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 and results of operations in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 24, 2020, as amended by our Annual Report (Amendment No. 1) on Form 10-K/A filed with the SEC on May 20, 2020 (referred to herein as our Annual Report).
In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. These statements are often identified by the use of words such as “believe,” “contemplate,” “continue,” “due,” “goal,” “objective,” “plan,” “seek,” “target,” “expect,” “believe,” “anticipate,” “intend,” “may,” “will,” “would,” “could,” “should,” “potential,” “predict,” “project,” or “estimate,” and similar expressions or variations. These statements are based on the beliefs and assumptions of management based on information currently available to management. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Except as may be required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
These forward-looking statements are subject to numerous risks, including, without limitation, the following:
•We will need significant additional funding to continue our operating activities and make further advancements in certain of our late-stage clinical development programs or develop additional product candidates. As of September 30, 2020, we had an accumulated deficit of $242.6 million. If we are unable to raise capital when needed, we would be forced to delay, reduce, terminate or eliminate our clinical development programs, or eventual commercialization efforts, and/or limit our operations.
•We have entered into and rely on, and may enter into and rely on other, strategic relationships for the further development and commercialization of our product candidates and if we are unable to enter into such relationships on favorable terms or at all, or if such relationships are unsuccessful, if disputes arise between us and our strategic partners or if we fail to trigger contingent payments under such strategic relationships, we may be unable to realize the potential economic benefit of those product candidates.
•Ongoing or future product development activities, including preclinical studies, may not prove successful in demonstrating proof-of concept, or may show adverse toxicological findings, and even if successful may not necessarily predict that subsequent clinical trials will show the requisite safety and efficacy of our product candidates.
•Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.
•Delay or termination of planned clinical trials for our product candidates, including as a result of disruptions caused by the COVID-19 pandemic, could result in unplanned expenses or significantly adversely impact our remaining developmental activities and potential commercial prospects with respect to, and ability to generate potential revenues from, such product candidates.
•We may not be able to achieve the objectives described in the sections entitled “Priority Development Pipeline,” “Pipeline Expansion Opportunities,” “Business Updates” and “Corporate Updates” below. The results of any further development activities may not be sufficient to support a new drug application, or NDA, submission for any of our product candidates, or regulatory approval of our product candidates.
•The regulatory approval processes of the Food and Drug Administration, or FDA, are lengthy, time-consuming and inherently unpredictable and may be disrupted by the COVID-19 pandemic, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
•We specialize solely in developing nitric oxide-based therapeutics to treat a range of diseases with significant unmet needs, and if we do not successfully achieve regulatory approval for any of our product candidates or successfully commercialize them, we may not be able to continue as a business.
•The issuance of shares in additional equity financings or upon exercise of our outstanding warrants and options may cause substantial dilution to our existing stockholders and reduce the trading price of our common stock.
•As a result of our operating losses and negative cash flows from operations, the report of our independent registered public accounting firm on our December 31, 2019 financial statements included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern.
•We rely on third parties to conduct some of our preclinical studies and our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, or are adversely impacted by the COVID-19 pandemic, we may be unable to obtain regulatory approval for or commercialize any of our product candidates.
•We have historically manufactured clinical trial materials internally and we intend to utilize third parties, including Orion Corporation, or Orion, to manufacture components of our clinical trial materials and, potentially, commercial supplies of any approved product candidates. If we do not have sufficient quantities of clinical trial materials at acceptable quality levels and within established timelines, it could adversely impact our development and potential future commercialization of any of our product candidates or result in our breaching our obligations to others.
•Unexpected delays in our ability to manufacture our NVN1000 active pharmaceutical ingredient, or API, or the associated drug product in a deliverable form, whether on a pilot scale in our facility or at a third-party manufacturer for support of our development and/or commercialization activities could adversely affect our development and commercialization timelines and result in increased costs of our development programs.
•We intend to rely on third parties to manufacture raw materials, including our NVN1000 API, and drug product components utilized in clinical trial materials for us and parties with which we contract. Failure to transfer technology and processes to third parties, including any NVN1000 API contract manufacturer and Orion, effectively or failure of those third parties to obtain approval of and maintain compliance with the FDA or comparable regulatory authorities, to provide us with sufficient quantities of raw materials, including API, and drug product components or to provide such raw materials or drug product components at acceptable quality levels or prices could adversely impact our development and potential future commercialization of any of our product candidates or result in our breaching our obligations to others.
•Our product candidates may pose safety issues, cause adverse events, have side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if any.
•Our product candidates, if approved, will face significant competition, and our failure to effectively compete may prevent us from achieving significant market penetration.
•If we are unable to obtain and maintain patent protection for our product candidates, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and product candidates may be impaired.
•If we are unable to establish sales, marketing and distribution capabilities for our product candidates or any future product candidate that receives regulatory approval, either through a commercial partner or internally, we may not be successful in commercializing and generating potential revenues from those product candidates, if approved.
•Changes to our leadership team or operational resources could prove disruptive to our operations and have adverse consequences for our business and operating results.
•We recently broadened the focus of our product development strategy, and there can be no guarantee that these areas of our platform will be successful or profitable.
For a further discussion of risks that could cause or contribute to differences between actual results and those implied by forward-looking statements, see the “Risk Factors” section of our Annual Report and of this Quarterly Report on Form 10-Q.
Novan® is a registered trademark of our company in the United States. This Quarterly Report on Form 10-Q also includes trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q appear without any “™” or “®” symbol, but those
references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of any applicable licensor, to these trademarks and trade names.
Overview
We are a clinical development-stage biotechnology company focused on leveraging nitric oxide’s naturally occurring anti-viral, anti-bacterial, anti-fungal and immunomodulatory mechanisms of action and our proprietary nitric oxide-based technology platform, Nitricil, to generate macromolecular new chemical entities, or NCEs, to treat a range of diseases with significant unmet needs. Nitric oxide plays a vital role in the natural immune system response against microbial pathogens and is a critical regulator of inflammation. Our ability to harness nitric oxide and its multiple mechanisms of action has enabled us to create a platform with the potential to generate differentiated product candidates.
The two key components of our nitric oxide platform are our proprietary Nitricil technology, which drives the creation of NCEs, and our formulation science, both of which we use to tune our product candidates for specific indications. Our ability to deploy nitric oxide in a solid form, on demand and in localized formulations allows us the potential to improve patient outcomes in a variety of diseases.
We have advanced strategic development programs in the field of dermatology, while also further expanding the platform into infectious diseases, companion animal health, men’s and women’s health and gastroenterological, or GI, therapeutic areas. We have clinical-stage dermatology drug candidates with multi-factorial (SB204), anti-viral (SB206), anti-fungal (SB208) and anti-inflammatory (SB414) mechanisms of action. We recently introduced SB207 as a possible product candidate for additional anti-viral programs. We are also conducting preclinical work on NCEs, including berdazimer sodium, and formulations for the potential treatment of (i) coronaviral infections, including SARS-CoV-2, the virus that causes COVID-19; (ii) antimicrobial indications for the adjacent companion animal health market; (iii) cervical intraepithelial neoplasia, or CIN, caused by high-risk human papilloma virus, or HPV, in the men’s and women’s health field (WH504 and WH602); (iv) inflammatory disorders and (v) diseases in the GI field.
During the first nine months of 2020, our primary programmatic focus was on our molluscum contagiosum (SB206) program, and for the remainder of 2020, we intend to focus our clinical-stage development efforts on that program. Following the receipt of verbal and minuted feedback from the Type-C meeting with FDA on April 1, 2020, we sent the proposed protocol to the FDA, manufactured the clinical trial materials at our facility in Morrisville, North Carolina and began the planning and start-up phase for B-SIMPLE4, a pivotal Phase 3 trial for SB206 as a treatment for molluscum. We initiated the B-SIMPLE4 trial in August 2020, and the first patient was enrolled and dosed in September 2020. Completion of patient enrollment is targeted for the first quarter of 2021, and, if the trial is not further impacted by the COVID-19 pandemic, top-line efficacy results would be targeted for the second quarter of 2021.
Further advancement of the molluscum contagiosum (SB206) program beyond the conduct and completion of the B-SIMPLE4 trial, or advancement of any other late-stage clinical program across our platform, is subject to our ability to secure additional capital, and has been and may be further impacted by the COVID-19 pandemic. Additional capital may potentially include (i) equity or debt financings, including through potential sales under the July 2020 Aspire CSPA; or (ii) non-dilutive sources, such as partnerships, collaborations, licensing, grants or other strategic relationships. Any issuance of equity or debt that could be convertible into equity would result in significant dilution to our existing stockholders.
On April 20, 2020, we announced that we engaged H.C. Wainwright & Co., LLC, or H.C. Wainwright, as a strategic and financial advisor to assist in conducting a comprehensive evaluation of financial and strategic alternatives, intended to maximize stockholder value. Among the strategic and financial alternatives that we have continued to evaluate are strategic transactions and relationships that center on our late-stage assets, our broader dermatology platform and underlying Nitricil technology, as well as evaluating potential sources of financing and other strategic alternatives.
As of September 30, 2020, we had a total cash and cash equivalents balance of $43.1 million and positive working capital of $36.7 million. We believe that our existing cash and cash equivalents balance as of September 30, 2020, and expected contractual payments to be received in connection with existing licensing agreements, will provide us with adequate liquidity to fund our operating needs through the fourth quarter of 2021. This operating forecast and related cash projection includes the expected costs associated with a pivotal Phase 3 trial for SB206 as a treatment for molluscum, the B-SIMPLE4 trial, and development activities in certain priority therapeutic areas, but excludes any potential costs associated with other late-stage clinical development programs.
We will need significant additional funding to continue our operating activities and make further advancements in our product development programs beyond those currently included in our operating forecast and related cash projection. Please refer to “Liquidity and Capital Resources” for further discussion of our current liquidity and our future funding needs.
COVID-19 Overview
In December 2019, the novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), which causes novel coronavirus disease 2019, or COVID-19, was reported in China, and in March 2020, the World Health Organization declared it a pandemic. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in federal, state and local governments around the world implementing measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions or bans, business curtailments, school closures, and other protective measures. Such orders, restrictions and recommendations, and the perception that additional orders, restrictions or recommendations could occur, resulted and may result in additional closures of businesses, work stoppages, slowdowns and delays, work-from-home policies and travel restrictions, among other effects.
We continue to closely monitor and rapidly respond to the ongoing impact of COVID-19 on our employees, our community and our business operations. We have worked to continue our critical business functions, including continued operation of our clinical development efforts, and we have adopted a series of precautionary measures and will continue to do so as the circumstances warrant, including increased sanitization of our facilities, use of personal protective equipment and physical distancing practices to help protect our employees’ health and safety as they continue to advance important research related to our product candidates.
The timetable for development of our product candidates has been impacted and may face further disruption and our business could be further adversely affected by the outbreak of COVID-19. In particular, COVID-19 impacted the timing of trial initiation of our B-SIMPLE4 Phase 3 trial for SB206, although we enrolled and dosed the first patient in the trial in September 2020. We continue to assess any further impact of COVID-19 on the B-SIMPLE4 Phase 3 trial for SB206, including any potential delay, postponement or other impact to the trial.
Despite disruptions to our business operations and the business operations of third parties on which we rely, the COVID-19 pandemic has not significantly impacted our operating results and financial condition to date. These items are discussed in greater detail later in the “Results of Operations” section in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Form 10-Q. At this time, the full extent to which COVID-19 may impact our financial condition or results of operations in the future is uncertain. Due to numerous uncertainties surrounding the COVID-19 pandemic, we are unable to predict the nature and extent of the future impacts that the pandemic will have on our financial condition and operating results. These uncertainties include, among other things, the ultimate severity and duration of the pandemic, including the timing and availability of a treatment or vaccine for COVID -19; governmental, business or other actions that have been, or will be, taken in response to the pandemic, including continued restrictions on travel and mobility, business closures and operating restrictions and imposition of social distancing measures; impacts of the pandemic on the conduct of our clinical trials, including with respect to enrollment rates, availability of investigators and clinical trial sites, and monitoring of data; impacts of the pandemic on regulatory authorities; and impacts of the pandemic on the United States and global economies more broadly. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, our financial condition or our results of operations, see the “Risk Factors” section in this Form 10-Q.
Priority Development Pipeline
SB206, a Topical Anti-viral Treatment for Viral Skin Infections (Molluscum Contagiosum)
We are developing SB206 as a topical anti-viral gel for the treatment of viral skin infections, with a current focus on molluscum contagiosum. Molluscum is a contagious skin infection caused by the molluscipoxvirus. Molluscum affects up to six million people in the United States annually. The greatest incidence is in children aged one to 14 years. The average time to resolution is 13 months, however, 13% of children experience lesions that may not resolve in 24 months. There is no FDA-approved treatment for molluscum. More than half of patients diagnosed with the infection are untreated. The majority of patients in the United States that receive treatment are treated with painful procedures and the remaining are often prescribed products indicated for the treatment of external genital warts.
In 2017, based on our observational learnings from an in-licensed topical nitric oxide technology study showing clinically meaningful complete clearance rates of baseline molluscum lesions, and combined with our SB206 program knowledge, we believed that there was a logical pathway for SB206 development in the molluscum indication. As such, we submitted an
investigational new drug application, or IND, to the FDA in December 2017 and initiated a Phase 2 clinical trial utilizing SB206 for the treatment of molluscum in the first quarter of 2018. The Phase 2 multi-center, randomized, double-blind, vehicle-controlled, ascending dose clinical trial evaluated the efficacy, safety and tolerability of SB206 in 256 patients, ages 2 and above, with molluscum. Patients were treated with one of three concentrations of SB206 or vehicle for up to 12 weeks. The primary endpoint was the proportion of patients achieving complete clearance of all molluscum lesions at Week 12. We announced top-line results from this Phase 2 clinical trial in the fourth quarter of 2018. SB206 demonstrated statistically significant results in the clearance of all molluscum lesions at Week 12, with signs of efficacy evident as early as Week 2 with the 12% once-daily dose. The safety and tolerability profiles were favorable overall with no serious adverse events reported, including the most effective dose, SB206 12% once-daily.
