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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
    
    
    
    
to
    
    
    
    
Commission file number
001-36577
 
 
ContraFect Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
39-2072586
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
28 Wells Avenue, 3rd Floor, Yonkers, NY
 
10701
(Address of principal executive offices)
 
(Zip Code)
(914)
207-2300
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, $0.0001 par value per share
 
CFRX
 
Nasdaq Capital Market 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
       
Non-accelerated
filer
     Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  
The number of shares of the registrant’s Common Stock outstanding as of November 10, 2021 was 39,332,721.
 
 
 

Table of Contents
CONTRAFECT CORPORATION
INDEX
 
         
Page No.
 
        
     
Item 1.
   Financial Statements      1  
Item 2.
   Management’s Discussion and Analysis of Financial Condition and Results of Operations      18  
Item 3.
   Quantitative and Qualitative Disclosures about Market Risk      26  
Item 4.
   Controls and Procedures      27  
   
        
     
Item 1.
        27  
Item 1A
        27  
Item 2.
        57  
Item 3.
        57  
Item 4.
        57  
Item 5.
        57  
Item 6.
        58  
   
     59  

Table of Contents
FORWARD LOOKING STATEMENTS
The information in this Quarterly Report on Form
10-Q
contains forward-looking statements and information 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. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, the sufficiency of our cash and cash equivalents and marketable securities, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates”, “believes”, “estimates”, “expects”, “intends”, “targets”, “may”, “plans”, “projects”, “potential”, “will”, “would”, “could” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. All such forward-looking statements involve significant risks and uncertainties, including, but not limited to, statements regarding:
 
   
the success, cost, timing and potential indications of our product development activities and clinical trials;
 
   
our ability to advance into and through clinical development and ultimately obtain FDA approval for our product candidates;
 
   
our research and development plans and ability to bring forward additional product candidates into preclinical and clinical development;
 
   
our expectations regarding the impact of
COVID-19
on our business, operations and financial performance and position;
 
   
our contract with the Biomedical Advanced Research and Development Authority (“BARDA”) (the “BARDA Contract”) and any exercise of BARDA’s options to extend the BARDA Contract;
 
   
our grant awards from the Combating Antibiotic-Resistant Bacteria Biopharmaceutical Accelerator
(“CARB-X”)
and the Military Infectious Diseases Research Program, United States Army Medical Research and Development Command (“USAMRDC”) and the respective options in each award for continued funding;
 
   
the rate and degree of market acceptance of our product candidates and our expectations regarding the size of the commercial markets for our product candidates;
 
   
our future marketing and sales programs;
 
   
the effect of competition and proprietary rights of third parties;
 
   
the availability of and our ability to obtain additional financing;
 
   
the effects of existing and future federal, state and foreign regulations;
 
   
the seeking of joint development, licensing or distribution and collaboration and marketing arrangements with third parties; and
 
   
the period of time for which our existing cash and cash equivalents will enable us to fund our operations.
As more fully described under the heading “Risk Factors” contained elsewhere in this Quarterly Report on Form
10-Q,
many important factors affect our ability to achieve our stated objectives and to develop and commercialize any product candidates. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks and uncertainties set forth in our filings with the SEC. You should read this Quarterly Report on Form
10-Q
with the understanding that our actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Table of Contents
RISK FACTOR SUMMARY
We are providing the following summary of the numerous risks and uncertainties that affect our business, including those fully described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form
10-Q.
You should carefully review and consider these risks and uncertainties when investing in our common stock. The principal risks and uncertainties affecting our business include, but are not limited to, the following:
 
 
 
We have incurred significant losses since our inception. We expect to incur losses for at least the next several years and may never achieve or maintain profitability.
 
 
 
We currently have no source of product revenue and have not yet generated any revenues from product sales.
 
 
 
We have a need for substantial additional funding. If we are unable to raise capital when needed or if we are unable to receive the maximum potential funding from BARDA,
CARB-X
or USAMRDC, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
 
 
 
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
 
 
 
The timing of the milestone and royalty payments we are required to make to The Rockefeller University (“Rockefeller”) under certain agreements is uncertain and could adversely affect our cash flows and results of operations.
 
 
 
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
 
 
 
The
COVID-19
pandemic or another pandemic, epidemic or outbreak of an infectious disease may materially and adversely impact our business, including our preclinical studies and clinical trials.
 
 
 
We are heavily dependent on the success of our leading product candidate, exebacase. If we are ultimately unable to obtain regulatory approval for exebacase or any other product candidate our business will be substantially harmed.
 
 
 
If clinical trials of exebacase or any other product candidate that we develop fail to demonstrate safety and efficacy to the satisfaction of the Food and Drug Administration (“FDA”) or similar international regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete the development and commercialization of exebacase or any other product candidate.
 
 
 
We may be required to suspend or discontinue clinical trials due to adverse side effects or other safety risks that could preclude approval of exebacase or any other product candidates.
 
 
 
Delays in clinical trials are common and have many causes, and any such delays could result in increased costs to us and jeopardize, delay or prevent our ability to obtain regulatory approval and commence product sales as currently contemplated.
 
 
 
We are significantly dependent on our license agreements with Rockefeller that relate to exebacase.
 
 
 
We rely on Contract Research Organizations (“CROs”) to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be delayed in obtaining, or may ultimately not be able to obtain, regulatory approval for commercialization of exebacase or any other product candidates.
 
 
 
Even if the FDA approves exebacase or any other product candidates, adverse effects discovered after approval could adversely affect our markets.
 
 
 
Any Breakthrough Therapy designation that we may receive from the FDA for our product candidates may not lead to a faster development or regulatory review or approval process, and it does not increase the likelihood that our product candidates will receive marketing approval.
 
 
 
Risks associated with the manufacture of our product candidates could include cost overruns, new impurities, difficulties in process or formulation development, scaling up or reproducing manufacturing processes, equipment failures, and lack of timely availability of raw materials.
 
 
 
Developments by competitors may render our products or technologies obsolete or
non-competitive.
 
 
 
The level of commercial success of exebacase or any other product candidates that we develop will depend upon significant market acceptance of these products among physicians and payors.
 
 
 
Coverage and reimbursement may not be available for exebacase or any other product candidates that we develop.

Table of Contents
 
 
If we are unable to establish our own marketing and sales capabilities, or enter into agreements with third parties, to market and sell our products after they are approved, we may not be able to generate revenues.
 
 
 
Interim, “topline” and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
 
 
 
Risks related to regulatory approval of our product candidates and other legal and compliance matters.
 
 
 
Risks related to employee matters and managing growth.
 
 
 
Risks related to our intellectual property.
 
 
 
Risks related to our securities and organizational documents.
 
 
 
Security breaches, cybersecurity attacks, failure of our data and personal information protections and other disruptions could compromise our information and technology systems and expose us to liability, which would cause our business and reputation to suffer.
 
 
 
Our collection, control, processing, sharing, disclosure and otherwise use of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements, and evolving laws concerning data privacy in the European Union (“EU”) and European Economic Area (“E.E.A”).

Table of Contents
CONTRAFECT CORPORATION PART
I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTRAFECT CORPORATION
Consolidated Balance Sheets
(in thousands, except share and
per-share
data)
                 
    
September 30,
2021
   
December 31,
2020
 
    
(unaudited)
   
(audited)
 
Assets
                
Current assets:
                
Cash and cash equivalents
   $ 20,225     $ 15,485  
Marketable securities
     43,092       27,005  
Prepaid expenses and other current assets
     10,556       4,165  
    
 
 
   
 
 
 
Total current assets
     73,873       46,655  
Property and equipment, net
     784       910  
Operating lease
right-of-use
assets
     2,614       2,811  
Other assets
     571       740  
    
 
 
   
 
 
 
Total assets
   $ 77,842     $ 51,116  
    
 
 
   
 
 
 
Liabilities and stockholders’ equity
                
Current liabilities:
                
Accounts payable
   $ 2,964     $ 1,806  
Accrued liabilities
     6,252       3,610  
Current portion of lease liabilities
     654       644  
    
 
 
   
 
 
 
Total current liabilities
     9,870       6,060  
Warrant liabilities
     12,194       29,404  
Long-term portion of lease liabilities
     2,700       2,959  
Other liabilities
     73       73  
    
 
 
   
 
 
 
Total liabilities
     24,837       38,496  
Commitments and contingencies
     —         —    
Stockholders’ equity:
                
Preferred stock, $0.0001 par value, 25,000,000 shares authorized and none outstanding at September 30, 2021 and December 31, 2020
     —         —    
Common stock, $0.0001 par value, 125,000,000 shares authorized, 39,332,721 shares and 27,810,161 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
     4       3  
Additional
paid-in
capital
     309,197       252,908  
Accumulated other comprehensive loss
     (43     (21
Accumulated deficit
     (256,153     (240,270
    
 
 
   
 
 
 
Total stockholders’ equity
     53,005       12,620  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 77,842     $ 51,116  
    
 
 
   
 
 
 
See accompanying notes.
 
1

Table of Contents
CONTRAFECT CORPORATION
Consolidated Statements of Operations
(unaudited)
(in thousands, except share and per share data) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
    
2021
   
2020
   
2021
   
2020
 
Operating expenses
                                
Research and development
   $ 8,664     $ 4,706     $ 24,462     $ 15,354  
General and administrative
     3,022       2,607       8,722       8,186  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     11,686       7,313       33,184       23,540  
    
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
     (11,686     (7,313     (33,184     (23,540
Other income (expense):
                                
Interest income
     36       58       91       154  
Other income (expense)
              10                (2,165
Change in fair value of warrant liabilities
     6,358       10,689       17,210       3,800  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total other income, net
     6,394       10,757       17,301       1,789  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net (loss) income
   $ (5,292   $ 3,444     $ (15,883   $ (21,751
    
 
 
   
 
 
   
 
 
   
 
 
 
Basic net (loss) income per share
   $ (0.13   $ 0.12     $ (0.44   $ (1.03
    
 
 
   
 
 
   
 
 
   
 
 
 
Shares used in computing basic net (loss) income per share
     39,332,721       27,809,169       35,914,327       21,069,057  
    
 
 
   
 
 
   
 
 
   
 
 
 
Diluted net
 
(loss)
income
 
per share
   $ (0.13   $ (0.19   $ (0.44   $ (1.03
    
 
 
   
 
 
   
 
 
   
 
 
 
Shares used in computing diluted net
(
loss
) income
per share
     39,332,721       29,079,107       35,914,327       21,069,057  
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes.
 
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Table of Contents
CONTRAFECT CORPORATION
Consolidated Statements of Comprehensive
(
Loss
) Income
(unaudited)
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
    
2021
   
2020
   
2021
   
2020
 
Net
(loss)
income
   $ (5,292   $ 3,444     $ (15,883   $ (21,751
Other comprehensive loss:
                                
Unrealized loss on
available-for-sale
securities
     (1     (1     (22     (8
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive
(loss)
income
   $ (5,293   $ 3,443     $ (15,905   $ (21,759
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes.
 
