods. As such, it is suggested
that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company’s Annual Report on
Form 10-K for the period ended December 31, 2017.
Reverse Stock Split
The
Company initiated a 1-for-20 reverse stock split effective February
23, 2018. All shares and per share amounts in these condensed
consolidated financial statements and notes thereto have been
retroactively adjusted to give effect to the reverse stock
split.
Going Concern
Management
believes the accompanying condensed consolidated financial
statements have been prepared in conformity with GAAP, which
contemplate continuation of the Company as a going concern. The
Company has an accumulated deficit of $218,081,498, at September
30, 2018 and $213,499,285 at December 31, 2017, and used cash in
operations of $4,301,820 and $10,858,446 during the nine months
ended September 30, 2018 and 2017, respectively. The Company
requires substantial additional funds to complete clinical trials
and pursue regulatory approvals. Management is actively seeking
additional sources of equity and/or debt financing; however, there
is no assurance that any additional funding will be
available.
In view
of the matters described above, recoverability of a major portion
of the recorded asset amounts shown in the accompanying September
30, 2018 balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company’s
ability to meet its financing requirements on a continuing basis,
to maintain present financing, and to generate cash from future
operations. These factors, among others, raise substantial doubt
about the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
Use of Estimates
In
preparing the unaudited
condensed
consolidated financial
statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
the dates of the unaudited
condensed
consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from these estimates
and the operating results for the interim periods presented are not
necessarily indicative of the results expected for the full
year.
On an
ongoing basis, management reviews its estimates to ensure that
these estimates appropriately reflect changes in the
Company’s business and new information as it becomes
available. If historical experience and other factors used by
management to make these estimates do not reasonably reflect future
activity, the Company’s results of operations and financial
position could be materially impacted.
Principles of Consolidation
The
accompanying
condensed
consolidated financial statements include the accounts and
transactions of the Company and
Life
Newco, Inc. All material intercompany transactions and balances
have been eliminated in consolidation
.
Liquidity and Management’s Plan
At September 30, 2018, the Company had cash and cash equivalents,
including the fair value of its marketable securities, of
approximately $5.2 million. The Company used $4.3 million of cash
for operating activities during the nine months ended September 30,
2018 and had stockholders’ equity of $4.9 million, versus
$8.9 million at December 31, 2017.
The
Company expects to continue to incur expenses related to
development of levosimendan for pulmonary hypertension and other
potential indications, as well as identifying and developing other
potential product candidates. Based on its resources at September
30, 2018, the Company believes that it has sufficient capital to
fund its planned operations through the first quarter of calendar
year 2019. However, the Company will need substantial additional
financing in order to fund its operations beyond such period and
thereafter until it can achieve profitability, if ever. The Company
depends on its ability to raise additional funds through various
potential sources, such as equity and debt financing, or to license
its product candidates to another pharmaceutical company. The
Company will continue to fund operations from cash on hand and
through sources of capital similar to those previously described.
The Company cannot assure that it will be able to secure such
additional financing, or if available, that it will be sufficient
to meet its needs
.
To the extent that the Company raises additional funds by issuing
shares of its common stock or other securities convertible or
exchangeable for shares of common stock, stockholders will
experience dilution, which may be significant. In the event the
Company raises additional capital through debt financings, the
Company may incur significant interest expense and become subject
to covenants in the related transaction documentation that may
affect the manner in which the Company conducts its business. To
the extent that the Company raises additional funds through
collaboration and licensing arrangements, it may be necessary to
relinquish some rights to its technologies or product candidates,
or grant licenses on terms that may not be favorable to the
Company. Any or all of the foregoing may have a material adverse
effect on the Company’s business and financial
performance.
Net Loss per Share
Basic
net loss per share, which excludes antidilutive securities, is
computed by dividing net loss by the weighted-average number of
common shares outstanding for that particular period. In contrast,
diluted net loss per share considers the potential dilution that
could occur from other equity instruments that would increase the
total number of outstanding shares of common stock. Such amounts
include shares potentially issuable under outstanding options,
restricted stock and warrants.
The
following outstanding options, warrants and restricted stock were
excluded from the computation of basic and diluted net loss per
share for the periods presented because including them would have
had an anti-dilutive effect.
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
241,744
|
189,558
|
|
Warrants
to purchase common stock
|
120,773
|
120,773
|
|
Restricted
stock
|
19,914
|
-
|
Recent Accounting Pronouncements
The SEC
has released SEC Final Rule Release No. 33-10532 Disclosure Update
and Simplification, which adopts amendments to certain disclosure
requirements that have become redundant, duplicative, overlapping,
outdated, or superseded, in light of other SEC disclosure
requirements, GAAP, or changes in the information environment. The
amendments also refer certain SEC disclosure requirements that
overlap with but require information incremental to GAAP to the
Financial Accounting Standards Board (“FASB”) for
potential incorporation into GAAP. The amendments are intended to
facilitate the disclosure of information to investors and simplify
compliance without significantly altering the total mix of
information provided to investors. These amendments are part of an
initiative by the Division of Corporation Finance to review
disclosure requirements applicable to issuers to consider ways to
improve the requirements for the benefit of investors and issuers.
The amendments became effective on November 5, 2018 and did not
have a material impact to the Company.
In June
2018, the FASB issued an accounting standard that provides guidance
that aligns the accounting for share-based payment awards issued to
employees and nonemployees. Under the new guidance, the existing
employee guidance will apply to nonemployee share-based
transactions. The cost of nonemployee awards will continue to be
recorded as if the grantor had paid cash for the goods or services.
In addition, the contractual term will be able to be used in lieu
of an expected term in the option-pricing model for nonemployee
awards. Equity-classified share-based payment awards issued to
nonemployees will now be measured on the grant date, and, for
performance conditions, compensation cost associated with the award
will be recognized when achievement of the performance condition is
probable, rather than upon achievement of the performance
condition. The new guidance also clarifies that any share-based
payment awards issued to customers should be evaluated under ASC
606, Revenue from Contracts with Customers. The standard will be
effective for interim and annual reporting periods beginning after
December 15, 2018. Early adoption is permitted. The Company does
not believe adoption of this standard will have a material impact
on its condensed consolidated financial statements and related
disclosures.
In July
2017, the FASB issued an accounting standard that changes 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.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. 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. The
standard will be effective on January 1, 2019. Early adoption is
permitted, including adoption in an interim period. The Company
does not believe adoption of this standard will have a material
impact on its condensed consolidated financial statements and
related disclosures.
In
January 2017, the FASB issued an accounting standard that provides
guidance for evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. The
guidance provides a screen to determine when an integrated set of
assets and activities, or a set, does not qualify to be a business.
The screen requires that when substantially all of the fair value
of the gross assets acquired (or disposed of) is concentrated in an
identifiable asset or a group of similar identifiable assets, the
set is not a business. If the screen is not met, the guidance
requires a set to be considered a business to include, at a
minimum, an input and a substantive process that together
significantly contribute to the ability to create outputs and
removes the evaluation as to whether a market participant could
replace the missing elements. The standard became effective on
January 1, 2018 and was adopted on a prospective basis. The
Company’s adoption of this standard did not have a material
impact on its condensed consolidated financial statements and
related disclosures.
In
August 2016, the FASB issued an accounting standard that clarifies
how companies present and classify certain cash receipts and cash
payments in the statement of cash flows where diversity in practice
exists. The standard became effective in the Company’s first
quarter of fiscal 2018. The Company’s adoption of this
standard did not have a material impact on its condensed
consolidated financial statements and related
disclosures.
In June
2016, the FASB issued an accounting standard that amends how credit
losses are measured and reported for certain financial instruments
that are not accounted for at fair value through net income. This
standard requires that credit losses be presented as an allowance
rather than as a write-down for available-for-sale debt securities
and will be effective for interim and annual reporting periods
beginning January 1, 2020, with early adoption permitted, but
not earlier than annual reporting periods beginning January 1,
2019. A modified retrospective approach is to be used for certain
parts of this guidance, while other parts of the guidance are to be
applied using a prospective approach. The Company does not believe
adoption of this standard will have a material impact on its
condensed consolidated financial statements and related
disclosures.
