ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements, which are based on assumptions about the future of the Company’s business. The actual results could differ materially from those contained in the forward-looking statements. Please read “Forward-Looking Statements” included below for additional information regarding forward-looking statements.
Forward-Looking Statements
This report contains, in addition to historical information, certain information, assumptions and discussions that may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have made these statements in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected or anticipated. Although we believe our assumptions underlying our forward-looking statements are reasonable as of the date of this report, we cannot assure you that the forward-looking statements set out in this report will prove to be accurate. We typically identify these forward-looking statements by the use of forward-looking words such as “expect,” “potential,” “continue,” “may,” “will,” “should,” “could,” “would,” “seek,” “intend,” “plan,” “estimate,” “anticipate” or the negative version of those words or other comparable words. Forward-looking statements contained in this report include, but are not limited to, statements about:
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whether we can obtain approval from the U.S. Food and Drug Administration, or FDA, and foreign regulatory bodies, to commence our clinical studies and to sell, market and distribute our therapeutics and devices under development;
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our ability to successfully initiate and complete clinical trials of our pharmaceutical candidates under development, including our oral and topical Endoxifen (an active metabolite of Tamoxifen) and our intraductal technologies to administer therapeutics, including our study using fulvestrant;
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the success, cost and timing of our product and drug development activities and clinical trials, including whether the ongoing clinical study using our intraductal technologies to administer fulvestrant and our study using our oral Endoxifen in the window of opportunity prior to surgery will enroll a sufficient number of subjects or be completed in a timely fashion or at all;
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whether we will successfully complete our clinical study of topical Endoxifen to reduce mammographic breast density and whether the study will fail to achieve its objective, including because some participants have discontinued the study prior to completing the full six months of dosing because of skin irritation issues or for other reasons;
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our ability to contract with third-party suppliers, manufacturers and service providers, including clinical research organizations, and their ability to perform adequately;
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our ability to successfully develop and commercialize new therapeutics currently in development or that we might identify in the future and in the time frames currently expected;
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our ability to successfully defend litigation and other similar complaints that may be brought in the future, in a timely manner and within the coverage, scope and limits of our insurance policies;
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our ability to establish and maintain intellectual property rights covering our products;
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our expectations regarding, and our ability to satisfy, federal, state and foreign regulatory requirements;
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the accuracy of our estimates of the size and characteristics of the markets that our products and services may address;
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whether the final study results will vary from preliminary study results that we may announce;
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our expectations as to future financial performance, expense levels and capital sources;
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our ability to attract and retain key personnel; and
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our ability to raise capital.
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These and other forward-looking statements made in this report are presented as of the date on which the statements are made. We have included important factors in the cautionary statements included in this report, particularly in the section titled “ITEM 1A. RISK FACTORS,” that we believe could cause actual results or events to differ materially from the anticipated results as set forth in the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any new information, future events or circumstances that may affect our business after the date of this report. Except as required by law, we do not intend to update any forward-looking statements after the date on which the statement is made, whether as a result of new information, future events or circumstances or otherwise.
Company Overview
We are a clinical-stage biopharmaceutical company focused on developing novel, proprietary therapeutics and delivery methods for the treatment of breast cancer and other breast conditions. Our lead program is the development of Endoxifen, which is an active metabolite of tamoxifen, an FDA-approved drug to treat and prevent breast cancer. We are developing an oral and topical form of Endoxifen. Our Endoxifen is being developed to potentially treat a number of conditions, including: mammographic breast density (or, MBD); breast cancer in the “window of opportunity” between diagnosis of breast cancer and surgery; gynecomastia, which is male breast enlargement; and the recurrence of breast cancer in patients who do not benefit from taking tamoxifen meaning that they are “refractory” to tamoxifen. We are also developing our patented intraductal delivery technology to potentially target the delivery of therapies, including fulvestrant, immunotherapies and Chimeric Antigen Receptor T-cell therapies (CAR-T therapies), directly to the site of breast cancer.