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Table of Contents
CONTRAFECT CORPORATION
Consolidated Statements of Stockholders’ Equity
(unaudited)
(in thousands, except share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Common Stock
    
Additional
Paid-In Capital
   
Accumulated
Other
Comprehensive
Loss
   
Accumulated
Deficit
   
Stockholders’
Equity
 
    
Shares
    
Amount
 
Balance, December 31, 2020
     27,810,161      $ 3      $ 252,908     $ (21   $ (240,270   $ 12,620  
Issuance of securities in registered offering
     11,500,000        1        57,499       —         —         57,500  
Financing cost of sale of securities
     —          —          (3,703     —         —         (3,703
Issuance of common stock for exercise of warrants
     22,560        —          110       —         —         110  
Stock-based compensation
     —          —          581       —         —         581  
Unrealized loss on marketable securities
     —          —          —         (8     —         (8
Net loss
     —          —          —         —         (5,195     (5,195
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, March 31, 2021
     39,332,721      $ 4      $ 307,395     $ (29   $ (245,465   $ 61,905  
Stock-based compensation
     —          —          938       —         —         938  
Unrealized loss on marketable securities
     —          —          —         (13     —         (13
Net loss
     —          —          —         —         (5,396     (5,396
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, June 30, 2021
     39,332,721      $ 4      $ 308,333     $ (42   $ (250,861   $ 57,434  
Stock-based compensation
     —          —          864       —         —         864  
Unrealized loss on marketable securities
     —          —          —         (1     —         (1
Net loss
     —          —          —         —         (5,292     (5,292
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, September 30, 2021
     39,332,721      $ 4      $ 309,197     $ (43   $ (256,153   $ 53,005  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Common Stock
    
Additional
Paid-In Capital
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Accumulated
Deficit
   
Stockholders’
Equity
 
    
Shares
    
Amount
 
Balance, December 31, 2019
     15,332,042      $ 2      $ 227,658     $        $ (212,115   $ 15,545  
Stock-based compensation
     —          —          633       —         —         633  
Unrealized gain on marketable securities
     —          —          —         9       —         9  
Net loss
     —          —          —         —         (7,578     (7,578
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, March 31, 2020
     15,332,042      $ 2      $ 228,291     $ 9     $ (219,693   $ 8,609  
Issuance of securities in registered offering
     11,797,752        1        21,107       —         —         21,108  
Issuance of securities in private placement
     674,156        —          3,000       —         —         3,000  
Financing cost of sale of securities
     —          —          (1,462     —         —         (1,462
Issuance of common stock for exercise of options
     282        —          —         —         —         —    
Stock-based compensation
     —          —          652       —         —         652  
Unrealized loss on marketable securities
     —          —          —         (16     —         (16
Net loss
     —          —          —         —         (17,617     (17,617
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, June 30, 2020
     27,804,232      $ 3      $ 251,588     $ (7   $ (237,310   $ 14,274  
Issuance of common stock for exercise of warrants
     5,850        —          28       —         —         28  
Stock-based compensation
     —          —          652       —         —         652  
Unrealized loss on marketable securities
     —          —          —         (1     —         (1
Net income
     —          —          —         —         3,444       3,444  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, September 30, 2020
     27,810,082      $ 3      $ 252,268     $ (8   $ (233,866   $ 18,397  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes.
 
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CONTRAFECT CORPORATION
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
 
 
 
 
 
 
 
 
 
    
Nine Months Ended
September 30,
 
    
2021
   
2020
 
Cash flows from operating activities
                
Net loss
   $ (15,883   $ (21,751
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation
     110       126  
Stock-based compensation expense
     2,383       1,937  
Change in fair value of warrant liabilities
     (17,210     (3,800
Issuance costs allocated to warrants
     —         2,175  
Net amortization of premium on marketable securities
     503       161  
Changes in operating assets and liabilities:
                
(Increase) decrease in prepaid expenses and other current and
non-current
asset
s
     (6,260     720  
Increase (decrease) in accounts payable, accrued liabilities and other liabilities
     3,800       (5,240
    
 
 
   
 
 
 
Net cash used in operating activities
     (32,557     (25,672
Cash flows from investing activities
                
Purchases of marketable securities
     (47,644     (47,555
Proceeds from sales and maturities of marketable securitie
s
     31,034       15,303  
    
 
 
   
 
 
 
Net cash used in investing activities
     (16,610     (32,252
Cash flows from financing activities
                
Proceeds from issuance of securities
     57,500       55,500  
Payment of financing costs of securities sold
     (3,703     (3,637
Proceeds from the exercise of warrants
     110       29  
    
 
 
   
 
 
 
Net cash provided by financing activities
     53,907       51,892  
    
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
     4,740       (6,032
Cash and cash equivalents at beginning of period
     15,485       24,184  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 20,225     $ 18,152  
    
 
 
   
 
 
 
Supplemental disclosures of cash flow information:
                
Issuance of warrants to purchase common stock
   $ —       $ 31,392  
See accompanying notes.
 
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Table of Contents
CONTRAFECT CORPORATION
Notes to Unaudited Consolidated Financial Statements
September 30, 2021
1. Organization and Description of Business
Organization and Business
ContraFect Corporation (the “Company”) is a clinical-stage biotechnology company focused on the discovery and development of direct lytic agents (“DLAs”), including lysins and amurin peptides, as new medical modalities for the treatment of life-threatening, antibiotic-resistant infections. The Company intends to address antibiotic-resistant infections using product candidates from our lysin and amurin peptide platforms. DLAs are fundamentally different than antibiotics and offer a potential paradigm shift in the treatment of antibiotic-resistant infections. The Company’s most advanced product candidate is exebacase, a lysin which targets
Staph aureus
, including methicillin-resistant strains, which causes serious infections such as bacteremia, pneumonia and osteomyelitis.
Staph aureus
is also a frequent source of biofilm-dependent infections of heart valves (endocarditis), prosthetic joints, indwelling devices and catheters. These infections result in significant morbidity and mortality despite current antibiotic therapy. Exebacase is being studied in a pivotal Phase 3 superiority study to evaluate its efficacy, safety, tolerability, and pharmacokinetics when used in addition to standard of care antibiotics for the treatment of
Staph aureus
bacteremia, including right-sided endocarditis in adults and adolescents. The Phase 2 data in patients with methicillin-resistant
Staph aureus
(MRSA) bacteremia treated with exebacase, which demonstrated superior outcomes in clinical response at Day 14 and in
30-day
all-cause
mortality, as well as health economics benefits, provided the basis for the Phase 3 study design and designation as a Breakthrough Therapy from the U.S. Food and Drug Administration.
The Company has incurred losses from operations since inception as a research and development organization and has an accumulated deficit of $256.2 million as of September 30, 2021. For the nine months ended September 30, 2021, the Company used $32.6 million of cash in operations. The Company has relied on its ability to fund its operations through public and private debt and equity financings, and, to a lesser extent, grant funding. Management believes that its existing cash, cash equivalents and marketable securities, will be sufficient to fund operations for at least 12 months from the issuance date of these financial statements. The Company expects operating losses and negative cash flows to continue at significant levels in the future as it continues its clinical trials. Transition to profitability is dependent upon the successful development, approval, and commercialization of its product candidates and achieving a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital. Management intends to fund future operations through additional public or private debt and equity financings, and may seek additional capital through arrangements with strategic partners or from other sources. There can be no assurances that such financing will be available to the Company on satisfactory terms, or at all.
On August 14, 2020, the Company filed a new shelf registration statement on Form
S-3
(the “Form
S-3”)
with the SEC. The Form
S-3
was declared effective by the SEC on August 31, 2020. The Form
S-3
allows the Company to offer and sell from
time-to-time
up to $150.0 million of common stock, preferred stock, debt securities, warrants or units comprised of any combination of these securities.
On March 22, 2021, the Company completed an underwritten public offering under the Form
S-3
of 11,500,000 shares of its common stock, including shares sold pursuant to the fully exercised overallotment option granted to the underwriters in connection with the offering, at a public offering price of $5.00 per share, resulting in net proceeds to the Company of approximately $53.8 million after underwriting discounts and commissions and offering expenses payable by the Company.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial information as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 has been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet as of December 31, 2020 was derived from the Company’s audited consolidated financial statements. The Company’s audited consolidated financial statements as of and for the year ended December 31, 2020, including all related disclosures and the complete listing of significant accounting policies as described in Note 2 thereof, are included in the Company’s Annual Report on Form
10-K
that was filed with the SEC on March 30, 2021.
In the opinion of management, the unaudited financial information as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of financial position, results of operations and cash flows. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
 
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Table of Contents
Principles of Consolidation
The Company has a wholly-owned subsidiary, ContraFect International Limited, in Scotland that established legal status for previous interactions with the European Economic Area. This subsidiary is dormant or is otherwise
non-operative.
Any inter-company accounts have been eliminated in consolidation.
Significant Risks and Uncertainties
The Company’s operations are subject to a number of factors that can affect its operating results and financial condition. Such factors include, but are not limited to, the results of clinical testing and trial activities of the Company’s products, the Company’s ability to obtain regulatory approval to market its products, competition from products manufactured and sold or being developed by other companies, the price of, and demand for, the Company’s products, the Company’s ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products, the Company’s ability to raise capital and the effects of the novel coronavirus, or
COVID-19,
on the Company’s business, operations and financial performance and position.
The ongoing
COVID-19
pandemic has presented substantial public health challenges and is impacting the global healthcare system, including the conduct of clinical trials in the U.S. and other parts of the world. Healthcare resources, including the staff required to support the conduct of clinical trials, are being diverted away from the conduct of clinical trials other than
COVID-19
studies at hospitals serving as clinical trial sites. There are also operational impacts on local, regional and national CROs, manufacturers and other vendors and suppliers and an intermittent lack of availability of certain raw materials and consumables for manufacturing. While global infection rates have significantly reduced from their peak during 2020, new variants continue to circulate, and the number of
COVID-19
infections and hospitalizations remains elevated. Uncertainty remains as to whether additional restrictions may be implemented to address the spread of new variants.
The pandemic has had an impact, both directly and indirectly, on the Company. The full extent of the impact on the Company’s business, results of operations, financial condition and liquidity, including expenses, research and development, manufacturing costs and timelines, and clinical trial progress, will depend on future developments that remain highly uncertain.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to accruals, stock-based compensation, valuation of warrant liabilities and income taxes. The Company’s actual results may differ from these estimates under different assumptions or conditions, including the effects of significant risks and uncertainties.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company holds these investments in highly rated financial institutions, and, by policy, limits the amounts of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no
off-balance
sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include bank demand deposits, marketable securities with maturities of three months or less at purchase, and money market funds that invest primarily in certificates of deposit, commercial paper and U.S. government and U.S. government agency obligations. Cash equivalents are
reported at fair value.
 
