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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 June 30, 2022
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 August 12, 2022 was 39,332,721.
 
 
 

Table of Contents
CONTRAFECT CORPORATION
INDEX
 
 
  
 
  
Page No.
 
PART I – FINANCIAL INFORMATION
  
Item 1.
  
  
 
1
 
Item 2.
  
  
 
18
 
Item 3.
  
  
 
27
 
Item 4.
  
  
 
27
 
PART II – OTHER INFORMATION
  
Item 1.
  
  
 
27
 
Item 1A.
  
  
 
28
 
Item 2.
  
  
 
58
 
Item 3.
  
  
 
58
 
Item 4.
  
  
 
58
 
Item 5.
  
  
 
58
 
Item 6.
  
  
 
59
 
  
 
60
 

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, future revenues, our ability to continue as a going concern, 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 U.S. Food and Drug Administration (“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 award from the Military Infectious Diseases Research Program, United States Army Medical Research and Development Command (“USAMRDC”);
 
 
 
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;
 
 
 
our recurring losses from operations raise substantial doubt regarding our ability to continue as a going concern;
 
 
 
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
Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form
10-Q.
You should carefully 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.
 
 
 
Our recurring losses from operations raise substantial doubt regarding our ability to continue as a going concern.
 
 
 
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, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
 
 
 
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.
 
 
 
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 candidates. If we are ultimately unable to obtain regulatory approval for any of our product candidates, our business will be substantially harmed.
 
 
 
If clinical trials of any of our product candidates that we develop fail to demonstrate safety and efficacy, or the manufacturing for the commercial supply of drug substance or drug product fails to demonstrate robustness, stability, purity and potency to the satisfaction of the 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 our product candidates.
 
 
 
We may be required to suspend or discontinue clinical trials due to adverse side effects or other safety risks that could preclude approval of any of our 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 any of our product candidates.
 
 
 
We rely on contract manufacturing organizations (“CMOs”) to manufacture clinical and commercial supplies of our product candidates. In addition to the risks associated with the manufacture of our product candidates, which could include cost overruns, new impurities, difficulties in process or formulation development, scaling up or reproducing manufacturing processes and lack of timely availability of raw materials, 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 any of our product candidates.
 
 
 
Even if the FDA approves any of our 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.
 
i

Table of Contents
 
 
Developments by competitors may render our products or technologies obsolete or
non-competitive.
 
 
 
The level of commercial success of any of our 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 any of our product candidates that we develop.
 
 
 
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 our operations.
 
 
 
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.”).
 
ii

Table of Contents
CONTRAFECT CORPORATION
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTRAFECT CORPORATION
Consolidated Balance Sheets
(in thousands, except share data)
 
    
June 30,

2022
   
December 31,

2021
 
    
(unaudited)
   
(audited)
 
Assets
                
Current assets:
                
Cash and cash equivalents
   $ 9,549     $ 16,654  
Marketable securities
     17,753       37,631  
Prepaid expenses
     8,313       4,439  
Other current assets
     2,097       4,140  
    
 
 
   
 
 
 
Total current assets
     37,712       62,864  
Property and equipment, net
     653       741  
Operating lease
right-of-use
assets
     2,326       2,544  
Other assets
     107       613  
    
 
 
   
 
 
 
Total assets
   $ 40,798     $ 66,762  
    
 
 
   
 
 
 
Liabilities and stockholders’ equity
                
Current liabilities:
                
Accounts payable
   $ 11,269     $ 2,389  
Accrued and other current liabilities
     8,667       9,128  
Current portion of lease liabilities
     664       657  
    
 
 
   
 
 
 
Total current liabilities
     20,600       12,174  
Warrant liabilities
     4,826       2,530  
Long-term portion of lease liabilities
     2,414       2,609  
Other liabilities
     73       73  
    
 
 
   
 
 
 
Total liabilities
     27,913       17,386  
Commitments and contingencies
     —         —    
Stockholders’ equity:
                
Preferred stock, $0.0001 par value, 25,000,000 shares authorized and none outstanding at June 30, 2022 and December 31, 2021
     —         —    
Common stock, $0.0001 par value, 125,000,000 shares authorized, 39,332,721 shares issued and outstanding at June 30, 2022 and December 31, 2021
     4       4  
Additional
paid-in
capital
     311,892       310,008  
Accumulated other comprehensive loss
     (213     (84
Accumulated deficit
     (298,798     (260,552
    
 
 
   
 
 
 
Total stockholders’ equity
     12,885       49,376  
Total liabilities and stockholders’ equity
   $ 40,798     $ 66,762  
    
 
 
   
 
 
 
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 June 30,
   
Six Months Ended June 30,
 
    
2022
   
2021
   
2022
   
2021
 
Operating expenses
                                
Research and development
   $ 16,760     $ 7,777     $ 29,485     $ 15,798  
General and administrative
     3,266       2,935       6,520       5,700  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     20,026       10,712       36,005       21,498  
    
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
     (20,026     (10,712     (36,005     (21,498
Other income (expense):
                                
Interest income
     21       30       55       55  
Change in fair value of warrant liabilities
     1,916       5,286       (2,296     10,852  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total other income (expense), net
     1,937       5,316       (2,241     10,907  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
   $ (18,089   $ (5,396   $ (38,246   $ (10,591
Per share information:
                          
 
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Basic and diluted net loss per share
   $ (0.46   $ (0.14   $ (0.97   $ (0.31
    
 
 
   
 
 
   
 
 
   
 
 
 
Shares used in computing net loss per share
     39,332,721       39,332,721       39,332,721       34,176,801  
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes.
 
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CONTRAFECT CORPORATION
Consolidated Statements of Comprehensive Loss
(unaudited)
(in thousands)
 
    
Three Months Ended June 30,
   
Six Months Ended June 30,
 
    
2022
   
2021
   
2022
   
2021
 
Net loss
   $ (18,089   $ (5,396   $ (38,246   $ (10,591
Other comprehensive loss:
                                
Unrealized gain (loss) on
available-for-sale
securities
     11       (13     (129     (21
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive loss
   $ (18,078   $ (5,409   $ (38,375   $ (10,612
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes.
 
