sbph-10q_20160930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-37718

 

Spring Bank Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

52-2386345

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

86 South Street

Hopkinton, MA

01748

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (508) 473-5993

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a small reporting company)

Small reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of October 27, 2016, the registrant had 7,767,981 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

PART II.

OTHER INFORMATION

25

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 6.

Exhibits

59

Signatures

60

Exhibit Index

61

 

 

 

i


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions.

These forward-looking statements include, among other things, statements about:

 

the anticipated timing, cost and conduct of our ongoing Phase 2a clinical trial of SB 9200 in chronic hepatitis B virus;

 

the anticipated timing, cost and conduct of additional clinical trials of SB 9200 in chronic hepatitis B virus and in other indications and of other product candidates;

 

the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;

 

our plans to seek and enter into clinical trial collaborations and other broader collaborations;

 

our intellectual property position and strategy;

 

the rate and degree of market acceptance and clinical utility of our products

 

our commercialization, marketing and manufacturing capabilities and strategy; and

 

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

 

2


 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

SPRING BANK PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,332

 

 

$

4,347

 

Marketable securities

 

 

10,313

 

 

 

5,335

 

Prepaid expenses and other current assets

 

 

1,059

 

 

 

313

 

Total current assets

 

 

16,704

 

 

 

9,995

 

Marketable securities

 

 

 

 

 

3,189

 

Property and equipment, net

 

 

496

 

 

 

427

 

Other assets

 

 

35

 

 

 

966

 

Total

 

$

17,235

 

 

$

14,577

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,340

 

 

$

2,183

 

Accrued expenses and other current liabilities

 

 

1,360

 

 

 

1,369

 

Total liabilities

 

 

3,700

 

 

 

3,552

 

Commitments (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.0001 par value—authorized, no shares and 5,000,000

   shares at September 30, 2016 and December 31, 2015, respectively; no shares and

   1,000,000 shares issued and outstanding at September 30, 2016 and December 31,

   2015, respectively

 

 

 

 

 

 

Preferred stock, $0.0001 par value—authorized, 10,000,000 and no shares at September

   30, 2016 and December 31, 2015, respectively; no shares issued or outstanding at

   September 30, 2016 and December 31, 2015

 

 

 

 

 

 

Common stock, $0.0001 par value—authorized, 200,000,000 and 50,000,000 shares at

   September 30, 2016 and December 31, 2015, respectively; 7,767,981 and 5,796,091

   shares issued and outstanding at September 30, 2016 and December 31, 2015,

   respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

62,669

 

 

 

45,211

 

Accumulated deficit

 

 

(49,135

)

 

 

(34,169

)

Other comprehensive income (loss)

 

 

 

 

 

(18

)

Total stockholders’ equity

 

 

13,535

 

 

 

11,025

 

Total

 

$

17,235

 

 

$

14,577

 

 

See notes to consolidated financial statements.

 

 

3


 

SPRING BANK PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In Thousands, Except Share and Per Share Data)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Grant revenue

 

$

-

 

 

$

260

 

 

$

352

 

 

$

841

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,723

 

 

 

2,101

 

 

 

11,247

 

 

 

4,779

 

General and administrative

 

 

1,452

 

 

 

1,566

 

 

 

4,136

 

 

 

3,695

 

Total operating expenses

 

 

4,175

 

 

 

3,667

 

 

 

15,383

 

 

 

8,474

 

Loss from operations

 

 

(4,175

)

 

 

(3,407

)

 

 

(15,031

)

 

 

(7,633

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

27

 

 

 

10

 

 

 

65

 

 

 

15

 

Net loss

 

 

(4,148

)

 

 

(3,397

)

 

 

(14,966

)

 

 

(7,618

)

Unrealized gain (loss) on marketable securities

 

 

(3

)

 

 

2

 

 

 

18

 

 

 

(3

)

Comprehensive loss

 

$

(4,151

)

 

$

(3,395

)

 

$

(14,948

)

 

$

(7,621

)

Net loss per common share – basic and diluted

 

$

(0.53

)

 

$

(0.59

)

 

$

(2.18

)

 

$

(1.35

)

Weighted-average number of shares outstanding – basic and

   diluted

 

 

7,759,630

 

 

 

5,796,091

 

 

 

6,856,876

 

 

 

5,644,587

 

 

See notes to consolidated financial statements.

 

 

4


 

SPRING BANK PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(14,966

)

 

$

(7,618

)

Adjustments for:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

87

 

 

 

61

 

Non-cash stock-based compensation

 

 

1,015

 

 

 

693

 

Non-cash issuance of common stock and warrants connected to license agreement

 

 

2,780

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(781

)

 

 

(39

)

Accounts payable

 

 

148

 

 

 

169

 

Accrued expenses and other

 

 

(19

)

 

 

392

 

Net cash used in operating activities

 

 

(11,736

)

 

 

(6,342

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

      Purchases of marketable securities

 

 

(6,693

)

 

 

(7,704

)

      Proceeds from sale of marketable securities

 

 

4,922

 

 

 

 

      Purchases of property and equipment

 

 

(156

)

 

 

(324

)

Net cash used in investing activities

 

 

(1,927

)

 

 

(8,028

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

      Proceeds from issuance of common stock

 

 

11,339

 

 

 

21,648

 

      Payment of financing costs related to issuance of common stock

 

 

(2,128

)

 

 

(1,754

)

      Proceeds from exercise of stock options

 

 

95

 

 

 

 

      Proceeds from exercise of warrants

 

 

5,342

 

 

 

25

 

Cash provided by financing activities

 

 

14,648

 

 

 

19,919

 

Net increase in cash and cash equivalents

 

 

985

 

 

 

5,549

 

Cash and cash equivalents, beginning of period

 

 

4,347

 

 

 

1,570

 

Cash and cash equivalents, end of period

 

$

5,332

 

 

$

7,119

 

Supplemental disclosures of noncash financing activities:

 

 

 

 

 

 

 

 

Issuance of common stock warrants in connection with initial public offering

 

$

218

 

 

$

 

Financing costs related to the issuance of common stock included in accounts payable and accrued expenses

 

$

19

 

 

$

 

Issuance of common stock warrants to brokers in connection with sale of common stock

 

$

 

 

$

334

 

 

See notes to consolidated financial statements.

 

 

5


 

Spring Bank Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

 

 

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Spring Bank Pharmaceuticals, Inc. (the “Company”) is a clinical-stage biopharmaceutical company engaged in the discovery and development of a novel class of therapeutics using a proprietary small molecule nucleic acid hybrid, or SMNH, chemistry platform. Since inception in 2002 and prior to its initial public offering in May 2016, the Company built its technology platform and product candidate pipeline using a semi-virtual business model, supported by grants and direct funding from the United States National Institutes of Health (“NIH”) as well as through private financings. In September 2015, the Company formed a wholly owned subsidiary, Sperovie Biosciences, Inc.