In 2017, we completed a Phase 1 placebo-controlled clinical study of our proprietary oral and topical formulations of Endoxifen in 48 healthy women. All objectives were met: there were no clinically significant safety signals and no clinically significant adverse events, and both the oral and topical Endoxifen were well tolerated. In the topical arm of the study, low but measurable Endoxifen levels were detected in the blood in a dose-dependent fashion. In the oral arm of the study, participants exhibited dose-dependent Endoxifen levels that met or exceeded the published therapeutic level. The median time for patients in the study to reach the steady-state serum levels of Endoxifen while taking daily doses of oral Endoxifen was 7 days. Published literature indicates that it takes approximately 50-200 days for patients to reach steady-state Endoxifen levels from daily doses of oral tamoxifen. In September 2018, we completed a Phase 1 placebo-controlled clinical study of our proprietary topical Endoxifen in 24 healthy men. All of our objectives of safety, tolerability and pharmacokinetics were successfully met.
We are currently conducting two Phase 2 studies of our proprietary Endoxifen: one in Stockholm, Sweden using our topical Endoxifen for reduction of MBD and another in Australia using our oral Endoxifen for patients in the window of opportunity between diagnosis of breast cancer and surgery. In October 2018, the MBD study in Sweden was fully-enrolled with all 90 participants: 60 participants on two different dose levels and 30 participants on placebo. Dosing in this study was completed in April 2019 and we expect to report preliminary results in the second quarter 2019.
In December 2018, we began providing our oral Endoxifen to a pre-menopausal, estrogen-receptor positive (ER+), lacking CYP2D6 function, breast cancer patient under an FDA-approved "expanded access" program. The purpose of this therapeutic approach was to reduce activity of the cancer cells prior to surgery. The patient received daily doses of our oral Endoxifen for approximately three weeks prior to surgery. There were no safety or tolerability issues and her surgery was successfully completed. The cancer cell biological activity was reduced, based on the estrogen receptor activity of the tumor cells and a 50% reduction in Ki-67. The FDA has also approved use of our Endoxifen for this patient following her surgery, under the FDA expanded access IND program, the use of our proprietary oral Endoxifen is restricted solely to this patient.
We are currently conducting a Phase 2 study at Montefiore Medical Center, Bronx, New York, using our intraductal technology to deliver fulvestrant directly to the site of the tumor via the breast ducts. Our program to use our intraductal technology to deliver CAR-T and other immunotherapies is in the pre-clinical phase.
Research and Development Phase
We are in the research and development phase and are not currently marketing any products or services. We do not anticipate generating revenue unless and until we develop and launch our pharmaceutical programs.
Commercial Lease Agreements
On November 1, 2018, the Company entered into an operating lease to pay $3,660 monthly rent for a term of 22 months with WW 107 Spring Street LLC to lease office space at 107 Spring Street, Seattle, Washington.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.
Significant changes to our accounting policies as a result of adopting ASC Topic 842 are discussed in Note 11 of the notes to our unaudited condensed consolidated financial statements. There were no other changes in our significant accounting policies and estimates during the three months ended March 31, 2019, from those set forth in “Note 3,
Summary of Accounting Policies
” in our Annual Report on Form 10-K for the year ended December 31, 2018. We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.
Share-Based Payments
We follow the provisions of ASC 718,
Compensation – Stock Compensation
, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, non-employee directors, and consultants, including employee stock options. Stock compensation expense based on the grant date’s fair value was estimated in accordance with the provisions of ASC 718 and is recognized as an expense over the requisite service period with forfeitures recognized when they occur.