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CONTRAFECT CORPORATION
Consolidated Statements of Stockholders’ Equity
(unaudited)
(in thousands, except share data)
 
    
Common Stock
    
Additional
   
Accumulated
Other
Comprehensive
   
Accumulated
   
Stockholders’
 
    
Shares
    
Amount
    
Paid-In Capital
   
Loss
   
Deficit
   
Equity
 
Balance, December 31, 2021
     39,332,721      $ 4      $ 310,008     $ (84   $ (260,552   $ 49,376  
Stock-based compensation
     —          —          919       —         —         919  
Unrealized loss on marketable securities
     —          —          —         (140     —         (140
Net loss
     —          —          —         —         (20,157     (20,157
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, March 31, 2022
     39,332,721      $ 4      $ 310,927     $ (224   $ (280,709   $ 29,998  
Stock-based compensation
     —          —          965       —         —         965  
Unrealized gain on marketable securities
     —          —          —         11       —         11  
Net loss
     —          —          —         —         (18,089     (18,089
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, June 30, 2022
     39,332,721      $ 4      $ 311,892     $ (213   $ (298,798   $ 12,885  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
           
    
Common Stock
    
Additional
   
Accumulated
Other
Comprehensive
   
Accumulated
   
Stockholders’
 
    
Shares
    
Amount
    
Paid-In Capital
   
Loss
   
Deficit
   
Equity
 
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  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes.
 
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CONTRAFECT CORPORATION
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
    
Six Months Ended June 30,
 
    
2022
   
2021
 
Cash flows from operating activities
                
Net loss
   $ (38,246   $ (10,591
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation
     76       73  
Stock-based compensation expense
     1,884       1,519  
Change in fair value of warrant liabilities
     2,296       (10,852
Net amortization of premium on marketable securities
     502       212  
Changes in operating assets and liabilities:
                
Increase in prepaid expenses and other current and
non-current
assets
     (1,283     (3,759
Increase in accounts payable, accrued and other current liabilities
     8,419       1,894  
    
 
 
   
 
 
 
Net cash used in operating activities
     (26,352     (21,504
Cash flows from investing activities
                
Purchases of marketable securities
              (44,822
Proceeds from maturities of marketable securities
     19,247       18,340  
    
 
 
   
 
 
 
Net cash provided by (used in) investing activities
     19,247       (26,482
Cash flows from financing activities
                
Proceeds from issuance of securities
     —         57,500  
Payment of financing costs of securities sold
     —         (3,703
Proceeds from the exercise of warrants
     —         110  
    
 
 
   
 
 
 
Net cash provided by financing activities
     —         53,907  
    
 
 
   
 
 
 
Net (decrease) increase in cash and cash equivalents
     (7,105     5,921  
Cash and cash equivalents at beginning of period
     16,654       15,485  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 9,549     $ 21,406  
    
 
 
   
 
 
 
See accompanying notes.
 
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CONTRAFECT CORPORATION
Notes to Unaudited Consolidated Financial Statements
June 30, 2022
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
S. aureus
, including methicillin-resistant strains, which causes serious infections such as bacteremia, pneumonia and osteomyelitis.
S. 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 was being studied in a pivotal Phase 3 superiority study (the “DISRUPT study”) to evaluate its safety, tolerability, efficacy and pharmacokinetics when used in addition to background standard of care antibiotic therapy for the treatment of
S.
aureus
bacteremia, including right-sided endocarditis in adolescent and adult patients. On July 7, 2022, the Data Safety Monitoring Board (“DSMB”) conducted an interim futility analysis and recommended that the DISRUPT study be stopped because the conditional power of the study was below the pre-specified threshold for futility. Based on the DSMB’s recommendation, patient enrollment in the Phase 3 trial was stopped (“Trial Closure”). The Company continues to monitor <20 already enrolled patients as they complete their follow-up visits and to perform ongoing data review. The Company also expects to complete all clinical study reports as required by the U.S. Food and Drug Administration (“FDA”).
The Company has incurred recurring losses since inception as a research and development organization and has an accumulated deficit of $298.8 million as of June 30, 2022. For the six months ended June 30, 2022, the Company used $26.4 
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 and government contracts. The Company expects operating losses and negative cash flows to continue at significant levels in the future as it continues to advance its programs. As of June 30, 2022, the Company had approximatel
y $27.3 
million in cash, cash equivalents and marketable securities, which, without additional funding, the Company believes will not be sufficient to meet its obligations within the next twelve months from the date of issuance of these consolidated financial statements. The Company plans to continue to fund its operations through public or private debt and equity financings, but there can be no assurances that such financing will continue to be available to the Company on satisfactory terms, or at all, particularly in light of the Trial Closure. As such, under the requirements of Accounting Standard Codification (“ASC”)
205-40,
management may not consider the potential for future capital raises in its assessment of the Company’s ability to meet its obligations for the next twelve months, and substantial doubt exists about the Company’s ability to continue as a going concern for twelve months from the date the financial statements were issued. The Company recently implemented a restructuring plan resulting in a reduction to the Company’s workforce of 16 employees, or approximately 37% of the Company’s headcount as of June 30, 2022. If the Company is unable to obtain funding, the Company would be forced to delay, further reduce its workforce or reduce or eliminate its research and development programs, which could adversely affect its business prospects, or the Company may be unable to continue operations or continue as a going concern.
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
On August 14, 2020, the Company filed a 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.
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 base period for the BARDA Contract includes government funding of up to $9.8 
million to reimburse expenses to support the conduct of the Phase 3 clinical trial and futility analysis. Following completion of the base period, the BARDA Contract may provide additional BARDA funding in support of the completion of the Phase 3 clinical trial of exebacase.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial information as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 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, 2021 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, 2021, 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 
25, 2022.
 