In May
2014, the FASB issued an accounting standard that supersedes nearly
all existing revenue recognition guidance under GAAP. The standard
is principles-based and provides a five-step model to determine
when and how revenue is recognized. The core principle of the
standard is that revenue should be recognized when a company
transfers promised goods or services to customers in an amount that
reflects the consideration to which the Company expects to be
entitled in exchange for those goods or services. In March 2016,
the FASB issued a standard to clarify the implementation guidance
on principal versus agent considerations, and in April 2016, the
FASB issued a standard to clarify the implementation guidance on
identifying performance obligations and licensing. The standard
also requires disclosure of qualitative and quantitative
information surrounding the amount, nature, timing and uncertainty
of revenues and cash flows arising from contracts with customers.
In July 2015, the FASB agreed to defer the effective date of the
standard from annual periods beginning after December 15, 2016, to
annual periods beginning after December 15, 2017. Early application
prior to the original effective date was not permitted. The
standard permits the use of either the retrospective or cumulative
effect transition method. The Company reviewed its current
accounting policies and practices to assess the impact of the
guidance on its business processes. Based on this evaluation, the
adoption of this standard did not have a material impact on its
condensed consolidated financial statements and related
disclosures.
In
February 2016, the FASB issued an accounting standard intended to
improve financial reporting regarding leasing transactions. The
standard will require the Company to recognize on its balance sheet
the assets and liabilities for the rights and obligations created
by all leased assets. The standard will also require it to provide
enhanced disclosures designed to enable users of financial
statements to understand the amount, timing, and uncertainty of
cash flows arising from all leases, operating and capital, with
lease terms greater than 12 months. The standard is effective for
financial statements beginning after December 15, 2018, and interim
periods within those annual periods. Early adoption is permitted.
The Company is currently evaluating the impact that this standard
will have on its condensed consolidated financial statements and
related disclosures.
In
January 2016, the FASB issued an accounting standard that will
enhance the Company’s reporting for financial instruments.
The standard is effective for financial statements issued for
annual periods beginning after December 15, 2017, and interim
periods within those annual periods. Earlier adoption is permitted
for interim and annual reporting periods as of the beginning of the
fiscal year of adoption. The Company’s adoption of this
standard did not have a material impact on its condensed
consolidated financial statements and related
disclosures.
NOTE
3: FAIR VALUE
The
Company determines the fair value of its financial assets and
liabilities in accordance with the FASB Accounting Standards
Codification (“ASC”) 820 Fair Value Measurements. The
Company's balance sheet includes the following financial
instruments: cash and cash equivalents, investments in marketable
securities, and warrant liabilities. The Company considers the
carrying amount of its cash and cash equivalents to approximate
fair value due to the short-term nature of these
instruments.
Accounting
for fair value measurements involves a single definition of fair
value, along with a conceptual framework to measure fair value,
with a fair value defined as “the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date.” The fair value measurement hierarchy consists of three
levels:
|
Level
one
|
|
Quoted
market prices in active markets for identical assets or
liabilities;
|
|
|
|
|
|
Level
two
|
|
Inputs
other than level one inputs that are either directly or indirectly
observable; and
|
|
|
|
|
|
Level
three
|
|
Unobservable
inputs developed using estimates and assumptions, which are
developed by the reporting entity and reflect those assumptions
that a market participant would use.
|
The
Company applies valuation techniques that (1) place greater
reliance on observable inputs and less reliance on unobservable
inputs and (2) are consistent with the market approach, the
income approach and/or the cost approach, and include enhanced
disclosures of fair value measurements in the Company’s
condensed
consolidated
financial statements.
Investments in Marketable Securities
The
Company classifies all of its investments as available-for-sale.
Unrealized gains and losses on investments are recognized in
comprehensive income/(loss), unless an unrealized loss is
considered to be other than temporary, in which case the unrealized
loss is charged to operations. The Company periodically reviews its
investments for other than temporary declines in fair value below
cost basis and whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The
Company believes the individual unrealized losses represent
temporary declines primarily resulting from interest rate changes.
Realized gains and losses are reflected in other income in the
C
ondensed
Consolidated
Statements of Comprehensive Loss and are determined using the
specific identification method with transactions recorded on a
settlement date basis. Investments with original maturities at date
of purchase beyond three months and which mature at or less than 12
months from the balance sheet date are classified as current.
Investments with a maturity beyond 12 months from the balance sheet
date are classified as long-term. At September 30, 2018, the
Company believes that the costs of its investments are recoverable
in all material respects.
The
following table summarizes the fair value of the Company’s
investments by type. The estimated fair value of the
Company’s fixed income investments is classified as Level 2
in the fair value hierarchy as defined in U.S. GAAP. These fair
values are obtained from independent pricing services which utilize
Level 2 inputs:
|
|
|
|
|
|
|
|
|
|
|
Corporate
debt securities
|
$
1,802,485
|
$
12,962
|
$
-
|
$
(9,981
)
|
$
1,805,466
|
The
following table summarizes the scheduled maturity for the
Company’s investments at September 30, 2018 and December 31,
2017.
|
|
|
|
|
Maturing
in one year or less
|
$
1,509,117
|
$
6,122,400
|
|
Maturing
after one year through three years
|
296,349
|
1,809,428
|
|
Total
investments
|
$
1,805,466
|
$
7,931,828
|
Warrant liability
On July 23, 2013, the Company issued common stock warrants in
connection with the issuance of Series C 8% Preferred Stock (the
“Series C Warrants”). As part of the offering, the
Company issued 137,668 warrants at an exercise price of $52.00 per
share and contractual term of 6 years. On November 11, 2013, the
Company satisfied certain contractual obligations pursuant to the
Series C offering which caused certain “down-round”
price protection clauses in the outstanding warrants to become
effective on that date. In accordance with ASC 815-40-35-9, the
Company reclassified these warrants as a current liability and
recorded a warrant liability of $1,380,883, which represents the
fair market value of the warrants at that date. The initial fair
value recorded as warrants within stockholders’ equity of
$233,036 was reversed and the subsequent changes in fair value are
recorded as a component of other expense.
Financial
assets or liabilities are considered Level 3 when their fair
values are determined using pricing models, discounted cash flow
methodologies or similar techniques and at least one significant
model assumption or input is unobservable. The Series C Warrants
are measured using the Monte Carlo valuation model which is based,
in part, upon inputs for which there is little or no observable
market data, requiring the Company to develop its own
assumptions. The assumptions used in calculating the
estimated fair value of the warrants represent the Company’s
best estimates; however, these estimates involve inherent
uncertainties and the application of management judgment. As
a result, if factors change and different assumptions are used, the
warrant liabilities and the change in estimated fair value of the
warrants could be materially different.
Inherent
in the Monte Carlo valuation model are assumptions related to
expected stock-price volatility, expected life, risk-free interest
rate and dividend yield. The Company estimates the volatility
of its common stock based on historical volatility that matches the
expected remaining life of the warrants. The risk-free
interest rate is based on the U.S. Treasury zero-coupon yield curve
on the grant date for a maturity similar to the expected remaining
life of the warrants. The expected life of the warrants is
assumed to be equivalent to their remaining contractual term.
The dividend rate is based on the historical rate, which the
Company anticipates to remain at zero.
The
Monte Carlo model is used for the Series C Warrants to
appropriately value the potential future exercise price adjustments
triggered by the anti-dilution provisions. This requires Level 3
inputs which are based on the Company’s estimates of the
probability and timing of potential future financings and
fundamental transactions. The other assumptions used by the
Company are summarized in the following table for the Series C
Warrants that were outstanding as of September 30, 2018 and
December 31, 2017:
|
Series C Warrants
|
|
|
|
Closing
stock price
|
$
5.26
|
$
9.80
|
|
Expected
dividend rate
|
0
%
|
0
%
|
|
Expected
stock price volatility
|
90.00
%
|
81.26
%
|
|
Risk-free
interest rate
|
2.50
%
|
1.83
%
|
|
Expected
life (years)
|
0.81
|
1.56
|
As of September 30, 2018, the fair value of the warrant liability
was $19,376. The Company recorded a gain of $5,175 and $14,297 for
the change in fair value as a component of other income on the
condensed consolidated statements of comprehensive loss for the
three and nine months ended September 30, 2018,
respectively.
