QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
(Address of principal executive offices) |
(Zip Code) | |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
| Emerging growth company | ||||||
CONTRAFECT CORPORATION
INDEX
| Page No. | ||||||
| PART I – FINANCIAL INFORMATION |
||||||
| Item 1. |
Financial Statements | 1 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||||
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 26 | ||||
| Item 4. |
Controls and Procedures | 26 | ||||
| PART II – OTHER INFORMATION |
||||||
| Item 1. |
Legal Proceedings | 27 | ||||
| Item 1A. |
Risk Factors | 27 | ||||
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 58 | ||||
| Item 3. |
Defaults Upon Senior Securities | 58 | ||||
| Item 4. |
Mine Safety Disclosures | 58 | ||||
| Item 5. |
Other Information | 58 | ||||
| Item 6. |
Exhibits | 59 | ||||
| 60 | ||||||
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; |
| • | anticipated reductions in operating expenses; |
| • | 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.
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. |
| • | Developments by competitors may render our products or technologies obsolete or non-competitive. |
i
| • | 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, including as a result of healthcare reform measures. |
| • | We may not successfully execute or achieve the expected benefits of our restructuring program and other cost saving measures we may take in the future, and our efforts may result in further actions and may adversely affect our business, financial condition and results of operations. |
| • | 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. |
| • | We currently do not meet certain of Nasdaq Capital Market’s continued listing requirements and other Nasdaq rules. If we are unable to regain compliance, we are likely to be delisted. Delisting could negatively affect the price of our common stock and could make it more difficult for us to sell securities in a future financing or for you to sell our common stock. |
| • | 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
ITEM 1. |
FINANCIAL STATEMENTS |
September 30, 2022 |
December 31, 2021 |
|||||||
(unaudited) |
(audited) |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | $ | ||||||
Marketable securities |
||||||||
Prepaid expenses |
||||||||
Other current assets |
||||||||
Total current assets |
||||||||
Property and equipment, net |
||||||||
Operating lease right-of-use |
||||||||
Other assets |
||||||||
Total assets |
$ | $ | ||||||
Liabilities and stockholders’ (deficit) equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | $ | ||||||
Accrued and other current liabilities |
||||||||
Current portion of lease liabilities |
||||||||
Total current liabilities |
||||||||
Warrant liabilities |
||||||||
Long-term portion of lease liabilities |
||||||||
Other liabilities |
||||||||
Total liabilities |
||||||||
Commitments and contingencies |
||||||||
Stockholders’ (deficit) equity: |
||||||||
Preferred stock, $ |
||||||||
Common stock, $ |
||||||||
Additional paid-in capital |
||||||||
Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
Accumulated deficit |
( |
) | ( |
) | ||||
Total stockholders’ (deficit) equity |
( |
) | ||||||
Total liabilities and stockholders’ (deficit) equity |
$ | $ | ||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Operating expenses |
||||||||||||||||
Research and development |
$ | $ | $ | $ | ||||||||||||
General and administrative |
||||||||||||||||
Restructuring |
— | — | ||||||||||||||
Total operating expenses |
||||||||||||||||
Loss from operations |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other income: |
||||||||||||||||
Interest income , net |
||||||||||||||||
Change in fair value of warrant liabilities |
||||||||||||||||
Total other income, net |
||||||||||||||||
Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Per share information: |
||||||||||||||||
Basic and diluted net loss per share |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Shares used in computing net loss per share |
||||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Other comprehensive loss: |
||||||||||||||||
| Unrealized gain (loss) on available-for-sale |
( |
) | ( |
) | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| |
|
|
|
|
|
|
|
|||||||||
Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Stockholders’ (Deficit) Equity |
||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||
Balance, December 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