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In the opinion of management, the unaudited financial information as of June 30, 2022 and for three and six months ended June 30, 2022 and 2021 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 three and six months ended June 30, 2022 are
not
necessarily indicative of the operating results for the full fiscal year or any future periods.
Principles of Consolidation
The Company has a wholly-owned subsidiary, ContraFect International Limited, in Scotland that establishes legal status for 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 Company currently relies on a single manufacturer of exebacase drug substance, located in the United States, and two manufacturers of drug product, one located in the United States and one in Western Europe, and there are no long-term supply agreements in place. A sustained disruption in the operations of any of these manufacturers or in the event the Company would need to change to a new supplier, could result in a significant delay in the ability of the Company to complete any associated activities.
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 research and development prepaid expenses and accruals, stock-based compensation, warrant valuation and realization of net deferred 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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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 in stockholders’ equity and a component of total comprehensive loss in the consolidated statements of comprehensive loss, until realized. The fair value of these securities is based on quoted prices for identical or similar assets. Realized gains and losses are included in interest income in the consolidated statement of operations on a specific-identification basis.
There were no realized gains on sales of marketable securities for the three and six months ended June 30, 2022 or 2021. There were no marketable securities that had been in an unrealized loss position for more than 12 months as of June 30, 2022 or December 31, 2021.
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 judgment and therefore cannot be determined with precision. The fair value of the Company’s warrant liabilities is 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
(“ASC 820”), establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The three levels of the fair value hierarchy are described below:
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.
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 Company had no liabilities classified as Level 1 or Level 2. 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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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, directors, and
non-employees,
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 on the date of grant based on key assumptions such as stock price, risk free interest rates, expected volatility, expected term, and expected dividend yield. The Company’s estimates of these assumptions are based on historical data and judgment regarding future trends and factors.
Government Contracts and Grant Agreements
The Company recognizes a receivable, which is included in other current assets on its consolidated balance sheet, 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 $2.2 million and $3.0 million for the three months ended June 30, 2022 and 2021, and $4.3 million and $4.0 million for the six months ended June 30, 2022 and 2021, respectively. The receivable for government contracts and grant agreements as of June 30, 2022 and December 31, 2021 was approximately $2.1 million and $4.1 million, respectively, and is included in other current assets on the consolidated balance sheet. The Company has approximately $2.7 million of committed government contract and grant agreement funding remaining as of June 30, 2022.
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 7—“Commitments and Contingencies.”
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 Per Share
Basic net loss per share applicable to common stockholders is calculated by dividing net loss applicable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share applicable to common stockholders 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 the dilutive net loss per share applicable to common stockholders’ calculation, stock options and warrants are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share applicable to common stockholders, as their effect would be anti-dilutive; therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented.
Recently Adopted Accounting Pronouncements
Government Assistance
On January 1, 2022, the Company adopted Accounting Standards Update
No. 2021-10,
Disclosure by Business Entities about Government Assistance (ASU
2021-10)
. ASU
2021-10
improves the transparency of government assistance received by certain business entities by requiring the disclosure of (1) the types of government assistance received, (2) the accounting for such assistance, and (3) the effect of the assistance on the business entity’s financial statements. The adoption of the new guidance did not affect the Company’s consolidated financial statements.
 
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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 consolidated financial statements and related disclosures.
3. Marketable Securities
Marketable securities at June 30, 2022 consisted of the following (in thousands):
 
Marketable Securities
  
Amortized Cost
    
Unrealized

Gains
    
Unrealized

Losses
    
Fair Value
 
Current:
                                   
Corporate debt
   $ 17,966      $         $ (213    $ 17,753  
Marketable securities at December 31, 2021 consisted of the following (in thousands):
 
Marketable Securities
  
Amortized Cost
    
Unrealized

Gains
    
Unrealized

Losses
    
Fair Value
 
Current:
                                   
Corporate debt
   $ 37,715      $         $ (84    $ 37,631  
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 June 30, 2022, the Company held 11 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 June 30, 2022 was approximately $17.8 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 June 30, 2022.
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 June 30, 2022 and December 31, 2021 (in thousands):
 
    
Fair Value Measurement as of June 30, 2022
 
    
Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)
    
Significant

Other

Observable

Inputs

(Level 2)
    
Significant

Unobservable

Inputs

(Level 3)
 
Cash equivalents
   $ 6,792      $ —        $ —    
Marketable securities
     17,753        —          —    
Warrant liabilities
     —          —          4,826  
    
 
 
    
 
 
    
 
 
 
Total
   $ 24,545      $ —        $ 4,826  
    
 
 
    
 
 
    
 
 
 
 
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Fair Value Measurement as of December 31, 2021
 
    
Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)
    
Significant

Other

Observable

Inputs

(Level 2)
    
Significant

Unobservable

Inputs

(Level 3)
 
Cash equivalents
   $ 7,734      $ —        $ —    
Marketable securities
     37,631        —          —    
Warrant liabilities
     —          —          2,530  
    
 
 
    
 
 
    
 
 
 
Total
   $ 45,365      $ —        $ 2,530  
    
 
 
    
 
 
    
 
 
 
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 8, “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

June 30,

2022
   
As of

December 31,

2021
 
Expected volatility
     146.3     56.5
Remaining contractual term (in years)
     0.08       0.58  
Risk-free interest rate
     1.28     0.19
Expected dividend yield
     —       —  
The Company issued warrants to the purchasers of its May 27, 2020 offering (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 8, “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

June 30,

2022
   
As of

December 31,

2021
 
Expected volatility
     84.6     61.9
Remaining contractual term (in years)
     0.92       1.42  
Risk-free interest rate
     2.80     0.56
Expected dividend yield
     —       —  
Warrant liabilities
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 six months ended June 30, 2022 and 2021 (in thousands):
 
    
Three Months Ended

June 30,
    
Six Months Ended

June 30,
 
    
2022
    
2021
    
2022
    
2021
 
Balance at beginning of period
   $ 6,742      $ 23,838      $ 2,530      $ 29,404  
(Decrease) increase in fair value (1)
     (1,916      (5,286      2,296        (10,852
    
 
 
    
 
 
    
 
 
    
 
 
 
Balance at end of period
   $ 4,826      $ 18,552      $ 4,826      $ 18,552  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
The change in fair values of the warrant liabilities is recorded in other income in the consolidated statement of operations.
 
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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. Accrued Liabilities
Accrued liabilities consist of the following as of June 30, 2022 and December 31, 2021 (in thousands):
 
    
June 30,

2022
    
December 31,

2021
 
Accrued research and development service fees
   $ 6,011      $ 5,641  
Accrued compensation costs
     1,327        2,215  
Accrued professional fees
     1,000        819  
Accrued facilities operation expenses
     144        307  
Other accrued expenses
     185        146  
    
 
 
    
 
 
 
Total accrued liabilitie
s
   $ 8,667      $ 9,128  
    
 
 
    
 
 
 
6. Net Loss Per Share of Common Stock
Diluted net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive. Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding.
The following table sets forth the computation of basic and diluted net loss per share for common stockholders (in thousands, except share and per share data):
 
 
  
Three Months Ended June 30,
 
  
Six Months Ended June 30,
 
 
  