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Table of Contents
Marketable Securities
Marketable securities consist of investments in corporate debt securities. Management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The Company classifies its marketable securities as
available-for-sale
pursuant to ASC 320, Investments – Debt and Equity Securities. The Company classifies marketable securities available to fund current operations as current assets on its consolidated balance sheets. Marketable securities are classified as long-term assets on the consolidated balance sheets if (i) the Company has the intent and ability to hold the investments for a period of at least one year and (ii) the contractual maturity date of the investments is greater than one year.
Marketable securities are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive (loss) income in stockholders’ equity and a component of total comprehensive
(loss)
income in the consolidated statements of comprehensive
(loss)
income
,
until realized.
The fair value of these securities is based on quoted prices for identical or similar assets. The Company utilizes the specific identification method in computing realized gains and losses on sales of its marketable securities. Realized gains and losses are included in other income (expense) in the consolidated statements of operations. There were no realized gains or losses on marketable securities for the three or nine months ended September 30, 2021 or 2020. There were no marketable securities that had been in an unrealized loss position for more than 12 months as of September 30, 2021 or December 31, 2020.
The Company reviews marketable securities for other-than-temporary impairment whenever the fair value of a marketable security is less than the amortized cost and evidence indicates that a marketable security’s carrying amount is not recoverable within a reasonable period of time. Other-than- temporary impairments of investments are recognized in the consolidated statements of operations if the Company has experienced a credit loss, has the intent to sell the marketable security, or if it is more likely than not that the Company will be required to sell the marketable security before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and the duration of the impairment and changes in value subsequent to the end of the period
.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, marketable securities, accounts payable, accrued liabilities and warrant liabilities. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The fair value of the Company’s warrant liabilities are based upon unobservable inputs, as described further below.
The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820,
Fair Value Measurements and Disclosures
, establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality.
The three levels of the fair value hierarchy are described below:
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The carrying amounts reported in the accompanying financial statements for accounts payable and accrued liabilities approximate their respective fair values due to their short-term maturities. The fair value of the warrant liabilities is discussed in Note 4, “Fair Value Measurements.”
 
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Table of Contents
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees,
non-employees
and
non-employee
directors, including employee stock options. Compensation expense based on the grant date fair value is generally amortized over the requisite service period of the award on a straight-line basis.
The fair value of options is calculated using the Black-Scholes option pricing model to determine the fair value of stock options on the date of grant based on key assumptions such as stock price, expected volatility and expected term. The Company’s estimates of these assumptions are primarily based on historical data and judgment regarding future trends and factors.
Government Contracts and Grant Agreements
On March 10, 2021, the Company entered into a cost-share contract (the “BARDA Contract”) with BARDA, a division of the U.S. Department of Health and Human Services’ Office of the Assistant Secretary for Preparedness and Response. The Company evaluated the BARDA Contract under Topic 606 and determined that it does not fall within the scope of Topic 606. Accordingly, the Company considered other relevant guidance and concluded that the BARDA Contract will be accounted for consistent with its accounting practices related to its existing grant agreements.
The Company recognizes a receivable and the related reduction in its research and development expenses when the actual reimbursable costs have been incurred and there is reasonable assurance that the Company has complied with the conditions of the applicable government contract or grant agreement and the amounts will be received. The Company recognized a reduction to its research and development expense in the amount of approximately $3.7 million and $1.0 million for the three months ended September 30, 2021 and 2020 respectively, and $7.7 million and $3.4 million for the nine months ended September 30, 2021 and 2020, respectively. The receivable for government contracts and grant agreements as of September 30, 2021 and December 31, 2020 was approximately $4.4 million and $1.1 million, respectively, and is included in prepaid expenses and other current assets on the balance sheet. The Company has approximately $10.5 million of committed government contract and grant agreement funding remaining as of September 30, 2021.
Leases
The Company accounts for leases in accordance with Accounting Standards Update No.
2016-02-
Leases
(Topic 842). The Company determines if an arrangement is a lease at inception and recognizes
right-of-use
(“ROU”) assets as the present value of the lease payments plus initial direct costs, if any, less any lease incentives. Assets are classified as either operating or finance ROU assets according to the classification criteria in Topic 842. The corresponding liability is computed as the present value of the lease payments at inception. The present value of the lease payments is computed using the rate implicit in the lease, if known, or the Company’s incremental borrowing rate. Operating lease costs are charged to operations on a straight-line basis over the term of the lease. The Company’s leases are further discussed in
Note
8
—“Commitments.”
Under the Company’s policy, it does not record an ROU asset or corresponding liability for arrangements where the initial lease term is one year or less. Those leases are expensed on a straight-line basis over the term of the lease.
Net (Loss) Income Per Share
Basic net (loss) income per share is calculated by dividing net (loss) income by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net (loss) income per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of a dilutive net loss per share calculation, stock options and warrants are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive given the Company’s net loss. Common stock equivalents may also be excluded from the calculation of diluted
net
(loss)
income
per share if the exercise prices exceed the average market price for the reporting period.
Recently Adopted Accounting Pronouncements
Income Taxes
On January 1, 2021, the Company adopted Accounting Standards Update No.
2019-12-
Income Taxes
(Topic 740)
, which simplifies the accounting for income taxes. The adoption of the new guidance did not affect the Company’s consolidated financial statements.
 
9
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued a new Accounting Standards Update,
Financial Instruments-Credit Losses (ASU
2016-13).
ASU
2016-13
amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. This new standard also requires that credit losses related to
available-for-sale
debt securities be recorded through an allowance for such losses rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The new standard is effective for interim and annual periods beginning after December 15, 2022. The Company is currently evaluating the impact that this new standard will have on its financial statements and related disclosures.
3. Marketable Securities
Marketable securities at September 30, 2021 consisted of the following (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable Securities
  
Amortized Cost
    
Unrealized
Gains
    
Unrealized
Losses
    
Fair
Value
 
Current:
                                   
Corporate Debt
   $ 43,134      $ 1      $ (43 )    $ 43,092  
Marketable securities at December 31, 2020 consisted of the following (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable Securities
  
Amortized Cost
    
Unrealized
Gains
    
Unrealized
Losses
   
Fair
Value
 
Current:
                                  
Corporate debt
   $  27,026      $  6      $    (27   $  27,005  
Corporate debt includes obligations issued by investment-grade corporations, and may include issues that have been guaranteed by governments and government agencies. Investments classified as short-term have maturities of less than one year, and investments classified as long-term are those that have maturities of greater than one year and management does not intend to liquidate within the next twelve months. All of the Company’s marketable securities have an effective maturity of less than two years.
At September 30, 2021, the Company held 23 debt securities that individually and in total were in an immaterial unrealized loss position for less than one year. The aggregate fair value of debt securities in an unrealized loss position at September 30, 2021 was approximately $38.3 million. The Company evaluated its securities for other than temporary impairment and considered the decline in market value for the securities to be primarily attributable to current economic and market conditions. It was not more likely than not that the Company would have been required to sell the securities prior to the recovery of the amortized cost basis. Based on this analysis, these marketable securities were not considered to be other-than-temporarily impaired as of September 30, 2021.
4. Fair Value Measurements
The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Fair Value Measurement as of September 30, 2021
 
    
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
 
Cash equivalents
   $ 14,116      $ —        $ —    
Marketable securities
     43,092        —          —    
Warrant liabilities
     —          —          12,194  
    
 
 
    
 
 
    
 
 
 
Total
   $ 57,208      $      $ 12,194  
    
 
 
    
 
 
    
 
 
 
 
10

Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Fair Value Measurement as of December 31, 2020
 
    
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
 
Cash equivalents
   $ 12,921      $ —        $ —    
Marketable securities
     27,005                    
Warrant liabilities
     —          —          29,404  
    
 
 
    
 
 
    
 
 
 
Total
   $ 39,926      $ —        $ 29,404  
    
 
 
    
 
 
    
 
 
 
The Company issued warrants to the purchasers of its July 27, 2016 offering (the “2016 Warrants”). The Company determined that these warrants should be classified as a liability and considered as a Level 3 financial instrument (see also Note
9
, “Capital Structure”). The 2016 Warrants were
re-measured
at each subsequent reporting period and changes in fair value was recognized in the consolidated statement of operations. The 2016 Warrants expired in accordance with their terms on July 27, 2021. The following assumptions were used in a Black-Scholes option-pricing model to determine the fair value of the warrant liability:
 
 
 
 
 
 
    
As of
December 31,
2020
 
Expected volatility
     59.7
Remaining contractual term (in years)
     0.58  
Risk-free interest rate
     0.09
Expected dividend yield
     —   
The Company issued warrants to the purchasers of its July 25, 2017 offering (the “2017 Warrants”). The Company determined that these warrants should be classified as a liability and considered as a Level 3 financial instrument (see also Note
9
, “Capital Structure”). The 2017 Warrants are
re-measured
at each subsequent reporting period and changes in fair value are recognized in the consolidated statement of operations. The following assumptions were used in a Black-Scholes option-pricing model to determine the fair value of the warrant liability:
 
 
 
 
 
 
 
 
 
 
    
As of
September 30,
2021
   
As of
December 31,
2020
 
Expected volatility
     64.1     100.1
Remaining contractual term (in years)
     0.83       1.58  
Risk-free interest rate
     0.09     0.12
Expected dividend yield
     —       —  
The Company issued warrants to the purchasers of its May 27, 2020 registered offering of securities (the “2020 Warrants”). The Company determined that these warrants should be classified as a liability and considered as a Level 3 financial instrument (see also Note
9
, “Capital Structure”). The 2020 Warrants are
re-measured
at each subsequent reporting period and changes in fair value are recognized in the consolidated statement of operations. The following assumptions were used in a Black-Scholes option-pricing model to determine the fair value of the warrant liability:
 
 
 
 
 
 
 
 
 
 
    
As of
September 30,
2021
   
As of
December 31,
2020
 
Expected volatility
     80.3     111.9
Remaining contractual term (in years)
     1.67       2.42  
Risk-free interest rate
     0.28     0.15
Expected dividend yield
     —       —  
 
11

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The following tables present a reconciliation of the Company’s financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Warrant liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2021
    
2020
    
2021
    
2020
 
Balance at beginning of period
   $ 18,552      $ 44,350      $ 29,404      $ 6,069  
Issuance of 2020 Warrants
     —          —          —          31,392  
Decrease in fair value (1)
     (6,358      (10,689      (17,210      (3,800
    
 
 
    
 
 
    
 
 
    
 
 
 
Balance at end of perio
d
   $ 12,194      $ 33,661      $ 12,194      $ 33,661  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
The change in fair values of the warrant liabilities is recorded in other income (expense) in the consolidated statement of operations.
The key inputs into the Black-Scholes option pricing model are the current
per-share
value and the expected volatility of the Company’s common stock. Significant changes in these inputs will directly increase or decrease the estimated fair value of the Company’s warrant liabilities.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
 
 
  
September 30,
2021
 
  
December 31,
2020
 
Prepaid research and development costs
  
$
4,882
 
  
$
2,358
 
Government contract and grant agreement receivables
  
 
4,419
 
  
 
1,081
 
Prepaid insurance premiums
  
 
1,098
 
  
 
649
 
Other prepaid expenses
  
 
157
 
  
 
77
 
 
  
 
 
 
  
 
 
 
Total prepaid expenses and other current assets
  
$
10,556
 
  
$
4,165
 
 
  
 
 
 
  
 
 
 
6. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
 
 
 
 
 
 
 
 
 
 
    
September 30,
2021
    
December 31,
2020
 
Accrued research and development service fees
   $ 3,695      $ 801  
Accrued compensation costs
     1,798        2,069  
Accrued professional fees
     618        456  
Accrued facilities operation expenses
     122        173  
Other accrued liabilities
     19        111  
    
 
 
    
 
 
 
Total accrued liabilities
   $ 6,252      $ 3,610  
    
 
 
    
 
 
 