On May 11, 2016 the Company completed its initial public offering of 920,000 shares of common stock at a price to the public of $12.00 per share, resulting in net proceeds of approximately $10.2 million, after underwriting discounts and commissions, but before deducting offering-related expenses. In addition, on June 3, 2016, the Company issued and sold an additional 24,900 shares of common stock at the initial public offering price of $12.00 per share pursuant to the underwriter’s partial exercise of their option to purchase additional shares of common stock, resulting in net proceeds of approximately $275,000, after underwriting discounts and commissions, but before deducting offering-related expenses. In connection with the initial closing of the initial public offering, the Company received approximately $5.3 million in proceeds upon the exercise of previously issued warrants to purchase 641,743 shares of common stock of the Company.

The Company’s success is dependent upon its ability to successfully complete clinical development and obtain regulatory approval of its product candidates, successfully commercialize approved products, generate revenue, and, ultimately, attain profitable operations.

Basis of Presentation and Liquidity

The accompanying consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”).

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses from operations and negative operating cash flows since inception, and expects to incur additional operating losses. The Company’s current resources include cash resources of approximately $5,332,000 and marketable securities of $10,313,000 at September 30, 2016. The Company believes that its cash, cash equivalents and marketable securities will be sufficient to allow the Company to fund its current operating plan and continue as a going concern.

The accompanying interim financial statements as of September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015, and related interim information contained within the notes to the financial statements are unaudited. In management’s opinion, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments (including normal recurring adjustments) necessary for the fair presentation of the Company’s financial position as of September 30, 2016, results of operations for the three and nine months ended September 30, 2016 and 2015, and its cash flows for the nine months ended September 30, 2016 and 2015. These interim financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2015 filed with the Securities and Exchange Commission on May 6, 2016. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the full fiscal year or any interim period.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Sperovie Biosciences, Inc. Sperovie did not have any assets, liabilities or operations for any period presented.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities (including clinical trial accruals), the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases estimates and assumptions on historical experience when available and on various factors that it

6


 

believes to be reasonable under the circumstances. Significant estimates relied upon in preparing the accompanying financial statements related to the fair value of common stock and other equity instruments, accounting for stock-based compensation, income taxes, useful lives of long-lived assets, and accounting for certain accruals. The Company evaluates its estimates and assumptions on an ongoing basis. The Company’s actual results may differ from these estimates.

Cash and Cash Equivalents

Cash equivalents are stated at fair value and include short-term, highly liquid investments with remaining maturities of 90 days or less at the date of purchase.

Included in cash and cash equivalents as of September 30, 2016 and December 31, 2015 are money market fund investments of $3,993,000 and $2,422,000 as of September 30, 2016 and December 31, 2015, respectively, and commercial paper of $450,000 as of December 31, 2015, which are reported at fair value (Note 4).

Concentration of Credit Risk

Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. Substantially all of the Company’s cash is held at financial institutions that management believes to be of high-credit quality. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

The Company had one source of revenue, grants from the NIH, during all periods presented, representing 100% of total revenue for each period.

Investments in Marketable Securities

The Company invests excess cash balances in short-term and long-term marketable securities. The Company classifies investments in marketable securities as either held-to-maturity or available-for-sale based on facts and circumstances present at the time of purchase. At each balance sheet date presented, all investments in securities are classified as available-for-sale. The Company reports available-for-sale investments at fair value at each balance sheet date and includes any unrealized holding gains and losses (the adjustment to fair value) in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains and losses are determined using the specific identification method and are included in other income (expense). If any adjustment to fair value reflects a decline in the value of the investment, the Company considers all available evidence to evaluate the extent to which the decline is “other than temporary,” including the intention to sell and, if so, marks the investment to market through a charge to the Company’s consolidated statements of operations and comprehensive loss.

Property and Equipment, Net

Property and equipment are recorded at cost. Costs associated with maintenance and repairs are expensed as incurred. Depreciation and amortization are provided using the straight-line method over the estimated useful lives:

 

Asset Category

 

Useful Life

Equipment

 

5-7 years

Furniture and fixtures

 

5 years

Leasehold improvements

 

10 years or the remaining term of respective

lease, if shorter

 

 

 

 

 

 

Impairment of Long-Lived Assets

Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If the undiscounted cash flows are insufficient to recover the carrying value, an impairment loss is recorded for the difference between the carrying value and fair value of the asset. Through September 30, 2016, no such impairment has occurred.

7


 

Deferred Public Offering Costs

Deferred public offering costs, which primarily consist of direct and incremental legal and accounting fees relating to the Company’s initial public offering, are capitalized. As of December 31, 2015, deferred public offering costs were $966,000, and recorded in other assets in the accompanying consolidated balance sheet. In May 2016, in connection with the consummation of the Company’s initial public offering, total deferred public offering costs of $2.1 million were fully offset against proceeds received by the Company in the initial public offering. There were no deferred public offering costs as of September 30, 2016.

Deferred Rent

The Company’s operating leases include rent escalation payment terms and other incentives received from landlords. Deferred rent represents the difference between actual operating lease payments due and straight-line rent expense over the term of the lease, which is recorded in accrued expenses and other current liabilities. The Company had deferred aggregate rent for its research and development facility in Milford, Massachusetts and its headquarters in Hopkinton, Massachusetts of $33,000 and $6,000 as of September 30, 2016 and December 31, 2015, respectively.

Revenue Recognition

The Company recognizes revenue when all of the following criteria are met: there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery has occurred or services we recognized have been rendered and collection of the related receivable is reasonably assured. Generally, these criteria were met and revenue from grants from the NIH, which subsidized certain of our research projects, as efforts were expended and as eligible project costs were incurred.

Research and Development Costs

Research and development expenses consist primarily of costs incurred for the Company’s research activities, including discovery efforts, and the development of product candidates, which include:

 

expenses incurred under agreements with third parties, including contract research organizations, or CROs, that conduct research, preclinical activities and clinical trials on the Company’s behalf as well as contract manufacturing organizations, or CMOs, that manufacture drug products for use in the Company’s preclinical and clinical trials;

 

salaries, benefits and other related costs, including stock-based compensation expense, for personnel in the Company’s research and development functions;

 

costs of outside consultants, including their fees, stock-based compensation and related travel expenses;

 

the cost of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials;

 

costs related to compliance with regulatory requirements; and

 

facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

The Company expenses research and development costs as incurred. The Company recognizes external development costs based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its vendors and its clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in the Company’s consolidated financial statements as prepaid or accrued research and development expenses.

Warrants

The Company reviews the terms of all warrants issued and classifies the warrants as a component of permanent equity if they are freestanding financial instruments that are legally detachable and separately exercisable, contingently exercisable, do not embody an obligation for the Company to repurchase its own shares, and permit the holders to receive a fixed number of shares of common stock upon exercise. In addition, the warrants must require physical settlement and may not provide any guarantee of value or return. Warrants that meet these criteria are initially recorded at their grant date fair value and are not subsequently remeasured.