2022
 
  
2021
 
  
2022
 
  
2021
 
Net loss
   $ (18,089    $ (5,396    $ (38,246    $ (10,591
Weighted average shares of common stock outstanding
     39,332,721        39,332,721        39,332,721        34,176,801  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net loss per share of common stock—basic and diluted
   $ (0.46    $ (0.14    $ (0.97    $ (0.31
    
 
 
    
 
 
    
 
 
    
 
 
 
The following potentially dilutive securities outstanding at June 30, 2022 and 2021 have been excluded from the computation of diluted weighted average shares outstanding, as they would have been anti-dilutive:
 
    
June 30,
 
    
2022
    
2021
 
Options to purchase common stock
     4,448,969        2,848,693  
Warrants to purchase common stock
     10,925,166        12,327,304  
    
 
 
    
 
 
 
Total
     15,374,135        15,175,997  
    
 
 
    
 
 
 
7. Commitments and Contingencies
Operating 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.
 
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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
  
June 30,

2022
    
December 31,

2021
 
Operating lease liabilities:
                 
Current portion of lease liabilities
   $ 664      $ 657  
Long-term portion of lease liabilities
   $ 2,414      $ 2,609  
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 June 30, 2022, the maturities of our operating lease liabilities were as follows (in thousands):
 
    
Amount
 
July 1, 2022 - December 31, 2022
   $ 347  
Year ending December 31:
        
2023
     707  
2024
     721  
2025
     736  
2026
     750  
Thereafter
     702  
    
 
 
 
Total lease payments
     3,963  
Less: Present value adjustment
     (885
    
 
 
 
Operating lease liabilities
   $ 3,078  
    
 
 
 
Lease costs under the terms of the Company’s leases for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
 
    
Three Months Ended

June 30,
    
Six Months Ended

June 30,
 
    
2022
    
2021
    
2022
    
2021
 
Operating lease cost (1)
   $ 154      $ 154      $ 307      $ 307  
Variable lease costs (2)
     42        35        81        65  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total lease cost
   $ 196      $ 189      $ 388      $ 372  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(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.
 
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Rockefeller University
License Agreements
The Company has entered into the following license agreements with The Rockefeller University:
 
   
On July 12, 2011, the Company entered into a license agreement for the worldwide, exclusive right to a patent covering the composition of matter for the lysin PlySS2 for the treatment and prevention of diseases caused by gram-positive bacteria (the
“CF-301
License”). The Company rebranded PlySS2 as
CF-301
and subsequently, exebacase. The license gives the Company the right to exclusively develop, make, have made, use, import, lease, sell and offer for sale products that would otherwise infringe a claim of this patent application or patent.
 
   
On June 1, 2011, the Company entered into a license agreement for the exclusive rights to The Rockefeller University’s interest in a joint patent application covering the method of delivering antibodies through the cell wall of gram-positive bacteria to the periplasmic space. This intellectual property was developed as a result of the sponsored research agreement between the Company and The Rockefeller University and was jointly discovered and filed by the two parties.
 
   
On September 23, 2010, the Company entered into a license agreement for the worldwide, exclusive right to develop, make, have made, use, import, lease, sell, and offer for sale products that would otherwise infringe a claim of the suite of patents and patent applications covering the composition of matter for eight individual lysin molecules for the treatment and prevention of diseases caused by gram-positive bacteria. The lysins in this suite have activity against Group B
Streptococci
,
Staphylococcus aureus, Streptococcus pneumonia, Bacillus anthracis, Enterococcus faecalis and Enterococcus faecium
.
In consideration for the licenses, the Company paid Rockefeller license initiation fees in cash and stock. The Company paid annual maintenance fees of $200,000 in each of 2021, 2020 and 2019, and are required to pay $200,000 each year thereafter until the licenses terminate. Depending on the success of its programs, the Company may also incur regulatory milestone payments up to a total of $5.0 million and royalties of up to 5% on net sales from products to Rockefeller. We are allowed to grant sublicenses to third parties without prior approval, subject to certain conditions and the payment of a certain percentage of all payments we receive from sublicensees. There were no milestone, royalty or sublicense payments made during the six months ended June 30, 2022 or 2021. The Company has made total milestone payments under the
CF-301
License of $810,000 as of June 30, 2022.
Each license agreement terminates upon the later of (i) the expiration or abandonment of the last licensed patent under the license agreement to expire or become abandoned, or (ii) 10 years after the first commercial sale of the first licensed product. The Rockefeller University may terminate any license agreement in the event of a breach of such agreement by the Company or if the Company challenges the validity or enforceability of the underlying patent rights. The Company may terminate any license agreement at any time on 60 days’ notice.
Legal Contingencies
From time to time, the Company may be involved in disputes and legal proceedings in the ordinary course of its business. These proceedings may include allegations of infringement of intellectual property, employment or other matters. The Company records a liability in its financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary to make the financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the Company’s financial statements. The Company currently has no legal proceedings ongoing that management estimates could have a material effect on the Company’s financial statements.
8. Capital Structure
Common Stock
As of June 30, 2022, 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.
 
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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. No warrants were exercised during the six months ended June 30, 2022. Warrants to purchase 22,560 shares of common stock were exercised during the six months ended June 30, 2021.
The Company issued warrants in its 2020 and 2017 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 and the 2017 Warrants classified as liabilities in the Company’s consolidated balance sheet. At issuance, the Company determined the fair value of the 2020 Warrants and the 2017 Warrants to be $31.4 million and $12.4 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 and $0.9 million of issuance costs to the 2020 Warrants and the 2017 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.
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.​​​​​​​
Dividends
The holders of shares of common stock are entitled to receive dividends, if and when declared by the board of directors. As of June 30, 2022, 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 June 30, 2022 and December 31, 2021:
 
    
June 30,
2022
    
December 31,
2021
 
Outstanding options to purchase common stock
     4,448,969        2,899,694  
Outstanding warrants to purchase common stock
     10,925,166        10,926,594  
For future issuance under the 2014 Omnibus Incentive Plan
     116,665        77,631  
For future issuance under the 2021 Employment Inducement Plan
     985,000        1,000,000  
    
 
 
    
 
 
 
       16,475,800        14,903,919  
    
 
 
    
 
 
 
 
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9. Stock Warrants
As of June 30, 2022 and December 31, 2021, the Company had warrants to purchase the underlying common stock outstanding as shown in the table below.
 