7
. Net Loss
(Income)
Per Share of Common Stock
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of shares of common stock outstanding. For the three months ended September 30, 2021 and the nine months ended September 30, 2021 and 2020, the Company incurred a net loss and therefore diluted net loss per share is the same as basic net loss per share as the Company excluded certain potentially dilutive securities from the computation of diluted weighted average shares outstanding as they would have been anti-dilutive. For the three months ended September 30, 2020, the impact of the outstanding 2020 Warrants was determined to be dilutive. As a result, the Company adjusted the numerator amount used in the calculation of net (loss) income per diluted share to remove the gain associated with the change in fair value of $8,826,913. Additionally, the 1,269,938 net shares required under the treasury stock method upon exercise of the 2020 Warrants were included in the denominator in the calculation of dilutednet loss per share.
The following table sets forth the computation of basic and diluted net income (loss) per share for common stockholders (in thousands, except share and per share data):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Three Months Ended September 30,
    
Nine Months Ended September 30,
 
    
2021
    
2020
    
2021
    
2020
 
Net
(loss)
income – basic
   $ (5,292    $ 3,444      $ (15,883    $ (21,751
Less: decrease in fair value of 2020 Warrants, net of tax
     —          (8,827      —          —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Net loss – diluted
   $ (5,292    $ (5,383    $ (15,883    $ (21,751
Shares used in computing basic net (loss) income per share
     39,332,721        27,809,169        35,914,327        21,069,057  
Plus: dilutive effect of 2020 Warrants
     —          1,270        —          —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Shares used in computing diluted net loss per share
     39,332,721        29,079,107        35,914,327        21,069,057  
    
 
 
    
 
 
    
 
 
    
 
 
 
Basic net
(loss)
income per share
   $ (0.13    $ 0.12      $ (0.44    $ (1.03
Diluted net loss per share
   $ (0.13    $ (0.19    $ (0.44    $ (1.03
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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Table of Contents
The following table sets forth the potentially dilutive securities outstanding as of September 30, 2021 and 2020 that were excluded from the computation of diluted weighted average shares outstanding, as they would have been anti-dilutive:
 
 
 
 
 
 
 
 
 
 
    
September 30,
 
    
2021
    
2020
 
Options to purchase common stock
     2,950,551        1,864,631  
Warrants to purchase common stock
     10,926,733        12,354,580  
    
 
 
    
 
 
 
Total
     13,877,284        14,219,211  
    
 
 
    
 
 
 
8
. Commitments
Leases
In December 2010, the Company entered into a
non-cancellable
operating lease for office space and laboratory facilities in Yonkers, New York expiring in December 2025. In December 2011, the Company entered into an amendment which extended the term of the lease through December 2027 (the “Third Floor Lease”). The lease provides for the option to renew for two additional five-year terms. The premises were occupied in June 2011. Monthly rent payments began the date the office and laboratory facilities were ready for occupancy.
In January 2012, the Company entered into a
non-cancellable
operating lease for additional office space and laboratory facilities in the same building in Yonkers, New York expiring in December 2027 (the “Fourth Floor Lease”). The Fourth Floor Lease provides for an option to renew for two additional five-year terms. Effective August 1, 2017, the Company relinquished 10,912 square feet of space under the Fourth Floor Lease and was relieved of its obligations related to such space.
The Company performed an evaluation of its other contracts in accordance with Topic 842 and has determined that, except for the leases described above, none of its contracts contain a lease.
The balance sheet classification of the Company’s lease liabilities was as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
Description
  
September 30,
2021
    
December 31,
2020
 
Operating lease liabilities:
                 
Current portion of lease liabilities
   $ 654      $ 644  
Long-term portion of lease liabilities
   $ 2,700      $ 2,959  
Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. The leases are renewable at the end of the lease term at our option. For the purposes of determining the remaining lease term in contemplation of available extensions, the Company did not consider either renewal to be probable at this time. In determining the present value of lease payments, the Company estimated its incremental borrowing rate, or discount rate, based on the information available at the adoption date of Topic 842. The discount rate used to determine the operating lease liability was 9.93%.
As of September 30, 2021, the maturities of our operating lease liabilities were as follow
s
 (in thousands):
 
 
 
 
 
 
    
Amount
 
October 1, 2021 - December 31, 2021
   $ 171  
Year ending December 31:
        
2022
     693  
2023
     707  
2024
     721  
2025
     736  
Thereafter
     1,452  
    
 
 
 
Total lease payments
     4,480  
Less: Present value adjustment
     (1,126
    
 
 
 
Operating lease liabilities
     3,354  
    
 
 
 
 
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Table of Contents
Lease costs under the terms of the Company’s leases for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2021
    
2020
    
2021
    
2020
 
Operating lease cost (1)
   $ 154      $ 154      $ 461      $ 461  
Variable lease costs (2)
     46        43        111        89  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total lease cost
   $ 200      $ 197      $ 572      $ 550  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Operating lease payments included in the measurement of the Company’s lease liabilities are comprised of fixed payments according to the terms of the Company’s leases.
(2)
Variable lease payments consist of the Company’s utility costs billed by and paid to its landlord. Variable lease payments are presented as operating expenses in the Company’s Consolidated Statement of Operations in the same line item as expense arising from fixed lease payments and in net cash used in operating activities in the Company’s Statement of Cash Flows.
9
. Capital Structure
As of September 30, 2021, the Company was authorized to issue 125,000,000 shares of common stock.
Follow-on
Offerings
On March 22, 2021, the Company completed an underwritten public offering of 11,500,000 shares of its common stock, including shares sold pursuant to the fully exercised overallotment option granted to the underwriters in connection with the offering, at a public offering price of $5.00 per share, resulting in net proceeds to the Company of approximately $53.8 million after underwriting discounts and commissions and offering expenses payable by the Company.
On May 27, 2020, the Company completed an underwritten public offering of 11,797,752 shares of its common stock and warrants to purchase an additional 8,848,314 shares of its common stock at an exercise price of $4.90 per share. The public offering price was $4.45 for one share of common stock and an accompanying warrant to purchase 0.75 shares of common stock, resulting in net proceeds to the Company of approximately $48.9 million after underwriting discounts and commissions and offering expenses payable by the Company. The Company completed a concurrent private placement to Pfizer Inc. (“Pfizer”) of 674,156 shares of common stock and an accompanying warrant to purchase an additional 505,617 shares of its common stock at an exercise price of $4.90 per share (the “Pfizer Warrant”) at a price of $4.45 for one share of common stock and an accompanying warrant to purchase 0.75 shares of common stock, resulting in net proceeds to the Company of approximately $3.0 million. Warrants to purchase 22,560 shares of common stock were exercised during the nine months ended September 30, 2021 and warrants to purchase 5,850 shares of common stock were exercised during the year ended December 31, 2020.
The Company issued warrants in its 2020, 2017 and 2016 offerings. These warrants contain a fundamental transaction provision that obligates the Company to cash settle the warrants under a limited set of conditions not entirely within the Company’s control. Due to this conditional obligation, the Company determined that the 2020 Warrants, the 2017 Warrants and the 2016 Warrants should be classified as liabilities in the Company’s consolidated balance sheet. At issuance, the Company determined the fair value of the 2020 Warrants, the 2017 Warrants and 2016 Warrants to be $31.4 million, $12.4 million and $18.6 million, respectively, and reclassified these balances from stockholders’ equity to warrant liability. The fair value of these warrants is
re-measured
at each reporting period and changes in fair value are recognized in the consolidated statement of operations (see Note 4, “Fair Value Measurements”). Additionally, the Company allocated approximately $2.2 million, $0.9 million and $1.6 million of issuance costs to the 2020 Warrants, the 2017 Warrants and 2016 Warrants, respectively, based on the proportion of the proceeds allocated to the fair value of the warrants. The allocated issuance costs were expensed as other expense in the Company’s consolidated statement of operations. On July 27, 2021, the 2016 Warrants expired in accordance with their terms and are no longer exercisable.
The Pfizer Warrant does not contain the same fundamental transaction provision that obligates the Company to cash settle the warrants under a limited set of conditions not entirely within the Company’s control. Therefore, the Company determined that the Pfizer Warrant should be classified as equity in the Company’s consolidated balance sheet.
Voting
The holders of shares of common stock are entitled to one vote for each share of common stock held at all meetings of stockholders and written actions in lieu of meetings.
 
14

Table of Contents
Dividends
The holders of shares of common stock are entitled to receive dividends, if and when declared by the board of directors. As of September 30, 2021, no dividends have been declared or paid on the Company’s common stock since inception.
Reserved for Future Issuance
The Company has reserved for future issuance the following number of shares of common stock as of September 30, 2021 and December 31, 2020:
 
 
 
 
 
 
 
 
 
 
    
September 30,
2021
    
December 31,
2020
 
Outstanding options to purchase common stock
     2,950,551        1,853,841  
Outstanding warrants to purchase common stock
     10,926,733        12,350,293  
For future issuance under the 2014 Plan
     26,774        41,079  
    
 
 
    
 
 
 
     13,904,058      14,245,213  
    
 
 
    
 
 
 
10
. Stock Warrants
As of September 30, 2021 and December 31, 2020, the Company had warrants to purchase the underlying common stock outstanding as shown in the table below.
 
 
 
 
 
 
 
 
 
 
    
September 30,
2021
    
December 31,
2020
 
2020 Warrants
     8,819,904        8,842,464  
2017 Warrants
     1,599,645        1,599,645  
2016 Warrants
               1,400,000  
Pfizer Warrant
     505,617        505,617  
Other warrants (1)
     1,567        2,567  
    
 
 
    
 
 
 
Warrants to purchase common stock
     10,926,733        12,350,293  
    
 
 
    
 
 
 
Weighted-average exercise price per share
   $ 6.47      $ 9.14  
    
 
 
    
 
 
 
 
(1)
Other warrants are comprised of warrants issued prior to the Company’s initial public offering (“IPO”), generally in exchange for services rendered to the Company.
The following table summarizes information regarding the Company’s warrants outstanding at September 30, 2021:
 
 
 
 
 
 
 
 
 
 
Exercise Prices
  
Shares
Underlying
Outstanding
Warrants
    
Expiration Date
 
£
$10.00
     9,325,521        May 27, 2023  
> $10.00
£
$20.00
     1,599,645        July 25, 2022  
> $20.00
     1,567        October 17, 2021 – January 5, 2022  
    
 
 
          
       10,926,733           
    
 
 
          
1
1
. Stock Option and Incentive Plans
Amended and Restated 2008 Equity Incentive Plan
In July 2008, the Company adopted the 2008 Equity Incentive Plan (the “Plan”). On February 26, 2013, the board of directors approved an amended and restated plan (the “Amended Plan”) under which the number of shares of common stock available for issuance was 157,143. For new awards, the period that vested awards would remain exercisable upon termination of service was reduced from ten years to two years. The board of directors also increased the number of shares of common stock available under the Company’s Amended Plan on February 24, 2014 and April 29, 2014 to 185,714 and 235,714, respectively. As of the closing of the Company’s IPO, there were no further grants made under the Amended Plan.
 