Stock-Based Compensation

The Company accounts for all stock-based payment awards granted to employees and nonemployees using a fair value method. The Company’s stock-based payments include stock options and grants of common stock, including common stock subject to vesting. The

8


 

measurement date for employee awards is the date of grant, and stock-based compensation costs are recognized as expense over the employees’ requisite service period, which is the vesting period, on a straight-line basis. The measurement date for nonemployee awards is the date the services are completed, resulting in periodic adjustments to stock-based compensation during the vesting period for changes in the fair value of the awards. Stock-based compensation costs for nonemployees are recognized as expense over the vesting period on a straight-line basis. Stock-based compensation is classified in the accompanying consolidated statements of operations and comprehensive loss based on the department to which the related services are provided.

Financial Instruments

The Company’s financial instruments consist of cash equivalents, marketable securities, and accounts payable. The carrying amounts of cash and cash equivalents and accounts payable approximate their fair value due to the short-term nature of those financial instruments. The fair value of the marketable securities are remeasured each reporting period as described in Note 4.

Fair Value Measurements

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a hierarchy of inputs used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The three levels of the fair value hierarchy are described below:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company’s assets and liabilities measured at fair value on a recurring basis include cash equivalents and marketable securities.

Net Loss Per Share Attributable to Common Stockholders

Basic net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding for the period, determined using the treasury-stock method and the as if-converted method, for convertible securities, if inclusion of these instruments is dilutive.

In May and June 2016, the Company issued 944,900 shares of common stock in connection with its initial public offering and 641,743 shares of common stock upon the exercise of outstanding warrants to purchase common stock of the Company. Additionally, upon the closing of the initial public offering, all outstanding shares of the Company’s preferred stock automatically converted into 250,000 shares of the Company’s common stock. The issuance of these shares resulted in a significant increase in the Company’s shares outstanding, to 7,767,981 shares as of September 30, 2016, and weighted average shares outstanding for the three and nine months ended September 30, 2016, when compared to the comparable prior year period, is expected to continue to impact the year-over-year comparability of the Company’s loss per share calculations through 2017.

Income Taxes

Deferred tax assets and liabilities are determined based upon the differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and for loss and credit carryforwards using enacted tax rates expected to be in effect in the

9


 

years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized in the consolidated financial statements. The Company classifies interest and penalties associated with such uncertain tax positions as a component of interest expense. As of September 30, 2016 and December 31, 2015, the Company has not identified any material uncertain tax positions.

Guarantees and Indemnifications

As permitted under Delaware law, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity.

The Company leases office and laboratory space in Hopkinton, Massachusetts and Milford, Massachusetts, under non-cancelable operating leases. The Company has standard indemnification arrangements under these leases that require it to indemnify the landlords against any liability for injury, loss, accident, or damage from any claims, actions, proceedings, or costs resulting from certain acts, breaches, violations, or nonperformance under the Company’s lease.

Through September 30, 2016, the Company had not experienced any losses related to these indemnification obligations and no material claims were outstanding. The Company does not expect significant claims related to these indemnification obligations, and consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, the Company’s Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment and does not track expenses on a program-by-program basis.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under US GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In July 2015, the FASB delayed the effective date of the new standard by one year to December 15, 2017, for annual and interim reporting periods beginning after that date. In accordance with the delay, the new standard will be effective for the Company beginning January 1, 2018. Early adoption is permitted, but not before the original effective date of December 15, 2016. The new standard allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. In April 2016, the FASB issued ASU 2016-10—Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations. The Company is currently evaluating the impact that the adoption of the standards may have on its consolidated financial statements and additional changes may be identified. The Company has not elected a transition method.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. The requirements of ASU 2014-15 will be effective for the annual financial statement period beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact that the adoption of the standards may have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the current leasing guidance and upon adoption, will require lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The new standard is effective for the Company for the annual period beginning after December 15, 2018, and can be early adopted by applying a modified retrospective approach for leases existing at, and entered into after, the beginning of the earliest comparable period presented in the financial statements. The Company is currently evaluating the impact that the adoption of the standards may have on its consolidated financial statements.

10


 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation, and includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new standard is effective for the Company for the annual period ending after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact that the adoption of the standards may have on its consolidated financial statements.

 

 

2. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company (in thousands, except share and per share data):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(4,148

)

 

$

(3,397

)

 

$

(14,966

)

 

$

(7,618

)

Weighted-average number of common shares-basic

   and diluted

 

 

7,759,630

 

 

 

5,796,091

 

 

 

6,856,876

 

 

 

5,644,587

 

Net loss per common share-basic and diluted

 

$

(0.53

)

 

$

(0.59

)

 

$

(2.18

)

 

$

(1.35

)

 

Because the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share.

The following potentially dilutive securities outstanding, prior to the use of the treasury stock method or if-converted method, have been excluded from the computation of diluted weighted-average shares outstanding, because such securities had an antidilutive impact due to the losses reported:

 

 

 

For the Three and Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Preferred stock

 

 

 

 

 

1,000,000

 

Common stock warrants

 

 

153,347

 

 

 

1,181,776

 

Stock options

 

 

718,065

 

 

 

485,481

 

Upon the closing of the initial public offering, all outstanding shares of the Company’s 1,000,000 shares of preferred stock automatically converted into 250,000 shares of the Company’s common stock.

 

 

3. PROPERTY AND EQUIPMENT, NET

Property and equipment as of September 30, 2016 and December 31, 2015, consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Equipment

 

$

515

 

 

$

448

 

Furniture and fixtures

 

 

144

 

 

 

55

 

Leasehold improvements

 

 

133

 

 

 

133

 

Total property and equipment

 

 

792

 

 

 

636

 

Less: accumulated depreciation and amortization

 

 

(296

)

 

 

(209

)

Property and equipment, net

 

$

496

 

 

$

427

 

 

Depreciation and amortization expense for the three and nine months ended September 30, 2016 was $30,000 and $87,000, respectively. Depreciation and amortization expense for the three and nine months ended September 30, 2015 was $27,000 and $61,000, respectively.

 

 

4. FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the

11


 

measurement date. Valuation techniques used to measure fair value are performed in a manner to maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company classified its money market funds within Level 1 because their fair values are based on their quoted market prices. The Company classified its commercial paper and fixed income securities within Level 2 because their fair values are determined using alternative pricing sources or models that utilized market observable inputs.