    
June 30,
2022
    
December 31,
2021
 
2020 Warrants
     8,819,904        8,819,904  
2017 Warrants
     1,599,645        1,599,645  
Pfizer Warrant
     505,617        505,617  
Other warrants (1)
               1,428  
    
 
 
    
 
 
 
Warrants to purchase common stock
     10,925,166        10,926,594  
    
 
 
    
 
 
 
Weighted-average exercise price per share
   $ 6.45      $ 6.47  
    
 
 
    
 
 
 
 
(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 June 30, 2022:
 
Exercise Prices
  
Shares

Underlying

Outstanding

Warrants
    
Expiration Date
$4.90
     9,325,521      May 27, 2023
$15.50
     1,599,645      July 25, 2022
    
 
 
      
       10,925,166       
    
 
 
      
10. 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.
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 4,268,682 shares of common stock have been reserved under the 2014 Plan as of January 1, 2022.
2021 Omnibus Incentive Plan
In September 2021, the Company’s board of directors adopted the 2021 Employment Incentive Omnibus Incentive Plan (the “2021 Plan”). The 2021 Plan allows for the granting of
non-qualified
stock options, restricted stock and stock unit awards, stock appreciation rights and other performance-based awards to new employees of the Company. On September 13, 2021, the effective date of the 2021 Plan, 1,000,000 shares of common stock were reserved under the 2021 Plan.
 
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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 six months ended June 30, 2022, 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, 2021
     2,899,694      $ 9.12                    
Granted
     1,674,000        3.33                    
Exercised
                                     
Expired
     (36,788      12.10                    
Forfeited
     (87,937      4.54                    
    
 
 
                            
Options outstanding at June 30, 2022
     4,448,969        7.01        8.46      $     
    
 
 
                      
 
 
 
Vested and exercisable at June 30, 2022
     1,972,774        10.54        6.97      $     
    
 
 
                      
 
 
 
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 June 30, 2022 and 2021 was $3.32 and $4.22, respectively, and during the six months ended June 30, 2022 and 2021 was $3.33 and $4.35, respectively. Total compensation expense recognized amounted to $1.0 million and $0.9 million for the three months ended June 30, 2022 and 2021, respectively, and $1.9 million and $1.5 million for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, the total remaining unrecognized compensation cost related to unvested stock options was approximately $7.2 million which will be recognized over a weighted average period of approximately 2.35 years.
The following assumptions were used to compute the fair value of stock options granted during the period:
 
    
Three Months Ended

June 30,
   
Six Months Ended

June 30,
 
    
2022
   
2021
   
2022
   
2021
 
Risk free interest rate
     2.94     0.85     2.15     0.84
Expected dividend yield
                                    
Expected term (in years)
     5.52       5.97       5.95       5.98  
Expected volatility
     91.0     94.3     91.2     94.5
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
Expected volatility—
The Company estimated the expected volatility based on the Company’s historical volatility data.
11. Subsequent Events
On July 7, 2022, the DSMB of the Phase 3 DISRUPT study conducted an interim futility analysis and recommended that the study be stopped because the conditional power of the study was below the pre-specified threshold for futility. Based on the DSMB’s recommendation, patient enrollment in the Phase 3 trial was stopped (“Trial Closure”). The Company continues to monitor <20 already enrolled patients as they complete their follow-up visits and to perform ongoing data review. The Company also expects to complete all clinical study reports as required by the FDA.
On July 29, 2022, the Company implemented a restructuring plan resulting in a reduction to the Company’s workforce of 16 employees, or approximately 37% of the Company’s headcount as of June 30, 2022. This reduction includes the resignation of Cara Cassino, M.D. as Chief Medical Officer and Executive Vice President of Research and Development of the Company. The Company expects to recognize a restructuring charge in the third quarter of 2022 of approximately $1.5 million consisting primarily of severance, one-time termination and other related costs, all of which will result in future cash expenditures. Any further financial statement impact of the Trial Closure cannot be estimated by the Company at this time.
 
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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, 2021 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 25, 2022.
Overview
We are a late 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. We believe DLAs are fundamentally different than antibiotics and offer a potential paradigm shift in the treatment of antibiotic-resistant infections. According to one of the most recent and comprehensive reports on the global burden of bacterial antimicrobial resistance (“AMR”), there were an estimated 4.95 million deaths associated with bacterial AMR in 2019, including 1.27 million deaths directly attributable to bacterial AMR. The six leading pathogens for deaths associated with resistance (
Escherichia coli (“E. coli”)
,
Staphylococcus aureus (“S. aureus”)
,
Klebsiella pneumoniae (“K. pneumoniae”)
,
Streptococcus pneumoniae
,
Acinetobacter baumannii (“A. baumannii”)
, and
Pseudomonas aeruginosa
(“
P. aeruginosa
”)) were responsible for 929,000 deaths. Only one pathogen–drug combination, methicillin-resistant
S. aureus
(“MRSA”), caused more than 100,000 deaths in 2019.
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. Amurin peptides are a new class of DLAs, 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 a potent, broad spectrum of
in vitro
activity against a wide range of gram-negative pathogens, including deadly, drug-resistant
P. aeruginosa
,
K. pneumoniae, E. coli, A. 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 underscore their potential use in addition to antibiotics with the goal of improving clinical outcomes compared to antibiotics alone. The development of DLAs involves a novel clinical and regulatory strategy, using superiority design clinical trials with the goal of delivering significantly improved clinical outcomes for patients with serious, antibiotic-resistant bacterial infections, including biofilm-associated infections. We believe 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 estimated 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 (together with any exercise of BARDA’s options to extend such 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. The initial funding has been used to support the pivotal Phase 3 DISRUPT superiority trial of exebacase. Under the terms of the agreement, BARDA may provide the Company with additional funding. 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.
On July 29, 2022, we implemented a restructuring plan resulting in a reduction to our workforce of 16 employees, or approximately 37% of our headcount as of June 30, 2022. This reduction includes the resignation of Cara Cassino, M.D. as Chief Medical Officer and Executive Vice President of Research and Development of the Company. We expect to recognize a restructuring charge in the third quarter of 2022 of approximately $1.5 million consisting primarily of severance, one-time termination and other related costs, all of which will result in future cash expenditures.
 