15

Table of Contents
2014 Omnibus Incentive Plan
In April 2014, the Company’s board of directors adopted the 2014 Omnibus Incentive Plan (the “2014 Plan”). The 2014 Plan was approved by the Company’s stockholders on July 3, 2014. The 2014 Plan allows for the granting of incentive and
non-qualified
stock options, restricted stock and stock unit awards, stock appreciation rights and other performance-based awards to the Company’s employees, members of the board of directors and consultants of the Company. On July 28, 2014, the effective date of the 2014 Plan, the number of shares of common stock reserved pursuant to the 2014 Plan was 57,143. The 2014 Plan provides for an annual increase, to be added on the first day of each fiscal year, beginning with the fiscal year ended December 31, 2015 and ending on January 1, 2024, equal to the lesser of (i) 4% of the outstanding shares of common stock on December 31 immediately preceding such date or (ii) a lesser amount determined by the Company’s board of directors. Consistent with the provision for an annual increase, an additional 2,695,373 shares of common stock have been reserved under the 2014 Plan as of January 1, 2021.
The Company recognized compensation expense for
stock
-based compensation based on the fair value of the underlying instrument.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. A summary of stock option activity for the nine months ended September 30, 2021, is summarized as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Number of
Options
    
Weighted
Average
Exercise
Price
    
Weighted
Average
Remaining
Contractual
Life
(in years)
    
Aggregate
Intrinsic
Value
 
Options outstanding at December 31, 2020
     1,853,841      $ 14.33                    
Granted
     1,227,500        4.31                    
Exercised
               —                      
Expired
     (95,978      46.18                    
Forfeited
     (34,812      5.62                    
    
 
 
                            
Options outstanding at September 30, 2021
     2,950,551        9.22        8.10      $ 72,725  
    
 
 
                      
 
 
 
Vested and exercisable at September 30, 2021
     1,324,857        13.74        6.86      $ 16,125  
    
 
 
                      
 
 
 
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. The weighted average grant date fair value of options granted during the three months ended September 30, 2021 and 2020 was $3.93 and $5.66, respectively, and during the nine months ended September 30, 2021 and 2020 was $4.31 and $9.77, respectively. Total compensation expense recognized amounted to $0.9 million and $0.7 million for the three months ended September 30, 2021 and 2020, respectively, and $2.4 million and $1.9 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, the total remaining unrecognized compensation cost related to unvested stock options was approximately $6.7 million which will be recognized over a weighted average period of approximately 2.58 years.
The following assumptions were used to compute the fair value of stock options granted during the period:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
    
2021
   
2020
   
2021
   
2020
 
Risk free interest rate
     0.81     0.27     0.83     1.15
Expected dividend yield
     —         —         —         —    
Expected term (in years)
     6.12       6.12       5.99       6.03  
Expected volatility
     95.1     97.4     94.5     94.6
Risk-free interest rate
—The Company estimated the risk-free interest rate in reference to yield on U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award.
Expected dividend yield—
The Company estimated the expected dividend yield based on consideration of its historical dividend experience and future dividend expectations. The Company has not historically declared or paid dividends to common stockholders. Moreover, it does not intend to pay dividends in the future, but instead expects to retain any earnings to invest in its continued growth.
Expected term—
The Company based expected term on the midpoint of the vesting period and the contractual term of each respective option grant
 
16

Table of Contents
Expected volatility—
The Company estimated the expected volatility based on the Company’s historical volatility data.
 
17

Table of Contents
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
You should read the following discussion and analysis of our financial condition in conjunction with the information set forth in our financial statements and the notes to those statements included in this Quarterly Report on Form
10-Q
and the audited financial statements and notes thereto as of and for the year ended December 31, 2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form
10-K
filed by us with the Securities and Exchange Commission (“SEC”) on March 30, 2021.
Overview
We are a clinical-stage biotechnology company focused on the discovery and development of direct lytic agents (DLAs), including lysins and amurin peptides, as new medical modalities for the treatment of life-threatening, antibiotic-resistant infections. Antibiotic-resistant infections account for 2,000,000 illnesses in the United States and 700,000 deaths worldwide each year. We intend to address antibiotic-resistant infections using product candidates from our lysin and amurin peptide platforms. DLAs are fundamentally different than antibiotics and offer a potential paradigm shift in the treatment of antibiotic-resistant infections.
Lysins are recombinantly-produced enzymes, that when applied to bacteria cleave a key component of the target bacteria’s peptidoglycan cell wall, resulting in rapid bacterial cell death. In addition to the speed of action and potent cidality, we believe lysins are differentiated by their other hallmark features, which include the demonstrated ability to eradicate biofilms and synergistically boost the efficacy of conventional antibiotics in animal models. Lysins that target
Staph aureus
and other gram-positive pathogens tend to have a “targeted spectrum,” meaning they kill only specific species of bacteria or closely related bacteria. Amurin peptides are a new class of direct lytic agents, discovered in our laboratories, which disrupt the outer membrane of gram-negative bacteria, resulting in rapid bacterial cell death, offering a distinct mechanism of action from lysins. Amurins have shown potent “broad spectrum”
in vitro
activity against a wide range of gram-negative pathogens in, including deadly, drug-resistant
Pseudomonas aeruginosa
(“
P. aeruginosa”
),
Klebsiella pneumoniae, Escherichia coli, Acinetobacter baumannii
and
Enterobacter cloacae
bacteria species as well as difficult to treat pathogens such as
Stenotrophomonas,
Achromobacter
and some
Burkholderia
species. The highly differentiated properties of DLAs have shown these agents to be complementary to and synergistic with conventional antibiotics enabling the potential use of these agents in addition to traditional antibiotics with the goal of improving clinical outcomes compared to conventional antibiotics alone. The development of these compounds involves a novel clinical and regulatory strategy, using superiority design clinical trials with the goal of delivering significantly improved clinical outcomes for the treatment of serious, antibiotic-resistant bacterial infections, including biofilm-associated infections. This approach affords potential clinical benefits to patients as well as the potential ability to mitigate against further development of antibiotic resistance.
We have not generated any revenues and, to date, have funded our operations primarily through our initial public offering (“IPO”), our
follow-on
public offerings, private placements of securities, and grant funding received. On March 22, 2021, we completed an underwritten public offering of 11,500,000 shares of our common stock, including shares sold pursuant to the fully exercised overallotment option granted to the underwriters in connection with the offering, at a public offering price of $5.00 per share of common stock, resulting in net proceeds of approximately $53.8 million after underwriting discounts and commissions and offering expenses payable by us.
On March 10, 2021, we executed a cost-share contract (the “BARDA Contract”) with the Biomedical Advanced Research and Development Authority (“BARDA”), part of the Office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services. Under the terms of the BARDA Contract, the Company will receive $9.8 million in initial funding and up to an additional $77.0 million. The initial funding will be used to support our ongoing pivotal Phase 3 DISRUPT superiority trial of exebacase. Under the terms of the agreement, and if supported by Phase 3 DISRUPT study data, BARDA may provide the Company with additional funding upon achievement of key milestones to continue the advancement of exebacase through FDA product approval and completion of post-approval commitments. The BARDA Contract contains terms and conditions that are customary for contracts with BARDA of this nature, including provisions giving the government the right to terminate the contract at any time for its convenience. As a government contractor, we are subject to complex and wide-ranging federal and agency-specific regulations and contractual requirements. The costs of compliance with these requirements may be significant. Failure to comply with government contracting requirements could result in termination of our contract or the imposition of penalties.
We have never been profitable and our operating loss for the nine months ended September 30, 2021 was $15.9 million. Our net losses were $28.2 million and $12.8 million for the years ended December 31, 2020 and 2019, respectively. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, particularly as we advance our product candidates through preclinical activities and clinical trials to seek regulatory approval and, if approved, commercialize such product candidates. Accordingly, we will need additional financing to support our continuing operations. We expect to seek to fund our operations through public or private equity, debt financings, equity-linked financings, collaborations, strategic alliances, licensing arrangements, research grants or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so.
 
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The ongoing
COVID-19
pandemic has presented substantial public health challenges and is impacting the global healthcare system, including the conduct of clinical trials in the U.S. and other parts of the world. Healthcare resources, including the staff required to support the conduct of clinical trials, are being diverted away from the conduct of clinical trials other than
COVID-19
studies at hospitals serving as clinical trial sites. There are also operational impacts on local, regional and national CROs, manufacturers and other vendors and suppliers and an intermittent lack of availability of certain raw materials and consumables for manufacturing. While global infection rates have significantly reduced from their peak during 2020, new variants continue to circulate, and uncertainty remains as to whether additional restrictions may be implemented to address the spread of new variants.
The pandemic has had an impact, both directly and indirectly, on the Company. We adjusted our business operations, with a majority of our employees working remotely. We have continued to enroll patients in our Phase 3 DISRUPT superiority study of exebacase throughout the entire ongoing
COVID-19
pandemic. However, as the situation worsened across the country earlier this year with new variants circulating and the number of
COVID-19
infections and hospitalizations increased rapidly, we experienced effects on our trial, and our patient enrollment rate slowed during certain months. We continue with efforts to increase the rate of patient enrollment, such as providing additional site monitoring support and allowing patients the option of conducting certain
follow-up
study visits remotely. These efforts may not be effective and the progress of the study may be adversely affected. As the pandemic continues to evolve, we will continue to evaluate the impact of variable monthly patient enrollment rates on the timing of conducting the interim futility analysis and fully completing the trial. The full extent of the impact on our business, results of operations, financial condition and liquidity, including expenses, research and development, manufacturing costs and timelines, and clinical trial progress, depends on future developments that remain highly uncertain.
Financial Operations Overview
Revenue
We have not generated any revenues to date. In the future, we may generate revenues from product sales. In addition, to the extent we enter into licensing or collaboration arrangements, we may have additional sources of revenue. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the amount and timing of payments that we may recognize upon the sale of our products, to the extent that any products are successfully commercialized, and the amount and timing of fees, reimbursements, milestone and other payments received under any future licensing or collaboration arrangements. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.
Research and development expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates, which include:
 
   
employee-related expenses, including salaries, performance bonuses, benefits, travel and
non-cash
stock-based compensation expense;
 
   
external research and development expenses incurred under arrangements with third parties such as contract research organizations, or CROs, contract manufacturers, consultants and academic institutions; and
 
   
facilities and laboratory and other supplies.
We expense research and development costs to operations as incurred. We account for
non-refundable
advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.
The following summarizes our most advanced current research and development programs.
Exebacase
Our most advanced clinical candidate, exebacase, is an investigational novel lysin that targets
Staphylococcus aureus
(“
Staph aureus”)
, including methicillin-resistant (“MRSA”) strains, which causes serious infections such as bacteremia, pneumonia and osteomyelitis.
Staph aureus
is also a common cause of biofilm-associated infections of heart valves (endocarditis), prosthetic joints, indwelling devices and catheters. These infections result in significant morbidity and mortality despite currently available antibiotic therapies.
 