With the full results from this Phase 2 trial available, we held an end-of-Phase 2 (Type B) meeting with the FDA in early March 2019. Based on this meeting and the written minutes received, we commenced the Phase 3 development program for molluscum, primarily comprised of two pivotal clinical trials, in the second quarter of 2019 with SB206 12% once-daily as the active treatment arm. The “B-SIMPLE” (Berdazimer Sodium In Molluscum Patients with Lesions) Phase 3 pivotal trials consisted of two (B-SIMPLE1 and B-SIMPLE2) multi-center, randomized, double-blind, vehicle-controlled studies to evaluate the efficacy and safety of SB206 12% once-daily in 707 patients total (2:1 active:vehicle randomization), ages 6 months and above, with molluscum. Patients were treated once-daily with SB206 12% or Vehicle Gel once daily for a minimum of 4 weeks and up to 12 weeks to all treatable lesions (baseline and new). There were visits at Screening/Baseline, Week 2, Week 4, Week 8, Week 12 and a safety follow-up at Week 24. The primary endpoint was the proportion of patients achieving complete clearance of all molluscum lesions at Week 12. Both Phase 3 pivotal trials began dosing patients in June 2019 and completed patient recruitment in August 2019. Top-line efficacy results from the Phase 3 trials were announced in January 2020 with additional efficacy and safety analyses through Week 12 announced in February 2020. SB206 did not achieve statistically significant results in the primary endpoint in either trial, which was the complete clearance of all molluscum lesions at Week 12. In B-SIMPLE2, SB206 was near statistical significance for the primary endpoint (p=0.062), and was statistically significant for the secondary endpoint, the complete clearance of all lesions at Week 8 (p=0.028), and multiple pre-specified sensitivity analyses. We believe this confirms the robustness of the data in the B-SIMPLE2 trial. While the B-SIMPLE1 trial was not statistically significant for the primary endpoint (p=0.375) nor the secondary endpoint (p=0.202), all other pre-specified analyses trended in the same direction of improved treatment effect as the B-SIMPLE2 results.
In addition, the results of a statistical test of heterogeneity support that the two pivotal trials are not different from each other. Across both studies, the primary analysis odds ratio and standard error point estimates were similar and in a consistent direction with overlapping 95% confidence intervals. These statistical results are supported by an integrated analysis of the two pivotal trials, which demonstrated statistically significant complete clearance rate at Week 12 for SB206 (p=0.038). These additional analyses do not change the outcome of either B-SIMPLE trial, and the FDA may disagree with our conclusions from these analyses. P-value is a conventional statistical method for measuring the statistical significance of clinical results. A p-value of less than 0.050 is generally considered to represent statistical significance, meaning that there is a less than five percent likelihood that the observed results occurred by chance.
The last subject completed their final visit as part of the ongoing safety evaluation through Week 24 in February 2020 and full efficacy and safety data, including data from the safety evaluation through Week 24, were available in March 2020. The safety and tolerability profiles were favorable overall with no related serious adverse events reported. Execution of remaining Phase 3 pivotal development program activities for SB206 in molluscum continued in 2020 with the completion of ancillary trials, including human factor studies, occurring during the second quarter of 2020.
Enrollment was completed in the fourth quarter of 2019 for NI-MC101 (B-SIMPLE3), a Phase 1 open label study assessing the safety, tolerability, and pharmacokinetics of SB206 12% under maximal use conditions in the once daily treatment of molluscum. All patients completed visits for B-SIMPLE3 in the first quarter of 2020. In this open label study, 34 patients with molluscum enrolled, 31 (91%) patients completed the pharmacokinetic assessment phase, and 29 patients (85%) went on to continue study participation for the full 12 weeks of treatment. There were no discontinuations of study drug due to treatment related adverse events and there were no reports of serious adverse events. The final study report was completed in the third quarter of 2020.
Based on the results of the Phase 3 pivotal trials, discussed above, we held a Type C meeting with the FDA on April 1, 2020 seeking feedback on our proposal to conduct one additional, well-controlled pivotal study of SB206 to support a future NDA. Based on feedback during this meeting and the written minutes received following the meeting, the FDA provided guidance indicating that the FDA would consider one additional pivotal trial, or B-SIMPLE4, that, if successful, can be supported by the previously completed B-SIMPLE2 trial for a future NDA submission. In addition, the FDA provided guidance with regard to both the study design for B-SIMPLE4 and expectations for a future NDA submission.
Our current trial design characteristics of B-SIMPLE4 consist of a multi-center, randomized, double-blind, vehicle-controlled study to evaluate the efficacy and safety of SB206 12% once-daily in approximately 850 total patients (1:1 active:vehicle randomization), ages 6 months and above, with molluscum. Patients will be treated once-daily with SB206 12% or Vehicle Gel for a minimum of 4 weeks and up to 12 weeks to all treatable lesions (baseline and new). There will be visits at Screening/Baseline, Week 2, Week 4, Week 8, Week 12 and a safety follow-up at Week 24, with the implementation of additional patient and caregiver training and patient engagement efforts and decentralized visit capabilities for conducting those visits during the COVID-19 pandemic. The primary endpoint will be the proportion of patients achieving complete clearance of all treatable molluscum lesions at Week 12.
We provided the proposed protocol to the FDA and began the planning and start-up phase for B-SIMPLE4 in the second quarter of 2020. We initiated the B-SIMPLE4 trial in August 2020 and the first patient was enrolled and dosed in September 2020. The trial is currently progressing and we continue to target completion of patient enrollment during the first quarter of 2021, and if the trial is not further impacted by the COVID-19 pandemic, top-line efficacy results would be targeted for the second quarter of 2021.
In April 2020, our Japanese development and commercialization partner, Sato Pharmaceutical Co., Ltd., or Sato, informed us of its intention to progress the SB206 development program in Japan with a Phase 1 clinical trial given the observed treatment benefit and favorable safety profile in the B-SIMPLE program. Based upon updates received from the most recent meeting of the committee that oversees the development activities under our agreement with Sato, Sato continues to evaluate the timing and anticipated progression of a Phase 1 clinical program in Japan.
Infectious Disease, Coronaviridae (COVID-19)
We are exploring the use of our proprietary Nitricil technology to potentially progress a likely topical oral or nasal treatment option for COVID-19, targeting the reduction of viral shedding and transmission. Nitric oxide has generally demonstrated the ability to inhibit viral replication of viruses within the Coronaviridae family, and we have an extensive body of in vitro and in vivo data demonstrating the efficacy of our proprietary technology for other anti-viral indications.
We recently announced positive in vitro results showing the potential efficacy of our Nitricil platform technology, berdazimer sodium (NVN1000,) as an anti-viral against SARS-CoV-2, the virus that causes COVID-19. To evaluate the ability of our Nitricil platform technology as a potential nasal treatment option for COVID-19, we initiated in vitro assessments targeting the reduction of viral burden in differentiated normal human bronchial epithelial cells. The studies were conducted at the Institute for Antiviral Research at Utah State University, and these results demonstrate the first instance of an anti-viral effect from a nitric oxide-based medicine in a 3-D tissue model that has similar structure to the human airway epithelium. The results from the in vitro assessment of concentrations as low as 0.75 mg/mL demonstrated that berdazimer sodium reduced 90% of virus after repeat dosing, once daily.
Based on the scientific literature and data available to-date related to berdazimer sodium and SB206, we believe that nitric oxide may inhibit viral replication by disrupting protein function critical for viral replication and infection through generation of reactive intermediates.
We are planning to initiate chemistry, manufacturing, and controls, or CMC, work with a global leader in providing integrated services, superior delivery technologies and manufacturing solutions to develop an intranasal formulation of berdazimer sodium for use in our COVID-19 program. The next step is to advance our program into preclinical IND-enabling studies and we are in the process of finalizing arrangements with a global leader in drug development to assist in our development activities as we work toward a potential IND filing targeted in 2021. We are also exploring the potential for federal grants to support these efforts.
Companion Animal Health
We have initiated exploratory work to evaluate our new chemical entity, NVN4100, as a potential product candidate for antimicrobial indications in companion animal health. We have engaged animal health experts to assess technical feasibility and market potential. We currently intend to seek a potential strategic partner or collaborator to advance development in this area following initial proof-of-concept work.
Pipeline Expansion Opportunities
SB204, for the Treatment of Acne Vulgaris
In the second quarter of 2018, we conducted a Type C meeting to further discuss the path forward for our SB204 product candidate and possible Phase 3 programs for the treatment of acne vulgaris with the FDA, and the potential for proceeding with a more narrowly defined patient segmentation. In that meeting, our focus was centered specifically on the severe patient population. In the third quarter of 2018, the FDA provided feedback in their minutes on two paths forward for the acne indication, confirming the need for one additional pivotal trial for moderate-to-severe acne patients prior to a NDA submission or, as an alternative, additional preliminary trials for a severe-only patient population.
Following receipt of FDA feedback via written minutes, we have determined that the most pragmatic development pathway for us will be to conduct one additional pivotal Phase 3 trial in moderate-to-severe acne patients. We have completed our clinical development plan for this additional trial, and further advancement of this program is subject to obtaining additional financing or strategic partnering.
SB208, for the Treatment of Athlete’s Foot (Tinea Pedis) and Fungal Nail Infections (Onychomycosis)
SB208 is a topical broad-spectrum anti-fungal gel for the treatment of fungal infections of the skin and nails, including athlete’s foot (tinea pedis) and fungal nail infections (onychomycosis).
We conducted a Phase 2 proof-of-concept trial in patients with clinical signs and symptoms of tinea pedis and announced top-line results in the second quarter of 2017. SB208 demonstrated a statistically significant effect compared to vehicle in (i) the primary endpoint of achieving negative fungal culture at day 14 and (ii) the secondary endpoint of achieving mycological cure at day 14 (mycological cure is defined by having a negative laboratory culture and negative fungal clinical diagnosis). At the end of a 4-week post treatment follow-up period, mycological cure was maintained at day 42 in both dose groups.
We conducted a Phase 1, single-center, double-blinded, randomized clinical trial in 32 adult females to evaluate the rate of fingernail growth associated with SB208 16% and the local tolerability of the gel when used over the course of 29 days. SB208 16% demonstrated a statistically significant greater mean daily nail growth rate for the treatment period when compared to the same patient’s own growth rate in the run-in period and was well tolerated by patients.
The SB208 program is currently on hold with further advancement subject to obtaining additional financing or strategic partnering.
SB414, for the Treatment of Inflammatory Skin Diseases
In 2018, we completed two complementary Phase 1b clinical trials with SB414 in patients with atopic dermatitis and psoriasis. The design of these complementary trials was to evaluate the safety, tolerability and pharmacokinetics of SB414. The trials were also designed to assess overall and specific target engagement through a reduction of key inflammatory biomarkers, also known as pharmacodynamic assessment.
Atopic Dermatitis
We initiated a Phase 1b trial with SB414 in adults with mild-to-moderate atopic dermatitis in December 2017. In the Phase 1b trial, 48 adults with mild-to-moderate atopic dermatitis with up to 30% body surface area at baseline, were randomized to receive one of 2% SB414 cream, 6% SB414 cream, or vehicle, twice daily for two weeks. In the complementary Phase 1b trial for mild-to-moderate chronic plaque psoriasis, 36 adults received SB414 6% cream or vehicle twice daily for four weeks.
We received and analyzed the preliminary top line results from the Phase 1b clinical trials during the second and third quarters of 2018. In the atopic dermatitis trial, biomarkers from the Th2, Th17 and Th22 inflammatory pathways known to be highly relevant and indicative of atopic dermatitis, including Interleukin-13, or IL-13, IL-4R, IL-5, IL-17A and IL-22, were downregulated after two weeks of treatment with SB414 2%. The changes in Th2 and Th22 biomarkers and clinical efficacy assessed as the percent change in Eczema Area Severity Index scores were highly correlated in the SB414 2% group.
Additionally, the proportion of patients achieving a greater than or equal to 3-point improvement on the pruritus (itch) numeric rating scale after two weeks of treatment was greater for patients treated with SB414 2% compared to patients treated with vehicle.
The 2% or 6% doses of SB414 in the trial did not result in any serious adverse events, and SB414 2% was more tolerable with no patients discontinuing treatment in the trial due to application site reactions. SB414 at the 6% dose was not consistently effective in reducing biomarkers across both the atopic dermatitis and psoriasis trials. This lack of consistent biomarker movement could potentially be explained by the increased irritation score experienced by patients treated with SB414 6%. Additionally, SB414 6% showed detectable systemic exposure in a subset of patients, which cleared in nearly all affected patients within 12 hours, in both the atopic dermatitis and psoriasis trials. Given the successful downregulation of key biomarkers, favorable tolerability and lack of systemic exposure with SB414 2%, we conducted non-clinical studies and completed our Phase 2 clinical development plan during 2019 to support a potential future Phase 2 clinical program launch. The SB414 program is currently on hold with further advancement subject to obtaining additional financing or strategic partnering.
Psoriasis
We initiated clinical development of SB414, our first use of our nitric oxide platform in the field of immunology by dosing the first patient in October 2017 in a Phase 1b clinical trial to evaluate SB414 in a cream for the treatment of psoriasis. Earlier in 2017, we presented mechanistic evidence for SB414, demonstrating a statistically significant reduction in composite psoriasis scores and an inhibition of IL-17A and IL-17F in an animal model.
In the Phase 1b trial for mild-to-moderate chronic plaque psoriasis, 36 adults received SB414 6% cream or vehicle twice daily for four weeks. We received and analyzed the preliminary top line results from this Phase 1b clinical trial during the second and third quarters of 2018. SB414 at the 6% dose did not result in any serious adverse events, but SB414 at the 6% dose was not consistently effective in reducing biomarkers across the trial. This lack of consistent biomarker movement could potentially be explained by the increased irritation score experienced by patients treated with SB414 6%. Additionally, SB414 6% showed detectable systemic exposure in a subset of patients, which cleared in nearly all affected patients within 12 hours. Based on the results of the Phase 1b trial in psoriasis, we will potentially explore the use of lower doses of SB414 in psoriasis, subject to obtaining additional financing or strategic partnering.