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We have never been profitable and our operating losses were $38.2 million, $47.3 million and $34.2 million for the six months ended June 30, 2022 and the years ended December 31, 2021 and 2020, respectively. As of June 30, 2022, we had an accumulated deficit of $298.8 million and we had approximately $27.3 million in cash, cash equivalents and marketable securities. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect the expenses for each program to increase as candidates advance through preclinical activities and clinical trials to seek regulatory approval and, if approved, commercialization. Accordingly, we will need additional financing to support our continuing operations and to continue as a going concern. 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, particularly in light of the Trial Closure (as defined below) and the substantial decline in the price of our common stock. 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. Without additional funding, the Company believes it will not have sufficient funds to meet its obligations within the next twelve months from the date of issuance of the consolidated financial statements included in this Quarterly Report on Form
10-Q.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. The recent substantial decline in the price per share of our common stock will likely make it more difficult for us to obtain financing. If potential collaborators decline to do business with us or potential investors decline to participate in any future financings due to such concerns, our ability to increase our cash position may be limited. We will need to generate significant revenues to achieve profitability, and we may never do so.
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 lead DLA product candidate, exebacase, was granted Breakthrough Therapy designation for development as a treatment for MRSA bloodstream infections (bacteremia), including right-sided endocarditis, when used in addition to
standard-of-care
(“SOC”) anti-staphylococcal antibiotics in adult patients, by the U.S. Food and Drug Administration (“FDA”) in February 2020. In addition to bacteremia,
S. aureus
is also a common cause of pneumonia and osteomyelitis as well as 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
S. aureus
Resistant Pathogen Trial) superiority design 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 adult and adolescent patients with complicated
S. aureus
bacteremia, including right-sided endocarditis. Patients entering the study were randomized 2:1 to either exebacase or placebo, with all patients receiving SOC antistaphylococcal 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 include clinical response at Day 14 in the All
S. aureus
patient group (MRSA and methicillin-sensitive
S. 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. On July 7, 2022, the Data Safety Monitoring Board (“DSMB”) of the Company’s Phase 3 DISRUPT (Direct Lysis of Staph aureus Resistant Pathogen Trial) study completed a
pre-specified,
interim futility analysis and recommended that the DISRUPT study be stopped because the conditional power of the study was below the
pre-specified
threshold for futility in the DSMB charter. The recommendation was based on an analysis of the clinical response rate at day 14 (the primary efficacy endpoint of the study) in 84 patients, or approximately 60% of the total planned MRSA population with bacteremia, including right-sided endocarditis. Based on the DSMB’s recommendation, patient enrollment in the Phase 3 trial was stopped (“Trial Closure”). We continue to monitor <20 already enrolled patients as they complete their follow-up visits and to perform ongoing data review. We also expect to complete all clinical study reports as required by the FDA. We expect that conclusions drawn from the ongoing data review will inform next steps for any potential further development of exebacase.
Other Programs
Our next product candidate,
CF-370,
is designed to target a range of gram-negative bacteria including
P. aeruginosa
and has demonstrated potent
in vivo
activity against extensively drug-resistant (“XDR”) strains.
P. aeruginosa
is a major cause of morbidity and mortality in patients with hospital-acquired or ventilator-associated pneumonia and a major medical challenge for cystic fibrosis patients with chronic lung infections.
CF-370
has also shown promising activity against
E. coli
,
K. pneumoniae
and
A. baumannii
in
in vitro
studies. We expect
CF-370
to be our next DLA to enter clinical studies.
We have entered into two funding agreements with the Cystic Fibrosis Foundation to investigate the potential utility of DLAs against resistant gram-negative pathogens which afflict Cystic Fibrosis (“CF”) patients. The first agreement provided funding for the assessment of the
in vitro
activity of
CF-370
and amurin peptides against bacterial specimens obtained from CF patients at different stages of disease. The second agreement will provide funding for assessing the
in vitro
and
in vivo
activity of exebacase against
S. aureus
isolates obtained from CF patients. If we obtain supportive data, we plan to evaluate potential future clinical development of DLA product candidates for the treatment of exacerbations in CF lung disease.
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
S. aureus
infections. We are conducting further
in vitro
and
in vivo
characterization of
CF-296
to evaluate the full profile of this compound. 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.
 
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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.
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. As our pipeline progresses, we are able to further leverage our employee and infrastructure resources across multiple development programs as well as research projects. We recorded approximately $16.8 million and $7.8 million of research and development expenses for the three months ended June 30, 2022 and 2021 and $29.5 million and $15.8 million, respectively, for the six months ended. 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 and
CF-370
as shown below.
 
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The following table summarizes our research and development expenses by category for the three and six months ended June 30, 2022 and 2021 (in thousands):
 
    
Three Months Ended

June 30,
    
Six Months Ended

June 30,
 
    
2022
    
2021
    
2022
    
2021
 
Product development
   $ 14,458      $ 6,418      $ 25,017      $ 12,128  
Personnel related
     2,418        2,085        4,809        3,913  
Professional fees
     1,110        918        2,135        1,822  
Laboratory costs
     530        377        1,089        699  
Stock-based compensation
     267        295        530        446  
External research and licensing costs
     205        727        247        758  
Expenses reimbursed by grants
     (2,228      (3,043      (4,342      (3,968
  
 
 
    
 
 
    
 
 
    
 
 
 
Total research and development expense
   $ 16,760      $ 7,777      $ 29,485      $ 15,798  
  
 
 
    
 
 
    
 
 
    
 
 
 
The following table summarizes our research and development expenses by program for the three and six months ended June 30, 2022 and 2021 (in thousands):
 
    
Three Months Ended

June 30,
    
Six Months Ended

June 30,
 
    
2022
    
2021
    
2022
    
2021
 
Exebacase
   $ 12,096      $ 4,208      $ 22,484      $ 9,541  
CF-370
     3,314        1,597        4,265        2,143  
Other research and development
     892        2,635        1,738        3,723  
Personnel related and stock-based compensation
     2,686        2,380        5,340        4,359  
Expenses reimbursed by grants
     (2,228      (3,043      (4,342      (3,968
  
 
 
    
 
 
    
 
 
    
 
 
 
Total research and development expense
   $ 16,760      $ 7,777      $ 29,485      $ 15,798  
  
 
 
    
 
 
    
 
 
    
 
 
 
We anticipate that our research and development expenses will decrease substantially after the final patients in the DISRUPT study complete their follow-up visits and all study sites are closed, resulting in rapidly decreasing expenditures on the DISRUPT study and the exebacase program more generally. The workforce reduction discussed above will also contribute to this decrease. Research and development expenses could increase in the future in connection with the commencement of any new clinical trials for our product candidates. However, the successful development of our 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 our product candidates could mean a significant change in the costs and timing associated with the development of such product candidates.
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.
We anticipate that our general and administrative expenses will decrease modestly in future periods as a result of decreased headcount, however, legal, accounting, compliance, investor and public relations, and other expenses associated with being a public company continue to increase, particularly insurance premiums.
 