As of
September 30, 2018, there were 12,035 Series C Warrants
outstanding.
The
following tables summarize information regarding assets and
liabilities measured at fair value on a recurring basis as of
September 30, 2018 and December 31, 2017:
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Balance as of
September 30,
2018
|
Quoted prices in Active Markets for Identical Securities
(Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
$
3,347,183
|
$
3,347,183
|
$
-
|
$
-
|
|
Marketable
securities
|
$
1,509,117
|
$
-
|
$
1,509,117
|
$
-
|
|
|
|
|
|
|
|
Long-term
Assets
|
|
|
|
|
|
Marketable
securities
|
$
296,349
|
$
-
|
$
296,349
|
$
-
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Warrant
liabilities
|
$
19,376
|
$
-
|
$
-
|
$
19,376
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Balance as of
December 31,
2017
|
Quoted prices in Active Markets for Identical Securities
(Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
$
1,604,810
|
$
1,604,810
|
$
-
|
$
-
|
|
Marketable
securities
|
$
6,122,400
|
$
-
|
$
6,122,400
|
$
-
|
|
|
|
|
|
|
|
Long-term
Assets
|
|
|
|
|
|
Marketable
securities
|
$
1,809,428
|
$
-
|
$
1,809,428
|
$
-
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Warrant
liabilities
|
$
33,673
|
$
-
|
$
-
|
$
33,673
|
There
were no significant transfers between levels during the three and
nine months ended September 30, 2018.
NOTE 4. BALANCE SHEET COMPONENTS
Property and equipment, net
Property
and equipment consist of the following as of September 30, 2018 and
December 31, 2017:
|
|
|
|
|
Laboratory
equipment
|
$
354,861
|
$
354,861
|
|
Computer
equipment and software
|
94,804
|
88,998
|
|
Office
furniture and fixtures
|
130,192
|
130,192
|
|
|
579,857
|
574,051
|
|
Less:
Accumulated depreciation
|
(571,679
)
|
(564,106
)
|
|
|
$
8,178
|
$
9,945
|
Depreciation
expense was approximately $2,000 and $3,000 for the three months
ended September 30, 2018 and 2017, respectively, and approximately
$8,000 and $11,000 for the nine months ended September 30, 2018 and
2017, respectively.
Accrued liabilities
Accrued
liabilities consist of the following as of September 30, 2018 and
December 31, 2017:
|
|
|
|
|
Operating
costs
|
$
56,345
|
$
39,252
|
|
Employee
related
|
47,955
|
324,054
|
|
|
$
104,300
|
$
363,306
|
NOTE
5. COMMITMENTS AND CONTINGENCIES
Simdax license agreement
On November 13, 2013, the Company acquired,
through its
wholly owned subsidiary, Life Newco,
that certain
License Agreement (the
“License”), dated September 20, 2013 by and between
Phyxius and Orion Corporation, a global healthcare company
incorporated under the laws of Finland (“Orion”), and
that certain Side Letter, dated October 15, 2013 by and between
Phyxius and Orion. The License grants the Company
an exclusive, sublicenseable right to develop and
commercialize pharmaceutical products containing levosimendan (the
“Product”) in the United States and Canada (the
“Territory”) from Orion. Pursuant to the
License, the Company must use Orion’s
“Simdax®” trademark to commercialize the
Product. The License also grants to the Company a right
of first refusal to commercialize new developments of the Product,
including developments as to the formulation, presentation, means
of delivery, route of administration, dosage or
indication. Orion’s ongoing role under the License
includes sublicense approval, serving as the sole source of
manufacture, holding a first right to enforce intellectual property
rights in the Territory, and certain regulatory participation
rights. Additionally, the Company must grant back to
Orion a broad non-exclusive license to any patents or clinical
trial data related to the Product developed by the Company under
the License. The License has a fifteen (15) year term,
provided, however, that the License will continue after the end of
the fifteen year term in each country in the Territory until the
expiration of Orion’s patent rights in the Product in such
country.
Pursuant to the terms of the License, the Company paid to Orion a
non-refundable up-front payment in the amount of $1.0
million. The License also includes the following
development milestones for which the Company shall make
non-refundable payments to Orion no later than twenty-eight (28)
days after the occurrence of the applicable milestone event: (i)
$2.0 million upon the grant of FDA approval, including all
registrations, licenses, authorizations and necessary approvals, to
develop and/or commercialize the Product in the United States; and
(ii) $1.0 million upon the grant of regulatory approval for the
Product in Canada. Once commercialized, the Company is obligated to
make certain non-refundable commercialization milestone payments to
Orion, aggregating up to $13.0 million, contingent upon achievement
of certain cumulative net sales amounts in the
Territory. The Company must also pay Orion tiered
royalties based on net sales of the Product in the Territory made
by the Company and its sublicensees. After the end of the term of
the License, the Company must pay Orion a royalty based on net
sales of the Product in the Territory for as long as Life Newco
sells the Product in the Territory
.
As of
September 30, 2018, the Company has not met any of the
developmental milestones and, accordingly, has not recorded any
liability for the contingent payments due to Orion.
NOTE 6.
STOCKHOLDERS’ EQUITY
Preferred Stock
Under
the Company’s Certificate of Incorporation, the Board of
Directors is authorized, without further stockholder action, to
provide for the issuance of up to 10,000,000 shares of preferred
stock, par value $0.0001 per share, in one or more series, to
establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences
and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. As of
September 30, 2018, no shares of preferred stock are designated,
issued or outstanding.
Common Stock
The
Company’s Certificate of Incorporation authorizes it to issue
400,000,000 shares of $0.0001 par value common stock. As of
September 30, 2018, there were 1,465,496 shares of common stock
issued and outstanding.
Warrants
As of
September 30, 2018, the Company had 120,773 warrants outstanding.
There was no warrant activity for the nine months ended September
30, 2018.
2016 Stock Incentive Plan
In June
2016, the Company adopted the 2016 Stock Incentive Plan (the
“2016 Plan”). Under the 2016 Plan, with the
approval of the Compensation Committee of the Board of Directors,
the Company may grant stock options, stock appreciation rights,
restricted stock, restricted stock units, performance shares,
performance units, cash-based awards or other stock-based awards.
On June 16, 2016, the Company’s stockholders approved the
2016 Plan and authorized for issuance under the 2016 Plan a total
of 150,000 shares of common stock. As of September 30, 2018, the
Company had 100,000 shares of common stock available for grant
under the 2016 Plan.
The
following table summarizes the shares available for grant under the
2016 Plan for the nine months ended September 30,
2018:
|
|
Shares Available for
Grant
|
|
Balances, at December 31, 2017
|
150,000
|
|
Options
granted
|
(50,000
)
|
|
Balances, at September 30, 2018
|
100,000
|
2016 Plan Stock Options
Stock
options granted under the 2016 Plan may be either incentive stock
options (“ISOs”), or nonqualified stock options
(“NSOs”). ISOs may be granted only to employees. NSOs
may be granted to employees, consultants and directors. Stock
options under the 2016 Plan may be granted with a term of up to ten
years and at prices no less than fair market value at the time of
grant. Stock options granted generally vest over three to four
years.
The
following table summarizes the outstanding stock options under the
2016 Plan for the nine months ended September 30,
2018:
|
|
|
|
|
|
Weighted Average Exercise Price
|
|
Balances, at December 31, 2017
|
-
|
$
-
|
|
Options
granted
|
50,000
|
$
6.10
|
|
Balances, at September 30, 2018
|
50,000
|
$
6.10
|
The
Company chose the “straight-line” attribution method
for allocating compensation costs of each stock option over the
requisite service period using the Black-Scholes Option Pricing
Model to calculate the grant date fair value.