SB207, a Topical Anti-viral Product Candidate
In response to our identification of targeted viral opportunities of high unmet need where we believe our nitric oxide releasing technology could provide clinical benefit to patients, we developed SB207, a new anti-viral product candidate. The SB207 product candidate incorporates our existing drug substance, berdazimer sodium (NVN1000), with a new formulation specifically engineered for a number of anti-viral programs. In December 2019, we received written responses in response to a pre-IND meeting request with the FDA and, based on such FDA responses, have determined that further advancement of SB207 is subject to further evaluation of clinical plans and securing additional financing or strategic partnering.
Advancement in Men’s and Women’s Health
In February 2020, following the successful progression of a Phase 1 grant received in August 2019, we were awarded a Phase 2 federal grant of approximately $1.0 million from the National Institute of Health, or NIH, that will enable the conduct of IND-enabling toxicology and pharmacology studies and other preclinical activity of a nitric oxide containing intravaginal gel (WH602) designed to treat high-risk HPV infections that can lead to CIN. We may be eligible to receive an additional $0.5 million in funding as part of this Phase 2 grant, subject to availability of NIH funds and satisfactory progress of the project during the initial 12-month term. Under the terms of the aforementioned NIH grant, we are entitled to receive the grant funds in the form of periodic reimbursements of our allowable direct expenses, allocated overhead, general and administrative expenses and payment of other specified amounts.
This product candidate, in addition to a non-gel formulation product candidate (WH504) supported by a federal grant from the U.S. Department of Defense’s, or DoD, Congressionally Directed Medical Research Programs, or CDMRP, currently in development, together represent the core of our Men’s and Women’s Health business unit. This unit has continued to be supported through a collaboration with Health Decisions, Inc., or Health Decisions.
Advancement in GI Disorders
In January 2019, we announced the addition of GI diseases as a therapeutic focus area as part of our overall science and business strategy. This decision was based on the connection between the multi-factorial pathologies of GI diseases and the demonstrable anti-microbial and anti-inflammatory properties of Novan’s nitric oxide technology. Nitric oxide produced in the GI tract regulates many of its functions including the secretion of mucous for protection against physical, chemical, and microbial injury, perfusion of blood through the GI tissue, mitigation of white blood cell adherence to GI tissue to protect from injury and the healing and repair of ulcers. We believe that our initial expansion into GI will require minimal investment due to our ability to leverage current technology, experience and assets.
In the fourth quarter of 2019, we received results from our contract research organization, or CRO, partner demonstrating statistically significant improvements in disease activity (i.e., reduced disease activity index scores) with berdazimer sodium (NVN1000) as compared to vehicle in a dextran sulfate sodium (DSS)-induced acute colitis mouse model. We intend to generate additional data through preclinical activity, focused on efficacy and mechanisms of action, while also performing additional work to advance oral formulation development upon securing funding.
Business Updates
Purchase Agreements and Registration Rights Agreements with Aspire Capital
July 2020 Aspire CSPA
On July 21, 2020, we entered into a common stock purchase agreement with Aspire Capital, or the July 2020 Aspire CSPA, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital committed to purchase up to an aggregate of $30.0 million of shares of our common stock at our request from time to time during the 30-month term of the July 2020 Aspire CSPA. Upon execution of the July 2020 Aspire CSPA, we agreed to sell to Aspire Capital 5,555,555 shares of common stock at $0.90 per share for proceeds of $5.0 million. The July 2020 Aspire CSPA replaced the prior common stock purchase agreement, dated as of June 15, 2020, between us and Aspire Capital, or the June 2020 Aspire CSPA, which was terminated under the terms of the July 2020 Aspire CSPA.
Concurrently with entering into the July 2020 Aspire CSPA, we also entered into a registration rights agreement with Aspire Capital, in which we agreed to file one or more registration statements, as permissible and necessary to register under the Securities Act of 1933, as amended, or the Securities Act, registering the sale of the shares of our common stock that have been and may be issued to Aspire Capital under the July 2020 Aspire CSPA. On July 23, 2020, we filed with the Securities and Exchange Commission, or the SEC, a prospectus supplement to our effective shelf Registration Statement on Form S-3 (File No. 333-236583) registering all of the shares of common stock that may be offered to Aspire Capital from time to time pursuant to the July 2020 Aspire CSPA.
The July 2020 Aspire CSPA has substantially similar terms to the June 2020 Aspire CSPA. There are no trading volume requirements or restrictions under the July 2020 Aspire CSPA, and we control the timing and amount of sales of our common stock to Aspire Capital. Aspire Capital has no right to require any sales by us, but is obligated to make purchases from us as we may direct in accordance with the July 2020 Aspire CSPA. There are no limitations on use of proceeds, financial or business covenants, restrictions on future financing transactions, rights of first refusal, participation rights, penalties or liquidated damages in the July 2020 Aspire CSPA. The July 2020 Aspire CSPA may be terminated by us at any time, at our discretion, without any penalty or additional cost to us. Any proceeds we receive under the July 2020 Aspire CSPA are expected to be used for the advancement of our research and development programs and for general corporate purposes, capital expenditures and working capital. As of September 30, 2020, we have sold 13,092,464 shares of common stock at an average price of $0.74 per share under the July 2020 Aspire CSPA, and there was $20.4 million of remaining availability for sales of common stock under the July 2020 Aspire CSPA.
Please refer to “Liquidity and Capital Resources” for further discussion of the July 2020 Aspire CSPA.
June 2020 Aspire CSPA
On June 15, 2020, we entered into a common stock purchase agreement with Aspire Capital, or the June 2020 Aspire CSPA, which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital committed to purchase up to an aggregate of $20.0 million of shares of our common stock at our request from time to time during the 30-month term of the June 2020 Aspire CSPA. The June 2020 Aspire CSPA replaced the prior common stock purchase agreement, dated as of August 30, 2019, between us and Aspire Capital, which was terminated under the terms of the June 2020 Aspire CSPA.
Concurrently with entering into the June 2020 Aspire CSPA, we also entered into a registration rights agreement with Aspire Capital, in which we agreed to file one or more registration statements, as permissible and necessary to register under the Securities Act of 1933, as amended, or the Securities Act, registering the sale of the shares of our common stock that have been issued to Aspire Capital under the June 2020 Aspire CSPA. On June 17, 2020, we filed with the Securities and Exchange Commission, or the SEC, a prospectus supplement to our effective shelf Registration Statement on Form S-3 (File No. 333-236583) registering all of the shares of common stock that were issued to Aspire Capital pursuant to the June 2020 Aspire CSPA.
As of September 30, 2020, we sold 37,764,280 shares of common stock at an average price of $0.53 per share under the June 2020 Aspire CSPA, and there was no remaining availability for sales of common stock under the June 2020 Aspire CSPA, which was fully utilized prior to entry into the July 2020 Aspire CSPA noted above. Please refer to “Liquidity and Capital Resources” for further discussion of the June 2020 Aspire CSPA.
March 2020 Registered Direct Offering
On March 24, 2020, we entered into a securities purchase agreement with several institutional and accredited investors, pursuant to which we agreed to sell and issue in a registered direct offering priced at-the-market under Nasdaq rules, an aggregate of 10,550,000 shares of our common stock and pre-funded warrants to purchase 8,054,652 shares of common stock. The March 2020 Registered Direct Offering closed on March 26, 2020. At closing, we also issued to H.C. Wainwright, as placement agent, warrants to purchase an aggregate of up to 558,140 shares of common stock representing 3.0% of the aggregate number of shares of common stock and shares of common stock underlying the pre-funded warrants sold in this offering.
Net proceeds from the March 2020 Registered Direct Offering were approximately $7.2 million after deducting the fees and commissions and offering expenses of approximately $0.8 million.
March 2020 Public Offering
On February 27, 2020, we entered into an underwriting agreement with H.C. Wainwright relating to the offering, issuance and sale of 14,000,000 shares of common stock, pre-funded warrants to purchase 4,333,334 shares of common stock, and accompanying common warrants to purchase up to an aggregate of 18,333,334 shares of common stock. We also granted H.C. Wainwright, as underwriter, a 30-day option to purchase up to 2,750,000 additional shares of common stock and/or common warrants to purchase up to an aggregate of 2,750,000 shares of common stock, which H.C. Wainwright partially exercised on March 2, 2020 to purchase 1,498,602 shares of common stock and common warrants to purchase 2,750,000 shares of common stock. The March 2020 Public Offering closed on March 3, 2020. At closing, we also issued to designees of H.C. Wainwright, as underwriter, warrants to purchase an aggregate of up to 594,958 shares of common stock representing 3.0% of the aggregate number of shares of common stock sold and shares of common stock underlying the pre-funded warrants sold in this offering.
Net proceeds from the March 2020 Public Offering were approximately $5.2 million after deducting underwriting discounts and commissions and offering expenses of approximately $0.8 million. As of September 30, 2020, 18,459,167 common warrants issued as part of the March 2020 Public Offering have been exercised for an additional $5.5 million of proceeds associated with this offering.
Drug Substance and Drug Product Arrangements; Operational Actions
We have worked to progress relationships with third-party manufacturers, which are integral to the advancement of our dermatological platform, including our SB206 molluscum program, by us or through partnerships, collaborations, licensing or other strategic relationships. This strategy includes an increased utilization of and reliance upon third-party vendors and strategic partners for the performance of activities, processes and services that (i) do not result in the generation of significant new intellectual property; and (ii) can leverage existing robust infrastructure, systems, and facilities as well as associated subject matter expertise. A parallel and inter-related strategic objective has been to reduce our own internal resources, large scale manufacturing facilities, and infrastructure capabilities that have historically performed such activities, processes and services.
On October 15, 2018, we established a strategic alliance with Orion, a Finnish full-scale pharmaceutical company with broad experience in drug manufacturing. The alliance enables Orion to manufacture our topical nitric oxide-releasing product candidates on our behalf and on the behalf of our global strategic partners. We have executed a master contract manufacturing agreement to enable technology transfer and manufacturing of clinical trial materials for future clinical trials with our topical product candidates. We are engaged in the transfer of technology for the manufacture of both SB204 and SB206, and upon its
completion intend for Orion to be able to manufacture the drug product, or the finished dosage form of the gel, in accordance with our established manufacturing processes, in compliance with applicable regulatory guidelines, as appropriate for clinical trials. A completed manufacturing technology transfer to Orion will enable the manufacture of multiple assets for clinical trial materials and, potentially, commercial quantities. Importantly, this alliance is being structured to support major global markets in which we and our partners pursue regulatory approvals for our product candidates and complements our present internal capability.
In June 2019, we established an operating and business relationship with a full-scale API manufacturer, with the goal for this manufacturer to become the primary external supplier of our proprietary berdazimer sodium (NVN1000) drug substance. We have executed a master contract manufacturing agreement, which includes the process and analytical method transfer necessary to advance the production of our berdazimer sodium (NVN1000) drug substance for future clinical trials and importantly, upon approval of any of our drug product candidates, for commercial purposes on a global basis. We are engaged in the process of transferring the NVN1000 manufacturing technology. We were able to manufacture the API necessary for our B-SIMPLE4 trial for SB206 through our internal manufacturing capabilities and believe we have sufficient quantities to complete our B-SIMPLE4 trial. Upon completion of the required technology transfer, we intend for this API manufacturer and/or another third-party API manufacturer to be able to manufacture NVN1000 in accordance with our established manufacturing processes, in compliance with applicable regulatory guidelines, as appropriate for clinical trials.
We believe this broad strategy of increasing utilization of and reliance upon third-party vendors and strategic partners for the performance of activities, processes and services can ultimately provide enhanced capabilities and operating efficiencies for us or any potential partnerships, collaborations, licensing or other strategic relationships we may enter. At our request, during the first quarter of 2020, the third-party manufacturers reduced certain near-term activities and extended certain timelines in an effort to reduce our near-term cash utilization. We resumed technical transfer efforts with the API manufacturer in April 2020 and resumed activities at Orion during the third quarter of 2020. We expect to incur certain incremental and discrete costs to effect this strategy, including our ongoing efforts to complete the required technology transfer of manufacturing processes and analytical methods for API development and commercial manufacturing under cGMP guidelines and regulations, and upon resumption of certain of the manufacturers’ transfer and potential production activities.
As we increase our reliance upon third-party vendors and strategic partners pursuant to the aforementioned strategy, we have continued to take corresponding steps to reduce or realign our own internal resources, facilities, and infrastructure capabilities. These corresponding steps have continued and we expect will continue to result in certain incremental and discrete costs.
As part of our strategic objective to reduce our own internal resources, facilities, and infrastructure capabilities, we took actions in February 2020 that reduced our internal resources, including personnel headcount. As a part of this action, we have reduced personnel headcount from a total of 42 employees as of December 31, 2019 to a total of 24 full-time and 2 part-time employees as of September 30, 2020. In addition, in July of 2020, we (i) entered into a lease termination agreement with our landlord which provided for the early termination of the lease for the 51,350 square foot facility that we leased for our corporate headquarters and sole research, development and manufacturing facility, and (ii) entered into a sublease agreement effective July 16, 2020, whereby we will sublease approximately 12,000 square feet (which was reduced to approximately 10,000 square feet after August 31, 2020) in the building that was covered by our original lease, all as described further below in “Corporate Updates—Primary Facility Lease Transaction”.
We will need significant additional funding to continue our operating activities, including these technical transfer projects and internal cost structure changes, and to make further advancements in our product development programs, as described below in “Liquidity and Capital Resources”.
Corporate Updates
Primary Facility Lease Transaction
As part of our broader strategic plan to shift our operating cost structure characteristics from fixed to variable and to reduce or offset our remaining fixed lease obligation, we entered into a lease termination agreement with our former landlord on July 16, 2020, which provided for the early termination of the lease for the 51,350 square foot facility that we leased for our corporate headquarters and sole research, development and manufacturing facility. The lease was scheduled to expire in 2026, and as of June 30, 2020, we had approximately $7.9 million in remaining minimum lease payments under the lease agreement. The lease was terminated in connection with our landlord entering into a lease with a new tenant, which commenced on July 16, 2020.