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Other Income and Expenses
Other income and expenses consist primarily of interest income and changes in the fair value measurement of our warrant liabilities. Interest income includes interest earned on our cash and cash equivalents and
available-for-sale
securities. The changes in the fair value of our warrant liabilities are derived using the Black-Scholes option pricing model. The key inputs into the 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, resulting in a
non-cash
gain or charge in each reporting period.
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
six-months
ended June 30, 2022, there have been no material changes to our critical accounting policies and significant judgments and estimates 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, 2021 filed by us with the SEC on March 25, 2022
.
Results of Operations
Comparison of Three Months Ended June 30, 2022 and 2021
The following table summarizes key components of our results of operations for the periods indicated (in thousands).
 
    
Three Months Ended

June 30,
    
Dollar Change
   
Six Months Ended

June 30,
    
Dollar Change
 
    
2022
    
2021
   
2022
   
2021
 
Operating expenses:
               
Research and development
   $ 16,760      $ 7,777      $ 8,983     $ 29,485     $ 15,798      $ 13,687  
General and administrative
   $ 3,266      $ 2,935      $ 331     $ 6,520     $ 5,700      $ 820  
Other income (expense)
   $ 1,937      $ 5,316      $ (3,379   $ (2,241   $ 10,907      $ (13,148
Research and Development Expenses
Research and development expenses were $16.85 million for the three months ended June 30, 2022 compared with $7.8 million for the three months ended June 30, 2021, an increase of $9.0 million. This increase was primarily attributable to a $5.3 million increase in spending on manufacturing costs related to the analytical and process validation and manufacturing of exebacase in order to support a potential BLA submission, a
$2.7 million increase in spending on
non-clinical
studies of exebacase and IND enabling studies of
CF-370
to support a potential IND application, and a $0.6 million increase in spending on clinical activities as we continued to enroll patients and expand the number of clinical sites in the Phase 3 DISRUPT study of exebacase. A $0.8 million decrease in the reimbursable expenditures under our grants and BARDA contract added to the increase. These increases were partially offset by a $0.4 million decrease in spending on our other preclinical programs.
General and Administrative Expenses
General and administrative expenses were $3.3 million for the three months ended June 30, 2022, compared with $2.9 million for the three months ended June 30, 2021, an increase of $0.3 million. This was due primarily to an increase in costs for personnel and related expenses.
 
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Other Income (Expense)
Other income was $1.9 million for the three months ended June 30, 2022, compared with $5.3 million for the three months ended June 30, 2021, a decrease in of $3.4 million. The decrease in other income was due primarily to the
non-cash
gain of $1.9 million in the current year period compared to $5.3 million in the prior year period, both resulting from the change in fair value of our warrant liabilities in each reporting period.
Comparison of Six Months Ended June 30, 2022 and 2021
Research and Development Expenses
Research and development expenses were $29.5 million for the six months ended June 30, 2022 compared with $15.8 million for the six months ended June 30, 2021, an increase of $13.7 million. This increase was primarily attributable to a $10.0 million increase in spending on manufacturing costs and a $3.7 million increase in spending on clinical activities as we continued to enroll patients and expand the number of clinical sites in the Phase 3 DISRUPT study of exebacase.
General and Administrative Expenses
General and administrative expense was $6.5 million for the six months ended June 30, 2022, compared with $5.7 million for the six months ended June 30, 2021, an increase of $0.8 million. This increase was primarily attributable to increases of $0.5 million in administrative personnel costs, a $0.2 million in legal fees, and $0.2 million in insurance costs.
Other Income (Expense)
Other expense was $2.2 million for the six months ended June 30, 2022, compared with other income of $10.9 million for the six months ended June 30, 2021, an increase in expense of $13.1 million. The increase in other expense relates primarily to the non-cash charge of $2.3 million in the current year period compared to a
non-cash
gain of $10.9 million in the prior year period, resulting from the change in fair value of our warrant liabilities at each reporting 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, funding received from government contracts and granting organizations. 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 IPO, 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 $23.2 million of funding from grant agreements and government contracts.
On August 14, 2020, we filed a 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 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 estimated 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 shelf registration statement 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.
As of June 30, 2022, we had approximately $27.3 million in cash, cash equivalents and marketable securities which we do not believe will be sufficient to meet our obligations within the next twelve months from the date of issuance of our consolidated financial statements that are included elsewhere in this Quarterly Report on Form
10-Q.
Combined with our accumulated deficit and our forecasted cash expenditures, these factors raise substantial doubt about our ability to continue as a going concern.
 
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As such, under the requirements of Accounting Standard Codification (“ASC”)
205-40,
we may not consider the potential for future capital raises in our assessment of our ability to meet our obligations for the next twelve months. We plan to continue to fund our operations through public or private debt and equity financings, but there can be no assurances that such financing will continue to be available to us on acceptable terms, or at all, particularly in light of the Trial Closure and the recent substantial decline in the price of our common stock, and the terms of any public or private offerings of stock could be significantly dilutive to existing stockholders. We recently implemented a restructuring plan resulting in a reduction to our workforce of 16 employees, or approximately 37% of the Company’s headcount as of June 30, 2022. If we are unable to obtain funding, we would be forced to delay, further reduce our workforce or reduce or eliminate our research and development programs, which could adversely affect our business prospects, or we may be unable to continue operations or continue as a going concern. In accordance with the requirements of ASC
205-40,
we have concluded that substantial doubt exists about our ability to continue as a going concern for twelve months from the date of issuance of our consolidated financial statements that are included elsewhere in this Quarterly Report on Form
10-Q.
In the past, we have obtained grants to supplement our financings with
non-dilutive
funding, including grants from
CARB-X,
USAMRDC and our cost-sharing contract with BARDA. Our grant programs under
CARB-X
have ended. We may continue to pursue further
non-dilutive
funding opportunities. In addition, there can be no assurances that we will receive the maximum potential funding to the Company under any of our ongoing agreements.
Cash Flows
The following table provides information regarding our cash flows for the six months ended June 30, 2022 and 2021 (in thousands):
 
    
Six Months Ended June 30,
 
    
2022
    
2021
 
Net cash (used in) provided by:
     