A summary of the assets and liabilities that are measured at fair value as of September 30, 2016 and December 31, 2015 is as follows (in thousands):

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying

Value

 

 

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

 

 

Significant

other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

3,993

 

 

$

3,993

 

 

$

 

 

$

 

Fixed income securities

 

 

10,313

 

 

 

 

 

 

10,313

 

 

 

 

Total September 30, 2016

 

$

14,306

 

 

$

3,993

 

 

$

10,313

 

 

$

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

2,422

 

 

$

2,422

 

 

$

 

 

$

 

Commercial paper (1)

 

 

450

 

 

 

 

 

 

450

 

 

 

 

Fixed income securities

 

 

8,524

 

 

 

 

 

 

8,524

 

 

 

 

Total December 31, 2015

 

$

11,396

 

 

$

2,422

 

 

$

8,974

 

 

$

 

 

(1)

Money market funds and commercial paper are included within cash and cash equivalents in the accompanying consolidated balance sheets recognized at fair value.

 

 

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses as of September 30, 2016 and December 31, 2015, consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Clinical

 

$

521

 

 

$

259

 

Compensation and benefits

 

 

635

 

 

 

684

 

Accounting and legal

 

 

169

 

 

 

416

 

Other

 

 

35

 

 

 

10

 

Total accrued expenses

 

$

1,360

 

 

$

1,369

 

 

 

6. STOCKHOLDERS’ EQUITY

Common and Preferred Stock

Effective February 1, 2016, the Company amended and restated its license agreement with BioHEP Technologies Ltd. (“BioHEP”) (Note 7). In connection with the amendment and restatement, the Company issued 125,000 shares of its common stock to BioHEP and granted to BioHEP a warrant to purchase an additional 125,000 shares of its common stock at a purchase price of $16.00 per share, which warrant will expire on August 1, 2018. The fair value of the common stock as of the date of issuance, $2.0 million, was expensed as research and development costs.

The Company effected a 1-for-4 reverse stock split of its common stock on March 8, 2016. All share and per share amounts, and the number of shares of common stock into which each share of preferred stock converted in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

On May 11, 2016, the Company completed its initial public offering of 920,000 shares of common stock at a price to the public of $12.00 per share, resulting in gross proceeds of approximately $11.0 million, before deducting underwriting discounts and

12


 

commissions and offering-related expenses. Upon the closing of its initial public offering, the Company filed an amended and restated certificate of incorporation, which authorizes the Company to issue 200,000,000 shares of common stock, $0.0001 par value per share, and 10,000,000 shares of preferred stock, $0.0001 par value per share.

Upon the closing of the initial public offering, all outstanding shares of the Company’s preferred stock automatically converted into 250,000 shares of the Company’s common stock.

On June 3, 2016, the Company issued and sold an additional 24,900 shares of common stock at the initial public offering price of $12.00 per share, pursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock, resulting in gross proceeds of approximately $0.3 million, before deducting underwriting discounts and commissions and offering-related expenses.

Warrants

In connection with the amendment and restatement of a license agreement, the Company issued a warrant to purchase 125,000 shares of the Company’s common stock to BioHEP, effective February 1, 2016 (Note 7). The Company evaluated the terms of the warrant and concluded that it should be equity-classified. The fair value of the warrant, $0.8 million, was estimated on the issuance date using a Black Scholes pricing model based on the following assumptions: an expected term of two and a half years, expected stock price volatility of 71%, a risk free rate of 1.01%, and a dividend yield of 0%. The fair value was expenses as research and development costs.

The Company issued to Dawson James Securities, Inc., the sole book-running manager for the initial public offering, a warrant to purchase 27,600 share of common stock in May 2016, and a warrant to purchase 747 shares of common stock in June 2016 (the “Dawson James Warrants”). The Dawson James Warrants are exercisable for cash at an exercise price of $15.00 per share commencing on November 5, 2016. The Dawson James Warrants expire on May 5, 2021. The Company evaluated the terms of the Dawson James Warrants and concluded that they should be equity-classified. The fair value of the May 2016 Dawson James Warrants were estimated on the applicable issuance dates using a Black Scholes pricing model based on the following assumptions: an expected term of 4.99 years; expected stock price volatility of 87%; a risk free rate of 1.20%; and a dividend yield of 0%. The fair value of the June 2016 Dawson James Warrants were estimated on the applicable issuance dates using a Black Scholes pricing model based on the following assumptions: an expected term of 4.92 years; expected stock price volatility of 87%; a risk free rate of 1.23%; and a dividend yield of 0%.

The Company received approximately $5.3 million in proceeds upon the exercise of warrants to purchase 641,743 shares of common stock of the Company, which were exercised in connection with the closing of the initial public offering. Upon the closing of the initial public offering, all of the outstanding warrants that were not exercised, except the warrant issued to BioHEP on February 1, 2016 and the Dawson James Warrants, terminated in accordance with their original terms.

A summary of warrant activities during the nine months ended September 30, 2016 follows:

 

 

 

Warrants

 

Outstanding at December 31, 2015

 

 

1,181,776

 

Grants

 

 

153,347

 

Exercises

 

 

(641,743

)

Expirations/cancellations

 

 

(540,033

)

Outstanding at September 30, 2016

 

 

153,347

 

 

2014 Stock Incentive Plan

In April 2014, the Company’s board of directors (the “Board”) approved the 2014 Stock Incentive Plan (the “2014 Plan”). The Company’s 2014 Plan provides for the issuance of common stock, stock options and other stock-based awards to employees, officers, directors, consultants, and advisors. As of September 30, 2016, the Board had authorized 750,000 shares of common stock to be issued under the 2014 Plan. Awards under the 2014 Plan may include options (incentive and non-statutory), stock appreciation rights, restricted stock, restricted stock units or dividend equivalent right, or a combination of them. Under the 2014 Plan, the Board, or a committee authorized by the Board, determines the number of shares of common stock to be granted pursuant to the awards, as well as the exercise price and terms of such awards.

The Company’s 2015 Stock Incentive Plan (the “2015 Plan”) became effective immediately prior to the closing of the Company’s initial public offering on May 11, 2016. Upon the effectiveness of the 2015 Plan, the 116,863 shares of common stock that remained

13


 

available for grant under the 2014 Plan became available for grant under the 2015 Plan, and no further awards were available to be issued under the 2014 Plan.

2015 Stock Incentive Plan

In December 2015, the Company’s Board approved the 2015 Plan, which became effective immediately prior to the closing of the Company’s initial public offering on May 11, 2016. The 2015 Plan provides for the issuance of common stock, stock options and other stock-based awards to employees, officers, directors, consultants, and advisors. The number of shares reserved for issuance under the 2015 Plan is the sum of 750,000 shares of common stock, plus the number of shares equal to the sum of (i) 116,863 shares of common stock, which was the number of shares reserved for issuance under the 2014 Plan that remained available for grant under the 2014 Plan immediately prior to the closing of the Company’s initial public offering, and (ii) the number of shares of common stock subject to outstanding awards under the 2014 Plan that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right. The exercise price of stock options cannot be less than the fair value of the common stock on the date of grant. Stock options awarded under the 2015 Plan expire 10 years after the grant date, unless the Board sets a shorter term.