Stock-based compensation |
— | — | — | — | ||||||||||||||||||||
Unrealized loss on marketable securities |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Balance, March 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
Stock-based compensation |
— | — | — | — | ||||||||||||||||||||
Unrealized gain on marketable securities |
— | — | — | — | ||||||||||||||||||||
Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Balance, June 30, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
Stock-based compensation |
— | — | — | — | ||||||||||||||||||||
Unrealized gain on marketable securities |
— | — | — | — | ||||||||||||||||||||
Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Balance, September 30, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||
Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Stockholders’ Equity |
||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||
Balance, December 31, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
Issuance of securities in registered offering |
— | — | ||||||||||||||||||||||
Financing cost of sale of securities |
— | — | ( |
) | — | — | ( |
) | ||||||||||||||||
Issuance of common stock for exercise of warrants |
— | — | — | |||||||||||||||||||||
Stock-based compensation |
— | — | — | — | ||||||||||||||||||||
Unrealized loss on marketable securities |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Balance, March 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
Stock-based compensation |
— | — | — | — | ||||||||||||||||||||
Unrealized loss on marketable securities |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Balance, June 30, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
Stock-based compensation |
— | — | — | — | ||||||||||||||||||||
Unrealized loss on marketable securities |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Balance, September 30, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
Nine Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
||||||||
Stock-based compensation expense |
||||||||
Change in fair value of warrant liabilities |
( |
) | ( |
) | ||||
Net amortization of premium on marketable securities |
||||||||
Changes in operating assets and liabilities: |
||||||||
Decrease (increase) in prepaid expenses and other current and non-current assets |
( |
) | ||||||
Increase in accounts payable, accrued and other current liabilities |
||||||||
Net cash used in operating activities |
( |
) | ( |
) | ||||
Cash flows from investing activities |
||||||||
Purchases of marketable securities |
( |
) | ||||||
Sales of marketable securities |
— |
|||||||
Proceeds from maturities of marketable securities |
||||||||
Purchases of property and equipment |
( |
) |
— |
|||||
Net cash provided by (used in) investing activities |
( |
) | ||||||
Cash flows from financing activities |
||||||||
Proceeds from issuance of securities |
— | |||||||
Payment of financing costs of securities sold |
— | ( |
) | |||||
Proceeds from the exercise of warrants |
— | |||||||
Net cash provided by financing activities |
— | |||||||
Net (decrease) increase in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents at beginning of period |
||||||||
Cash and cash equivalents at end of period |
$ | $ | ||||||
| Marketable Securities |
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
||||||||||||
| Current: |
||||||||||||||||
| Corporate debt |
$ | $ | $ | ( |
) | $ | ||||||||||
| Marketable Securities |
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
||||||||||||
| Current: |
||||||||||||||||
| Corporate debt |
$ | $ | $ | ( |
) | $ | ||||||||||
Fair Value Measurement as of September 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 |
$ | $ | — | $ | — | |||||||
| Marketable securities |
— | — | ||||||||||
| Warrant liabilities |
— | — | ||||||||||
| |
|
|
|
|
|
|||||||
| Total |
$ | $ | — | $ | ||||||||
| |
|
|
|
|
|
|||||||
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 |
$ | $ | — | $ | — | |||||||
| Marketable securities |
— | — | ||||||||||
| Warrant liabilities |
— | — | ||||||||||
| |
|
|
|
|
|
|||||||
| Total |
$ | $ | — | $ | ||||||||
| |
|
|
|
|
|
|||||||
As of September 30, 2022 |
As of December 31, 2021 |
|||||||
| Expected volatility |
% | % | ||||||
| Remaining contractual term (in years) |
||||||||
| Risk-free interest rate |
% | % | ||||||
| Expected dividend yield |
— | % | — | % | ||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Balance at beginning of period |
$ | $ | $ | $ | ||||||||||||