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In December 2019, we initiated the Phase 3 DISRUPT (Direct Lysis of
Staph aureus
Resistant Pathogen Trial) study of exebacase. The DISRUPT study is a randomized, double-blind, placebo-controlled Phase 3 clinical trial conducted in the U.S. alone to assess the efficacy and safety of exebacase in approximately 350 patients with
Staph aureus
bacteremia, including right-sided endocarditis. Patients entering the study will be randomized 2:1 to either exebacase or placebo, with all patients receiving
standard-of-care
(“SOC”) antibiotics. The primary efficacy endpoint of the study is clinical response at Day 14 in patients with MRSA bacteremia, including right-sided endocarditis. Secondary endpoints will include clinical response at Day 14 in the All
Staph aureus
patient group (MRSA and methicillin-sensitive
Staph aureus
(“MSSA”)),
30-day
all-cause
mortality in MRSA patients, and clinical response at later timepoints. We will also evaluate the impact of treatment with exebacase on health resource utilization, including hospital length of stay, ICU length of stay and
30-day
readmission rates. We plan to conduct an interim futility analysis following the enrollment of approximately 60% of the study population. We obtained concurrence with the U.S. Food and Drug Administration (“FDA”) on the Phase 3 study protocol at an
End-of-Phase
2 meeting with the FDA in September 2019, including the key design features of the study population, the endpoints and the size of the safety database that would be needed to support a Biologics License Application (“BLA”) for approval of exebacase, under the FDA’s “streamlined development” paradigm for agents to treat bacterial infections associated with high unmet medical need.
We completed a Phase 2 superiority study of exebacase that evaluated its safety, tolerability, efficacy and pharmacokinetics (“PK”) when used in addition to background SOC antibiotics compared to SOC antibiotics alone for the treatment of
Staph aureus
bacteremia, including endocarditis in adult patients. The results from this study showed clinically meaningful improvement in clinical responder rates among patients treated with exebacase in addition to SOC antibiotics compared to SOC antibiotics alone. In the primary efficacy analysis population of 116 patients with documented
Staph aureus
bacteremia, including endocarditis, who received a single intravenous (“IV”) infusion of blinded study drug, the clinical responder rate at Day 14 was 70.4% for patients treated with exebacase and 60.0% for patients dosed with SOC antibiotics alone (p=0.314). The clinical responder rate at Day 14 in the subset of patients with bacteremia including right-sided endocarditis was 80.0% for patients treated with exebacase compared to 59.5% for patients treated with SOC antibiotics alone, an increase of 20.5% (p=0.028). In the subset of patients with bacteremia alone, the clinical responder rate at Day 14 was 81.8% for patients treated with exebacase compared to 61.5% for patients treated with SOC antibiotics alone, an increase of 20.3% (p=0.035).
In a
pre-specified
analysis of MRSA-infected patients, the clinical responder rate at Day 14 in patients treated with exebacase was nearly
43-percentage
points higher than in patients treated with SOC antibiotics alone (74.1% for patients treated with exebacase compared to 31.3% for patients treated with SOC antibiotics alone (p=0.010)). In addition to the higher rate of clinical response, MRSA-infected patients treated with exebacase showed a
21-percentage
point reduction in
30-day
all-cause
mortality (p=0.056), a four day lower median length of hospital stay and meaningful reductions in hospital readmission rates. Exebacase was well-tolerated and treatment emergent adverse events, including serious treatment-emergent serious adverse events (“SAEs”) were balanced between the treatment groups. There were no SAEs that we determined to be related to exebacase, there were no reports of hypersensitivity related to exebacase and no patients discontinued treatment with study drug in either treatment group.
We also performed a
post-hoc
Phase 3 simulation analysis using the Phase 2 data to evaluate the clinical outcomes for the Phase 2 patient population that would meet the Phase 3 inclusion criteria. In this simulated Phase 3 analysis population of 84 U.S. patients with documented
Staph aureus
bacteremia, including right-sided endocarditis, who received a single IV infusion of blinded study drug, the clinical responder rate at Day 14 was 83.7% for patients treated with exebacase and 54.3% for patients dosed with SOC antibiotics alone, an improvement in the responder rate of over
29-percentage
points. The clinical responder rate at Day 14 in the subset of patients with MRSA bacteremia including right-sided endocarditis was 82.6% for patients treated with exebacase compared to 33.3% for patients treated with SOC antibiotics alone, an improvement in the responder rate of over
49-percentage
points. In the subset of patients with MSSA bacteremia including right-sided, the clinical responder rate at Day 14 was 84.6% for patients treated with exebacase compared to 66.7% for patients treated with SOC antibiotics alone, an increase of nearly
18-percentage
points.
We believe these data established proof of concept for exebacase and for DLAs as therapeutic agents. In particular, the data for MRSA-infected patients treated with exebacase, which, in the Phase 2 superiority study, demonstrated superior outcomes in clinical response at Day 14 and in
30-day
all-cause
mortality as well as health economics benefits, provided the basis for the FDA to grant Breakthrough Therapy designation to exebacase for the treatment of MRSA bloodstream infections (bacteremia), including right-sided endocarditis, when used in addition to SOC anti-staphylococcal antibiotics in adult patients. Breakthrough Therapy designation is a program designed by the FDA to expedite the development and review of medicines for serious or life-threatening diseases where preliminary clinical evidence suggests that the investigational therapy may demonstrate substantial improvement on at least one clinically significant endpoint over available therapies. The Breakthrough Therapy designation provides additional benefits, such as expedited meetings and interactions with the FDA and the potential for priority review, over the Fast Track designation granted to exebacase in August 2015.
 
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On March 10, 2021, we entered into a cost-share contract (the “BARDA Contract”) with BARDA, a division of the U.S. Department of Health and Human Services’ Office of the Assistant Secretary for Preparedness and Response. Under the BARDA Contract, we will receive funding of up to an estimated $86.8 million to advance the development of exebacase. The base period for the BARDA Contract includes government funding of up to $9.8 million to reimburse expenses for approximately one year to support the conduct of the ongoing Phase 3 clinical trial and futility analysis. Following successful completion of the base period, the BARDA Contract provides for approximately $77.0 million of additional BARDA funding for five option stages in support of the completion of the Phase 3 clinical trial of exebacase, further clinical and
non-clinical
studies, manufacturing, supply chain, clinical, regulatory and administrative activities. The contract
period-of-performance
(base period plus option exercises) is up to approximately six years. The BARDA Contract contains terms and conditions that are customary for contracts with BARDA of this nature, including provisions giving the government the right to terminate the contract at any time for its convenience.
In addition to the ongoing Phase 3 DISRUPT study of exebacase, we initiated an expanded access program to provide exebacase for the treatment of persistent bacteremia caused by MRSA in
COVID-19
patients and continued the investigator-initiated early access program for compassionate use of exebacase for individual named patients with chronic post-operative prosthetic joint infections (“PJIs”) under Temporary Authorizations for Use from the French National Agency for Medicines and Health Products Safety in collaboration with Dr. Tristan Ferry at the Hôpital de la Croix Rousse in Lyon, France.
Other Programs
We have made further advancements with our novel lytic agents across our portfolio. We have developed a novel, engineered variant of exebacase, known as
CF-296,
which we believe provides an additional opportunity to advance a potential targeted therapy for deep-seated, invasive biofilm-associated
Staph aureus
infections. We are conducting further
in vitro
and
in vivo
characterization of
CF-296
to evaluate the full profile of this compound. An analysis of bone samples from a study of
CF-296
in a preclinical rodent model of acute MRSA osteomyelitis demonstrated that
CF-296
has potent anti-staphylococcal activity and, when used with daptomycin, is active and well tolerated in MRSA acute osteomyelitis. Studies conducted in a preclinical murine
Staph aureus
infection model demonstrated the efficacy of
CF-296,
both as a mono therapy and in addition to
standard-of-care
antibiotics. The addition of
CF-296
to both daptomycin or vancomycin resulted in significantly enhanced antibacterial activity in the model, relative to the activity of these
standard-of-care
antibiotics alone. In June 2019, we were awarded up to $7.2 million of funding from the Military Infectious Diseases Research Program, United States Army Medical Research and Development Command (“USAMRDC”) over the course of three years to advance
CF-296
through Investigational New Drug application (“IND”)-enabling studies.
We have discovered and engineered a new lysin product candidate,
CF-370,
which in preclinical studies has demonstrated potent activity against antibiotic-resistant
P. aeruginosa
bacteria, a major cause of morbidity and mortality in patients with hospital acquired pneumonia and a major medical challenge for patients with cystic fibrosis. In July 2020, we were awarded up to $18.9 million in funding from
CARB-X
(Combating Antibiotic-Resistant Bacteria Biopharmaceutical Accelerator), including initial funding of $4.9 million, in support of the advancement of
CF-370
through
IND-enabling
activities toward future Phase 1 clinical trials. We expect
CF-370
to be our next molecule in clinical studies. In April 2021, the United States Patent and Trademark Office issued U.S. Patent No. 10,988,520 for
CF-370.
This patent, which is owned solely by the Company, expires in March 2039, and is the latest U.S. patent to issue from the Company’s DLA patent portfolio.
Beyond our lysin programs, we continue our research to advance potential product candidates from our amurin peptide platform. We are evaluating our most promising amurins in preclinical animal studies with the goals of determining our next product candidate and moving this program towards clinical studies as soon as possible. We have received approximately $1.6 million of funding from
CARB-X
to support the amurin peptide program.
In addition, we have recently completed an initial funding agreement with the Cystic Fibrosis Foundation to investigate the potential utility of DLAs, including
CF-370
and amurin peptides, against resistant Gram-negative pathogens which afflict Cystic Fibrosis (“CF”) patients. The agreement provided funding for the determination of the
in vitro
activity of
CF-370
and amurin peptides against bacterial specimens obtained from CF patients at different stages of disease. Having demonstrated potent activity of its agents against resistant Gram-negative pathogens isolated in samples from the lungs of CF patients, ContraFect is evaluating the potential future clinical development of
CF-370
and/or amurin peptides as therapeutic candidates for the treatment of pulmonary infections in patients with CF.
To date, a large portion of our research and development work has related to the establishment of our platform technologies, the advancement of our research projects to discovery of clinical candidates, manufacturing and preclinical testing of our clinical candidates and clinical testing of exebacase. We currently expect to focus the majority of our resources on the exebacase program. As our pipeline progresses, we are able to further leverage our employee and infrastructure resources across multiple development programs as well as research projects. For the three months ended September 30, 2021 and 2020, we recorded approximately $8.7 million and $4.7 million, respectively, of research and development expenses and for the nine months ended September 30, 2021 and 2020, we recorded approximately $24.5 million and $15.4 million, respectively, of research and development expenses. A breakdown of our research and development expenses by category is shown below. We do not currently utilize a formal time or laboratory project expense allocation system to allocate employee-related expenses, laboratory costs or depreciation to any particular project. Accordingly, we do not allocate these expenses to individual projects or product candidates. However, we do allocate some portions of our research and development expenses in the product development, external research and licensing and professional fees categories to exebacase as shown below.
 
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The following table summarizes our research and development expenses by category for the three and nine months ended September 30, 2021 and 2020 (in thousands):
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2021
    
2020
    
2021
    
2020
 
Product development
   $ 7,842      $ 2,711      $ 19,970      $ 10,691  
Personnel related
     2,357        1,176        6,270        3,201  
Professional fees
     879        903        2,701        2,710  
External research and licensing costs
     599        340        1,357        661  
Laboratory costs
     433        394        1,132        1,023  
Stock-based compensation
     264        166        710        493  
Expenses reimbursed by grants
     (3,710      (984      (7,678      (3,425
  
 
 
    
 
 
    
 
 
    
 
 
 
Total research and development expense
   $ 8,664      $ 4,706      $ 24,462      $ 15,354  
  
 
 
    
 
 
    
 
 
    
 
 
 
The following table summarizes our research and development expenses by program for the three and nine months ended September 30, 2021 and 2020 (in thousands):
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2021
    
2020
    
2021
    
2020
 
Exebacase
   $ 6,321      $ 2,646      $ 15,862      $ 10,156  
CF-370
     1,164        406        3,307        1,014  
Other research and development
     2,268        1,296        5,991        3,915  
Personnel related and stock-based compensation
     2,621        1,342        6,980        3,694  
Expenses reimbursed by grants
     (3,710      (984      (7,678      (3,425
  
 
 
    
 
 
    
 
 
    
 
 
 
Total research and development expense
   $ 8,664      $ 4,706      $ 24,462      $ 15,354  
  
 
 
    
 
 
    
 
 
    
 
 
 
We anticipate that our research and development expenses will increase substantially in connection with the commencement of additional clinical trials for our product candidates. However, the successful development of future product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
 
   
the scope, rate of progress and expense of our research and development activities;
 
   
clinical trial results;
 
   
the terms and timing of regulatory approvals;
 
   
our ability to market, commercialize and achieve market acceptance for our product candidates in the future; and
 
   
the expense, filing, prosecuting, defending and enforcing of patent claims and other intellectual property rights.
A change in the outcome of any of these variables with respect to the development of exebacase or any other product candidate that we may develop could mean a significant change in the costs and timing associated with the development of exebacase or any such product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of exebacase or if we experience significant delays in enrollment in any clinical trials of exebacase, we could be required to expend significant additional financial resources and time on the completion of the clinical development of exebacase.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, including
non-cash
stock-based compensation expense, in our executive, finance, legal, human resource and business development functions. Other general and administrative expenses include facility costs, insurance expenses and professional fees for legal, consulting and accounting services.
 