In connection with the termination of the lease with our landlord, we entered into a sublease agreement effective July 16, 2020, whereby we will sublease from the new tenant approximately 12,000 square feet (which was reduced to approximately 10,000 square feet after August 31, 2020) in the building that was covered by our original lease. The sublease will expire on March 31, 2021, if not earlier terminated, and we are able to terminate the sublease, in part or in whole, upon 30 days’ written notice with no penalty.
We currently expect to operate our corporate headquarters, research and development laboratories and pilot scale cGMP manufacturing activities within the facility pursuant to the sublease, however we decommissioned the areas within the facility, as well as the associated equipment, that supported our large scale cGMP drug manufacturing capability in preparation for execution of the lease termination agreement.
We incurred certain costs in connection with the termination of our lease, including (i) lease termination costs of approximately $0.6 million payable to the landlord pursuant to the lease termination agreement, (ii) broker commissions of approximately $0.4 million and (iii) facility decommissioning and environmental remediation costs of approximately $0.3 million. These costs resulted in approximately $1.3 million in cash expenditures, of which approximately $0.8 million was paid from our existing cash and cash equivalents and approximately $0.5 million was remitted through the security deposit that had been classified as restricted cash on our balance sheets. As a partial offset to these cash expenditures, we received approximately $0.3 million from the new tenant pursuant to a bill of sale executed in conjunction with the termination agreement and sublease. All of the decommissioning activities described herein were completed prior to the end of the quarterly period ended September 30, 2020.
The costs described above do not include non-cash impairment losses totaling $2.4 million for the three months ended June 30, 2020, which we recognized following an evaluation of all our long-lived assets for potential held for sale classification and an impairment assessment of our remaining long-lived assets classified as held and used. This evaluation and assessment was triggered by the previously described decommissioning of our large scale drug manufacturing capability and by the planned lease termination transaction that was executed in July 2020. Following the recognition of the aforementioned impairment charges during the second quarter of 2020, the resulting carrying values of the affected long-lived assets are representative of their fair value to a market participant for their highest and best use, as required under the FASB ASC 820 fair value model. We incurred an additional loss during the three months ended September 30, 2020 of $1.8 million related to the disposal of the asset group containing the right of use lease asset and other property affixed to the facility, as well as the associated right of use lease liability, in connection with the occurrence of the July 2020 lease termination transaction. This loss on lease termination was based upon Company-specific facts and circumstances associated with the July 2020 lease termination transaction, rather than the market participant valuation model that was required to be used during the impairment assessment conducted during the second quarter of 2020.
Further, we are exploring other facilities within the Research Triangle area in North Carolina to support our operations going forward upon the March 2021 expiration or earlier termination of the sublease described above. Such a new location, which we are targeting to be approximately the same square footage as our existing sublet space, would serve as our corporate headquarters and support our research and development laboratories and pilot scale cGMP manufacturing capabilities.
We have engaged a commercial real estate broker and continue to evaluate new locations. As we continue to consider potential new locations, we are evaluating a variety of designs and related capabilities for the pilot scale cGMP site. These evaluations include the ability to support various cGMP activities, including research and development, clinical trial material production and possibly a supportive component of the potential future commercial supply chain. We expect to incur certain incremental and discrete costs as we upfit and then operate a facility that meets such capability requirements.
Strategic Advisor
In April 2020, we announced that we engaged H.C. Wainwright to assist us in evaluating a range of strategic and financial alternatives, intended to maximize stockholder value. The scope of the review is comprehensive and includes evaluation of strategic and financial alternatives that can be utilized to advance SB206 for molluscum, the remainder of the dermatology platform and the business as a whole. We have not stated a definitive timeline for completion of this process, and there can be no assurance that this process will result in us pursuing any strategic or financial alternatives, or that pursuit of a strategic of financial alternative, if any, would be completed successfully or at all. We do not intend to discuss or disclose developments with respect to this process until the evaluation process has been completed, or our board of directors has concluded that disclosure is appropriate or required.
We believe that our clinical and preclinical data, technology platform and market potential provide for a range of opportunities in order to maximize stockholder value.
Nasdaq Listing Matters
As previously disclosed, on February 19, 2020, we received written notice from the staff of the Listing Qualifications Department of The Nasdaq Stock Market, or Nasdaq, indicating that we were not in compliance with Nasdaq Listing Rule 5450(a)(1) because the closing bid price for our common stock had closed below $1.00 per share for the previous 30 consecutive business days, or the Minimum Bid Price Requirement.
On April 17, 2020, we received a letter from Nasdaq indicating that, due to extraordinary market conditions, Nasdaq tolled the compliance period for the Minimum Bid Price Requirement through June 30, 2020, or the tolling period, and that on April 16, 2020, Nasdaq filed an immediately effective rule change with the SEC to implement the tolling period. The new notice indicated that upon expiration of the tolling period and beginning on July 1, 2020, we will receive the balance of days remaining under its currently pending compliance period in effect at the rule change date. Accordingly, we have 123 calendar days from July 1, 2020, or until November 2, 2020, to regain compliance with the Minimum Bid Price Requirement. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days prior to November 2, 2020.
If we are unable to regain compliance by November 2, 2020, we may be eligible to transfer to the Nasdaq Capital Market and apply for an additional 180 calendar day compliance period to demonstrate compliance with the Minimum Bid Price Requirement. To qualify, we will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and will need to provide written notice to Nasdaq of our intention to cure the deficiency during the second compliance period. If we do not qualify for the second compliance period or fail to regain compliance during the second 180 calendar day period, Nasdaq will notify us of its determination to delist the Common Stock, at which point we would have an opportunity to appeal the delisting determination to a Nasdaq Listing Qualifications Panel, or the Panel, but there can be no assurance that the Panel would grant our request for continued listing.
As also previously disclosed, on February 19, 2020 we received notice from the staff of Nasdaq notifying us that, for the previous 30 consecutive business days, the market value of our listed securities had been below the minimum $50.0 million requirement for continued inclusion on the Nasdaq Global Market pursuant to Nasdaq Listing Rule 5450(b)(2)(A), or the MVLS Requirement. We were provided until August 16, 2020 to regain compliance with the MVLS Requirement. On July 9, 2020 we received notification from Nasdaq that we had regained compliance with the MVLS Requirement.
Paycheck Protection Program
On April 22, 2020, we entered into a promissory note, which was subsequently amended, or the Note, for an unsecured loan in the amount of approximately $1.0 million, or the Loan, under the Paycheck Protection Program, or the PPP. The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and is administered by the U.S. Small Business Administration, or the SBA. The Loan was made through PNC Bank, National Association.
See “Liquidity and Capital Resources” for further information regarding the Loan, the Note, the CARES Act and the PPP.
Board of Directors
On September 23, 2020, our board of directors voted to increase the size of our board of directors from six to seven directors and appointed James L. Bierman to our board of directors to fill the resulting vacancy, effective immediately, and to serve as a Class II director until our 2021 annual meeting of stockholders and until his successor is elected and qualified or until his earlier death, resignation or removal. Mr. Bierman was also appointed to serve as a member of our Nominating and Corporate Governance Committee. We believe that Mr. Bierman strengthens our board of directors by contributing his extensive strategic financial expertise, including in the areas of financial and operational strategies, mergers and acquisitions, strategic alliances, enterprise risk management and investor relations.
On July 28, 2020, Paula Brown Stafford, our President and Chief Executive Officer, was appointed as Chairman of our board of directors. Concurrently, Robert Ingram retired as Executive Chairman although he will continue to serve as a member of our board of directors. These changes were effective as of July 28, 2020. W. Kent Geer will continue to act as Lead Independent Director on our board of directors, with significant responsibilities that are described in our Corporate Governance Guidelines.
Chief Financial Officer
On September 23, 2020, John M. Gay was appointed as our Chief Financial Officer after previously serving as our Vice President, Finance and Corporate Controller. Mr. Gay will continue to serve as our Secretary and principal financial officer. We entered into an employment agreement with Mr. Gay, or the Employment Agreement, in connection with his appointment as our Chief Financial Officer. Pursuant to the Employment Agreement, Mr. Gay receives an annual base salary of $315,000 and is entitled to reimbursement of certain expenses. The Employment Agreement also provides Mr. Gay with severance payments in the event of termination of his employment pursuant to the terms of the Employment Agreement and eligibility to participate in our incentive award plans and our standard benefit plans.
Financial Overview
Since our inception in 2006, we have devoted substantially all of our efforts to developing our nitric oxide platform technology and resulting product candidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations. We conduct these activities in a single operating segment. We have not generated any revenue from product sales and, to date, have funded our operations through a variety of sources described in further detail within the “Liquidity and Capital Resources” section below. From inception through September 30, 2020, we have raised total equity and debt proceeds of $235.8 million to fund our operations, including (i) $5.2 million in net proceeds from the sale of common stock (or pre-funded warrants in lieu thereof) and accompanying common warrants in the March 2020 Public Offering, (ii) $7.2 million in net proceeds from the sale of common stock (or pre-funded warrants in lieu thereof) in the March 2020 Registered Direct Offering, (iii) an additional $5.5 million of proceeds associated with exercises through September 30, 2020 of common warrants issued as part of the March 2020 Public Offering, and (iv) $32.7 million in proceeds from the sale of common stock under our August 2019, June 2020 and July 2020 common stock purchase agreements with Aspire Capital. In addition, through September 30, 2020, we have also generated additional liquidity and capital through other sources including: (i) governmental research contracts and grants totaling $12.7 million; (ii) our licensing and supply arrangements with Sato, totaling $24.2 million; and (iii) $25.0 million and $12.0 million in proceeds from two funding transactions during the second quarter of 2019 with Reedy Creek Investments LLC, or Reedy Creek, and Ligand Pharmaceuticals Incorporated, or Ligand, respectively.
We have never generated revenue from product sales and have incurred net losses in each year since inception. As of September 30, 2020, we had an accumulated deficit of $242.6 million. We incurred net losses of $8.4 million and $22.7 million during the three and nine months ended September 30, 2020, respectively, and $9.5 million and $24.4 million for the three and nine months ended September 30, 2019, respectively. We expect to continue to incur substantial losses in the future as we conduct our planned operating activities. We do not expect to generate revenue from product sales unless and until we obtain regulatory approval from the FDA for our clinical-stage product candidates. If we obtain regulatory approval for any of our product candidates, we and/or our commercial partners would expect to incur significant expenses related to product sales, marketing, manufacturing and distribution.
We believe that our existing cash and cash equivalents balance as of September 30, 2020, plus expected contractual payments to be received in connection with existing licensing agreements, will provide us with adequate liquidity to fund our operating needs through the fourth quarter of 2021. This operating forecast and related cash projection includes the expected costs associated with a pivotal Phase 3 trial for SB206 as a treatment for molluscum, the B-SIMPLE4 trial, and development activities in certain priority therapeutic areas, but excludes any potential costs associated with other late-stage clinical development programs. Further advancement of the molluscum contagiosum (SB206) program beyond the conduct and completion of the B-SIMPLE4 trial, or advancement of any other late-stage clinical program across our platform, is subject to
our ability to secure additional capital, and has been and may be further impacted by the COVID-19 pandemic. We will need significant additional funding to make further advancements in our product development programs beyond those currently included in our operating forecast and related cash projection. Please refer to “Liquidity and Capital Resources” for further discussion of our current liquidity and our future funding needs.
With our existing cash on hand, we have incurred and expect to continue to incur substantial research and development expenses in 2020 to: (i) advance our SB206 molluscum Phase 3 program, including the conduct of the B-SIMPLE4 trial, including supporting activities, in addition to completing the B-SIMPLE1, B-SIMPLE2 and B-SIMPLE3 studies; (ii) conduct drug manufacturing capability transfer activities to our external third-party contract manufacturing organizations, or CMOs; and (iii) conduct additional development activities in certain priority therapeutic areas. We also expect to incur substantial costs in 2020 associated with our research and development personnel, certain facility infrastructure and drug manufacturing capabilities to support preclinical and clinical development activities, including costs associated with the primary facility lease transaction as described in “Corporate Updates.”
We have engaged H.C. Wainwright as a strategic and financial advisor to assist in our comprehensive review of strategic and financial alternatives, which include evaluating potential sources of financing and strategic alternatives. We may seek to engage in one or more potential transactions, such as the sale of the Company, or sale, divestiture or licensing of some of our assets, such as a sale of our dermatology platform assets, but there can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or at all or on terms that are favorable to us.
Please refer to “Liquidity and Capital Resources” for further discussion of our current liquidity and our future funding needs.
Components of our Results of Operations
Revenue
License and collaboration revenue consists of the amortization of certain fixed and variable consideration under the Sato license agreement that was entered into during the first quarter of 2017, as amended in October 2018, or the Amended Sato Agreement, that (i) has been received to date in the form of upfront and milestone payments; or (ii) are future, non-contingent milestone payments that become payable upon the earlier occurrence of specified fixed dates in the future or the achievement of specified milestone events. This consideration is being recognized on a straight-line basis over the estimated performance period of approximately 7.5 years, from February 2017 through the third quarter of 2024. We monitor and reassess the estimated performance period for purposes of revenue recognition during each reporting period. During the third quarter of 2020, Sato prepared and we reviewed a SB206 Japan development program timeline that was supportive of the 7.5 year performance period estimate. However, the SB204 asset’s Japan development plan and program timeline remains under evaluation by us and Sato. This combined SB204 and SB206 development program timeline in Japan may potentially be affected by various factors, including (i) the results from our SB206 Phase 3 trials conducted to date in the United States, including but not limited to top-line efficacy results announced in January 2020 and the results of the ongoing B-SIMPLE4 trial, (ii) our remaining timeline for the ongoing B-SIMPLE4 trial in the United States, which has been and may be further impacted by the COVID-19 pandemic, and (iii) our drug manufacturing capabilities and the progression of our manufacturing technology transfer projects with third-party CMOs. Therefore, if the duration of the combined SB204 and SB206 development program timeline is affected by the establishment or subsequent adjustments, as applicable, to the mutually agreed upon SB204 and SB206 development plan in the Japan territory, we will adjust our estimated performance period for revenue recognition purposes accordingly, as needed.