| (Decrease) increase in fair value (1) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Balance at end of period |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| (1) | The change in fair values of the warrant liabilities is recorded in other income in the consolidated statement of operations. |
September 30, 2022 |
December 31, 2021 |
|||||||
Accrued research and development service fees |
$ | $ | ||||||
Accrued compensation costs |
||||||||
Accrued professional fees |
||||||||
Accrued facilities operation expenses |
||||||||
Other accrued expenses |
||||||||
Total accrued liabilities |
$ | $ | ||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Weighted average shares of common stock outstanding |
||||||||||||||||
Net loss per share of common stock – basic and diluted |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
September 30, |
||||||||
2022 |
2021 |
|||||||
Options to purchase common stock |
||||||||
Warrants to purchase common stock |
||||||||
Total |
||||||||
Description |
September 30, 2022 |
December 31, 2021 |
||||||
Operating lease liabilities: |
||||||||
Current portion of lease liabilities |
$ | $ | ||||||
Long-term portion of lease liabilities |
$ | $ | ||||||
Amount |
||||
October 1, 2022 - December 31, 2022 |
$ | |||
Year ending December 31: |
||||
2023 |
||||
2024 |
||||
2025 |
||||
2026 |
||||
Thereafter |
||||
Total lease payments |
||||
Less: Present value adjustment |
( |
) | ||
Operating lease liabilities |
$ | |||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Operating lease cost (1) |
$ | $ | $ | $ | ||||||||||||
Variable lease costs (2) |
||||||||||||||||
Total lease cost |
$ | $ | $ | $ | ||||||||||||
| (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. |
| • | 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 |
Amount |
||||
Employee termination costs and other related expenses |
$ |
|||
Write-off of prepaid manufacturing costs |
$ |
|||
Total |
$ |
|||
As of September 30, 2022 |
||||
Balance at beginning of period |
$ |
|||
Charge to expense |
||||
Payments made |
( |
) | ||
Balance at end of period |
$ |
|||
September 30, 2022 |
December 31, 2021 |
|||||||
Outstanding options to purchase common stock |
||||||||
Outstanding warrants to purchase common stock |
||||||||
For future issuance under the 2014 Omnibus Incentive Plan |
||||||||
For future issuance under the 2021 Employment Inducement Plan |
||||||||
September 30, 2022 |
December 31, 2021 |
|||||||
2020 Warrants |
||||||||
2017 Warrants |
||||||||
Pfizer Warrant |
||||||||
Other warrants (1) |
||||||||
Warrants to purchase common stock |
||||||||
Weighted-average exercise price per share |
$ | $ | ||||||
| (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. |
Exercise Prices |
Shares Underlying Outstanding Warrants |
Expiration Date | ||||
$ |
||||||
Number of Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (in years) |
Aggregate Intrinsic Value |
|||||||||||||
Options outstanding at December 31, 2021 |
$ | |||||||||||||||
Granted |
||||||||||||||||
Exercised |
||||||||||||||||
Expired |
( |
) | ||||||||||||||
Forfeited |
( |
) | ||||||||||||||
Options outstanding at September 30, 2022 |
$ | |||||||||||||||
Vested and exercisable at September 30, 2022 |
$ | |||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Risk free interest rate |
% | % | % | % | ||||||||||||
Expected dividend yield |
||||||||||||||||
Expected term (in years) |
||||||||||||||||
Expected volatility |
% | % | % | % | ||||||||||||
| 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 was used to support the pivotal Phase 3 DISRUPT superiority trial of exebacase. Following the interim futility analysis and the stopping of patient enrollment, on August 24, 2022, the BARDA Contract was modified to provide for and exercise an option by BARDA to provide up to $6.6 million in funding to support a futility outcome root-cause analysis and the close-out of the Phase 3 DISRUPT study 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. 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 prior to the reduction. This reduction included the resignation of Cara Cassino, M.D. as Chief Medical Officer and Executive Vice President of Research and Development of the Company. We recognized a restructuring charge in the third quarter of 2022 of approximately $7.7 million, including $1.6 million related to employee termination costs, and $6.1 million from the write-off of prepaid manufacturing costs which, as of September 30, 2022, will result in future cash expenditures of up to $7.4 million.