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We anticipate that our general and administrative expenses will increase in future periods to support increases in our research and development activities and as a result of increased headcount, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors.
Other Income (Expense)
Other income (expense) may consist of changes in the fair values of our warrant liabilities, offering expenses related to the issuance of warrants, and interest income earned on our cash and cash equivalents and marketable securities.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on our limited historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
During the nine-month period ended September 30, 2021, there have been no material changes to our critical accounting policies from the information provided in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on
Form 10-K
for the year ended December 31, 2020 filed by us with the SEC on March 30, 2021
.
Results of Operations
The following table summarizes key components of our results of operations for the periods indicated (in thousands).
 
    
Three Months
Ended
September 30,
    
Dollar Change
   
Nine Months Ended
September 30,
    
Dollar Change
 
    
2021
    
2020
   
2021
    
2020
 
Operating expenses:
                
Research and development
   $ 8,664      $ 4,706      $ 3,958     $ 24,462      $ 15,354      $ 9,108  
General and administrative
   $ 3,022      $ 2,607      $ 415     $ 8,722      $ 8,186      $ 536  
Other income, net
   $ 6,394      $ 10,757      $ (4,363   $ 17,301      $ 1,789      $ 15,512  
Comparison of Three Months Ended September 30, 2021 and 2020
Research and Development Expenses
Research and development expenses were $8.7 million for the three months ended September 30, 2021 compared with $4.7 million for the three months ended September 30, 2020, an increase of $4.0 million. This increase was primarily attributable to a $1.4 million increase in CRO and investigator site expenses related to the execution of the Phase 3 clinical study, a $1.3 million increase in expenditures for
non-clinical
studies of exebacase,
CF-370,
CF-296
and the amurin peptides, as all programs continued to progress forward, and a $1.1 million increase in clinical development and manufacturing headcount and related personnel costs to support the ongoing development of exebacase.
General and Administrative Expenses
General and administrative expenses were $3.0 million for the three months ended September 30, 2021 compared with $2.6 million for the three months ended September 30, 2020, an increase of $0.4 million. This increase was primarily attributable to an increase of $0.6 million in administrative personnel and insurance costs. This increase was partially offset by a $0.2 million decrease in legal expenses.
Other Income, Net
Other income was $6.4 million for the three months ended September 30, 2021 compared with $10.8 million for the three months ended September 30, 2020, a decrease of $4.4 million. The decrease in other income relates primarily to the
non-cash
gain of $6.3 million in the current year period compared to a
non-cash
gain of $10.7 million in the prior year period, resulting from the change in fair value of our warrant liabilities in each reporting period.
 
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Comparison of Nine Months Ended September 30, 2021 and 2020
Research and Development Expenses
Research and development expenses were $24.5 million for the nine months ended September 30, 2021 compared with $15.4 million for the nine months ended September 30, 2020, an increase of $9.1 million. This increase was primarily attributable to a $4.6 million increase in expenditures for
non-clinical
studies of exebacase,
CF-370,
CF-296
and the amurin peptides, as all programs continued to progress forward, a $4.2 million increase in CRO and investigator site expenses related to the execution of the Phase 3 clinical study, and a $3.1 million increase in clinical development and manufacturing headcount and related personnel costs to support the ongoing development of exebacase. These increases were partially offset by a $2.7 million increase in expenses that are reimbursable under our BARDA contract and other grants compared to the prior year period.
General and Administrative Expenses
General and administrative expense was $8.7 million for the nine months ended September 30, 2021, compared with $8.2 million for the nine months ended September 30, 2020, an increase of $0.5 million. This increase was primarily attributable to increases of $0.7 million in administrative personnel costs and professional fees, $0.5 million in insurance costs and local tax expenses. These increases were partially offset by a $0.7 million decrease in legal expenses.
Other Income, Net
Other income was $17.3 million for the nine months ended September 30, 2021, compared with $1.8 million for the nine months ended September 30, 2020, an increase of $15.5 million. The increase in other income relates primarily to the
non-cash
gain of $17.2 million in the current year period compared to a
non-cash
gain of $3.8 million in the prior year period, resulting from the change in fair value of our warrant liabilities at each reporting period. In addition, the prior year period had a charge to other expense of $2.2 million for issuance expenses allocated to warrants, for which there was no such expense in the current year period.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations to date primarily through proceeds from sales of common stock, common stock and warrants, convertible preferred stock and convertible debt and, to a lesser extent, grant funding. To date, we have not generated any revenue from the sale of products. We have incurred losses and generated negative cash flows from operations since inception.
Since the date of our initial public offering, we have funded our operations through the sale of registered securities for gross proceeds of $257.8 million, $9.6 million from the exercise of the Class B Warrants issued in our IPO, $26.0 million from the sale of securities in private placements and the receipt of $13.1 million of grant funding.
As of September 30, 2021, we had approximately $63.3 million in cash, cash equivalents and marketable securities.
On August 14, 2020, we filed a new shelf registration statement on Form
S-3
(the “Form
S-3”)
with the SEC. The Form
S-3
was declared effective by the SEC on August 31, 2020. The Form
S-3
allows us to offer and sell from
time-to-time
up to $150.0 million of common stock, preferred stock, debt securities, warrants or units comprised of any combination of these securities. On March 22, 2021, we completed an underwritten public offering under the Form
S-3
of 11,500,000 shares of our common stock, including shares sold pursuant to the fully exercised overallotment option granted to the underwriters in connection with the offering, at a public offering price of $5.00 per share of common stock, resulting in net proceeds of approximately $53.8 million after underwriting discounts and commissions and offering expenses payable by us. The terms of any future offerings under the Form
S-3
will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering. There can be no assurances that any such financing will be available to us on satisfactory terms, or at all.
We have also been successful obtaining grants to supplement our financings with
non-dilutive
funding, including grants from
CARB-X,
USAMRDC and our cost-sharing contract with BARDA. We may continue to pursue further
non-dilutive
funding opportunities. In addition, there can be no assurances that either BARDA,
CARB-X
or USAMRDC will provide the maximum potential funding to the Company.
 
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Cash Flows
The following table provides information regarding our cash flows for the nine months ended September 30, 2021 and 2020 (in thousands):
 
    
Nine Months Ended
September 30,
 
    
2021
    
2020
 
Net cash (used in) provided by:
     
Operating activities
   $ (32,557    $ (25,672
Investing activities
   $ (16,610    $ (32,252
Financing activities
   $ 53,907      $ 51,892  
Net cash used in operating activities
Net cash used in operating activities resulted primarily from our net losses adjusted for
non-cash
charges and changes in the components of working capital. Net cash used in operating activities for the nine months ended September 30, 2021 increased by $6.9 million compared to the same period in 2020, due primarily to payment of amounts owed to our contract research and manufacturing organizations in support of the exebacase development program including our Phase 3 DISRUPT trial.
Net cash used in investing activities
Net cash used in investing activities for the nine months ended September 30, 2021 and 2020 were driven by the purchases of marketable securities, less proceeds received from the maturities of marketable securities.
Net cash provided by financing activities
Net cash provided by financing activities for the nine months ended September 30, 2021 resulted from the $53.8 million of net proceeds from our March 22, 2021 offering of securities and $0.1 million of proceeds from the exercise of warrants. Net cash provided by financing activities for the nine months ended September 30, 2020 resulted from the $51.9 million of net proceeds from our May 27, 2020 offering of securities.
Funding Requirements
All of our product candidates are in clinical or preclinical development. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:
 
   
continue our ongoing clinical trials, and initiate the planned clinical trials of our product candidates;
 
   
continue our ongoing preclinical studies, and initiate additional preclinical studies, of our product candidates;
 
   
continue the research and development of our other product candidates and our platform technology;
 
   
seek to identify additional product candidates;
 
   
acquire or
in-license
other products and technologies;
 
   
seek marketing approvals for our product candidates that successfully complete clinical trials;
 
   
establish, either on our own or with strategic partners, a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
 
   
maintain, leverage and expand our intellectual property portfolio; and
 
   
add operational, financial and management information systems and personnel, including personnel to support our product development and future commercialization efforts.
We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund operations for at least 12 months from the issuance date of these financial statements. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may enter into collaborations with third parties for development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our current product candidates. We plan to continue to fund our operations through public or private debt and equity financings and grant funding but there can be no assurances that such financing or grants will be available to us on satisfactory terms, or at all. Our future capital requirements will depend on many factors, including:
 
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the progress and results of the clinical trials of our lead product candidates;
 
   
the scope, progress, results and costs of compound discovery, preclinical development, laboratory testing and clinical trials for our other product candidates;
 
   
the ongoing effects of
COVID-19
on, among other things, our clinical trials, manufacturing and sourcing of raw materials, financial performance, business and operations;
 
   
the extent to which we acquire or
in-license
other products and technologies;
 
   
the timing and amount of actual reimbursements under the BARDA Contract;
 
   
the costs, timing and outcome of regulatory review of our product candidates;
 
   
the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
 
   
revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;
 
   
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and
 
   
our ability to establish any future collaboration arrangements on favorable terms, if at all.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity and debt offerings, collaborations, grants, government contracts, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or other securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
We incur significant costs as a public company, including, but not limited to, increased personnel costs, increased directors fees, increased directors and officers insurance premiums, audit and legal fees, investor relations and external communications fees, expenses for compliance with the Sarbanes-Oxley Act and rules implemented by the SEC and Nasdaq and various other costs and expenses.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Contractual Obligations and Commitments” in our Annual Report on
Form 10-K
filed with the SEC on March 30, 2021.
Effects of Inflation
We do not believe that inflation or changing prices had a significant impact on our results of operations for any periods presented herein.
Off-Balance
Sheet Arrangements
We did not have during the periods presented, and we are currently not party to, any
off-balance
sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. As of September 30, 2021, we had cash, cash equivalents and marketable securities of $63.3 million. Because of the short-term maturities of our cash equivalents and marketable securities, we do not believe that an increase in market rates would have any significant impact on the fair value of our cash equivalents or marketable securities. If a 10% change in interest rates were to have immediately occurred on September 30, 2021, this change would not have had a material effect on the fair value of our investment portfolio as of that date.
 