The material terms of the Amended Sato Agreement and related revenue recognition are described within “Note 4—Licensing Arrangements” and “Note 5—Revenue Recognition” to the accompanying condensed consolidated financial statements.
Government Contracts and Grants Revenue
Government research contracts and grant revenue relates to the research and development of our nitric oxide platform for preclinical advancement of NCEs and formulations related to potential treatments for illnesses in the women’s health field. Revenue related to conditional government contracts and grants is recognized when the qualifying expenses are incurred.
Research and Development Expenses
Since our inception, we have focused our resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. Research and development expenses, including those paid to third parties for which there is no alternative use, are expensed as they are incurred. Research and development expenses include:
•external research and development expenses incurred under agreements with CROs, investigative sites and consultants to conduct our clinical trials and preclinical studies;
•costs to acquire, develop and manufacture supplies for clinical trials and preclinical studies at our facilities;
•costs to establish drug substance and drug product manufacturing capabilities with external contract manufacturing organizations and to enhance drug delivery device technologies through partnerships with technology manufacturing vendors;
•legal and other professional fees related to compliance with FDA requirements;
•licensing fees and milestone payments incurred under license agreements;
•salaries and related costs, including share-based compensation, for personnel in our research and development functions; and
•facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, utilities, equipment and other supplies.
From inception through September 30, 2020, we have incurred approximately $175.6 million in research and development expenses to develop, expand or otherwise improve our nitric oxide platform and resulting product candidates. This amount is net of $10.4 million of aggregate contra-research and development expense, including $0.3 million and $2.2 million of contra-research and development expense recorded for the three and nine months ended September 30, 2020, respectively, representing amortization of the liability related to the $12.0 million of funding received from Ligand to pursue the development and regulatory approval of SB206. For a description of methodology and assumptions used to recognize the ratable amortization of this liability, as well as other information about the Funding Agreement with Ligand, please see “Note 6—Research and Development Arrangements” to the accompanying condensed consolidated financial statements.
The table below sets forth our research and development expenses incurred for external clinical programs and the related product candidates, and other research and development expenses for the three and nine months ended September 30, 2020 and 2019.
Other research and development expenses include: (i) all preclinical program and development costs, including development activities in certain priority therapeutic areas, (ii) manufacturing capability and campaign costs, (iii) external costs to establish drug substance and drug product manufacturing capabilities at third-party CMOs, (iv) facility and infrastructure costs, and (v) costs related to all research and development salaries and related personnel costs.
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2020
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2019
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2020
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2019
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(in thousands)
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(in thousands)
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External clinical programs:
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SB204
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$
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—
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$
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19
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$
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16
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$
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194
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SB206
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2,737
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(1)
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3,440
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|
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4,282
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(1)
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5,968
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SB208
|
—
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—
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—
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7
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SB414
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21
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|
(2)
|
|
720
|
|
|
265
|
|
(2)
|
|
1,055
|
|
|
Other research and development
|
2,078
|
|
|
|
4,419
|
|
|
8,950
|
|
|
|
12,390
|
|
|
Total research and development expenses
|
$
|
4,836
|
|
|
|
$
|
8,598
|
|
|
$
|
13,513
|
|
|
|
$
|
19,614
|
|
(1)Amount shown net of $0.3 million and $2.2 million of contra-research and development expense recorded for the three and nine months ended September 30, 2020, respectively, and $3.4 million and $5.5 million of contra-research and development expense recorded for the three and nine months ended September 30, 2019, respectively, related to the Funding Agreement with Ligand described in “Note 6—Research and Development Arrangements” to the accompanying condensed consolidated financial statements.
(2)Amounts relate to the completion of Phase 2-enabling non-clinical studies and wind-down costs associated with the Phase 2 trial that we placed on indefinite hold in January 2020.
During the first nine months of 2020, our major clinical development activities were primarily associated with the continued conduct of our current SB206 Phase 3 clinical program activities. Our plan and timelines for further clinical development of SB206, which have been informed by verbal feedback during and meeting minutes received from the FDA following the Type C meeting on April 1, 2020, have been and may be further impacted by the COVID-19 pandemic. We expect that for the foreseeable future, the substantial majority of our research and development efforts will be focused on: (i) the SB206 molluscum program, including the conduct of the B-SIMPLE4 trial, including supporting activities; (ii) conducting drug manufacturing capability transfer activities to our external third-party CMOs; and (iii) conducting additional development activities in certain priority therapeutic areas. We also expect to incur substantial costs in 2020 associated with our research and development personnel, and certain facility infrastructure and drug manufacturing capabilities to support preclinical and clinical development activities, including costs associated with the primary facility lease transaction as described in “Corporate Updates.”
The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of our current product candidates or any future product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates. See the “Risk Factors” section in our Annual Report and in this Quarterly Report on Form 10-Q, for a discussion of the risks and uncertainties associated with our research and development projects.
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries and related costs, including share-based compensation expenses for personnel in our executive, finance, corporate development and other administrative functions. Other general and administrative expenses include allocated depreciation and facility-related costs, legal costs of pursuing patent protection of our intellectual property, insurance coverage and professional services fees for auditing, tax, general legal, business development, litigation defense and other corporate and administrative services.
We expect to continue to incur substantial general and administrative expenses in 2020 in support of our operating activities and as necessary to operate in a public company environment. Significant general and administrative expenses associated with operations in a public company environment include legal, accounting, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, directors’ and officers’ liability insurance premiums and investor relations activities.
Impairment loss on long-lived assets
As of June 29, 2020, we evaluated all of our long-lived assets for potential held for sale classification, and assessed our remaining long-lived assets classified as held and used for potential impairment pursuant to accounting policies described in “Note 1—Organization and Significant Accounting Policies”. This evaluation and assessment was triggered by the decommissioning of our large scale drug manufacturing capability at our former Morrisville, North Carolina facility and by preparatory actions taken in connection with the planned lease termination transaction for the facility that was executed in July 2020. In connection with this evaluation and impairment assessment, which is described in “Note 14—Assets Held for Sale, Impairment Charges” to the accompanying condensed consolidated financial statements, we recognized an impairment loss on long-lived assets that represent the carrying value in excess of fair value of assets held and used or the carrying value in excess of fair value less cost to sell for assets held for sale.
Loss on facility asset group disposition
In conjunction with the lease termination transaction executed in July 2020, all assets and liabilities within the related facility asset group were disposed of on July 16, 2020. As of the disposition date, the net aggregate carrying value of the assets and liabilities was written off, combined with certain other direct costs incurred in connection with the lease termination transaction, which resulted in a loss on disposition, which is described in “Note 15—Asset Group Disposition” to the accompanying condensed consolidated financial statements.
Other Income (Expense), net
Other income (expense), net consists primarily of (i) interest income earned on cash and cash equivalents and (ii) other miscellaneous income and expenses.
Results of Operations
Comparison of Three Months Ended September 30, 2020 and 2019
The following table sets forth our results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
|
|
(in thousands, except percentages)
|
|
License and collaboration revenue
|
$
|
1,100
|
|
|
$
|
1,100
|
|
|
$
|
—
|
|
|
—
|
%
|
|
Government research contracts and grants revenue
|
217
|
|
|
216
|
|
|
1
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
1,317
|
|
|
1,316
|
|
|
1
|
|
|
—
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
4,836
|
|
|
8,598
|
|
|
(3,762)
|
|
|
(44)
|
%
|
|
General and administrative
|
3,108
|
|
|
2,290
|
|
|
818
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
Loss on facility asset group disposition
|
1,772
|
|
|
—
|
|
|
1,772
|
|
|
100
|
%
|
|
Total operating expenses
|
9,716
|
|
|
10,888
|
|
|
(1,172)
|
|
|
(11)
|
%
|
|
Operating loss
|
(8,399)
|
|
|
(9,572)
|
|
|
1,173
|
|
|
(12)
|
%
|
|
Other (expense) income, net:
|
|
|
|
|
|
|
|
|
Interest income
|
2
|
|
|
53
|
|
|
(51)
|
|
|
(96)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
(8)
|
|
|
23
|
|
|
(31)
|
|
|
(135)
|
%
|
|
Total other (expense) income, net
|
(6)
|
|
|
76
|
|
|
(82)
|
|
|
(108)
|
%
|
|
Net loss and comprehensive loss
|
$
|
(8,405)
|
|
|
$
|
(9,496)
|
|
|
$
|
1,091
|
|
|
(11)
|
%
|
|
|
|
|
|
|
|
|
|
Revenue
License and collaboration revenue of $1.1 million for the three months ended September 30, 2020 and 2019, was associated with our performance during the period and the related amortization of the non-refundable upfront and expected milestone payments under the Amended Sato Agreement.
Government research contracts and grants revenue of $0.2 million for the three months ended September 30, 2020 includes $0.1 million of revenue recognized related to the $1.1 million grant we received in September 2019 from the DoD’s CDMRP as part of its Peer Reviewed Cancer Research Program, and $0.1 million of revenue recognized related to the $1.0 million grant we received in February 2020 from the NIH.
For additional information regarding our accounting for revenue-generating contracts and agreements, see “Note 5—Revenue Recognition” to the accompanying condensed consolidated financial statements.
Research and development expenses
Research and development expenses were $4.8 million for the three months ended September 30, 2020, compared to $8.6 million for the three months ended September 30, 2019. The net decrease of $3.8 million, or 44%, was primarily related to (i) a $0.7 million net decrease in the SB206 program, (ii) a $0.7 million decrease in our SB414 program, and (iii) a $2.3 million decrease in other research and development expenses.
In the SB206 program, we experienced a $3.8 million decrease in gross costs incurred due to the relative timing of the B-SIMPLE4 trial’s enrollment initiation, which occurred in late third quarter of 2020, compared to enrollment initiations for the previous Phase 3 trials (B-SIMPLE1 and B-SIMPLE2), which occurred in late second quarter of 2019. As a result of this enrollment timing, we incurred substantially more gross costs during the comparative period in 2019. This gross decrease was primarily offset by a $3.1 million corresponding decrease in contra-research and development expense from the ratable amortization of the Ligand Funding Agreement liability, which represents Ligand’s contribution to the clinical development and regulatory approval of SB206 for the treatment of molluscum.
The $2.3 million decrease in other research and development expenses was primarily driven by (i) a $0.9 million net decrease in research and development personnel costs, (ii) a $1.4 million decrease in costs associated with our manufacturing technology transfer projects to third-party manufacturers and (iii) a $0.3 million decrease in depreciation expense, partially offset by (iv) $0.1 million of discrete Morrisville, North Carolina facility decommissioning costs incurred during the third quarter of 2020,
(v) a $0.1 million increase in other preclinical development costs and (vi) a $0.1 million increase in other laboratory support costs at our Morrisville, North Carolina facility.
The $0.9 million net decrease in research and development personnel costs is primarily due to (i) a $0.4 million decrease in recurring salary and benefits costs due to a reduced number of research and development personnel between the two comparative periods, (ii) a $0.2 million decrease in salary, accrued bonuses and benefits costs associated with personnel who changed roles between the comparative periods and, as a result, changed from research and development expenses to general and administrative expenses between the comparative periods and (iii) a $0.3 million decrease in non-cash compensation expense associated with share-based incentive compensation expense and the change in the fair value of our Performance Plan liability.
General and administrative expenses
General and administrative expenses were $3.1 million for the three months ended September 30, 2020, compared to $2.3 million for the three months ended September 30, 2019. The net change in general and administrative expenses for the three months ended September 30, 2020 was primarily due to (i) a $0.8 million discrete non-cash charge recognized in the third quarter of 2020 related to the issuance of commitment shares in consideration for entering into the July 2020 Aspire CSPA and (ii) a $0.2 million net increase in other administrative expenses, partially offset by (iii) a $0.2 million decrease in general and administrative personnel and related costs.
The $0.2 million decrease in general and administrative personnel and related costs is primarily due to a decrease in non-cash compensation expenses associated with share-based incentive compensation expense and the change in the fair value of our Performance Plan liability. Cash-based compensation expenses were unchanged on a net basis between the comparative periods, but included (i) a $0.2 million decrease in recurring salary and benefits costs due to a reduced number of general and administrative personnel between the two comparative periods, offset by (ii) a $0.2 million increase in salary, accrued bonuses and benefits costs associated with personnel who changed roles between the comparative periods and, as a result, changed from research and development expenses to general and administrative expenses between the comparative periods.
Loss on facility asset group disposition
In conjunction with the lease termination transaction as described in “Note 8—Commitments and Contingencies”, to the accompanying condensed consolidated financial statements, all assets and liabilities within the facility asset group were disposed of on July 16, 2020. As of the disposition date, the aggregate carrying value of the assets was $7.3 million and the aggregate carrying value of the associated lease liabilities was $6.0 million. The $1.3 million net charge resulting from the write-off of these assets and liabilities was combined with $0.5 million of other direct costs incurred in connection with the lease termination transaction to result in a $1.8 million total loss on disposition. This loss, which is in addition to the impairment loss recognized during the quarterly period ended June 30, 2020 and described in “Note 14—Assets Held for Sale, Impairment Charges” to the accompanying condensed consolidated financial statements, was based upon Company-specific facts and circumstances associated with the July 2020 termination transaction, rather than the market participant valuation model that was required to be used during the impairment assessment as of June 29, 2020.
For additional information regarding our facility asset group disposition see “Note 15—Asset Group Disposition” to the accompanying condensed consolidated financial statements.
Other (expense) income, net
Other (expense) income, net was negligible for the three months ended September 30, 2020, compared to $0.1 million income for the three months ended September 30, 2019.