18
We have never been profitable and our operating losses were $55.3 million, $47.3 million and $34.2 million for the nine months ended September 30, 2022 and the years ended December 31, 2021 and 2020, respectively. As of September 30, 2022, we had an accumulated deficit of $315.9 million and we had approximately $17.6 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. Moreover, if we are delisted from the Nasdaq Stock Market LLC, it may become more difficult for us to obtain equity financing. For additional information regarding risks associated with potential delisting, see Part II, Item 1A, “We are required to meet the Nasdaq Capital Market’s continued listing requirements and other Nasdaq rules, or we may risk delisting. Delisting could negatively affect the price of our common stock and could make it more difficult for us to sell securities in a future financing or for you to sell our common stock.” 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.
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.
19
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.
On September 30, 2022, we submitted a Clinical Trial Authorization (“CTA”) with the French National Agency for the Safety of Medicines and Health Products (“ANSM”) for the study of intra-articular exebacase in patients with chronic prosthetic joint infections of the knee due to S. aureus or coagulase-negative Staphylococci, which was subsequently accepted for review. If the CTA is approved by ANSM, we expect to initiate dosing patients in the study in the first quarter of 2023 and to report early clinical data from the first cohort of patients in the second half of 2023.
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 plan to submit an Investigational New Drug (“IND”) application with the FDA for CF-370 in the first quarter of 2023 and, if approved, to initiate phase 1 clinical studies of CF-370 in healthy volunteers in the second quarter of 2023.
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 IND-enabling studies.
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 $10.8 million and $8.7 million of research and development expenses for the three months ended September 30, 2022 and 2021 and $40.3 million and $24.5 million, respectively, for the nine 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.
20
The following table summarizes our research and development expenses by category for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Product development |
$ | 8,634 | $ | 7,842 | $ | 33,650 | $ | 19,970 | ||||||||
| Personnel related |
1,472 | 2,357 | 6,282 | 6,270 | ||||||||||||
| Professional fees |
760 | 879 | 2,895 | 2,701 | ||||||||||||
| Laboratory costs |
470 | 433 | 1,559 | 1,132 | ||||||||||||
| Stock-based compensation |
258 | 264 | 788 | 710 | ||||||||||||
| External research and licensing costs |
78 | 599 | 325 | 1,357 | ||||||||||||
| Expenses reimbursed by grants |
(858 | ) | (3,710 | ) | (5,200 | ) | (7,678 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total research and development expense |
$ | 10,814 | $ | 8,664 | $ | 40,299 | $ | 24,462 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following table summarizes our research and development expenses by program for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Exebacase |
$ | 7,601 | $ | 6,321 | $ | 30,085 | $ | 15,862 | ||||||||
| CF-370 |
1,670 | 1,164 | 5,935 | 3,307 | ||||||||||||
| Other research and development |
671 | 2,268 | 2,408 | 5,991 | ||||||||||||
| Personnel related and stock-based compensation |
1,730 | 2,621 | 7,071 | 6,980 | ||||||||||||
| Expenses reimbursed by grants |
(858 | ) | (3,710 | ) | (5,200 | ) | (7,678 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total research and development expense |
$ | 10,814 | $ | 8,664 | $ | 40,299 | $ | 24,462 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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 and suspension of IV exebacase manufacturing activities 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; |
| • | third-party manufacturing of our product candidates and the active pharmaceutical ingredients for our product candidates; |
| • | 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.
Restructuring
In connection with our decision to stop the Phase 3 DISRUPT trial, suspend CMC activities related to the potential commercialization of IV exebacase and our restructuring plan, we expect that our future operating expenses will be substantially reduced. We currently expect our research and development and general and administrative expenses to be lower for the remainder of 2022 as we operate pursuant to our restructuring plan. In connection with our restructuring, approximately $7.7 million, including $1.6 million related to employee termination costs, including severance, health benefits and other related expenses from the workforce reduction, and $6.1 million from the write-off of prepaid manufacturing costs following the suspension of IV exebacase activities.