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While we believe our cash, cash equivalents and marketable securities do not contain excessive credit or liquidity risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.
We do not own any derivative financial instruments. Accordingly, we do not believe that there is any material market risk exposure with respect to derivative, foreign currency or other financial instruments that would require disclosure under this item.
ITEM 4. CONTROLS AND PROCEDURES
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
As required by Rule
13a-15(b)
and Rule
15d-15(b)
of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q
of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021.
Changes in Internal Control
As required by Rule
13a-15(d)
and Rule
15d-15(d)
of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer and principal financial officer concluded that there were no such changes during the quarter ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings at this time. From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are party to any claim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors, as well as the other information in this report, and in our other public filings. Our business, financial condition and operating results can be affected by a number of important factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, results of operations and common stock price. Other factors may exist that we do not consider significant based on information that is currently available. In addition, new risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect us. Past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
 
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Risks Related to Our Financial Position and Need for Additional Capital
We have incurred significant losses since our inception. We expect to incur losses for at least the next several years and may never achieve or maintain profitability.
We are a clinical-stage biopharmaceutical company with no approved products, and we have not generated any revenue from product sales to date. To date, we have focused exclusively on developing our product candidates and have funded our operations primarily through the sale of common stock and warrants, convertible preferred stock and issuances of convertible debt to our investors, and to a lesser extent, grant funding. We have not yet demonstrated an ability to overcome many of the risks and uncertainties frequently encountered by companies in the pharmaceutical industry, and you should analyze our company in light of such risks and uncertainties.
Since inception, we have incurred significant operating losses. Our loss from operations for the nine months ended September 30, 2021 was $15.9 million and our losses from operations were $28.2 million and $12.8 million for the years ended December 31, 2020 and 2019, respectively. We have devoted substantially all of our efforts to research and development. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. The net losses we incur may fluctuate significantly from quarter to quarter and year to year.
We anticipate that our expenses will increase substantially as clinical trials for any of our product candidates commence or progress. Our expenses will increase if and as we:
 
   
seek to discover or develop additional product candidates;
 
   
seek marketing approvals for any of our product candidates that successfully complete clinical trials;
 
   
in-license
or acquire other products and technologies;
 
   
maintain, expand and protect our intellectual property portfolio;
 
   
hire additional clinical, quality control and scientific personnel; and
 
   
add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.
We currently have no source of product revenue and have not yet generated any revenues from product sales.
To date, we have not completed the development of any products and have not generated any revenues from product sales. Our ability to generate revenue from product sales and achieve profitability will depend upon our ability to successfully commercialize products, including any of our current product candidates, or other product candidates that we may
in-license
or acquire in the future. Even if we are able to successfully achieve regulatory approval for these product candidates, we may never generate revenues that are significant enough to achieve profitability. Our ability to generate revenue from product sales from our current or future product candidates also depends on a number of additional factors, including our ability to:
 
   
successfully complete development activities, including the necessary clinical trials;
 
   
complete and submit BLAs to the FDA, and obtain regulatory approval for indications for which there is a commercial market;
 
   
complete and submit applications to, and obtain approval from, foreign regulatory authorities;
 
   
set a commercially viable price for our products;
 
   
develop a commercial organization capable of sales, marketing and distribution for any products we intend to sell ourselves in the markets which we choose to commercialize on our own;
 
   
find suitable distribution partners to help us market, sell and distribute our products in other markets; and
 
   
obtain coverage and adequate reimbursement from third parties, including government and private payors.
In addition, because of the numerous risks and uncertainties associated with product development, including that any of our product candidates may not advance through development or achieve the desired endpoints of applicable clinical trials, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. Even if we are able to complete the development and regulatory process for any product candidates, we anticipate incurring significant costs associated with commercializing these products.
 
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Even if we are able to generate revenues from the sale of our products, we may not become profitable. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital to expand our business or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.
We have a need for substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the clinical development of exebacase and possibly acquire and develop new product candidates or technologies. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. For example, the trading prices for our and other biopharmaceutical companies’ stock have been highly volatile as a result of the
COVID-19
pandemic. As a result, we may face difficulties raising capital through sales of our common stock and any such sales may be on unfavorable terms.
Our future capital requirements will depend on many factors, including:
 
   
the complexity, timing and results of our clinical trials of our product candidates;
 
   
the costs, timing and outcome of regulatory review of our product candidates;
 
   
the costs of developing our product candidates for additional indications;
 
   
the timing and amount of actual reimbursements under the BARDA Contract;
 
   
the continuation of funding under our
CARB-X
and USAMRDC grants;
 
   
our ability to establish scientific or business collaborations on favorable terms, if at all;
 
   
the costs of preparing, filing and prosecuting patent or other intellectual property applications, maintaining and protecting our intellectual property rights and defending against intellectual property-related claims;
 
   
the extent to which we
in-license
or acquire other product candidates or technologies; and
 
   
the scope, progress, results and costs of product development for our product candidates;
 
   
the effects of the
COVID-19
pandemic on, among other things, our financial performance, business and operations.
Conducting clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results to obtain marketing approval and achieve product sales. In addition, if approved, exebacase or any other product candidate that we develop may not achieve commercial success. Accordingly, we may need to continue to rely on additional financing to achieve our business objectives. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. Adequate additional financing may not be available to us on acceptable terms, or at all.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever, as we can generate substantial product revenues, we may finance our cash needs through a combination of equity offerings, debt financings, grants, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
 
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The timing of the milestone and royalty payments we are required to make under certain agreements to Rockefeller is uncertain and could adversely affect our cash flows and results of operations.
We are party to certain agreements with Rockefeller pursuant to which we have acquired licenses to certain patents and patent applications and other intellectual property related to a series of compounds, including exebacase to develop and commercialize therapeutics. Under our agreements with Rockefeller, we have obligations to achieve diligence minimums and to make payments upon achievement of specified development and regulatory milestones. We will also make additional payments upon the achievement of future sales milestones and for royalties on future net sales.
The timing of milestone payments under our licenses and sponsored research agreements is subject to factors relating to the clinical and regulatory development and commercialization of products, many of which are beyond our control. We may become obligated to make a milestone payment when we do not have the cash on hand to make such payment, which could require us to delay our clinical trials, curtail our operations, scale back our commercialization and marketing efforts or seek funds to meet these obligations on terms unfavorable to us.
If BARDA were to eliminate, reduce, or delay funding for our BARDA Contract, we would experience a negative impact on our programs associated with such funding.
On March 10, 2021, we executed a cost-share contract from BARDA, part of the Office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services. Under the terms of the BARDA Contract, the Company will receive $9.8 million in initial funding during the base period. Following successful completion of the base period, the BARDA Contract provides for approximately $77.0 million of additional BARDA funding for five option stages in support of the completion of the Phase 3 clinical trial of exebacase, further clinical and
non-clinical
studies, manufacturing, supply chain, clinical, regulatory and administrative activities. The BARDA Contract contains terms and conditions that are customary for contracts with BARDA of this nature, including provisions giving the government the right to terminate the contract at any time for its convenience. If BARDA were to eliminate, reduce, or delay funding under the BARDA Contract or prohibit reimbursement of some of our incurred costs, we would have to seek additional funding to complete our ongoing Phase 3 DISRUPT superiority trial of exebacase or advance exebacase through FDA product approval and completion of post-approval commitments.
The BARDA Contract includes special requirements, which subject us to the risk of a reduction or loss of funding.
Our BARDA Contract subjects us to various U.S. government contract requirements, including general clauses for a cost-reimbursement research and development contract, which may limit our reimbursement. In addition, if we are found to be in violation of the BARDA Contract, it could result in termination. If BARDA terminates the BARDA Contract with us for its convenience, or if we default by failing to perform in accordance with the contract schedule and terms, a significant negative impact on our cash flows and operations could result.
U.S. government contracts, such as our BARDA Contract, generally contain unfavorable termination provisions, which may subject us to additional risks as compared to our competitors that have not entered into such contracts. These risks include the ability of the U.S. government to unilaterally:
 
   
terminate or reduce the scope of our contract with or without cause;
 
   
interpret relevant regulations (federal acquisition regulation clauses);
 
   
require performance under circumstances that may not be favorable to us;
 
   
require an
in-process
review where the U.S. government will review the project and its options under the contract;
 
   
control the timing and amount of funding, which impacts the development progress of exebacase; and
 
   
audit and object to our contract-related costs and fees, including allocated indirect costs.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 and related provisions of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its
pre-change
net operating loss carryforwards and other
pre-change
tax attributes to offset its post-change income may be limited. As a result of our past transactions, we may have experienced an “ownership change.” At this time, we have not completed a study to assess whether an ownership change under Section 382 of the Code has occurred, or whether there have been multiple ownership changes since our formation, due to the costs and complexities associated with such a study. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. Thus, our ability to utilize carryforwards of our net operating losses and other tax attributes to reduce future tax liabilities may be substantially restricted. Further, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, we may not be able to take full advantage of these carryforwards for federal or state tax purposes. As of December 31, 2020 and 2019, we had federal and state net operating loss carryforwards of approximately $234.3 million and $201.3 million, respectively, and federal research and development credits of approximately $3.8 million and $3.1 million, the use of which could be limited or eliminated by virtue of one or more “ownership changes.”
 
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Risks Related to the Discovery, Development and Commercialization of Our Product Candidates
The
COVID-19
pandemic or other pandemics, epidemics or outbreaks of an infectious disease may materially and adversely impact our business, including our preclinical studies and clinical trials.
The outbreak and government measures taken in response to the ongoing COVID-19 pandemic had a significant impact on the economy and, to a lesser extent, both directly and indirectly, on our business. We adjusted our business operations, with a majority of our employees working remotely. Our Phase 3 DISRUPT clinical trial was also affected as a result of the
COVID-19
pandemic, as clinical sites experienced periodic delays in new patient enrollment.
The
COVID-19
pandemic worsened across the country earlier this year as new variants circulate and the number of
COVID-19
infections and hospitalizations increased rapidly. We are seeing effects of the pandemic on our trial with our patient enrollment rate slowed during certain months. Efforts we take to mitigate slowed enrollment may not be effective and the progress of our study may be adversely affected. If patient enrollment is delayed during future months, our related corporate milestones, such as our planned interim futility analysis of the Phase 3 DISRUPT clinical trial, could be further delayed.
As a result of the
COVID-19
pandemic, the spread of variants of the virus or another pandemic, epidemic or outbreak of an infectious disease, we may experience disruptions that could severely impact our business, preclinical studies and clinical trials, including:
 
   
delays or difficulties in enrolling patients in our clinical trials;
 
   
delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and staff;
 
   
increased rates of patients withdrawing from our clinical trials following enrollment as a result of contracting
COVID-19
or other health conditions or being forced to quarantine;
 
   
interruption of key clinical trial activities, such as clinical trial site data monitoring and efficacy and safety data collection, processing and analyses, due to limitations on travel imposed or recommended by federal, state or local governments, employers and others or interruption of clinical trial subject visits, which may impact the collection and integrity of subject data and clinical study endpoints;
 
   
interruption of, or delays in receiving, supplies of our products and product candidates from our contract manufacturing organizations due to staffing shortages, production slowdowns or stoppages and disruptions in supply or delivery systems;
 
   
delays in receiving authorization from local regulatory authorities to initiate our planned clinical trials;
 
   
changes in regulations as part of a response to the
COVID-19
pandemic which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;