Comparison of Nine Months Ended September 30, 2020 and 2019
The following table sets forth our results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
|
|
(in thousands, except percentages)
|
|
License and collaboration revenue
|
$
|
3,224
|
|
|
$
|
3,301
|
|
|
$
|
(77)
|
|
|
(2)
|
%
|
|
Government research contracts and grants revenue
|
627
|
|
|
216
|
|
|
411
|
|
|
190
|
%
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
3,851
|
|
|
3,517
|
|
|
334
|
|
|
9
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
13,513
|
|
|
19,614
|
|
|
(6,101)
|
|
|
(31)
|
%
|
|
General and administrative
|
8,847
|
|
|
8,595
|
|
|
252
|
|
|
3
|
%
|
|
Impairment loss on long-lived assets
|
2,421
|
|
|
—
|
|
|
2,421
|
|
|
100
|
%
|
|
Loss on facility asset group disposition
|
1,772
|
|
|
—
|
|
|
1,772
|
|
|
100
|
%
|
|
Total operating expenses
|
26,553
|
|
|
28,209
|
|
|
(1,656)
|
|
|
(6)
|
%
|
|
Operating loss
|
(22,702)
|
|
|
(24,692)
|
|
|
1,990
|
|
|
(8)
|
%
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
Interest income
|
47
|
|
|
149
|
|
|
(102)
|
|
|
(68)
|
%
|
|
Interest expense
|
—
|
|
|
(1)
|
|
|
1
|
|
|
(100)
|
%
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
(3)
|
|
|
115
|
|
|
(118)
|
|
|
(103)
|
%
|
|
Total other income (expense), net
|
44
|
|
|
263
|
|
|
(219)
|
|
|
(83)
|
%
|
|
Net loss
|
$
|
(22,658)
|
|
|
$
|
(24,429)
|
|
|
$
|
1,771
|
|
|
(7)
|
%
|
|
|
|
|
|
|
|
|
|
Revenue
License and collaboration revenue of $3.2 million and $3.3 million for the nine months ended September 30, 2020 and 2019, respectively, was associated with our performance during the period and the related amortization of the non-refundable upfront and expected milestone payments under the Amended Sato Agreement.
Government research contracts and grants revenue of $0.6 million for the nine months ended September 30, 2020 primarily includes $0.5 million of revenue recognized related to the $1.1 million grant we received in September 2019 from the DoD’s CDMRP as part of its Peer Reviewed Cancer Research Program and $0.1 million revenue recognized related to the $1.0 million grant we received in February 2020 from the NIH.
For additional information regarding our accounting for revenue-generating contracts and agreements, see “Note 5—Revenue Recognition” to the accompanying condensed consolidated financial statements.
Research and development expenses
Research and development expenses were $13.5 million for the nine months ended September 30, 2020, compared to $19.6 million for the nine months ended September 30, 2019. The net decrease of $6.1 million, or 31%, was primarily related to (i) a $1.7 million net decrease in the SB206 program, (ii) a $3.4 million decrease in other research and development expenses, (iii) a $0.8 million decrease in our SB414 program and (iv) a $0.2 million decrease in our SB204 program.
In the SB206 program, we experienced a $5.1 million decrease in gross costs incurred primarily due to the relative timing of the B-SIMPLE4 trial’s enrollment initiation, which occurred in late third quarter of 2020, compared to enrollment initiations for the previous Phase 3 trials (B-SIMPLE1 and B-SIMPLE2), which occurred in late second quarter of 2019. As a result of these differences in the timing of trial execution activities between the comparative periods, we incurred substantially more gross costs during the comparative period in 2019. This decrease was partially offset by a $3.4 million corresponding decrease in contra-research and development expense from the ratable amortization of the Ligand Funding Agreement liability, which represents Ligand’s contribution to the clinical development and regulatory approval of SB206 for the treatment of molluscum.
The $3.4 million decrease in other research and development expenses was primarily driven by (i) a $2.1 million net decrease in research and development personnel costs, (ii) a $0.9 million decrease in costs associated with our manufacturing technology transfer projects to third-party manufacturers, (iii) a $0.3 million decrease in depreciation expense and (iv) a $0.5 million decrease in manufacturing materials and support costs at our Morrisville, North Carolina facility, partially offset by (v) $0.3 million of discrete Morrisville, North Carolina facility decommissioning costs incurred during the second and third quarters of 2020 and (vi) a $0.1 million increase in other preclinical development costs.
The $2.1 million net decrease in research and development personnel costs is primarily due to (i) a $1.1 million decrease in recurring salary and benefits costs due to a reduced number of research and development personnel between the two comparative periods, (ii) a $0.5 million decrease in salary, accrued bonuses and benefits costs associated with personnel who changed roles between the comparative periods and, as a result, changed from research and development expenses to general and administrative expenses between the comparative periods, (iii) $0.5 million in discrete charges during the first quarter of 2019 primarily related to severance and one-time payments associated with the departure of our former chief scientific officer in January 2019, and (iv) a $0.4 million decrease in non-cash compensation expense associated with the change in the fair value of our Performance Plan liability. These decreases were partially offset by $0.4 million in discrete severance charges and retention incentive compensation associated with business realignment and personnel reduction actions taken during the first quarter of 2020.
General and administrative expenses
General and administrative expenses were $8.8 million for the nine months ended September 30, 2020, compared to $8.6 million for the nine months ended September 30, 2019. The increase of approximately $0.3 million, or 3%, was primarily due to (i) $1.7 million of aggregate non-cash expense related to the issuance of commitment shares as consideration for entering into the June 2020 Aspire CSPA and July 2020 Aspire CSPA, partially offset by (ii) a $1.4 million decrease in general and administrative personnel and related costs and (ii) a $0.1 million decrease in other general and administrative expenses.
The $1.4 million decrease in general and administrative personnel and related costs is primarily due to (i) a $0.4 million discrete charge in the first quarter of 2019 primarily related to severance and one-time payments associated with the departure of our former chief business officer in January 2019, (ii) $0.5 million decrease in recurring salary and benefits costs due to a reduced number of general and administrative personnel between the two comparative periods and (iii) a $1.2 million decrease in non-cash compensation expenses, including a $0.8 million decrease associated with the change in the fair value of our Performance Plan liability and a $0.4 million decrease in stock option and other share-based compensation expenses. These decreases were partially offset by (i) a $0.6 million increase in salary, accrued bonuses and benefits costs associated with personnel who changed roles between the comparative periods and, as a result, changed from research and development expenses to general and administrative expenses between the comparative periods and (ii) $0.1 million of discrete retention incentive compensation and severance charges associated business realignment and personnel reductions occurring in the first quarter of 2020.
Impairment loss on long-lived assets
As of June 29, 2020, we evaluated all of our long-lived assets for potential held for sale classification, and assessed our remaining long-lived assets classified as held and used for potential impairment pursuant to accounting policies described in “Note 1—Organization and Significant Accounting Policies” to the accompanying condensed consolidated financial statements. Our evaluation resulted in a $2.4 million non-cash impairment loss on long-lived assets for the nine months ended September 30, 2020 comprised of (i) a $0.9 million impairment charge recognized on the leasehold improvements affixed to the Morrisville, North Carolina facility, (ii) a $0.2 million impairment charge recognized on furniture and equipment to be sold to our landlord’s new tenant pursuant to a bill of sale described in “Note 8—Commitments and Contingencies” to the accompanying condensed consolidated financial statements, (iii) a $0.8 million impairment charge recognized on certain manufacturing and laboratory equipment that we intend to sell through a consignment seller, and (iv) a $0.5 million impairment charge recognized on equipment and other property not directly associated with our continuing research and development and pilot scale drug manufacturing capabilities.
For additional information regarding our impairment evaluation see “Note 14—Assets Held for Sale, Impairment Charges” to the accompanying condensed consolidated financial statements.
Loss on facility asset group disposition
In conjunction with the lease termination transaction as described in “Note 8—Commitments and Contingencies” to the accompanying condensed consolidated financial statements, all assets and liabilities within the facility asset group were disposed of on July 16, 2020. As of the disposition date, the aggregate carrying value of the assets was $7.3 million and the aggregate carrying value of the associated lease liabilities was $6.0 million. The $1.3 million net charge resulting from the write-off of these assets and liabilities was combined with $0.5 million of other direct costs incurred in connection with the lease termination transaction to result in a $1.8 million total loss on disposition. This loss, which is in addition to the impairment loss recognized during the quarterly period ended June 30, 2020 and described in “Note 14—Assets Held for Sale, Impairment Charges” to the accompanying condensed consolidated financial statements, was based upon Company-specific facts and circumstances associated with the July 2020 lease termination transaction, rather than the market participant valuation model that was required to be used during the impairment assessment as of June 29, 2020.
For additional information regarding our facility asset group disposition see “Note 15—Asset Group Disposition” to the accompanying condensed consolidated financial statements.
Other income (expense), net
Other income (expense), net was negligible for the nine months ended September 30, 2020, compared to $0.3 million income for the nine months ended September 30, 2019.
Liquidity and Capital Resources
As of September 30, 2020, we had a total cash and cash equivalents of $43.1 million and positive working capital of $36.7 million.
From inception through September 30, 2020, we have raised total equity and debt proceeds of $235.8 million to fund our operations, including (i) $5.2 million in net proceeds from the sale of common stock (or pre-funded warrants in lieu thereof) and accompanying common warrants in the March 2020 Public Offering, (ii) $7.2 million in net proceeds from the sale of common stock (or pre-funded warrants in lieu thereof) in the March 2020 Registered Direct Offering, (iii) an additional $5.5 million of proceeds associated with exercises through September 30, 2020 of common warrants issued as part of the March 2020 Public Offering, and (iv) $32.7 million in proceeds from the sale of common stock under our August 2019, June 2020 and July 2020 common stock purchase agreements with Aspire Capital. In addition, through September 30, 2020, we have also generated additional liquidity and capital through other sources including: (i) governmental research contracts and grants totaling $12.7 million; (ii) our licensing and supply arrangements with Sato, totaling $24.2 million, described below; and (iii) $37.0 million in proceeds from two funding transactions during the second quarter of 2019, also described below.
We believe that our existing cash and cash equivalents balance as of September 30, 2020, and expected contractual payments to be received in connection with existing licensing agreements, will provide us with adequate liquidity to fund our operating needs through the fourth quarter of 2021. This operating forecast and related cash projection includes the expected costs associated with a pivotal Phase 3 trial for SB206 as a treatment for molluscum, the B-SIMPLE4 trial, and development activities in certain priority therapeutic areas, but excludes any potential costs associated with other late-stage clinical development programs. Further advancement of the molluscum contagiosum (SB206) program beyond the conduct and completion of the B-SIMPLE4 trial, or advancement of any other late-stage clinical program across our platform, is subject to our ability to secure additional capital, and has been and may be further impacted by the COVID-19 pandemic. We will need significant additional funding to make further advancements in our product development programs beyond those currently included in our operating forecast and related cash projection.
With our existing cash on hand, we expect to incur substantial research and development expenses in 2020 on: (i) the SB206 molluscum program, including the conduct of the B-SIMPLE4 trial, including supporting activities; (ii) conducting drug manufacturing capability transfer activities to our external third-party CMOs; and (iii) conducting additional development activities in certain priority therapeutic areas. We also expect to incur substantial costs in 2020 associated with our research and development personnel, and certain facility infrastructure and drug manufacturing capabilities to support preclinical and clinical development activities, including costs associated with the primary facility lease transaction as described in “Corporate Updates.”
We may decide to revise our development and operating plans or the related timing, depending on information we learn through our research and development activities, the impact of outside factors such as the COVID-19 pandemic, our ability to enter into
strategic arrangements, our ability to access additional capital and our financial priorities. Our assumptions and plans may change and could impact the magnitude and/or timing of development and operating expenses and, therefore, our cash runway.
We will need significant additional funding to support our planned and future operating activities and make further advancements in our product development programs beyond those currently included in our operating forecast and related cash projection. We do not currently have sufficient funds to complete development and commercialization of any of our product candidates. Our ability to continue to operate our business, including our ability to advance development programs unrelated to the B-SIMPLE4 trial, as well as our ability to progress SB206 for molluscum to an NDA filing, which would occur, if at all, following completion of the B-SIMPLE4 trial, is dependent upon our ability to access additional sources of capital, including, but not limited to (i) equity or debt financings, including through potential sales under the July 2020 Aspire CSPA; or (ii) non-dilutive sources, such as partnerships, collaborations, licensing, grants or other strategic relationships. Our equity issuances during the nine months ended September 30, 2020, have resulted in significant dilution to our existing stockholders. Any future additional issuances of equity, or debt that could be convertible into equity, would result in further significant dilution to our existing stockholders. Alternatively, we may seek to engage in one or more potential transactions, such as the sale of the Company, or sale or divestiture of some of our assets, such as a sale of our dermatology platform assets, but there can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or at all or on terms that are favorable to us. If we are forced to terminate or eliminate our product development programs or pursue other strategic alternatives or corporate transactions, there can be no assurance that such actions would result in any additional stockholder value.
To date, we have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate revenue from product sales unless, and until, we obtain regulatory approval of one of our current or future product candidates and achieve successful commercialization by a strategic partner or by ourselves. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates and begin any commercialization activities. We are subject to all of the risks inherent in the development of new pharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Our anticipated expenditure levels may change if we adjust our current operating plan. Such actions could delay development timelines and have a material adverse effect on our results of operations, financial condition and market valuation. As of September 30, 2020, we had an accumulated deficit of $242.6 million.
Our cash and cash equivalents are held in a variety of interest-bearing instruments, including money market accounts. Cash in excess of immediate requirements is invested with a view toward liquidity and capital preservation, and we seek to minimize the potential effects of concentration and degrees of risk.
Prior Aspire Common Stock Purchase Agreements
On August 30, 2019, we entered into the 2019 Aspire CSPA, and on June 15, 2020, we entered into the June 2020 Aspire CSPA, which provide that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $25.0 million and $20.0 million, respectively, of shares of our common stock at our request from time to time during the 30-month term of each agreement. The June 2020 Aspire CSPA replaced the 2019 Aspire CSPA, which was terminated under the terms of the June 2020 Aspire CSPA.