The Company recorded compensation expense for these stock options
grants of $29,732 and $59,463 for the three and nine months ended
September 30, 2018, respectively.
As of
September 30, 2018, there were unrecognized compensation costs of
approximately $189,744 related to non-vested stock option awards
under the 2016 Plan that will be recognized on a straight-line
basis over the weighted average remaining vesting period of 2.17
years.
1999 Amended Stock Plan
In
October 2000, the Company adopted the 1999 Stock Plan, as amended
and restated on June 17, 2008 (the “1999 Plan”).
Under the 1999 Plan, with the approval of the Compensation
Committee of the Board of Directors, the Company may grant stock
options, restricted stock, stock appreciation rights and new shares
of common stock upon exercise of stock options. On March 13, 2014,
the Company’s stockholders approved an amendment to the 1999
Plan which increased the number of shares of common stock
authorized for issuance under the 1999 Plan to a total of 200,000
shares, up from 15,000 previously authorized. On September 15,
2015, the Company’s stockholders approved an additional
amendment to the 1999 Plan which increased the number of shares of
common stock authorized for issuance under the 1999 Plan to a total
of 250,000 shares, up from 200,000 previously authorized. The 1999
Plan expired on June 17, 2018 and no new grants may be made under
that plan after that date. However, unexpired awards granted under
the 1999 Plan remain outstanding and subject to the terms of the
1999 Plan.
1999 Plan Stock Options
Stock
options granted under the 1999 Plan may be ISOs, or NSOs. ISOs may
be granted only to employees. NSOs may be granted to employees,
consultants and directors. Stock options under the 1999 Plan may be
granted with a term of up to ten years and at prices no less than
fair market value for ISOs and no less than 85% of the fair market
value for NSOs. Stock options granted generally vest over one to
three years.
The
following table summarizes the outstanding stock options under the
1999 Plan for the nine months ended September 30,
2018:
|
|
|
|
|
|
Weighted Average Exercise Price
|
|
Balances, at December 31, 2017
|
188,744
|
$
95.24
|
|
Options
granted
|
3,000
|
$
6.23
|
|
Options
cancelled
|
-
|
$
-
|
|
Balances, at September 30, 2018
|
191,744
|
$
93.85
|
The
Company chose the “straight-line” attribution method
for allocating compensation costs of each stock option over the
requisite service period using the Black-Scholes Option Pricing
Model to calculate the grant date fair value.
The Company recorded compensation expense for these stock options
grants of $62,564 and $196,499 for the three and nine months ended
September 30, 2018, respectively.
As of
September 30, 2018, there were unrecognized compensation costs of
approximately $178,962 related to non-vested stock option awards
under the 1999 Plan that will be recognized on a straight-line
basis over the weighted average remaining vesting period of 1.12
years. Additionally, there were unrecognized compensation costs of
approximately $5.9 million related to non-vested stock option
awards under the 1999 Plan subject to performance-based vesting
milestones with a weighted average remaining life of 1.5 years. As
of September 30, 2018, none of these milestones have been
achieved.
The
Company used the following assumptions to estimate the fair value
of options granted under its stock option plans for the nine months
ended September 30, 2018 and 2017:
|
|
For the nine months ended September 30,
|
|
|
|
|
|
Risk-free
interest rate (weighted average)
|
2.85
%
|
2.19
%
|
|
Expected
volatility (weighted average)
|
102.38
%
|
99.59
%
|
|
Expected
term (in years)
|
7
|
7
|
|
Expected
dividend yield
|
0.00
%
|
0.00
%
|
|
Risk-Free Interest Rate
|
The
risk-free interest rate assumption was based on U.S. Treasury
instruments with a term that is consistent with the expected term
of the Company’s stock options.
|
|
Expected Volatility
|
The
expected stock price volatility for the Company’s common
stock was determined by examining the historical volatility and
trading history for its common stock over a term consistent with
the expected term of its options.
|
|
Expected Term
|
The
expected term of stock options represents the weighted average
period the stock options are expected to remain outstanding. It was
calculated based on the Company’s historical experience with
its stock option grants.
|
|
Expected Dividend Yield
|
The
expected dividend yield of 0% is based on the Company’s
history and expectation of dividend payouts. The Company has not
paid and does not anticipate paying any dividends in the near
future.
|
|
Forfeitures
|
Stock
compensation expense recognized in the statements of operations for
the nine months ended September 30, 2018 and 2017 is based on
awards ultimately expected to vest, and it has been reduced for
estimated forfeitures. ASC 718 requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on the Company’s historical
experience.
|
Restricted Stock Grants
The
following table summarizes the restricted stock grants under the
1999 Plan for the nine months ended September 30, 2018
.
|
|
Outstanding Restricted Stock Grants
|
|
|
|
Weighted Average Grant Date Fair Value
|
|
Balances, at December 31, 2017
|
-
|
$
-
|
|
Restricted
stock granted
|
85,900
|
$
5.82
|
|
Restricted
stock vested
|
(37,420
)
|
$
5.69
|
|
Restricted
stock cancelled
|
(28,566
)
|
$
5.66
|
|
Balances, at September 30, 2018
|
19,914
|
$
6.29
|
The Company recorded compensation expense for these restricted
stock grants of approximately $63,000 and $188,000 for the three
and nine months ended September 30, 2018,
respectively.
As of
September 30, 2018, there was approximately $63,000 of unrecognized
compensation costs related to the non-vested restricted stock
grants.
ITEM 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, which are subject to the “safe
harbor” created by those sections. Forward-looking statements
are based on our management’s beliefs and assumptions and on
information currently available to them. In some cases you can
identify forward-looking statements by words such as
“may,” “will,” “should,”
“could,” “would,” “expects,”
“plans,” “anticipates,”
“believes,” “estimates,”
“projects,” “predicts,”
“potential” and similar expressions intended to
identify forward-looking statements. Examples of these statements
include, but are not limited to, statements regarding: the
implications of interim or final results of our clinical trials,
the progress of our research programs, including clinical testing,
the extent to which our issued and pending patents may protect our
products and technology, our ability to identify new product
candidates, the potential of such product candidates to lead to the
development of commercial products, our anticipated timing for
initiation or completion of our clinical trials for any of our
product candidates, our future operating expenses, our future
losses, our future expenditures for research and development, our
ability to raise capital and the sufficiency of our cash resources.
Our actual results could differ materially from those anticipated
in these forward-looking statements for many reasons, including the
risks faced by us and described in Part II, Item 1A of this
Quarterly Report on Form 10-Q, Part I, Item 1A of our Annual Report
on Form 10-K, and our other filings with the Securities and
Exchange Commission, or SEC. You should not place undue reliance on
these forward-looking statements, which apply only as of the date
of this Quarterly Report on Form 10-Q. You should read this
Quarterly Report on Form 10-Q completely and with the understanding
that our actual future results may be materially different from
those we expect. Except as required by law, we assume no obligation
to update these forward-looking statements, whether as a result of
new information, future events or otherwise.
The following discussion and analysis should be read in conjunction
with the unaudited
condensed
consolidated financial statements and notes thereto included in
Part I, Item 1 of this Quarterly Report on Form 10-Q and with
the audited consolidated financial statements and related notes
thereto included as part of our Annual Report on Form 10-K for the
year ended December 31, 2017.
All references in this Quarterly Report to “Tenax
Therapeutics”, “we”, “our” and
“us” means Tenax Therapeutics, Inc.
Overview
Strategy
We are
a specialty pharmaceutical company focused on identifying and
developing products that address diseases with high unmet medical
needs. Our principal business objective is to identify, develop and
commercialize novel therapeutic products for disease indications
that represent significant areas of clinical need and commercial
opportunity. Our lead product is levosimendan, which was acquired
in an asset purchase agreement with Phyxius Pharma, Inc., or
Phyxius. Levosimendan is a calcium sensitizer developed for
intravenous use in hospitalized patients with acutely decompensated
heart failure. The treatment is currently approved in more than 60
countries for this indication and not available in the United
States or Canada.