Operating activities
   $ (26,352    $ (21,504
Investing activities
   $ 19,247      $ (26,482
Financing activities
   $ —        $ 53,907  
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 six months ended June 30, 2022 increased by $4.9 million compared to the same period in 2021, due primarily to increased payments to our contract research organizations in support of our Phase 3 DISRUPT trial of exebacase and to our contract manufacturing organizations for completion of the exebacase process transfer and ongoing analytical and process validation activities in the first six months of 2022.
Net Cash Provided by Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2022 were from the proceeds received from the maturities of marketable securities. Net cash used in investing activities for the six months ended June 30, 2021 was from the purchases of marketable securities less the proceeds received from the maturities of marketable securities.
Net Cash Provided by Financing Activities
There was no net cash provided by or used in financing activities for the six months ended June 30, 2022. Net cash provided by financing activities for the six months ended June 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.
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:
 
   
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;
 
   
add operational, financial and management information systems and personnel, including personnel to support our product development and future commercialization efforts;
 
   
seek marketing approvals for our product candidates that successfully complete clinical trials;
 
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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;
 
   
seek to identify additional product candidates;
 
   
acquire or
in-license
other products and technologies; and
 
   
maintain, leverage and expand our intellectual property portfolio.
For a description of our contractual obligations, see Note 7, “Commitments and Contingencies” to the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form
10-Q.
Without additional funding, we believe we will not have sufficient funds to meet our obligations within the next twelve months from the date of issuance of our consolidated financial statements that are included elsewhere in this Quarterly Report on Form
10-Q.
We plan to continue to fund our operations through public or private debt and equity financings, but there can be no assurances that such financing will be available to us on satisfactory terms, or at all, particularly in light of the Trial Closure. We recently implemented a restructuring plan resulting in a reduction to our workforce of 16 employees, or approximately 37% of the Company’s headcount as of June 30, 2022. If we are unable to obtain funding, we would be forced to delay, further reduce our workforce or reduce or eliminate our research and development programs, which could adversely affect our business prospects, or we may be unable to continue operations or continue as a going concern. In accordance with the requirements of ASC
205-40,
we have concluded that substantial doubt exists about our ability to continue as a going concern. 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 supplement our financings with
non-dilutive
funding, including grants and our cost-sharing contract with BARDA, but there can be no assurances that we will receive the maximum potential funding to the Company under such arrangements.
Our future capital requirements will depend on many factors, including:
 
   
the 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 product candidates;
 
   
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.
 
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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. We continue to monitor the impact of inflationary pressures on purchases and new contractual commitments.
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 June 30, 2022, we had cash, cash equivalents and marketable securities of $27.3 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 50% change in interest rates were to have immediately occurred on June 30, 2022, this change would not have had a material effect on the fair value of our investment portfolio as of that date.
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 June 30, 2022.
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 June 30, 2022 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 June 30, 2022 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.
 
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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.
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 losses from operations for the six months ended June 30, 2022 and the years ended December 31, 2021 and 2020 were $38.2 million, $47.3 million, and $34.2 million, respectively. We have devoted substantially all of our efforts to research and development. We expect to continue to incur significant expenses and 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 any future commercialization efforts.
Our recurring losses from operations raise substantial doubt regarding our ability to continue as a going concern.
We currently operate with limited resources. We have incurred significant losses since our inception and have never generated revenue or profit, and it is possible we will never generate revenue or profit. Based on our current operating plans, and without additional funding, we believe we will not have sufficient funds to meet our obligations within the next twelve months from the issuance of our consolidated financial statements that are included elsewhere in this Quarterly Report on Form
10-Q.
These factors raise substantial doubt about our ability to continue as a going concern. We have relied on our ability to fund our operations primarily through public and private debt and equity financings, and, to a lesser extent, funding received from government contracts and granting organizations, but there can be no assurances that such financing or funding will continue to be available to us on satisfactory terms, or at all.
Securing additional financing may divert our management from our
day-to-day
activities, which may adversely affect our ability to develop any of our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all, particularly in light of our stopping patient enrollment in our Phase 3 trial of exebacase based on the recommendation of the Data Safety Monitoring Board (“DSMB”) that the trial be stopped because the conditional power of the study was below the pre-specified threshold for futility (the “Trial Closure”). We recently implemented a restructuring plan resulting in a reduction to our workforce of 16 employees, or approximately 37% of the Company’s headcount as of June 30, 2022. If we are unable to obtain funding, we would be forced to further reduce our workforce or delay, reduce or eliminate our research and development programs, which could adversely affect our business prospects, or we may be unable to continue operations or continue as a going concern.
 
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The recent substantial decline in the price per share of our common stock will likely make it more difficult for us to obtain financing. If potential collaborators decline to do business with us or potential investors decline to participate in any future financings due to such concerns, our ability to increase our cash position may be limited. The perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.
We have prepared our consolidated financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Our consolidated financial statements included in this Quarterly Report on Form
10-Q
do not include any adjustments to reflect the possible inability of the Company to continue as a going concern within one year after the issuance of such financial statements. If we are unable to continue as a going concern, you could lose all or part of your investment in our Company.
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.
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 will need to obtain substantial additional funding in connection with our continuing operations, particularly if we continue the clinical development of exebacase or develop new product candidates or acquire new product candidates or technologies. We recently implemented a restructuring plan resulting in a reduction to our workforce of 16 employees, or approximately 37% of the Company’s headcount as of June 30, 2022. If we are unable to raise capital when needed or on attractive terms, we could be forced to further reduce our workforce or 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, the current conflict between Russia and Ukraine and interest rate increases. As a result, we may face difficulties raising capital through sales of our common stock and any such sales may be on unfavorable terms.
 
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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 the BARDA Contract and our grant agreements;
 
   
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;
 
   
the scope, progress, results and costs of product development for our product candidates; and
 
   
the effects of the
COVID-19
pandemic, global supply chain disruptions, international political instability, and rising inflation and interest rates 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. For example, we recently stopped patient enrollment in our Phase 3 trial of exebacase based on the recommendation of the DSMB that the trial be stopped because the conditional power of the study was below the pre-specified threshold for futility.
In addition, if approved, any of our product candidates that we develop may not achieve commercial success. Accordingly, we may need to continue to rely on additional financing to achieve our business objectives and to continue as a going concern. 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.
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.
 
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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 completion of the base period, the BARDA Contract may provide funding in support of the completion of the Phase 3 clinical trial of exebacase. 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 Phase 3 DISRUPT trial.
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; 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