The fair value of each option grant is estimated using the Black-Scholes option-pricing model, which requires assumptions regarding the expected volatility of our stock options, the expected life of the options, an expectation regarding future dividends on our common stock, and estimation of an appropriate risk-free interest rate. Our expected common stock price volatility assumption is based upon the volatility of our stock price. The expected life assumption for stock option grants was based upon the simplified method provided for under ASC 718-10, which averages the contractual term of the options of ten years with the average vesting term of one to four years. The dividend yield assumption of zero is based upon the fact that we have never paid cash dividends and presently have no intention of paying cash dividends in the future. The risk-free interest rate used for each grant was based upon prevailing short-term interest rates over the expected life of the options.
Results of Operations
Comparison of the three months ended March 31, 2019 and 2018
Revenue and Cost of Revenue:
For the three months ended March 31, 2019 and 2018, we have no source of sustainable revenue and no associated cost of revenue.
Operating Expenses
: Total operating expenses were approximately $4,064,000 for the three months ended March 31, 2019, which is an increase of approximately $2,190,000 or 117%, from the three months ended March 31, 2018. Operating expenses for 2019 consisted of research and development (R&D) expenses of approximately $1,451,000 and general and administrative (G&A) expenses of approximately $2,613,000. Operating expenses for 2018 consisted of R&D expenses of approximately $471,000, and G&A expenses of approximately $1,403,000.
Research and Development Expenses
: R&D expenses for the three months ended March 31, 2019, were approximately $1,451,000, an increase of approximately $980,000 or 208% from total R&D expenses for the three months ended March 31, 2018 of approximately $471,000. The increase in R&D expense is attributed to salaries, stock-based compensation, and clinical trial expenses associated with our Endoxifen program. Stock-based compensation expense increased approximately $668,000 in 2019 resulting from the cancellation of stock options. There were no Liability Option cancellations in the comparable period in 2018. We expect our R&D expenses to increase throughout 2019 as we commence additional Phase 2 clinical studies of Endoxifen, continue the clinical trial of Fulvestrant administered via our intraductal technology and continue the development of other indications and therapeutics, including CAR-T and immunotherapies administered via our intraductal technologies.
General and Administrative Expenses
: G&A expenses were approximately $2,613,000 for the three months ended March 31, 2019, an increase of approximately $1,210,000, or 86% from the total G&A expenses for the three months ended March 31, 2018, of approximately $1,403,000. G&A expenses consist primarily of personnel and related benefit costs, facilities, professional services, insurance, and public company related expenses. The increase in G&A expenses for the quarter ended March 31, 2019, is mainly attributed to an increase in stock-based compensation expense due to the cancellation of the 2018 Liability Options of approximately $1,074,000, payroll expenses resulting from salary increases, and increased legal and professional consulting expenses over the prior year.
Income taxes:
We have incurred net operating losses from inception; we did not record an income tax benefit for our incurred losses for the three months ended March 31, 2019 and 2018, due to uncertainty regarding utilization of our net operating carryforwards and due to our history of losses.
Liquidity and Capital Resources
The Company has incurred net losses and negative operating cash flows since inception. For the three months ended March 31, 2019, the Company recorded a net loss of approximately $4.1 million and used approximately $2.1 million of cash in operating activities. As of March 31, 2019, the Company had approximately $19.6 million in cash and cash equivalents and working capital of approximately $19.3 million. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and is currently expending funds in research and development activities that are expected to continue to require funding. Management believes the currently available funding will be sufficient to finance the Company’s operations for at least one year from the date of these Condensed Consolidated Financial Statements. However, the Company will likely require additional funding to continue its activities beyond that date. If adequate funds are not available, the Company may be required to reduce the scope, delay, or eliminate some or all of its planned commercial activities. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.
Cash Flows
As of March 31, 2019, we had cash, cash equivalents and restricted cash of approximately $19.7 million.
Net Cash Flows from Operating Activities
: Net cash used in operating activities was approximately $2,149,000 for the three months ended March 31, 2019, a decrease of approximately $238,000, or 10%, compared to net cash used in operating activities for the three months ended March 31, 2018 of approximately $2,387,000. The decrease in the 2019 period as compared to 2018 resulted primarily from decreased spending on R&D activities.