21
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 nine-months ended September 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
The following table summarizes key components of our results of operations for the periods indicated (in thousands).
| Three Months Ended September 30, |
Dollar Change | Nine Months Ended September 30, |
Dollar Change | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||
| Research and development |
$ | 10,814 | $ | 8,664 | $ | 2,150 | $ | 40,299 | $ | 24,462 | $ | 15,837 | ||||||||||||
| General and administrative |
$ | 3,366 | $ | 3,022 | $ | 344 | $ | 9,886 | $ | 8,722 | $ | 1,164 | ||||||||||||
| Restructuring |
$ | 7,719 | $ | — | $ | 7,719 | $ | 7,719 | $ | — | $ | 7,719 | ||||||||||||
| Other income, net |
$ | 4,832 | $ | 6,394 | $ | (1,562 | ) | $ | 2,591 | $ | 17,301 | $ | (14,710 | ) | ||||||||||
Comparison of Three Months Ended September 30, 2022 and 2021
Research and Development Expenses
Research and development expenses were $10.8 million for the three months ended September 30, 2022 compared with $8.7 million for the three months ended September 30, 2021, an increase of $2.1 million. This increase was primarily attributable to a $1.8 million increase in spending on clinical activities as we stopped enrollment of patients in the Phase 3 DISRUPT study of exebacase and continued patient follow-up procedures and monitoring and a $0.5 million increase in spending on non-clinical studies of CF-370 to support a potential IND application and the completion of ongoing non-clinical studies of exebacase. A $2.8 million decrease in the reimbursable expenditures under our grants and BARDA contract contributed to the increase. These increases were partially offset by a $1.5 million decrease in manufacturing expenses due to the suspension of CMC activities related to the potential commercialization of exebacase, a $0.9 million decrease in spending on our development personnel as a result of our restructuring plan and a $0.5 million decrease in external research expenditures on our other discovery programs.
General and Administrative Expenses
General and administrative expenses were $3.4 million for the three months ended September 30, 2022, compared with $3.0 million for the three months ended September 30, 2021, an increase of $0.4 million. This was due primarily to a $0.3 million increase in legal fees and $0.1 million increase in stock-based compensation expense.
Restructuring Charges
During the three months ended September 30, 2022, we incurred restructuring expenses of $7.7 million related to our restructuring plan. Restructuring expenses for the period were primarily comprised of $1.6 million of severance and other employee costs and a $6.1 million write-off of prepaid manufacturing costs. For further information, refer to Note 8, “Restructuring” to the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
22
Other Income, Net
Other income, net was $4.8 million for the three months ended September 30, 2022, compared with $6.4 million for the three months ended September 30, 2021, a decrease in of $1.6 million. The decrease in other income was due to the non-cash gain resulting from the change in fair value of our warrant liabilities in each reporting period.
Comparison of Nine Months Ended September 30, 2022 and 2021
Research and Development Expenses
Research and development expenses were $40.3 million for the nine months ended September 30, 2022 compared with $24.5 million for the nine months ended September 30, 2021, an increase of $15.8 million. This increase was primarily attributable to a $8.3 million increase in spending on manufacturing costs for both exebacase and CF-370 and a $4.9 million increase in spending on clinical activities related to the Phase 3 DISRUPT study of exebacase. A $2.5 million decrease in the reimbursable expenditures under our grants and BARDA contract contributed to the increase.
General and Administrative Expenses
General and administrative expense was $9.9 million for the nine months ended September 30, 2022, compared with $8.7 million for the nine months ended September 30, 2021, an increase of $1.2 million. This increase was primarily attributable to increases of $0.6 million in administrative personnel costs, including $0.5 million of stock-based compensation expense, a $0.5 million in legal fees, and $0.1 million in insurance costs.
Restructuring Charges
During the nine months ended September 30, 2022, we incurred restructuring expenses of $7.7 million related to our restructuring plan in the third quarter of 2022. Restructuring expenses for the period were primarily comprised of $1.6 million of severance and other employee costs and a $6.1 million write-off of prepaid manufacturing costs. For further information, refer to Note 8, “Restructuring” to the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Other Income, Net
Other income, net was $2.6 million for the nine months ended September 30, 2022, compared with $17.3 million for the nine months ended September 30, 2021, a decrease of $14.7 million. The decrease in other income relates primarily to the non-cash gain resulting from the change in fair value of our warrant liabilities in 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 $25.6 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 September 30, 2022, we had approximately $17.6 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.