As of September 30, 2020, we had sold 4,865,717 shares of common stock at an average price of $0.62 per share under the 2019 Aspire CSPA. These amounts, combined with the 345,622 shares issued as part of the commitment fee related to the agreement’s execution, resulted in a total of 5,211,339 shares being issued to Aspire Capital under the agreement as of September 30, 2020. As of September 30, 2020, we had sold 37,764,280 shares of common stock at an average price of $0.53 per share under the June 2020 Aspire CSPA. These amounts, combined with the 1,449,275 shares issued as part of the commitment fee related to the agreement’s execution, resulted in a total of 39,213,555 shares being issued to Aspire Capital under the agreement as of September 30, 2020. As of September 30, 2020, there was no remaining availability for sales of common stock under the June 2020 Aspire CSPA, which was fully utilized prior to entry into the July 2020 Aspire CSPA noted below. The 2019 Aspire CSPA and June 2020 Aspire CSPA had substantially similar terms to the July 2020 Aspire CSPA described below. See “Note 10—Stockholders’ Equity (Deficit)” to the accompanying condensed consolidated financial statements for information regarding the 2019 Aspire CSPA and the June 2020 Aspire CSPA.
July 2020 Aspire CSPA
On July 21, 2020, we entered into the July 2020 Aspire CSPA which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of shares of our common stock at our request from time to time during the 30-month term of the July 2020 Aspire CSPA. Upon execution of the July 2020 Aspire CSPA, we agreed to sell to Aspire Capital 5,555,555 shares of common stock at $0.90 per share for proceeds of $5.0 million. In addition, as consideration for entering into the July 2020 Aspire CSPA, we issued to Aspire Capital 1,000,000 shares of our common stock as a commitment fee. The July 2020 Aspire CSPA replaced the June 2020 Aspire CSPA described above.
Concurrently with entering into the July 2020 Aspire CSPA, we also entered into a registration rights agreement with Aspire Capital, in which we agreed to file one or more registration statements, as permissible and necessary to register under the Securities Act of 1933, as amended, or the Securities Act, registering the sale of the shares of our common stock that have been and may be issued to Aspire Capital under the July 2020 Aspire CSPA. On July 23, 2020, we filed with the Securities and Exchange Commission, or the SEC, a prospectus supplement to our effective shelf Registration Statement on Form S-3 (File No. 333-236583) registering all of the shares of common stock that may be offered to Aspire Capital from time to time under the July 2020 Aspire CSPA.
Under the terms of the July 2020 Aspire CSPA, on any trading day we select, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice, or the Purchase Notice, directing Aspire Capital (as principal) to purchase up to 300,000 shares of our common stock per business day, up to an aggregate of $30.0 million of our common stock, at a per share price equal to the lesser of (i) the lowest sale price of our common stock on the purchase date; or (ii) the arithmetic average of the three lowest closing sale prices for our common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date. The aggregate purchase price payable by Aspire Capital on any one purchase date may not exceed $0.5 million, unless otherwise mutually agreed. The parties may mutually agree to increase the number of shares of our common stock that may be purchased per trading day pursuant to the terms of the July 2020 Aspire CSPA to up to 2,000,000 shares.
In addition, on any date on which we submit a Purchase Notice in an amount equal to 300,000 shares, we can also, in our sole discretion, present Aspire Capital with a volume-weighted average price purchase notice, or a VWAP Purchase Notice, directing Aspire Capital to purchase an amount of our common stock equal to up to 30% of the aggregate shares of our common stock traded on its principal market on the next trading day, or the VWAP Purchase Date, subject to a maximum number of shares determined by us. The purchase price per share pursuant to such VWAP Purchase Notice is generally 97% of the volume-weighted average price for our common stock traded on our principal market on the VWAP Purchase Date.
Under the terms of the July 2020 Aspire CSPA, the number of shares that may be sold to Aspire Capital is limited to 25,433,642 shares, or the Exchange Cap, which represents 19.99% of our outstanding shares of common stock on July 21, 2020, unless stockholder approval or an exception pursuant to the rules of the Nasdaq Global Market is obtained to issue more than 19.99%. This limitation will not apply if, at any time the Exchange Cap is reached and at all times thereafter, the average price paid for all shares issued under the July 2020 Aspire CSPA is equal to or greater than $0.5907, which is the arithmetic average of the five closing sale prices of our common stock immediately preceding the execution of the July 2020 Aspire CSPA. The July 2020 Aspire CSPA provides that we and Aspire Capital shall not effect any sales under the July 2020 Aspire CSPA on any purchase date where the closing sale price of our common stock is less than $0.15.
There are no trading volume requirements or restrictions under the July 2020 Aspire CSPA, and we will control the timing and amount of sales of our common stock to Aspire Capital. Aspire Capital has no right to require any sales by us, but is obligated to make purchases from us as we may direct in accordance with the July 2020 Aspire CSPA. There are no limitations on use of proceeds, financial or business covenants, restrictions on future financing transactions, rights of first refusal, participation rights, penalties or liquidated damages in the July 2020 Aspire CSPA. The July 2020 Aspire CSPA may be terminated by us at any time, at our discretion, without any penalty or additional cost to us. Any proceeds we receive under the July 2020 Aspire CSPA are expected to be used for the advancement of our research and development programs and for general corporate purposes, capital expenditures and working capital.
As of September 30, 2020, we have sold 13,092,464 shares of common stock at an average price of $0.74 per share under the July 2020 Aspire CSPA. These amounts, combined with the 1,000,000 shares issued as part of the commitment fee related to the agreement’s execution, resulted in a total of 14,092,464 shares being issued to Aspire Capital under the agreement as of September 30, 2020. As of September 30, 2020, there was $20.4 million of remaining availability for sales of common stock under the July 2020 Aspire CSPA.
Primary Facility Lease Financing
As described in the “Corporate Updates” section, in July 2020 we recently completed a lease termination transaction associated with our approximately 51,000 square foot leased facility in Morrisville, North Carolina, which had served as our corporate headquarters and sole research, development and manufacturing facility. The transaction is part of our broader strategic plan to shift our operating cost structure characteristics from fixed to variable and to reduce or offset fixed lease obligations. The ten-year, non-cancellable lease agreement was originally entered into in 2016, immediately prior to its termination in July 2020, had approximately 6 years remaining under the lease term and approximately $7.9 million in remaining minimum lease payments.
As of June 29, 2020, we evaluated all of our long-lived assets for potential held for sale classification, and assessed our remaining long-lived assets classified as held and used for potential impairment pursuant to accounting policies described in “Note 1—Organization and Significant Accounting Policies” to the accompanying condensed consolidated financial statements. This evaluation and assessment was triggered by the previously described decommissioning of our large scale drug manufacturing capability and by the planned lease termination transaction that was executed in July 2020. In connection with this evaluation and impairment assessment, which is described in “Note 14—Assets Held for Sale, Impairment Charges” to the accompanying condensed consolidated financial statements, we recognized non-cash impairment losses totaling $2.4 million in the second quarter of 2020.
In conjunction with the lease termination transaction, as described in “Note 15—Asset Group Disposition” to the accompanying condensed consolidated financial statements, all assets and liabilities within the facility asset group were disposed of on July 16, 2020. As of the disposition date, the aggregate carrying value of the assets was $7.3 million and the aggregate carrying value of the associated lease liabilities was $6.0 million. The $1.3 million net charge resulting from the write-off of these assets and liabilities was combined with $0.5 million of other direct costs incurred in connection with the lease termination transaction to result in a $1.8 million total loss on disposition within the accompanying condensed consolidated financial statements. This loss, which is in addition to the impairment loss recognized during the quarterly period ended June 30, 2020, described above, was based upon Company-specific facts and circumstances associated with the July 2020 lease termination transaction, rather than the market participant valuation model that was required to be used during the impairment assessment as of June 29, 2020.
Paycheck Protection Program
On April 22, 2020, and as subsequently amended, we entered into the Note for an unsecured loan of approximately $1.0 million made to us, or the Loan, under the Paycheck Protection Program, or the PPP. The PPP was established under the CARES Act and is administered by the SBA. The Loan to us was made through PNC Bank, National Association. Subject to the terms of the Note, the Loan bears interest at a fixed rate of one percent (1%) per annum. Principal and interest on unforgiven amounts are payable monthly commencing on the fifteenth day of the month following the First Payment Date, as defined within the Note. The Note provides that the Loan may be prepaid by us at any time prior to the April 22, 2022 maturity date without penalty. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of loan proceeds for payment of permitted and program-eligible expenses. Interest payable on the Note may be forgiven only if the SBA agrees to pay such interest on the forgiven principal amount of the Note. No assurance is provided that we will obtain forgiveness of the Loan in whole or in part. We will be obligated to repay any portion of the principal amount of the Note that is not forgiven, together with interest accrued and accruing thereon at the rate set forth above, until such unforgiven portion is paid in full.
See “Note 9—Paycheck Protection Program” to the accompanying condensed consolidated financial statements for information regarding the Loan.
Royalty and Milestone Payments Purchase Agreement with Reedy Creek Investments LLC
On April 29, 2019, we entered into the Purchase Agreement with Reedy Creek, pursuant to which Reedy Creek provided us funding in an initial amount of $25.0 million for us to use primarily to pursue the development, regulatory approval and commercialization (including through out-license agreements and other third-party arrangements) activities for SB206, for the treatment of molluscum, and advancing programmatically other activities with respect to SB414, for atopic dermatitis, and SB204, for acne. Reedy Creek was to provide $10.0 million of additional funding contingent upon our achievement of the primary endpoints in each of the two SB206 Phase 3 clinical trials no later than March 31, 2020. Based on the top line efficacy results from the Phase 3 SB206 program released in January 2020, we understand that Reedy Creek will not be paying us the contingent $10.0 million of additional funding.
Pursuant to the Purchase Agreement, we will pay Reedy Creek ongoing quarterly payments, calculated based on an applicable percentage per product of any upfront fees, milestone payments, royalty payments or equivalent payments received by us
pursuant to any out-license agreement for the products in the United States, Mexico or Canada, net of any upfront fees, milestone payments, royalty payments or equivalent payments paid by us to third parties pursuant to any agreements under which we have in-licensed intellectual property with respect to the products.
The applicable percentage used for determining the ongoing quarterly payments, applied to amounts received directly by us pursuant to any out-license agreement for each product, ranges from 10% for SB206 to 20% for SB414 and SB204. However, the agreement provides that the applicable percentage for each product will be 25% for fees or milestone payments received by us (but not royalty payments received by us) until Reedy Creek has received payments under the Purchase Agreement equal to the total funding amount provided by Reedy Creek under the Purchase Agreement. If we decide to commercialize any product on our own following regulatory approval, as opposed to commercializing through an out-license agreement or other third-party arrangement, we will be obligated to pay Reedy Creek a low single digits royalty on net sales of the products.
Development Funding and Royalties Agreement with Ligand Pharmaceuticals Incorporated
On May 4, 2019, we entered into the Funding Agreement with Ligand, pursuant to which Ligand provided us funding of $12.0 million for us to use to pursue the development and regulatory approval of SB206, for the treatment of molluscum.
Pursuant to the Funding Agreement, we will pay Ligand up to $20.0 million in milestone payments upon the achievement by us of certain regulatory and commercial milestones associated with SB206 or any product that incorporates or uses NVN1000, the active pharmaceutical ingredient for our clinical stage product candidates, for the treatment of molluscum. In addition to the milestone payments, we will pay Ligand tiered royalties ranging from 7% to 10% based on annual aggregate net sales of the products in the United States, Mexico or Canada.
Expansion of Partnership with Sato in Japanese Territory
On October 5, 2018, we and Sato entered into the second amendment to the initial license agreement dated January 12, 2017, or the Sato Amendment. The initial license agreement had focused on the development and commercialization of SB204 for the treatment of acne vulgaris in Japan. The Sato Amendment also provides Sato with the exclusive rights to develop and commercialize SB206 and related dosage forms for the treatment of viral skin infections, including but not limited to molluscum contagiosum and external genital warts, in Japan. We have received approximately $24.2 million from Sato beginning January 2017 through September 30, 2020 under the Amended Sato Agreement, including (i) a $10.8 million upfront payment received following the execution of the agreement in January 2017; (ii) a $2.2 million payment related to the initiation of a Phase 1 trial in Japan in the third quarter of 2018; and (iii) $11.2 million of installment payments received following the October 2018 amendment to our amended license agreement with Sato. Under the terms of the Sato Amendment, we received an upfront payment from Sato totaling 1.25 billion JPY (approximately $11.2 million USD) to be paid in three installments over a 12 months period. We received the first installment of 0.25 billion JPY (approximately $2.2 million USD) in October 2018, the second installment of 0.5 billion JPY (approximately $4.5 million USD) in March 2019 and the third installment of 0.5 billion JPY (approximately $4.6 million USD) in November 2019. The Sato Amendment also provides for an aggregate of 1.0 billion JPY in additional non-contingent milestone payments that become payable upon the earlier occurrence of specified fixed dates in the future or the achievement of specified milestone events.
Cash Flows
The following table sets forth our cash flows for the periods indicated:
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Nine Months Ended September 30,
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2020
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2019
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(in thousands)
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Net cash (used in) provided by:
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Operating activities
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$
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(21,868)
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$
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(11,421)
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Investing activities
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(90)
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(38)
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Financing activities
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50,779
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25,271
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Net increase in cash, cash equivalents and restricted cash
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$
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28,821
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$
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13,812
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Net Cash Used in Operating Activities
During the nine months ended September 30, 2020, net cash used in operating activities was $21.9 million and consisted primarily of a net loss of $22.7 million, with adjustments for non-cash amounts related to (i) depreciation expense of $1.1 million, (ii) impairment of long-lived assets of $2.4 million, (iii) loss on facility asset group disposition of $0.8 million, (iv)
share-based compensation expense of $0.8 million, (v) fees of $1.7 million related to commitment shares for the June 2020 Aspire CSPA and July 2020 Aspire CSPA, and (vi) a loss on disposal of equipment of $0.1 million, and a $6.1 million net decrease in other operating assets and liabilities. The net decrease in operating assets and liabilities was primarily due to a $2.2 million decrease in research and development service obligation liabilities related to the amortization of the Ligand Funding Agreement liability, a $3.3 million decrease in deferred revenue associated with our performance under, and revenue recognition of, the Amended Sato Agreement, a $0.3 million decrease in accrued legal and professional fees, and a $1.4 million decrease in accounts payable. These decreases were partially offset primarily by a $0.7 million decrease in prepaid expenses and other current assets, a $0.3 million increase in accrued compensation and a $0.3 million decrease in contracts and grants receivable. The changes in accounts payable during the nine months ended September 30, 2020 were primarily related to timing of invoice receipts and payments associated with the SB206 Phase 3 development program.