Net Cash Flows from Financing Activities:
Net cash provided by financing activities was approximately $11,337,000 for the three months ended March 31, 2019, which represents proceeds from the exercise of warrants issued in the May 2018 financing. There were no comparable warrant exercises or financing activities for the three months ended March 31, 2018.
Funding Requirements
We expect to incur ongoing operating losses for the foreseeable future as we continue to develop our planned therapeutic programs including related clinical studies and other programs in the pipeline. We expect that our current available funding will be sufficient to fund our planned operations for at least the next 12 to 18 months from the date of this report. If we meet certain requirements, we may sell securities that are registered on our Form S-3 registration statement, and by raising capital through sales of securities to third parties and existing stockholders. If we are unable to raise additional capital when needed, however, we could be forced to curtail or cease operations. Our future capital uses and requirements will depend on the time and expenses needed to begin and continue clinical trials for our new drug developments.
Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or by selling debt securities, if convertible, further dilution to our existing stockholders would result. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, collaboration agreements, debt financings or licensing arrangements.
If adequate funds are not available, we may be required to terminate, significantly modify or delay our development programs, reduce our planned commercialization efforts, or obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. Further, we may elect to raise additional funds even before we need them if we believe the conditions for raising capital are favorable.
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.
Recently Adopted Accounting Pronouncements:
In the first quarter of 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02,
Lease Accounting
Topic 842
: ("
Topic 842
")
and recognized on our Condensed Consolidated Balance Sheet $101,000 of lease liabilities with corresponding right-of-use assets for operating leases. The new lease standard requires a lessee to measure its operating lease liabilities at the present value of the remaining minimum lease payments with a discounted cash flow model using the interest rate implicit in the lease. If the implicit interest rate cannot be readily determined, the lessee must use its incremental borrowing rate (“IBR”). If the lessee does not have an IBR, the lessee must use a rate that approximates the rate of interest that the lessee would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The implicit interest rate was readily determinable for our copier lease; however, we used an IBR to measure our adoption date operating lease liability related to our office space which rate represents our estimated borrowing rate on a secured loan collateralized by similar assets for a similar term. The adoption did not have an impact on the Condensed Consolidated Statements of Cash Flows. As permitted under the standard, we elected prospective application of the new guidance and prior periods continue to be presented in accordance with Accounting Standards Codification ("ASC") Topic 840. Refer to our 2018 Annual Report on Form 10-K for disclosures required by Topic 840. The new standard provides a number of optional practical expedients in transition. We elected the practical expedients to not reassess its prior conclusions about lease identification under the new standard, to not reassess lease classification, to not separate lease and non lease components and to not reassess initial direct costs. We did not elect the practical expedient allowing the use-of-hindsight which would require us to reassess the lease term of its leases based on all facts and circumstances through the effective date and did not elect the practical expedient pertaining to land easements as this is not applicable to our current contract portfolio. See Note 11,
Commitments and Contingencies,
of the notes to our unaudited condensed consolidated financial statements for additional discussion of our leases and the amounts recognized in these unaudited condensed consolidated financial statements.
On January 1, 2019, we adopted ASU 2018-08,
Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.
This ASU affects not-for-profit entities and business entities that receive or make contributions of cash. The ASU clarifies and improves the scope and accounting guidance to assist entities in evaluating if those transactions should be accounted for as contributions under the scope of Topic 958 or as an exchange transaction subject to other guidance. The adoption did not have any impact on the financial statements.
Recent Accounting Pronouncements:
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
, to improve the effectiveness of disclosures. The amendments remove, modify, and add certain disclosure requirements in Topic 820, “Fair Value Measurement.” The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. Furthermore, an entity is permitted to early adopt any removed or modified disclosures upon issuance of the update and delay adoption of the additional disclosures until their effective date. We do not expect this amendment to have a material impact on our consolidated financial statements.