The following table summarizes the option activity for the nine months ended September 30, 2016, under the 2014 Plan and the 2015 Plan (the “Plans”):

 

 

 

Options

 

 

Weighted-Average

Exercise Price Per

Share

 

Outstanding at December 31, 2015

 

 

610,481

 

 

$

11.99

 

Granted

 

 

123,334

 

 

 

10.42

 

Exercised

 

 

(10,247

)

 

 

9.28

 

Cancelled

 

 

(5,503

)

 

 

11.96

 

Outstanding at September 30, 2016

 

 

718,065

 

 

$

11.76

 

Exercisable at September 30, 2016

 

 

205,059

 

 

$

11.01

 

 

All stock options granted have a ten-year term. As of September 30, 2016, all options granted are expected to vest and the weighted-average remaining contractual life of all options is 8.8 years.

Prior to the initial public offering on May 11, 2016, the Board determined the estimated fair value of the Company’s common stock on the date of grant based on a number of objective and subjective factors, including third party valuations. Since the initial public offering, the fair value of the Company’s common stock on the date of the grant is based on the closing price per share of the Common Stock on the NASDAQ Capital Market on the date of grant. The computation of expected volatility is based on the historical volatilities of peer companies. The peer companies include organizations that are in the same industry, with similar size and stage of growth. The Company estimates that the expected life of the options granted using the simplified method allowable under Staff Accounting Bulletin No. 107, Share Based Payments. The interest rate is based on the U.S. Treasury bill rates for U.S. treasury bills with terms commensurate with the expected term of the option grants on the grant date of the option.

The following table summarizes the stock-based compensation expense for the three and nine months ended September 30, 2016, under the Plans:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

104

 

 

$

97

 

 

$

286

 

 

$

187

 

General and administrative

 

 

274

 

 

 

336

 

 

 

729

 

 

 

506

 

Total Stock-based compensation

 

$

378

 

 

$

433

 

 

$

1,015

 

 

$

693

 

 

The fair value of stock options vested during the nine months ended September 30, 2016 was $1,088,000. At September 30, 2016, there was $4,051,000 of unrecognized stock-based compensation expense relating to stock options granted pursuant to the Plans, which will be recognized over the weighted-average remaining vesting period of 2.9 years. Total unrecognized stock-based compensation expense may be adjusted for future changes in the estimated forfeiture rate.

14


 

Reserved Shares

As of September 30, 2016 and 2015, the Company has reserved the following shares of common stock for potential conversion of the Preferred Stock, exercise of warrants and outstanding options and issuance of shares available for grant under the 2015 Plan:

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

Preferred Stock

 

 

 

 

 

250,000

 

2012 Convertible financing warrants

 

 

 

 

 

798,653

 

2013 Convertible financing warrants

 

 

 

 

 

238,804

 

2014 Financing warrants

 

 

 

 

 

144,319

 

2015 BioHEP warrants

 

 

125,000

 

 

 

 

2015 Dawson James warrants

 

 

28,347

 

 

 

 

2014 and 2015 Stock incentive plans

 

 

1,475,000

 

 

 

725,000

 

Total

 

 

1,628,347

 

 

 

2,156,776

 

 

 

7. COMMITMENTS

Leases

In April 2015, the Company entered into an amendment to the lease for its research and development facility in Milford, Massachusetts to extend the term of the lease through March 31, 2018 and expand the leased laboratory space.

On March 24, 2016, the Company entered into a new operating lease for its headquarters in Hopkinton, Massachusetts with a lease term through May 31, 2021. The total payments due during the term of the lease are approximately $771,000.

Rent paid for the three and nine months ended September 30, 2016 was $56,000 and $110,000, respectively. Rent paid for the three and nine months ended September 30, 2015 was $20,000 and $34,000, respectively.

Future minimum commitments due under all leases at September 30, 2016 are as follows (in thousands):

 

Year

 

 

 

 

2016 (three months from October 2016 through December 2016)

 

$

56

 

2017

 

 

232

 

2018

 

 

174

 

2019

 

 

158

 

2020

 

 

164

 

Thereafter

 

 

70

 

Total minimum lease payments

 

$

854

 

 

BioHEP Technologies Ltd. License Agreement

In January 2016, the Company entered into an amended and restated license agreement with BioHEP, which amended and restated the prior license agreement with BioHEP which the Company had entered into in December 2003. The amendment and restatement of the license agreement became effective on February 1, 2016.

Under the amended and restated license agreement, the Company agreed to pay BioHEP up to $3.5 million in development and regulatory milestone payments for disease(s) caused by each distinct virus for which the Company develops licensed product(s). BioHEP is also eligible to receive tiered royalties in the low-to-mid single-digits on net product sales of licensed products by the Company and its affiliates and sub licensees, and a specified share of non-royalty sublicensing revenues the Company and its affiliates receive from sub licensees, which share of sublicensing revenues is capped at a maximum aggregate of $2.0 million under all such sublicenses.

Contingencies

The Company is subject to claims in the ordinary course of business, however, the Company is not currently a party to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or the results

15


 

of its operations. The Company accrues for contingent liabilities to the extent that the liability is probable and estimable, but there are no accruals for contingent liabilities in these consolidated financial statements.

 

 

8. RELATED PARTY TRANSACTIONS

The Company incurred no advisory fees during the three and nine months ended September 30, 2016 and incurred $19,000 and $56,000 in advisory fees to one of its directors during the three and nine months ended September 30, 2015, respectively.

 

 

9. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date on which the consolidated financial statements were issued, to ensure that this submission includes appropriate disclosure of events both recognized in the consolidated financial statements and events which occurred subsequently but were not recognized in the consolidated financial statements.

 

 

16


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our final prospectus for our initial public offering filed pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission, or SEC, on May 6, 2016. This discussion and other parts of this Quarterly Report contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Quarterly Report.

Overview

We are a clinical-stage biopharmaceutical company engaged in the discovery and development of a novel class of therapeutics using our proprietary small molecule nucleic acid hybrid, or SMNH, chemistry platform. We are developing our most advanced SMNH product, SB 9200, for the treatment of viral diseases. We have designed SB 9200 to selectively activate within infected cells the cellular proteins retinoic acid-inducible gene 1, or RIG-I, and nucleotide-binding oligomerization domain-containing protein 2, or NOD2, to inhibit viral replication and to cause the induction of intracellular interferon signaling pathways for antiviral defense. We believe that SB 9200 can play an important role in antiviral therapy by modulating the body’s immune response to fight viral infections. In 2014, we completed a Phase 1 clinical trial of SB 9200 in 38 non-cirrhotic patients infected with the hepatitis C virus, or HCV, who had not received any prior antiviral treatment. In June 2016, we dosed the first patient in our ongoing Phase 2a clinical trial of SB 9200 for the treatment of chronic hepatitis B virus, or HBV. We expect to report top line monotherapy data from the first cohort (25 mg) of the Phase 2a clinical trial of SB 9200 in the first half of 2017. Subject to obtaining additional financing, we also plan to explore the potential use of SB 9200 in other viral diseases, including respiratory syncytial virus, or RSV, human immunodeficiency virus, or HIV, and latency and hepatitis delta virus, or HDV, conduct preclinical research of additional SMNH product candidates or compounds as antiviral therapies and conduct early-stage research programs exploring the use of SMNH compounds against targets implicated in certain inflammatory diseases and cancers.