23
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 to reduce costs and align resources with our anticipated product development milestones for exebacase and CF-370 and to help preserve the value of our drug discovery operations, resulting in a reduction to our workforce of 16 employees, or approximately 37% of the Company’s headcount prior to the reduction and the suspension of CMC activities related to the potential commercialization of exebacase. 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 and have initiated proposal processes with government agencies for potential non-dilutive funding for the advancement of lysins as biodefense agents. However, there can be no assurances that we will be successful in obtaining new non-dilutive funding or 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 nine months ended September 30, 2022 and 2021 (in thousands):
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash (used in) provided by: |
||||||||
| Operating activities |
$ | (36,006 | ) | $ | (32,557 | ) | ||
| Investing activities |
$ | 24,016 | $ | (16,610 | ) | |||
| 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 nine months ended September 30, 2022 increased by $3.4 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 nine months of 2022. In connection with our decision to stop the Phase 3 DISRUPT trial, suspend CMC activities related to the potential commercialization of exebacase and our restructuring plan, we expect that our operating expenses for the remainder of 2022 will be substantially reduced.
Net Cash Provided by Investing Activities
Net cash provided by investing activities for the nine months ended September 30, 2022 were from the proceeds received from the sales and maturities of marketable securities. Net cash used in investing activities for the nine months ended September 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 nine months ended September 30, 2022. Net cash provided by financing activities for the nine months ended September 30, 2021 resulted from the $53.8 million of net proceeds from our March 22, 2021 offering of securities and $0.1 million of proceeds from the exercise of warrants.
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; |
24
| • | 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 to reduce costs and align resources with our anticipated product development milestones for exebacase and CF-370 and to help preserve the value of our drug discovery operations, resulting in a reduction to our workforce of 16 employees, or approximately 37% of the Company’s headcount prior to the reduction and the suspension of CMC activities related to the potential commercialization of exebacase. 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; |
| • | costs associated with manufacturing of our product candidates and the active pharmaceutical ingredients for our product candidates; |
| • | 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.
25
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.
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 September 30, 2022, we had cash, cash equivalents and marketable securities of $17.6 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 a material 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 September 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 September 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 September 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 September 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
26
PART II – OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
We are not a party to any material legal proceedings at this time. From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are party to any claim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
| ITEM 1A. | RISK FACTORS |
You should carefully consider the following risk factors, as well as the other information in this report, and in our other public filings. Our business, financial condition and operating results can be affected by a number of important factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, results of operations and common stock price. Other factors may exist that we do not consider significant based on information that is currently available. In addition, new risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect us. Past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
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 nine months ended September 30, 2022 and the years ended December 31, 2021 and 2020 were $55.3 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.
27
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 to reduce costs and align resources with our anticipated product development milestones for exebacase and CF-370 and to help preserve the value of our drug discovery operations, resulting in a reduction to our workforce of 16 employees, or approximately 37% of the Company’s headcount prior to the reduction and the suspension of CMC activities related to the potential commercialization of exebacase. 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.
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.
28
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 prior to the reduction. 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.
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.
29
The timing of the milestone and royalty payments we are required to make under certain agreements to Rockefeller is uncertain and could adversely affect our cash flows and results of operations.
We are party to certain agreements with Rockefeller pursuant to which we have acquired licenses to certain patents and patent applications and other intellectual property related to a series of compounds, including exebacase to develop and commercialize therapeutics. Under our agreements with Rockefeller, we have obligations to achieve diligence minimums and to make payments upon achievement of specified development and regulatory milestones. We will also make additional payments upon the achievement of future sales milestones and for royalties on future net sales.
The timing of milestone payments under our licenses and sponsored research agreements is subject to factors relating to the clinical and regulatory development and commercialization of products, many of which are beyond our control. We may become obligated to make a milestone payment when we do not have the cash on hand to make such payment, which could require us to delay our clinical trials, curtail our operations, scale back our commercialization and marketing efforts or seek funds to meet these obligations on terms unfavorable to us.