The European Society of Cardiology, or the ESC, recommends
levosimendan as a preferable agent over dobutamine to reverse the
effect of beta blockade if it is thought to be contributing to
hypotension. The ESC guidelines also state that levosimendan is not
appropriate for patients with systolic blood pressure less than
85mmHg or in patients in cardiogenic shock unless it is used in
combination with other inotropes or vasopressors
.
Other unique properties of
levosimendan include sustained efficacy through the formation of a
long acting metabolite, lack of impairment of diastolic function,
and evidence of better compatibility with beta blockers than
dobutamine.
We are
currently developing levosimendan in North America for the
treatment of patients with pulmonary hypertension associated with
heart failure with preserved ejection fraction, or PH-HFpEF.
PH-HFpEF is defined hemodynamically by a pulmonary artery
pressure, or mPAP, ≥25 mmHg, a pulmonary capillary wedge
pressure, or PCWP, >15 mmHg, and a diastolic pressure gradient,
or diastolic PAP – PCWP, >7mmHg. Pulmonary hypertension in
these patients initially develops from a passive backward
transmission of elevated filling pressures from left-sided heart
failure. These mechanical components of pulmonary venous congestion
may trigger pulmonary vasoconstriction, decreased nitric oxide
availability, increased endothelin expression, desensitization to
natriuretic peptide induced vasodilation, and vascular
remodeling. Finally, these changes often lead to advanced
pulmonary vascular disease, increased right ventricle, or RV,
afterload, and RV failure.
PH-HFpEF
is a common form of pulmonary hypertension with an estimated US
prevalence exceeding 1.5 million patients. Currently, no
pharmacologic therapies are approved for treatment of
PH-HFpEF. Despite the fact that many therapies have been
studied in PH-HFpEF patients, including therapies approved to treat
pulmonary arterial hypertension patients, no therapies have been
shown to be effective in treating PH-HFpEF patients.
Published
pre-clinical and clinical studies indicate that levosimendan may
provide important benefits to patients with pulmonary hypertension.
Data from these published trials indicate that levosimendan may
reduce pulmonary vascular resistance and improve important
cardiovascular hemodynamics such as reduced pulmonary capillary
wedge pressure in patients with pulmonary hypertension. In
addition, several published studies provide evidence that
levosimendan may improve right ventricular dysfunction which is a
common comorbidity in patients with pulmonary hypertension. While
none of these studies have focused specifically on PH-HFpEF
patients, the general hemodynamic improvements in these published
studies of various types of pulmonary hypertension provide an
indication that levosimendan may be beneficial in PH-HFpEF
patients.
In
March 2018, we met with the United States Food and Drug
Administration, or FDA, to discuss development of levosimendan in
PH-HFpEF patients. The FDA was in agreement with our planned Phase
2 design, patient entry criteria, and endpoints. The study may be
conducted under the existing investigational new drug application
with no additional nonclinical studies required to support full
development. The FDA recognized there were no approved drug
therapies to treat PH-HFpEF patients and acknowledged this provided
an opportunity for a limited Phase 3 clinical program. This topic
will be discussed further at the End-of-Phase 2 Meeting following
completion of the planned Phase 2 study in PH-HFpEF patients. We
plan to begin enrollment of the Phase 2 trial in the fourth quarter
of 2018.
Third Quarter 2018 Highlights
The
following summarizes certain key financial measures for the three
months ended September 30, 2018:
●
Cash and cash
equivalents, including the fair-value of our marketable securities,
were $5.2 million at September 30, 2018.
●
Our net loss from
operations was $1.6 million for the third quarter of fiscal 2018
compared to $1.3 million for the three months ended September 30,
2017.
●
Net cash used in
operating activities was $1.6 million and $1.3 million for the
three months ended September 30, 2018 and 2017,
respectively.
Opportunities and Trends
As we
focus on the development of levosimendan, we also continue to
position ourselves to execute upon licensing and other partnering
opportunities. To do so, we will need to continue to maintain our
strategic direction, manage and deploy our available cash
efficiently and strengthen our collaborative research development
and partner relationships.
During
the remainder of calendar year 2018, we are focused on the
following initiatives:
●
Working with
collaborators and partners to accelerate product development,
reduce our development costs, and broaden our commercialization
capabilities;
●
Gaining regulatory
approval for the continued development and commercialization of
levosimendan in the United States; and
●
Identifying new
products or product candidates for potential
acquisitions.
Financial Overview
Results of Operations- Comparison of the Three Months Ended
September 30, 2018 and 2017
General and Administrative Expenses
General
and administrative expenses consist primarily of compensation for
executive, finance, legal and administrative personnel, including
stock-based compensation. Other general and administrative expenses
include facility costs not otherwise included in research and
development expenses, legal and accounting services, other
professional services, and consulting fees. General and
administrative expenses and percentage changes for the three months
ended September 30, 2018 and 2017, respectively, are as
follows:
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
Personnel
costs
|
$
719,870
|
$
599,289
|
$
120,581
|
20
%
|
|
Legal
and professional fees
|
289,893
|
284,470
|
5,423
|
2
%
|
|
Other
costs
|
144,333
|
136,096
|
8,237
|
6
%
|
|
Facilities
|
35,720
|
34,024
|
1,696
|
5
%
|
|
Depreciation
and amortization
|
1,761
|
2,568
|
(807
)
|
(31
)%
|
Personnel costs:
Personnel
costs increased approximately $121,000 for the
three months ended September 30, 2018
compared to the same period in the prior year. This increase was
due primarily to the hiring of our CEO in the current year as well
as an increase of approximately $29,000 in recognized costs for
stock-based compensation in the current period as compared to the
same period in the prior year.
Legal and professional fees:
Legal
and professional fees consist of the costs incurred for legal fees,
accounting fees, consulting fees, recruiting costs and investor
relations services, as well as fees paid to our Board of Directors.
Legal and professional fees increased approximately $5,000 for the
three months ended September 30,
2018
compared to the same period in the prior year. This
increase was due primarily to an increase in costs incurred for
legal fees and investor relations fees, partially offset by
decreases in costs incurred for consulting fees and fees paid to
our Board of Directors, including the vested value of stock option
grants.
●
Legal fees
increased approximately $31,000 in the current period. This
increase was due primarily to an increase in costs associated with
levosimendan intellectual property, partially offset by a decrease
in costs incurred in support of the Board of Directors Strategic
Alternatives Committee in the current period as compared to same
period of the prior year.
●
Investor relations
fees increased approximately $43,000 in the current period. This
increase was due primarily to additional fees paid to investor
relations firms and conference fees and travel costs that were not
incurred in the same period of the prior year.
●
Consulting costs
decreased approximately $54,000 in the current period. This
decrease was due primarily to the fees paid to third-party firms
for FDA and Health Canada submissions as well as costs incurred in
support of the Board of Directors Strategic Alternatives Committee
in the prior year that were not incurred in the current
period.
●
Board of Directors
fees decreased in the current period by approximately $16,000. This
decrease was due primarily to a member of the Board of Directors
accepting the position of CEO, and a reduction in the recognized
expense for the vesting of stock options awarded in the current
period as compared to the recognized expense for stock options
awarded in the same period of the prior year.
Other costs:
Other
costs include costs incurred for travel, supplies, insurance and
other miscellaneous charges. The approximately $8,000 increase in
other costs for the
three months ended
September 30, 2018
compared to the same period in the prior
year was due primarily to approximately $30,000 in relocation
costs, an increase of approximately $15,000 in travel related costs
and an increase of approximately $10,000 in insurance and other
miscellaneous charges, partially offset by a decrease of
approximately $47,000 in franchise taxes paid in the current period
as compared to the same period in the prior year.
Facilities:
Facilities
expenses include costs paid for rent and utilities at our corporate
headquarters in North Carolina. Facilities expenses remained
relatively consistent for the three months
ended September 30, 2018 and
2017.
Depreciation and Amortization:
Depreciation
and amortization costs remained relatively consistent for the three
months
ended September 30, 2018 and
2017.