We have not generated any revenue to date other than from grants from the National Institutes of Health, or NIH. We have incurred significant annual net operating losses in every year since our inception and expect to continue to incur net operating losses for the foreseeable future. Our net losses were $11.6 million for the year ended December 31, 2015 and $14.9 million for the nine months ended September 30, 2016. As of September 30, 2016, we had an accumulated deficit of $49.1 million. We expect to continue to incur significant expenses and increasing operating losses for the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly if and as we:

 

continue to develop and conduct clinical trials of SB 9200, including our ongoing Phase 2a clinical trial in chronic HBV;

 

initiate and continue research and preclinical and clinical development efforts for our other product candidates;

 

seek to identify and develop additional product candidates;

 

seek regulatory and marketing approvals for our product candidates that successfully complete clinical trials, if any;

 

establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval, if any;

 

require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;

 

maintain, expand and protect our intellectual property portfolio;

 

hire and retain additional personnel, including clinical, quality control and scientific personnel;

 

add operational, financial and management information systems and personnel, including personnel to support our product development and help us comply with our obligations as a public company; and

 

add equipment and physical infrastructure to support our research and development programs.

As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our

17


 

financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.

As of September 30, 2016, we had $15.6 million in cash, cash equivalents and marketable securities. We expect that our cash, cash equivalents and marketable securities as of September 30, 2016, will enable us to fund our operating expenses and capital expenditure requirements at least into the third quarter of 2017. See “—Liquidity and Capital Resources.”

Financial Operations Overview

Grant revenue

We have generated revenue from grants from the NIH for the development of SB 9200. The NIH grants provided funding of $6.8 million between October 2003 and September 30, 2016. As of September 30, 2016, no additional funding remains available to us under any grant for the development of SB 9200.

Operating expenses

Our operating expenses since inception have consisted primarily of research and development expense and general and administrative costs.

Research and development

Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our product candidates, which include:

 

expenses incurred under agreements with third parties, including contract research organizations, or CROs, that conduct research, preclinical activities and clinical trials on our behalf as well as contract manufacturing organizations, or CMOs, that manufacture drug products for use in our preclinical and clinical trials;

 

salaries, benefits and other related costs, including stock-based compensation expense, for personnel in our research and development functions;

 

costs of outside consultants, including their fees, stock-based compensation and related travel expenses;

 

the cost of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials;

 

costs related to compliance with regulatory requirements; and

 

facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our consolidated financial statements as prepaid or accrued research and development expenses.

Our primary focus of research and development since inception has been on the development of SB 9200. Our direct research and development expenses consist primarily of external costs, such as fees paid to investigators, consultants and CROs in connection with our preclinical studies and clinical trial and regulatory fees. We do not allocate employee-related costs and other indirect costs to specific research and development programs because our primary focus has been on the discovery and development of SB 9200. Our direct research and development expenses are not currently tracked on a program-by-program basis.

The successful development of our product candidates is highly uncertain. Accordingly, at this time, we cannot reasonably estimate the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of these product candidates. We are also unable to predict when, if ever, we will generate revenues from SB 9200 or any of our other current or potential product candidates. This is due to the numerous risks and uncertainties associated with developing medicines, including the uncertainties of:

 

establishing an appropriate safety profile with investigational new drug, or IND, application enabling toxicology studies;

 

successful enrollment in and completion of clinical trials;

 

receipt of marketing approvals from applicable regulatory authorities;

18


 

 

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

 

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

 

launching commercial sales of the products, if and when approved, whether alone or in collaboration with others; and

 

a continued acceptable safety profile of the products following approval.

A change in the outcome of any of these variables with respect to any of our product candidates would significantly change the costs and timing associated with the development of that product candidate.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we initiate clinical trials for certain product candidates and pursue later stages of clinical development of other product candidates. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

General and administrative

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs, and investor and public relations costs.

Other income (expense)

Other income (expense) consists of interest income, consisting primarily of interest income earned on our cash, cash equivalents and marketable securities.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, costs and expenses and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described therein may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

During the three months ended September 30, 2016, there were no material changes to our critical accounting policies. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Significant Judgments and Estimates” in our final prospectus for our initial public offering filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on May 6, 2016 and the notes to the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company,” or EGC, can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an EGC can delay the

19


 

adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Subject to certain conditions, as an EGC, we are able to rely on certain of the exemptions and reduced reporting requirements available under the JOBS Act, including the exemption from the requirement that the auditors provide an attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an EGC until the earliest of the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; the last day of the fiscal year following the fifth anniversary of the date of the completion of our initial public offering; the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Results of Operations

Comparison of the three and nine months ended September 30, 2016 and 2015

The following table summarizes our results of operations for the three and nine months ended September 30, 2016 and 2015:

 

 

 

For the Three Months Ended September 30,

 

 

Increase

 

 

For the Nine Months Ended September 30,

 

 

Increase

 

 

 

2016

 

 

2015

 

 

(Decrease)

 

 

2016

 

 

2015

 

 

(Decrease)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant revenue

 

$

-

 

 

$

260

 

 

$

(260

)

 

$

352

 

 

$

841

 

 

$

(489

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,723

 

 

 

2,101

 

 

 

622

 

 

 

11,247

 

 

 

4,779

 

 

 

6,468

 

General and administrative

 

 

1,452

 

 

 

1,566

 

 

 

(114

)

 

 

4,136

 

 

 

3,695

 

 

 

441

 

Total operating expenses

 

 

4,175

 

 

 

3,667

 

 

 

508

 

 

 

15,383

 

 

 

8,474

 

 

 

6,909

 

Loss from operations

 

 

(4,175

)

 

 

(3,407

)

 

 

(768

)

 

 

(15,031

)

 

 

(7,633

)

 

 

(7,398

)

Other income

 

 

27

 

 

 

10

 

 

 

17

 

 

 

65

 

 

 

15

 

 

 

50

 

Net loss

 

$

(4,148

)

 

$

(3,397

)

 

$

(751

)

 

$

(14,966

)

 

$

(7,618

)

 

$

(7,348

)

 

Grant revenue. Grant revenue was $0 and $352,000 for the three and nine months ended September 30, 2016, respectively, compared to $260,000 and $841,000 for the three and nine months ended September 30, 2015, respectively. The decrease of $260,000 and $489,000 for the three and nine months ended September 30, 2016, respectively, were primarily due to the completion of our last NIH grant as of April 30, 2016.