If BARDA were to eliminate, reduce, or delay funding for our BARDA Contract, we would experience a negative impact on our programs associated with such funding.
On March 10, 2021, we executed a cost-share contract from BARDA, part of the Office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services. Under the terms of the BARDA Contract, the Company will receive $9.8 million in initial funding during the base period. Following the interim futility analysis and the stopping of patient enrollment, on August 24, 2022, the BARDA Contract was modified to provide for and exercise an option by BARDA to provide up to $6.6 million in funding to support a futility outcome rootcause analysis and the close-out of the Phase 3 DISRUPT study 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 pre-change tax attributes to offset its post-change income may be limited. As a result of our past transactions, we may have experienced an “ownership change.” At this time, we have not completed a study to assess whether an ownership change under Section 382 of the Code has occurred, or whether there have been multiple ownership changes since our formation, due to the costs and complexities associated with such a study. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. Thus, our ability to utilize carryforwards of our net operating losses and other tax attributes to reduce future tax liabilities may be substantially restricted. Further, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, we may not be able to take full advantage of these carryforwards for federal or state tax purposes. As of December 31, 2021, we had federal and state net operating loss carryforwards of approximately $275.5 million and $293.9 million, respectively, and federal research and development credits of approximately $5.0 million, the use of which could be limited or eliminated by virtue of one or more “ownership changes.”
30
Risks Related to the Discovery, Development and Commercialization of Our Product Candidates
The COVID-19 pandemic or other pandemics, epidemics or outbreaks of an infectious disease may materially and adversely impact our business, including our preclinical studies and clinical trials.
The measures taken in response to the evolving COVID-19 pandemic have had a significant impact on the economy and, to a lesser extent, both directly and indirectly, on our business. We adjusted our business operations, with a majority of our employees working remotely. Our Phase 3 DISRUPT clinical trial was also affected, as clinical sites experienced periodic delays in new patient enrollment.
As a result of the COVID-19 pandemic, the spread of variants of the virus or another pandemic, epidemic or outbreak of an infectious disease, we may experience disruptions that could severely impact our business, preclinical studies and clinical trials, including:
| • | delays or difficulties in enrolling patients in our clinical trials; |
| • | delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and staff; |
| • | increased rates of patients withdrawing from our clinical trials following enrollment as a result of contracting COVID-19 or other health conditions or being forced to quarantine; |
| • | interruption of key clinical trial activities, such as clinical trial site data monitoring and efficacy and safety data collection, processing and analyses, due to limitations on travel imposed or recommended by federal, state or local governments, employers and others or interruption of clinical trial subject visits, which may impact the collection and integrity of subject data and clinical study endpoints; |
| • | interruption of, or delays in receiving, supplies of our products and product candidates from our contract manufacturing organizations due to staffing shortages, production slowdowns or stoppages and disruptions in supply or delivery systems; |
| • | delays in receiving authorization from local regulatory authorities to initiate our planned clinical trials; |
| • | changes in regulations as part of a response to the COVID-19 pandemic which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether; |
| • | delays in necessary interactions with regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government or contractor personnel; |
| • | diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials; |
| • | delays in preclinical studies due to restricted or limited operations resulting from restrictions on our on-site activities; |
| • | interruption or delays of our sourced discovery and clinical activities; and |
| • | the ability of our contract research organizations (“CROs”), contract manufacturing organizations and suppliers to meet their contractual obligations in connection with the conduct of our clinical trial for our current product candidate and for any future product candidate. |
The extent to which the pandemic further impacts our business, results of operations and financial condition, including expenses, research and development costs, procurement of raw materials for our supply chain, and clinical trial progress, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic and future waves of infection, including the spread of variants of the virus, the availability, adoption and effectiveness of vaccines and treatments, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. If we or any of the third parties with whom we engage were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively impacted. Additionally, concerns over the economic impact of COVID-19 pandemic have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price and our ability to access capital markets.
31
We are heavily dependent on the success of our leading product candidates. The approval process of the FDA and comparable foreign regulatory authorities is lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for any of our product candidates, our business will be substantially harmed.