During the nine months ended September 30, 2019, net cash used in operating activities was $11.4 million and consisted primarily of a net loss of $24.4 million, with adjustments for non-cash amounts related primarily to depreciation expense of $1.5 million, share-based compensation expense for both equity-based and liability-based awards of $2.4 million and a $9.0 million favorable change in other operating assets and liabilities. The favorable net change in assets and liabilities was primarily due to (i) a $12.0 million increase related to the advanced payment for the research and development service obligation associated with the Funding Agreement with Ligand, offset by a $5.5 million decrease in research and development service obligation liabilities related to the amortization of the liability associated with Ligand, (ii) a $1.2 million increase in deferred revenue following the receipt of an additional upfront installment payment under the Amended Sato Agreement during the first quarter of 2019; (iii) a $1.2 million increase in accounts payable and (iv) a $0.8 million increase in accrued outside research and development services. The increase in accounts payable and accruals was primarily related to the Phase 3 development program for molluscum. These favorable changes were partially offset by changes in other operating assets and liabilities totaling $0.7 million, including an increase in contracts and grants receivable and a decrease in accrued legal and professional fees.
Net Cash Used in Investing Activities
During the nine months ended September 30, 2020, the $0.1 million of net cash used in investing activities was primarily related to installment payments made to a drug delivery device technology manufacturing vendor in connection with an ongoing drug delivery device technology enhancement project of $0.4 million, offset by $0.3 million of proceeds from the sale of equipment.
During the nine months ended September 30, 2019, net cash used in investing activities was minimal and consisted of purchases of laboratory and manufacturing equipment.
Net Cash Provided by Financing Activities
During the nine months ended September 30, 2020, net cash provided by financing activities was $50.8 million and consisted primarily of $5.3 million of proceeds, net of underwriting fees, from closing of our March 2020 Public Offering, $5.5 million of proceeds from the exercise of common warrants associated with the March 2020 Public Offering, $7.3 million of proceeds, net of placement agent fees, from our March 2020 Registered Direct Offering, $1.0 million from the entry into a promissory note for an unsecured loan under the PPP, and $31.9 million of proceeds from the sale of our common stock pursuant to the 2019 Aspire CSPA, the June 2020 Aspire CSPA and the July 2020 Aspire CSPA. These financing cash inflows were partially offset by $0.2 million of other offering costs, including legal and professional fees, directly associated with the March 2020 Public Offering, March 2020 Registered Direct Offering and the February 2020 shelf registration statement filing.
During the nine months ended September 30, 2019, net cash provided by financing activities was $25.3 million and consisted primarily of funding received pursuant to the Purchase Agreement with Reedy Creek.
Capital Requirements
As of September 30, 2020, we had a total cash and cash equivalents balance of $43.1 million and positive working capital of $36.7 million. We believe that our existing cash and cash equivalents balance as of September 30, 2020, and expected contractual payments to be received in connection with existing licensing agreements, will provide us with adequate liquidity to fund our operating needs through the fourth quarter of 2021. This operating forecast and related cash projection includes the expected costs associated with a pivotal Phase 3 trial for SB206 as a treatment for molluscum, the B-SIMPLE4 trial, and development activities in certain priority therapeutic areas, but excludes any potential costs associated with other late-stage clinical development programs. Further advancement of the molluscum contagiosum (SB206) program beyond the conduct and completion of the B-SIMPLE4 trial, or advancement of any other late-stage clinical program across our platform, is subject to our ability to secure additional capital, and has been and may be further impacted by the COVID-19 pandemic. We will need
significant additional funding to make further advancements in our product development programs beyond those currently included in our operating forecast and related cash projection.
We are utilizing our existing capital resources to fund the ongoing and near-term operating and development activities, as described in the “Priority Development Pipeline” and “Pipeline Expansion Opportunities” section above. We also expect to incur substantial costs in 2020 associated with our research and development personnel, and certain facility infrastructure and drug manufacturing capabilities to support preclinical and clinical development activities, as described in the “Business Updates” and “Corporate Updates” section, including costs associated with the primary facility lease transaction. While our operating forecast and related cash projection includes these expected costs and the costs associated with the B-SIMPLE4 trial and development activities in certain priority therapeutic areas, it excludes any potential costs associated with other new clinical stage development programs. If we were to progress other clinical stage development programs, we will need significant additional funding, including, but not limited to through (i) equity or debt financings, including through potential sales under the July 2020 Aspire CSPA; or (ii) non-dilutive sources, such as partnerships, collaborations, licensing, grants or other strategic relationships. Any issuance of equity or debt that could be convertible into equity would result in significant dilution to our existing stockholders. If we continue to attempt to raise additional capital, there can be no assurance that we will be able to obtain it on terms acceptable to us, on a timely basis, or at all. The current market value of our common stock may negatively impact funding options and the acceptability of funding terms. A failure to obtain sufficient funds on acceptable terms when needed could cause us to alter or reduce our planned operating activities to conserve our cash and cash equivalents, including but not limited to delaying planned activities directly related to or in support of product candidate development. Our anticipated expenditure levels may change if we adjust our current operating plan and could impact the magnitude and/or timing of development and operating expenses and therefore our cash runway. Such actions could delay development timelines and have a material adverse effect on our results of operations, financial condition and market valuation. As of September 30, 2020, we had an accumulated deficit of $242.6 million.
To date, we have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate revenue from product sales unless, and until, we obtain regulatory approval of one of our current or future product candidates and achieve successful commercialization by a strategic partner or by ourselves. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates and begin any commercialization activities. We are subject to all of the risks inherent in the development of new pharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.
Adequate funding may not be available to us on terms acceptable to us, on a timely basis, or at all. The current market value of our common stock may negatively impact funding options and the acceptability of funding terms. Our failure to obtain sufficient additional funds on acceptable terms as and when needed could cause us to alter or reduce our planned operating activities, including but not limited to delaying, reducing, terminating or eliminating planned product candidate development activities, such as our current hold on most of our clinical development programs, to conserve our cash and cash equivalents or, ultimately, we may need to dissolve and liquidate our assets or seek protection under bankruptcy laws. Such actions could delay development timelines and have a material adverse effect on our business, results of operations, financial condition and market valuation. If we are forced to terminate or eliminate our product development programs, wind down our operations, liquidate or seek bankruptcy protection, it is unclear to what extent we will be able to pay our obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to our stockholders, whereby, our stockholders may lose some or all of their investment. If we are forced to terminate or eliminate our product development programs or pursue other strategic alternatives or corporate transactions, there can be no assurance that such actions would result in any additional stockholder value. Alternatively, we may seek to engage in one or more potential transactions, such as the sale of the Company, or sale or divestiture of some of our assets, such as a sale of our dermatology platform assets, but there can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or at all or on terms that are favorable to us. If we are forced to terminate or eliminate our product development programs or pursue other strategic alternatives or corporate transactions, there can be no assurance that such actions would result in any additional stockholder value.
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount or timing of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
•the initiation, progress, timing, costs, results, and evaluation of results of trials for our clinical-stage product candidates, including trials conducted by us or potential future partners;
•the progress, timing, costs and results of development and preclinical study activities relating to other potential applications of our nitric oxide platform;
•the number and characteristics of product candidates that we pursue;
•our ability to enter into strategic relationships to support the continued development of certain product candidates and the success of those arrangements;
•our success in optimizing the size and capability of our manufacturing capabilities and related processes to meet our strategic objectives;
•our success in the technical transfer of methods and processes related to our drug substance and drug product manufacturing with our current and/or potential future contract manufacturing partners;
•the outcome, timing and costs of seeking regulatory approvals;
•the occurrence and timing of potential development and regulatory milestones achieved by Sato, our licensee for SB204 and SB206 in Japan;
•the terms and timing of any future collaborations, licensing, consulting, financing or other arrangements that we may enter into;
•the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;
•the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights;
•defending against intellectual property related claims;
•the costs associated with any potential future securities litigation, and the outcome of that litigation;
•the extent to which we in-license or acquire other products and technologies; and
•subject to receipt of marketing approval, revenue received from commercial sales or out licensing of our product candidates.
Contractual Obligations and Contingent Liabilities
Except for compensatory obligations described in “Note 8—Commitments and Contingencies” and the Loan we received under the PPP described in “Note 9—Paycheck Protection Program” to the accompanying condensed consolidated financial statements, there were no material changes during the nine months ended September 30, 2020 in our commitments under contractual obligations, as disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.
Jumpstart Our Business Startups Act of 2012 (JOBS Act)
In April 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable. We have chosen to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. We may remain an emerging growth company until the last day of 2021. However, if certain events occur prior to such date, including if we become a “large accelerated filer,” our annual gross revenue equals or exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to such date.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.
Our significant accounting policies are more fully described in “Note 1—Organization and Significant Accounting Policies” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in “Note 1—Organization and Significant Accounting Policies” to our audited consolidated financial statements contained in our Annual Report. Except for the following matters, during the nine months ended September 30, 2020, there were no other material changes to our critical accounting policies.
Assessment of Long-Lived Assets for Held-for-Sale Classification and Potential Impairment; Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As described in “Note 14—Assets Held for Sale, Impairment Charges” to the accompanying condensed consolidated financial statements, we evaluated all of our long-lived assets for potential for held for sale classification and potential impairment as of June 29, 2020. This evaluation, which included the conduct of nonrecurring fair value measurements pursuant to FASB ASC 820, Fair Value Measurements, required the use of significant judgments and estimates.
The carrying values of long-lived assets within disposal groups that met the criteria to be classified as held for sale were adjusted to equal the disposal groups’ fair value less cost to sell. Quoted or estimated selling prices were used to estimate the fair value of the disposal group assets, which were determined to be Level 2 or Level 3 inputs within the fair value measurement hierarchy in ASC 820, respectively.
Long-lived assets in certain asset groups that remained classified as held and used were assessed for potential impairment. For those asset groups that had indicators of impairment and failed a test of recoverability, their carrying value was adjusted to equal their estimated fair value. For the asset group consisting of a right-of-use lease asset, leasehold improvements and other property affixed to the Morrisville, North Carolina facility, we determined that the lease terms established in the new tenant’s prime lease of the Morrisville, North Carolina facility were representative of the asset group’s highest and best use and were consistent with market terms; therefore, such terms were considered to be the best available valuation inputs for the fair value estimate, and such inputs were determined to be Level 3 inputs within the fair value measurement hierarchy. For the asset group consisting of other property and equipment not directly associated with our continuing research, development and pilot scale drug manufacturing capabilities, we determined that a market participant was unlikely to pay any material value for such assets and therefore we determined that their fair value was zero. The inputs used to estimate fair value of this asset group were determined to be Level 3 inputs within the fair value measurement hierarchy. Given the impairment recorded among our long-lived assets, it is reasonably possible that changes in judgments and assumptions we used to estimate the fair value of such assets or other circumstances, including changes in our intended use of such assets, could cause us to consider some portion or all of the remaining long-lived assets to become impaired.
Restatement of Previously Issued Financial Statements
On May 14, 2020, the Audit Committee of our board of directors, in consultation with management and BDO USA, LLP, concluded that, because of a misapplication of the accounting guidance applicable to the warrants we issued in January 2018, our previously issued consolidated financial statements for the year ended December 31, 2018, and all quarterly periods of 2019 and 2018, or the Affected Periods, should no longer be relied upon. On May 20, 2020, we restated our consolidated financial statements for all Affected Periods in our Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended December 31, 2019. As such, the comparative information provided for the three and nine months ended September 30, 2019 contained in the results of operations discussed above reflect these previously restated amounts.
Recent Accounting Pronouncements
Recently issued accounting pronouncements that we have adopted or are currently evaluating are described in detail within “Note 1—Organization and Significant Accounting Policies” to the accompanying condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, cannot provide absolute assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Our management, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020, the end of the period covered by this Quarterly Report on Form 10-Q. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based upon such evaluation, our principal executive and financial officers have concluded because of the previously reported material weakness in our internal control over financial reporting discussed below, our disclosure controls and procedures were not effective as of such date at the reasonable assurance level.
Remediation of Previously Reported Material Weakness
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Because of these inherent limitations, management does not expect that our internal control over financial reporting will prevent all error and all fraud. In our Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended December 31, 2019, filed with the SEC on May 20, 2020, management concluded that our internal control over financial reporting was not effective as of December 31, 2019 because of a material weakness in internal control related to the accounting for significant and unusual transactions.
We have devoted, and plan to continue to devote, significant efforts and resources to the remediation plan for the previously reported material weakness described in our prior periodic filings and to the improvement of our internal control over financial reporting. While we have processes to identify and apply accounting guidance pertaining to significant and unusual transactions, we have begun and plan to continue to enhance the design of control activities that will better enable our understanding of the nuances of increasingly complex accounting standards and their application. We have initiated the following changes in our internal control over financial reporting during the three months ended September 30, 2020:
•expanded access to accounting research databases; and
•enhanced assessment, scoping and involvement of highly qualified consultative third party professionals regarding potentially complex accounting matters.
As we continue to evaluate and work to remediate this material weakness our internal control over financial reporting, we may determine to take additional measures to address the material weakness or determine to supplement or modify certain of the remediation efforts described above. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.
Restatement of Previously Issued Financial Statements
On May 14, 2020, we revised our prior position on accounting for warrants and concluded that our previously issued consolidated financial statements for the year ended December 31, 2018, and all quarterly periods of 2019 and 2018, or the Affected Periods, should not be relied upon because of a misapplication in the guidance on warrant accounting. On May 20, 2020, we restated our consolidated financial statements for all Affected Periods in our Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended December 31, 2019.
(b) Changes in Internal Controls Over Financial Reporting
Except for the changes described above to remediate the previously reported material weakness, there have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.