Research and Development
Expenses
Research
and development expenses include, but are not limited to,
(i) expenses incurred under agreements with clinical research
organizations, or CROs, and investigative sites, which conduct our
clinical trials and a substantial portion of our pre-clinical
studies; (ii) the cost of manufacturing and supplying clinical
trial materials; (iii) payments to contract service
organizations, as well as consultants; (iv) employee-related
expenses, which include salaries and benefits; and
(v) depreciation and direct and allocated expenses for rent
and maintenance of equipment and other supplies. All research and
development expenses are expensed as incurred. Research and
development expenses and percentage changes for the
three months ended September 30, 2018 and 2017,
respectively
, are as follows:
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
Clinical
and preclinical development
|
$
310,158
|
$
226,225
|
$
83,933
|
37
%
|
|
Personnel
costs
|
48,329
|
25,993
|
22,336
|
86
%
|
|
Consulting
|
2,900
|
-
|
2,900
|
-
%
|
|
Other
costs
|
1,241
|
1,755
|
(514
)
|
(29
)%
|
Clinical and preclinical development:
Clinical
and preclinical development costs include, primarily, the costs
associated with our Phase 3 LEVO-CTS clinical trial for
levosimendan, which was completed during fiscal year 2017 and the
costs associated with our Phase 2 PH-HFpEF clinical trial which we
plan to initiate in the fourth quarter of the current fiscal year.
The increase of approximately $84,000 in clinical and preclinical
development costs for the three months ended September 30, 2018
compared to the same period in the prior year, was primarily due to
an increase of approximately $274,000 in costs associated with
initiating the Phase 2 PH-HFpEF clinical trial in the current
period and approximately $36,000 in preclinical costs associated
with formulation development of levosimendan, partially offset by a
decrease of approximately $226,000 in CRO costs to manage the Phase
3 LEVO-CTS clinical trial in the same period of the prior year that
were not incurred in the current period.
Personnel costs:
Personnel
costs increased approximately $22,000 in the current period due to
headcount increases to manage the Phase 2 PH-HFpEF clinical trial
which were not incurred in the same period in the prior
year.
Consulting fees:
Consulting
fees remained relatively consistent for the three months
ended September 30, 2018 and
2017
.
Other costs:
Other
costs remained relatively consistent for the three months
ended September 30, 2018 and
2017.
The
process of conducting preclinical studies and clinical trials
necessary to obtain approval from the FDA is costly and time
consuming. The probability of success for each product candidate
and clinical trial may be affected by a variety of factors,
including, among other things, the quality of the product
candidate’s early clinical data, investment in the program,
competition, manufacturing capabilities and commercial viability.
As a result of the uncertainties discussed above, uncertainty
associated with clinical trial enrollment and risks inherent in the
development process, we are unable to determine the duration and
completion costs of current or future clinical stages of our
product candidates or when, or to what extent, we will generate
revenues from the commercialization and sale of any of our product
candidates. Development timelines, probability of success and
development costs vary widely. We are currently focused on
developing our most advanced product candidate, levosimendan;
however, we will need substantial additional capital in the future
in order to complete the development and potential
commercialization of levosimendan, and to continue with the
development of other potential product candidates.
Other income and expense, net
Other
income and expense include non-operating income and expense items
not otherwise recorded in our
condensed
consolidated statement of
comprehensive loss
. These items
include, but are not limited to, changes in the fair value of
financial assets and derivative liabilities, interest income earned
and fixed asset disposals. Other income for the three months ended
September 30, 2018 and 2017, respectively, is as
follows:
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
Other
income, net
|
$
(23,400
)
|
$
(76,226
)
|
$
52,826
|
Other
income decreased approximately $53,000 for the three months ended
September 30, 2018 compared to the same period in the prior year.
This decrease is due primarily to the change in fair value of our
Series C warrant derivative liability in the current period and a
reduction in the interest earned on our investment in marketable
securities.
During the three months ended September 30, 2018, we recorded a
derivative gain of approximately $5,000 which compared to a
derivative gain of approximately $36,000 for the same period in the
prior year. These charges to income are derived from the
free-standing Series C warrants which are measured at their fair
market value each period using the Monte Carlo simulation
model
.
During
the three months ended September 30, 2018, we recorded interest
income of approximately $17,000 from our investments in marketable
securities. This income is derived from approximately $20,000 in
bond interest paid, partially offset by approximately $3,000 in
charges for amortization of premiums paid and fair-value
adjustments measured each period, which compares to approximately
$84,000 in bond interest paid, partially offset by approximately
$44,000 in charges for amortization of premiums paid and fair-value
adjustments during the same period in the prior year.
Results of Operations- Comparison of the Nine Months Ended
September 30, 2018 and 2017
General and Administrative Expenses
General
and administrative expenses and percentage changes for the nine
months ended September 30, 2018 and 2017, respectively, are as
follows:
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
Personnel
costs
|
$
2,311,185
|
$
2,510,569
|
$
(199,384
)
|
(8
)%
|
|
Legal
and professional fees
|
1,134,868
|
1,324,424
|
(189,556
)
|
(14
)%
|
|
Other
costs
|
372,468
|
347,585
|
24,883
|
7
%
|
|
Facilities
|
108,919
|
104,850
|
4,069
|
4
%
|
|
Depreciation
and amortization
|
6,328
|
7,908
|
(1,580
)
|
(20
)%
|
Personnel costs:
Personnel
costs decreased approximately $199,000 for the
nine months ended September 30, 2018
compared to the same period in the prior year. This decrease was
due primarily to the payment of $430,000 in severance costs in the
prior year, partially offset by and an overall increase in salaries
and benefits paid of approximately $11,000, an increase of
approximately $168,000 in bonuses paid and an increase of
approximately $50,000 in recognized costs for stock-based
compensation in the current period as compared to the same period
in the prior year.
Legal and professional fees:
Legal
and professional fees decreased approximately $190,000 for the
nine months ended September 30,
2018
compared to the same period in the prior year. This
decrease was due primarily to decreases in costs incurred for
auditing fees, consulting fees, and the vested value of stock
option grants to our Board of Directors, partially offset by an
increase in costs incurred for legal fees and investor relations
fees.
●
Audit and
accounting fees decreased approximately $7,000 in the current
period. This decrease was due primarily to the reduction in audit
fees associated with our transition to “smaller reporting
company” filer status for our fiscal year ended December 31,
2017 as compared to the same period in the prior year.
●
Consulting costs
decreased approximately $209,000 in the current period. This
decrease was due primarily to the fees paid to third-party firms
for FDA and other regulatory submissions and costs incurred to
support the Board of Directors Strategic Alternatives Committee in
the prior year that were not incurred in the current
period.
●
Board of Directors
fees decreased in the current period by approximately $47,000. This
decrease was due primarily to a member of the Board of Directors
accepting the position of CEO in the current period, and a
reduction in the recognized expense for the vesting of stock
options awarded in the current period as compared to the recognized
expense for stock options awarded in the same period of the prior
year.
●
Legal fees
increased approximately $39,000 in the current period. This
increase was due primarily to the costs incurred for the filings
associated with our Special Meeting of Stockholders and costs
incurred in support of the Board of Directors Strategic
Alternatives Committee in the current period that were not incurred
in the prior year, as well as an increase in costs associated with
levosimendan intellectual property in the current period as
compared to same period of the prior year.
●
Investor relations
fees increased approximately $34,000 in the current period. This
increase was due primarily to the costs associated with our Special
Meeting of Stockholders in the current period that were not
incurred in the prior year.
Other costs:
The
approximately $25,000 increase in other costs for the
nine months ended September 30, 2018
compared to the same period in the prior year was due primarily to
increases of approximately $43,000 in travel related costs,
approximately $30,000 in relocation costs and approximately $12,000
in insurance costs, partially offset by an approximately $60,000
decrease in franchise taxes paid in the current period as compared
to the same period in the prior year.
Facilities:
Facilities
expenses remained relatively consistent for the nine months
ended September 30, 2018 and
2017.