Our near-term business prospects are substantially dependent on our ability to develop our product candidates. 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. The Company continues to monitor <20 already enrolled patients as they complete their follow-up visits and to perform ongoing data review. We expect that conclusions drawn from the ongoing data review will inform next steps for any potential further development of exebacase. We cannot market or sell any of our product candidates in the United States without FDA approval. To commercialize any product candidate outside of the United States, we will need applicable foreign regulatory approvals. The clinical development of any product candidate is susceptible to the inherent risks of any drug development program, including a failure to achieve efficacy across a broad population of patients, the potential occurrence of severe adverse events and the risks that the FDA or any applicable foreign regulatory authority will determine that a drug product is not approvable.
The process required to obtain approval for commercialization from the FDA and similar foreign authorities is unpredictable, and typically takes many years even after the commencement of clinical trials, depending on numerous factors. In addition, approval policies, regulations, or the type and amount of clinical data necessary to obtain regulatory approval may change during the course of a product’s clinical development may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that any product candidates we may seek to develop in the future will never obtain regulatory approval. Neither we nor any future collaborator is permitted to market any of our product candidates in the United States until we receive regulatory approval of a BLA from the FDA or outside the United States, until we receive similar approval from foreign regulatory authorities.
Prior to obtaining approval to commercialize a product candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA or foreign regulatory agencies, that such product candidates are safe and effective, or in the case of biologics, safe, pure, and potent, for their intended uses. Results from nonclinical studies and clinical trials can be interpreted in different ways. Even if we believe the nonclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. The FDA or other regulatory authorities also require us to conduct additional preclinical studies or clinical trials for our product candidates either prior to or post-approval, or it may object to elements of our clinical development program.
We may fail to obtain regulatory approval for any product candidate for many reasons, including the following:
| • | we may not be able to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that any of our product candidate is safe and effective for any indication; |
| • | the results of clinical trials may not meet the level of clinical or statistical significance required for approval by the FDA or comparable foreign regulatory authorities; |
| • | the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials; |
| • | we may not be able to demonstrate that any of our product candidate’s clinical and other benefits outweigh its safety risks; |
| • | the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval; |
| • | the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials; |
| • | the FDA or comparable foreign regulatory authorities may identify deficiencies in data generated at our clinical trial sites; |
| • | the FDA or comparable foreign regulatory authorities may identify deficiencies in the clinical practices of the third-party CROs we use for clinical trials; and |
| • | the FDA or comparable foreign regulatory authorities may identify deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we or our collaborators enter into agreements for clinical and commercial supplies. |
32
This lengthy approval process as well as the unpredictability of future clinical trial results may prevent us from obtaining regulatory approval to market any of our product candidates, which would significantly harm our business. In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays in obtaining regulatory review and approval. Of the large number of drugs in development, only a small percentage successfully complete the FDA or foreign regulatory approval processes and are commercialized. The lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects.
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 regulatory authorities outside the United States 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 or any of our product candidates.
Before obtaining marketing approval from regulatory authorities for the sale of any of our product candidate, we must complete preclinical development, perform extensive process validation and complete the manufacturing of our initial commercial supply of product to demonstrate robustness, stability, purity and potency of our drug product, and conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products. For example, on July 7, 2022, the DSMB for the Phase 3 DISRUPT study recommended that the trial be stopped because the conditional power of the study was below the pre-specified threshold for futility.
We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:
| • | clinical trials of our product candidates may produce negative or inconclusive results, or significant adverse side effects, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs; |
| • | the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate; |
| • | our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; |
| • | regulators or IRBs (or independent Ethics Committees (“IECs”)) may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site; |
| • | we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites; |
| • | we may voluntarily suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks; |
| • | regulators or IRBs may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks; |
| • | the cost of clinical trials of our product candidates may be greater than we anticipate; |
| • | the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; |
| • | our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators or IRBs (or IECs) to suspend or terminate the trials; or |
| • | the effects of the COVID-19 pandemic. |
33