Research and development expenses. Research and development expenses were $2.7 million for the three months ended September 30, 2016, compared to $2.1 million for the three months ended September 30, 2015. The increase of $0.6 million in research and development expenses was due primarily to a $0.3 million increase in spending on clinical trial-related activities for our ongoing Phase 2a clinical trial of SB 9200; and additional salaries, benefits and stock-based compensation of $0.3 million associated with higher headcount in the three months ended September 30, 2016.

Research and development expenses were $11.2 million for the nine months ended September 30, 2016, compared to $4.8 million for the nine months ended September 30, 2015. The increase of $6.5 million was due primarily to a $2.8 million non-cash charge for the fair value of 125,000 shares of common stock and warrants to purchase 125,000 shares of common stock issued in connection with the BioHEP license agreement in February 2016; $3.0 million in increased spending on clinical trial related activities for our ongoing Phase 2a clinical trial of SB 9200; and additional salaries, benefits and stock-based compensation of $0.7 million associated with higher headcount in the nine months ended September 30, 2016.

General and administrative expenses. General and administrative expenses were $1.5 million for the three months ended September 30, 2016, compared to $1.6 million for the three months ended September 30, 2015. The decrease of $0.1 million was primarily due to a $0.4 million decrease in severance expenses offset by $0.1 million in additional salaries, benefits and stock based compensation associated with higher headcount in the three months ended September 30, 2016 and $0.2 million in increased legal and liability insurance expenses.  

 

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General and administrative expenses were $4.1 million for the nine months ended September 30, 2016, compared to $3.7 million for the nine months ended September 30, 2015. The increase of $0.4 million was primarily due to additional salaries, benefits and stock-based compensation of $0.6 million associated with higher headcount in the nine months ended September 30, 2016, increased legal and liability insurance expenses of $0.4 million offset by a $0.4 million decrease in severance expenses and a $0.2 million decrease in expenses related to consulting activities which are now performed in-house.

Other income, net. Other income for the three and nine months ended September 30, 2016 is solely comprised of interest income. Interest income for the three and nine months ended September 30, 2016, was $27,000 and $65,000, respectively, related to the interest earned on marketable securities. Other income for the three and nine months ended September 30, 2015 is comprised of interest income of $10,000 and $15,000, respectively, primarily related to the interest earned on marketable securities.

Liquidity and Capital Resources

Sources of Liquidity

From our inception through September 30, 2016, we financed our operations from NIH funding, our initial public offering and private placements of convertible notes, common stock and warrants.

On May 11, 2016, we completed our initial public offering of 920,000 shares of common stock at a price to the public of $12.00 per share, resulting in net proceeds of approximately $10.2 million, after deducting underwriting discounts and commissions, but before deducting offering-related expenses. On June 3, 2016, we issued and sold an additional 24,900 shares of common stock at the initial public offering price of $12.00 per share pursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock, resulting in net proceeds of approximately $275,000, after deducting underwriting discounts and commissions but before deducting offering-related expenses.

As of September 30, 2016, we had cash, cash equivalents and marketable securities totaling $15.6 million and an accumulated deficit of $49.1 million.

Cash Flows

The following table summarizes sources and uses of cash for each of the periods presented:

 

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

(in thousands)

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

(11,736

)

 

$

(6,342

)

Net cash used in investing activities

 

 

(1,927

)

 

 

(8,028

)

Net cash provided by financing activities

 

 

14,648

 

 

 

19,919

 

Net increase in cash and cash equivalents

 

$

985

 

 

$

5,549

 

 

Net cash used in operating activities. The use of cash in both periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities was $11.7 million and $6.3 million during the nine months ended September 30, 2016 and 2015, respectively. The increase of $5.4 million in cash used in operating activities5.4during the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 was primarily due to an increase in net loss of $7.5 million and an increase in prepaid expense, other assets, accounts payable and accrued expenses of $1.1 million, which were offset by an increase in non-cash common stock and warrant valuation expense related to the BioHEP license agreement of $2.8 million and an increase in non-cash stock based compensation of $0.3 million.

Net cash used in investing activities. Net cash used in investing activities was $1.9 million for the nine months ended September 30, 2016 compared to net cash used in investing activities of $8.0 million for the nine months ended September 30, 2015. The cash used in investing activities of $1.9 million in the nine months ended September 30, 2016 was primarily the result of $4.9 million in proceeds from the sale of marketable securities, offset by $6.7 million for the purchase of marketable securities. The cash used in investing activities of $8.0 million for the nine months ended September 30, 2015 was mainly due to the purchase of marketable securities of $7.7 million. Cash of $156,000 and $324,000 was used to purchase property and equipment during the nine months ended September 30, 2016 and 2015, respectively.

Net cash provided by financing activities. Net cash provided by financing activities was $14.6 million and $19.9 million during the nine months ended September 30, 2016 and 2015, respectively. The cash provided by financing activities in the nine months ended

21


 

September 30, 2016 was primarily the result of $11.3 million of gross proceeds received from the initial public offering of our common stock, cash of $5.3 million for the exercise of warrants in connection with the closing of the initial public offering and $0.1 million for the exercise of stock options, offset by $2.1 million underwriting discounts and offering expenses related to the initial public offering. The cash provided by financing activities in the nine months ended September 30, 2015 was primarily the result of $21.7 million of gross proceeds received from private placements of our common stock offset by $1.8 million of broker commissions paid.

Funding Requirements

We anticipate that our expenses will increase significantly if and as we continue to develop and conduct clinical trials with respect to SB 9200 product candidates; initiate and continue research, preclinical and clinical development efforts for our other product candidates and potential product candidates; maintain, expand and protect our intellectual property portfolio; establish a commercial infrastructure to support the marketing and sale of certain of our product candidates; and hire additional personnel, such as clinical, regulatory, quality control and scientific personnel. Furthermore, we expect to incur additional costs associated with operating as a public company. Specifically, we anticipate that our expenses will increase substantially if and as we:

 

conduct our ongoing Phase 2 clinical program of SB 9200 for chronic HBV;

 

develop SB 9200 for additional indications, including RSV, HIV latency and HDV;

 

continue the research and development of our other product candidates;

 

seek to leverage our SMNH platform and explore new targets in additional non-viral disease states;

 

maintain, expand and protect our intellectual property portfolio;

 

add key clinical, scientific, operational and financial employees; and

 

enhance our management information systems and personnel, including personnel to support our product development efforts and to support our transition to a public company.