Depreciation and Amortization:
Depreciation
and amortization costs remained relatively consistent for the nine
months
ended September 30, 2018 and
2017.
Research and Development
Expenses
Research
and development expenses and percentage changes for the
nine months ended September 30, 2018
and 2017, respectively
, are as follows:
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
Clinical
and preclinical development
|
$
594,000
|
$
3,230,215
|
$
(2,636,215
)
|
(82
)%
|
|
Personnel
costs
|
122,340
|
177,615
|
(55,275
)
|
(31
)%
|
|
Other
costs
|
9,991
|
7,572
|
2,419
|
32
%
|
|
Consulting
|
6,034
|
112,936
|
(106,902
)
|
(95
)%
|
Clinical and preclinical development:
The
decrease of approximately $2.6 million in clinical and preclinical
development costs for the nine months ended September 30, 2018
compared to the same period in the prior year, was primarily due to
a decrease of approximately $3.2 million in CRO costs to manage the
Phase 3 LEVO-CTS clinical trial, partially offset by an increase of
approximately $531,000 in costs associated with initiating the
Phase 2 PH-HFpEF clinical trial and approximately $36,000 in
preclinical costs associated with formulation development of
levosimendan.
Personnel costs:
Personnel
costs decreased approximately $55,000 for the nine months ended
September 30, 2018 compared to the same period in the prior year,
primarily due to a reduction in headcount in the current period as
compared to the same period in the prior year.
Other costs:
Other
costs remained relatively consistent for the nine months
ended September 30, 2018 and
2017.
Consulting fees:
Consulting
fees decreased approximately $107,000 for the nine months ended
September 30, 2018 compared to the same period in the prior year,
primarily due to a decrease in fees paid to third-party consulting
firms for services provided for report-writing and regulatory
submissions in support of our Phase 3 LEVO-CTS clinical trial in
the prior year which were not incurred in the current
period.
Other income and expense, net
Other
income for the nine months ended September 30, 2018 and 2017,
respectively, is as follows:
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
Other
income
|
$
(83,920
)
|
$
(327,725
)
|
$
243,805
|
Other
income decreased approximately $244,000 for the nine months ended
September 30, 2018 compared to the same period in the prior year.
This decrease is due primarily to the change in fair value of our
Series C warrant derivative liability in the current period and a
reduction in the interest earned on our investment in marketable
securities.
During the nine months ended September 30, 2018, we recorded a
derivative gain of approximately $14,000 which compared to a
derivative gain of approximately $190,000 for the same period in
the prior year. These charges to income are derived from the
free-standing Series C warrants which are measured at their fair
market value each period using the Monte Carlo simulation
model
.
During
the nine months ended September 30, 2018, we recorded interest
income of approximately $68,000 from our investments in marketable
securities. This income is derived from approximately $150,000 in
bond interest paid, partially offset by approximately $83,000 in
charges for amortization of premiums paid and fair-value
adjustments measured each period, which compares to approximately
$288,000 in bond interest paid, partially offset by approximately
$158,000 in charges for amortization of premiums paid and
fair-value adjustments during the same period in the prior
year.
Liquidity, Capital Resources and Plan of Operation
We have
incurred losses since our inception, and as of September 30, 2018,
we had an accumulated deficit of approximately $218 million. We
will continue to incur losses until we generate sufficient revenue
to offset our expenses, and we anticipate that we will continue to
incur net losses for at least the next several years. We expect to
incur increased expenses related to our development and potential
commercialization of levosimendan for pulmonary hypertension and
other potential indications, as well as identifying and developing
other potential product candidates and, as a result, we will need
to generate significant net product sales, royalty and other
revenues to achieve profitability.
Liquidity
We have
financed our operations since September 1990 through the issuance
of debt and equity securities and loans from stockholders. We had
total current assets of $5,141,157 and $8,062,893 and working
capital of $4,624,999 and $7,054,053 as of September 30, 2018 and
December 31, 2017, respectively. Based on our working capital and
the value of our investments in marketable securities at September
30, 2018, we believe we have sufficient capital to fund our
operations through the first quarter of calendar year
2019.
We will
need substantial additional capital in the future in order to
continue the development of levosimendan and to fund the
development and commercialization of other future product
candidates. Until we can generate a sufficient amount of product
revenue, if ever, we expect to finance future cash needs through
public or private equity offerings, debt financings or corporate
collaboration and licensing arrangements. Such funding may not be
available on favorable terms, if at all. In the event we are unable
to obtain additional capital, we may delay or reduce the scope of
our current research and development programs and other
expenses.
To the
extent that we raise additional funds by issuing equity securities,
our stockholders may experience additional significant dilution,
and debt financing, if available, may involve restrictive
covenants. To the extent that we raise additional funds through
collaboration and licensing arrangements, it may be necessary to
relinquish some rights to our technologies or our product
candidates or grant licenses on terms that may not be favorable to
us. We may seek to access the public or private capital markets
whenever conditions are favorable, even if we do not have an
immediate need for additional capital.
Cash Flows
The following table shows a summary of our cash flows for the nine
months ended September 30, 2018 and 2017:
|
|
Nine months ended September 30,
|
|
|
|
|
|
Net
cash used in operating activities
|
$
(4,301,820
)
|
$
(10,858,446
)
|
|
Net
cash provided by investing activities
|
6,044,193
|
2,626,374
|
Net cash used in operating activities.
Net cash used
in operating activities was approximately $4.3 million for the nine
months ended September 30, 2018 compared to net cash used in
operating activities of approximately $10.9 million for the nine
months ended September 30, 2017. The decrease in cash used for
operating activities was due primarily to a decrease in our accrued
costs related to the Phase 3 clinical trial for levosimendan in the
current period as compared to the same period in the prior
year.
Net cash provided by investing activities
. Net cash
provided by investing activities was approximately $6.0 million for
the nine months ended September 30, 2018 compared to approximately
$2.6 million for the nine months ended September 30, 2017. The
increase in cash provided by investing activities was primarily due
to an increase in the sale of marketable securities in the current
period.
Operating Capital and Capital Expenditure Requirements
Our
future capital requirements will depend on many factors that
include, but are not limited to the following:
●
the initiation,
progress, timing and completion of clinical trials for our product
candidates and potential product candidates;
●
the outcome, timing
and cost of regulatory approvals and the regulatory approval
process;
●
delays that may be
caused by changing regulatory requirements;
●
the number of
product candidates that we pursue;
●
the costs involved
in filing and prosecuting patent applications and enforcing and
defending patent claims;
●
the timing and
terms of future in-licensing and out-licensing
transactions;
●
the cost and timing
of establishing sales, marketing, manufacturing and distribution
capabilities;
●
the cost of
procuring clinical and commercial supplies of our product
candidates;
●
the extent to which
we acquire or invest in businesses, products or technologies;
and
●
the possible costs
of litigation.
We
believe that our existing cash and cash equivalents, along with our
investment in marketable securities, will be sufficient to fund our
projected operating requirements through the first quarter of
calendar year 2019. We will need substantial additional capital in
the future in order to complete the development and
commercialization of levosimendan and to fund the development and
commercialization of other future product candidates. Until we can
generate a sufficient amount of product revenue, if ever, we expect
to finance future cash needs through public or private equity
offerings, debt financings or corporate collaboration and licensing
arrangements. Such funding may not be available on favorable terms,
if at all. In the event we are unable to obtain additional capital,
we may delay or reduce the scope of our current research and
development programs and other expenses.
To the
extent that we raise additional funds by issuing equity securities,
our stockholders may experience additional significant dilution,
and debt financing, if available, may involve restrictive
covenants. To the extent that we raise additional funds through
collaboration and licensing arrangements, it may be necessary to
relinquish some rights to our technologies or our product
candidates or grant licenses on terms that may not be favorable to
us. We may seek to access the public or private capital markets
whenever conditions are favorable, even if we do not have an
immediate need for additional capital.
Critical Accounting Policies and Significant Judgments and
Estimates
Our condensed consolidated financial statements have been prepared
in accordance with GAAP.