We expect that our existing cash, cash equivalents and marketable securities of $15.6 million at September 30, 2016 will enable us to fund our operating expenses and capital expenditures requirements at least into the third quarter of 2017 and to fund the Phase 2a clinical trial of SB 9200 that we initiated in chronic HBV in June 2016. However, we do not believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund all of the efforts that we plan to undertake or to fund the completion of development of SB 9200 beyond the ongoing trial, including our planned Phase 2b clinical trial of SB 9200 for chronic HBV that we plan to conduct subject to the results of the Phase 2a clinical trial, discussions with regulatory authorities and the receipt of additional funding. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of SB 9200, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements will depend on many factors, including:

 

progress, timing, costs and results of preclinical studies and clinical trials of SB 9200, including our ongoing Phase 2a clinical trial and planned Phase 2b clinical trial in chronic HBV;

 

initiation, progress, timing, costs and results of preclinical studies and clinical trials of SB 9200 for additional indications, including RSV, HIV latency and HDV, and of our other product candidates;

 

our obligation to make royalty and non-royalty sublicense receipt payments to third-party licensors, if any, under our licensing agreements;

 

the number and characteristics of product candidates that we discover or in-license and develop;

 

the outcome, timing and cost of seeking regulatory review by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies than those that we currently expect;

 

the costs of filing, prosecuting, defending and enforcing any patent claims and maintaining and enforcing other intellectual property rights;

 

subject to receipt of marketing approval, revenue, if any, received from commercial sales of SB 9200 and any other products;

 

the costs and timing of the implementation of commercial-scale manufacturing activities;

22


 

 

the costs and timing of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval; and

 

the costs of operating as a public company.

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.

Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our common stockholders’. Additional debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute our stockholders’ ownership interest.

If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at September 30, 2016, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

 

 

 

Payments Due by Period

 

 

 

Total

 

 

Less Than

1 Year

 

 

1 – 3

Years

 

 

3 – 5

Years

 

 

More than

5 Years

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease commitments (1)

 

$

854

 

 

$

230

 

 

$

513

 

 

$

111

 

 

$

 

Total

 

$

854

 

 

$

230

 

 

$

513

 

 

$

111

 

 

$

 

 

(1)

In April 2015, we entered into an amendment to extend the term of the lease for our research and development facility in Milford, Massachusetts through March 31, 2018. On March 24, 2016, we entered into a new operating lease for our headquarters in Hopkinton, Massachusetts with a lease term through May 31, 2021. The amounts in the table reflect amounts due under both leases.

In addition to the amounts shown in the above table, we have contractual obligations pursuant to our license agreement with BioHEP Technologies Ltd., or BioHEP. In January 2016, we entered into an amended and restated license agreement with BioHEP. Under the amended and restated license agreement, we have agreed to pay up to $3.5 million in development and regulatory milestone payments to BioHEP for disease(s) caused by each distinct virus for which we develop licensed product(s). BioHEP is also eligible to receive tiered royalties in the low-to-mid single-digits on net product sales of licensed products by us and our affiliates and sub licensees, and a specified share of non-royalty sublicensing revenues we and our affiliates receive from sub licensees, which share of sublicensing revenues is capped at a maximum aggregate of $2.0 million under all such sublicenses. Milestone and royalty payments associated with our license agreement with BioHEP have not been included in the above table of contractual obligations as we cannot reasonably estimate if or when they will occur.

We enter into contracts in the normal course of business with third party service providers for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes. We have not included our payment obligations under these contracts in the table as these contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material. We could also enter into additional research, manufacturing, supplier and other agreements in the future, which may require up-front payments and even long-term commitments of cash.

23


 

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 in the rules and regulations of the SEC.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under U.S. generally accepted accounting principles. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In July 2015, the FASB delayed the effective date of the new standard by one year to December 15, 2017, for annual and interim reporting periods beginning after that date. In accordance with the delay, the new standard will be effective for us beginning January 1, 2018. Early adoption is permitted, but not before the original effective date of December 15, 2016. The new standard allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. In April 2016, the FASB issued ASU 2016-10—Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations. We are currently evaluating the impact that the adoption of the standards may have on our consolidated financial statements and additional changes may be identified. We have not elected a transition method.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. The requirements of ASU 2014-15 will be effective for the annual financial statement period beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact that the adoption of the standards may have on our consolidated financial statements and additional changes may be identified.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the current leasing guidance and upon adoption, will require lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The new standard is effective for our annual period beginning after December 15, 2018, and can be early adopted by applying a modified retrospective approach for leases existing at, and entered into after, the beginning of the earliest comparable period presented in the financial statements. We are currently evaluating the impact that the adoption of the standards may have on our consolidated financial statements and additional changes may be identified.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation, and includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new standard is effective for our annual period ending after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. We are currently evaluating the impact that the adoption of the standards may have on our consolidated financial statements and additional changes may be identified.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to changes in interest rates. Our cash, cash equivalents and marketable securities of $15.6 million as of September 30, 2016, consisted of cash, money market accounts and short-term marketable debt securities. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, an immediate 10% change in market interest rates would not be expected to have a material impact on the fair market value of our investment portfolio or on our financial condition or results of operations.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. Based on that evaluation of our disclosure controls and procedures as of September 30, 2016, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective at the reasonable assurance level.

24


 

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, of 1934, as amended, or the Exchange Act, means controls and other procedures of a company 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 are 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 information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Inherent Limitations of Internal Controls

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings.

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any material litigation.

Item 1A.

Risk Factors.

We operate in an industry that involves numerous risks and uncertainties. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this Form 10-Q for the quarterly period ended September 30, 2016 including our financial statements and related notes included therein. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects. The risks and uncertainties described below may change over time and other risks and uncertainties, including those that we do not currently consider material, may impair our business. In these circumstances, the market price of our common stock could decline.

Risks Related to Our Financial Position and Capital Needs

We have incurred significant losses since our inception and anticipate that we will incur significant and increasing losses in the future.

We are a clinical-stage biopharmaceutical company. We have one product candidate, SB 9200, in the early stages of clinical development and all of our other product candidates are preclinical. We do not have any products approved by regulatory authorities for marketing and have not generated any revenue from product sales, and we continue to incur significant research, development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in every reporting period since our inception in 2002. For the nine months ended September 30, 2016 and 2015, we reported a net loss of $14.9 million and $7.6 million, respectively. We had an accumulated deficit of $49.1 million at September 30, 2016.

We expect to continue to incur significant and increasing losses for the foreseeable future. We anticipate these losses to increase as our expenses increase, and we expect that our expenses will increase if and as we:

 

continue to develop and conduct clinical trials of SB 9200, including the ongoing Phase 2a clinical trial of SB 9200 for chronic HBV that we initiated in June 2016;

 

initiate and continue research and preclinical and clinical development efforts for our other product candidates;

25


 

 

seek to identify and develop additional product candidates;

 

seek regulatory and marketing approvals for our product candidates that successfully complete clinical trials, if any;

 

establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval, if any;

 

require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;

 

maintain, expand and protect our intellectual property portfolio;