The preparation of these financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the expenses during the reporting
periods. These items are monitored and analyzed by us for changes
in facts and circumstances, and material changes in these estimates
could occur in the future. We base our estimates on historical
experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources.
Changes in estimates are reflected in reported results for the
period in which they become known. Actual results may differ
materially from these estimates under different assumptions or
conditions.
For information regarding
our critical accounting policies and estimates, please refer to
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Summary of Significant
Accounting Policies” contained in our Annual Report on Form
10-K for the year ended December 31, 2017. During the nine months
ended September 30, 2018, there were no material changes to the
critical accounting policies previously disclosed in that
report.
Recent Accounting Pronouncements
The SEC
has released SEC Final Rule Release No. 33-10532 Disclosure Update
and Simplification, which adopts amendments to certain disclosure
requirements that have become redundant, duplicative, overlapping,
outdated, or superseded, in light of other SEC disclosure
requirements, GAAP, or changes in the information environment. The
amendments also refer certain SEC disclosure requirements that
overlap with but require information incremental to GAAP to the
Financial Accounting Standards Board, or the FASB, for potential
incorporation into GAAP. The amendments are intended to facilitate
the disclosure of information to investors and simplify compliance
without significantly altering the total mix of information
provided to investors. These amendments are part of an initiative
by the Division of Corporation Finance to review disclosure
requirements applicable to issuers to consider ways to improve the
requirements for the benefit of investors and issuers. The
amendments became effective on November 5, 2018 and did not have a
material impact
on our condensed
consolidated financial statements and related
disclosures.
In June
2018, the FASB issued an accounting standard that provides guidance
that aligns the accounting for share-based payment awards issued to
employees and nonemployees. Under the new guidance, the existing
employee guidance will apply to nonemployee share-based
transactions. The cost of nonemployee awards will continue to be
recorded as if the grantor had paid cash for the goods or services.
In addition, the contractual term will be able to be used in lieu
of an expected term in the option-pricing model for nonemployee
awards. Equity-classified share-based payment awards issued to
nonemployees will now be measured on the grant date, and, for
performance conditions, compensation cost associated with the award
will be recognized when achievement of the performance condition is
probable, rather than upon achievement of the performance
condition. The new guidance also clarifies that any share-based
payment awards issued to customers should be evaluated under ASC
606, Revenue from Contracts with Customers. The standard will be
effective for interim and annual reporting periods beginning after
December 15, 2018. Early adoption is permitted. We do not believe
adoption of this standard will have a material impact on our
condensed consolidated financial statements and related
disclosures.
In July 2017, the FASB issued an accounting standard that changes
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.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. 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. The
standard will be effective on January 1, 2019. Early adoption is
permitted, including adoption in an interim period. We do not
believe adoption of this standard will have a material impact on
our condensed consolidated financial statements and related
disclosures.
In January 2017, the FASB issued an accounting standard that
provides guidance for evaluating whether transactions should be
accounted for as acquisitions (or disposals) of assets or
businesses. The guidance provides a screen to determine when an
integrated set of assets and activities, or a set, does not qualify
to be a business. The screen requires that when substantially all
of the fair value of the gross assets acquired (or disposed of) is
concentrated in an identifiable asset or a group of similar
identifiable assets, the set is not a business. If the screen is
not met, the guidance requires a set to be considered a business to
include, at a minimum, an input and a substantive process that
together significantly contribute to the ability to create outputs
and removes the evaluation as to whether a market participant could
replace the missing elements. The standard became effective on
January 1, 2018 and was adopted on a prospective basis. Adoption of
this standard did not have a material impact on our condensed
consolidated financial statements and related
disclosures.
In August 2016, the FASB issued an accounting standard that
clarifies how companies present and classify certain cash receipts
and cash payments in the statement of cash flows where diversity in
practice exists. The standard is effective in our first quarter of
fiscal 2018. Adoption of this standard did not have a material
impact on our condensed consolidated financial statements and
related disclosures.
In June 2016, the FASB issued an accounting standard that amends
how credit losses are measured and reported for certain financial
instruments that are not accounted for at fair value through net
income. This standard will require that credit losses be presented
as an allowance rather than as a write-down for available-for-sale
debt securities and will be effective for interim and annual
reporting periods beginning January 1, 2020, with early
adoption permitted, but not earlier than annual reporting periods
beginning January 1, 2019. A modified retrospective approach
is to be used for certain parts of this guidance, while other parts
of the guidance are to be applied using a prospective approach. We
do not believe adoption of this standard will have a material
impact on our condensed consolidated financial statements and
related disclosures.
In May 2014, the FASB issued an accounting standard that supersedes
nearly all existing revenue recognition guidance under GAAP. The
standard is principles-based and provides a five-step model to
determine when and how revenue is recognized. The core principle of
the standard is that revenue should be recognized when a company
transfers promised goods or services to customers in an amount that
reflects the consideration to which we expect to be entitled in
exchange for those goods or services. In March 2016, the FASB
issued a standard to clarify the implementation guidance on
principal versus agent considerations, and in April 2016, the FASB
issued a standard to clarify the implementation guidance on
identifying performance obligations and licensing. The standard
also requires disclosure of qualitative and quantitative
information surrounding the amount, nature, timing and uncertainty
of revenues and cash flows arising from contracts with customers.
In July 2015, the FASB agreed to defer the effective date of the
standard from annual periods beginning after December 15, 2016, to
annual periods beginning after December 15, 2017. Early application
prior to the original effective date was not permitted. The
standard permits the use of either the retrospective or cumulative
effect transition method. We reviewed our current accounting
policies and practices to assess the impact of the guidance on our
business processes. Based on this evaluation, the adoption of this
standard did not have a material impact on our condensed
consolidated financial statements and related
disclosures.
In February 2016, the FASB issued an accounting standard intended
to improve financial reporting regarding leasing transactions. The
standard will require us to recognize on our balance sheet the
assets and liabilities for the rights and obligations created by
all leased assets. The standard will also require us to provide
enhanced disclosures designed to enable users of financial
statements to understand the amount, timing, and uncertainty of
cash flows arising from all leases, operating and capital, with
lease terms greater than 12 months. The standard is effective for
financial statements beginning after December 15, 2018, and interim
periods within those annual periods. Early adoption is permitted.
We are currently evaluating the impact that this standard will have
on our condensed consolidated financial statements and related
disclosures.
In January 2016, the FASB issued an accounting standard that will
enhance our reporting for financial instruments. The standard is
effective for financial statements issued for annual periods
beginning after December 15, 2017, and interim periods within those
annual periods. Earlier adoption is permitted for interim and
annual reporting periods as of the beginning of the fiscal year of
adoption. Adoption of this standard did not have a material impact
on our condensed consolidated financial statements and related
disclosures.
Contractual Obligations
There have been no material changes, outside of the ordinary course
of business, to our contractual obligations as previously disclosed
in our Annual Report on Form 10-K for the year ended December 31,
2017.
Off-Balance Sheet Arrangements
Since
our inception, we have not engaged in any off-balance sheet
arrangements, including the use of structured finance, special
purpose entities or variable interest entities.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not
applicable.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As
required by paragraph (b) of Rules 13a-15 and 15d-15
promulgated under the Exchange Act, our management, including our
Chief Executive Officer and Chief Financial Officer, conducted an
evaluation as of the end of the period covered by this report, of
the effectiveness of our disclosure controls and procedures as
defined in Exchange Act Rule 13a-15(e) and 15d-15(e).
Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective as of September 30, 2018, the end of the
period covered by this report in that they provide reasonable
assurance that the information we are required to disclose in the
reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods required
by the SEC and is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control over Financial Reporting
There
were no significant changes in our internal control over financial
reporting during our most recently completed fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. We routinely
review our internal controls over financial reporting and from time
to time make changes intended to enhance the effectiveness of our
internal control over financial reporting. We will continue to
evaluate the effectiveness of our disclosure controls and
procedures and internal controls over financial reporting on an
ongoing basis and will take action as appropriate.