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EX-32.1 - EX-32.1 - Gemphire Therapeutics Inc.gemp-20180930ex321bc9125.htm
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EX-10.4 - EX-10.4 - Gemphire Therapeutics Inc.gemp-20180930ex1043a3b6e.htm
EX-10.3 - EX-10.3 - Gemphire Therapeutics Inc.gemp-20180930ex103df9c6f.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, 2018

 

OR

 

 

 

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

 

For the transition period from          to          

 

Commission file number 001-37809

 

Gemphire Therapeutics Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

 

Delaware

 

47‑2389984

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

17199 N. Laurel Park Drive, Suite 401, Livonia, MI

 

48152

(Address of principal executive offices)

 

(Zip Code)

(734) 245‑1700

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

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

 

 

 

Large accelerated filer  ☐

Accelerated filer  ☐

 

 

Non-accelerated filer  ☒

Smaller reporting company  ☒

 

Emerging growth company  ☒

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

 

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

 

The number of outstanding shares of the registrant’s common stock, $0.001 par value, as of November 5, 2018 was 14,265,411. 

 

 

 

 


 

Gemphire Therapeutics Inc.

FORM 10-Q

INDEX

 

 

 

 

PART I 

FINANCIAL INFORMATION

 

 

 

 

ITEM 1 

Financial Statements

 

 

 

 

 

Condensed Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

3

 

 

 

 

Condensed Statements of Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017 (unaudited)

4

 

 

 

 

Condensed Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2018 and 2017 (unaudited)

5

 

 

 

 

Condensed Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)

6

 

 

 

 

Notes to Condensed Financial Statements (unaudited)

7

 

 

 

ITEM 2 

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

23

 

 

 

ITEM 3 

Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

ITEM 4 

Controls and Procedures

34

 

 

 

PART II 

OTHER INFORMATION

35

 

 

 

ITEM 1 

Legal Proceedings

35

 

 

 

ITEM 1A :

Risk Factors

35

 

 

 

ITEM 2 

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

ITEM 3 

Default upon Senior Securities

36

 

 

 

ITEM 4 

Mine Safety Disclosures

36

 

 

 

ITEM 5 

Other Information

36

 

 

 

ITEM 6 

Exhibits

37

 

 

 

SIGNATURES 

 

38

 

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

 

 

Gemphire Therapeutics Inc.

Condensed Balance Sheets

(in thousands, except share amounts and par value)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2018

 

2017

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,806

 

$

18,473

 

Prepaid expenses

 

 

1,033

 

 

490

 

Deferred offering costs

 

 

 9

 

 

21

 

Other assets

 

 

14

 

 

25

 

Total current assets

 

 

24,862

 

 

19,009

 

Deposits

 

 

 8

 

 

 8

 

Total assets

 

$

24,870

 

$

19,017

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,351

 

$

4,025

 

Accrued liabilities

 

 

1,585

 

 

1,010

 

Term loan - current portion

 

 

3,681

 

 

1,355

 

Total current liabilities

 

 

7,617

 

 

6,390

 

Long-term liabilities:

 

 

 

 

 

 

 

 Term loan

 

 

6,398

 

 

8,683

 

 Other liabilities

 

 

 2

 

 

 3

 

Total liabilities

 

 

14,017

 

 

15,076

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized as of September 30, 2018 and December 31, 2017, no shares issued or outstanding as of September 30, 2018 and December 31, 2017.

 

 

 —

 

 

 —

 

Common stock, $0.001 par value; 100,000,000 shares authorized as of September 30, 2018 and December 31, 2017,  14,265,411 and 10,633,042 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively.

 

 

22

 

 

18

 

Additional paid–in capital

 

 

91,286

 

 

64,397

 

Accumulated deficit

 

 

(80,455)

 

 

(60,474)

 

Total stockholders’ equity

 

 

10,853

 

 

3,941

 

Total liabilities and stockholders’ equity

 

$

24,870

 

$

19,017

 

 

See accompanying notes to condensed financial statements.

3


 

Gemphire Therapeutics Inc.

Condensed Statements of Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

 

2017

 

2018

 

2017

 

Operating expenses:

    

 

 

    

 

 

    

 

 

    

 

 

    

General and administrative

 

$

2,364

 

$

2,050

 

$

7,025

 

$

8,951

 

Research and development

 

 

3,542

 

 

6,489

 

 

12,479

 

 

17,606

 

Total operating expenses

 

 

5,906

 

 

8,539

 

 

19,504

 

 

26,557

 

Loss from operations

 

 

(5,906)

 

 

(8,539)

 

 

(19,504)

 

 

(26,557)

 

Interest expense, net

 

 

(172)

 

 

(132)

 

 

(476)

 

 

(107)

 

Other expense

 

 

(1)

 

 

 —

 

 

(1)

 

 

(5)

 

Loss before income taxes

 

 

(6,079)

 

 

(8,671)

 

 

(19,981)

 

 

(26,669)

 

Provision (benefit) for income taxes

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net loss

 

 

(6,079)

 

 

(8,671)

 

 

(19,981)

 

 

(26,669)

 

Other comprehensive loss, net of tax

 

 

 —

 

 

 

 

 —

 

 

 

Comprehensive loss

 

$

(6,079)

 

$

(8,671)

 

$

(19,981)

 

$

(26,669)

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted (Note 9)

 

$

(0.43)

 

$

(0.82)

 

$

(1.46)

 

$

(2.60)

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

14,259,691

 

 

10,623,601

 

 

13,650,556

 

 

10,253,437

 

 

See accompanying notes to condensed financial statements.

4


 

Gemphire Therapeutics Inc.

Condensed Statements of Changes in Stockholders’ Equity

(in thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Preferred Stock

 

 

 

Common Stock

 

Paid–In

 

Accumulated

 

Total

 

 

    

Shares

    

Amount

  

 

  

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

 —

 

$

 —

 

 

 

9,270,255

 

$

17

 

$

47,674

 

$

(27,059)

 

$

20,632

 

Issuance of common stock from private placement

 

 —

 

 

 —

 

 

 

1,324,256

 

 

 1

 

 

8,978

 

 

 —

 

 

8,979

 

Issuance of detachable stock warrants in connection with private placement

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

3,562

 

 

 —

 

 

3,562

 

Issuance costs of private placement

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

(1,219)

 

 

 —

 

 

(1,219)

 

Exercise of stock options

 

 —

 

 

 —

 

 

 

2,327

 

 

 —

 

 

 3

 

 

 —

 

 

 3

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

829

 

 

 —

 

 

829

 

Share–based compensation — non–employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 7

 

 

 —

 

 

 7

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(7,496)

 

 

(7,496)

 

Balance at March 31, 2017

 

 —

 

 

 —

 

 

 

10,596,838

 

 

18

 

 

59,834

 

 

(34,555)

 

 

25,297

 

Issuance of common stock from private placement

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Issuance of detachable stock warrants in connection with private placement

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Issuance costs of private placement

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

(38)

 

 

 —

 

 

(38)

 

Exercise of stock options

 

 —

 

 

 —

 

 

 

10,523

 

 

 —

 

 

10

 

 

 —

 

 

10

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

2,955

 

 

 —

 

 

2,955

 

Share–based compensation — non–employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 8

 

 

 —

 

 

 8

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(10,502)

 

 

(10,502)

 

Balance at June 30, 2017

 

 —

 

 

 —

 

 

 

10,607,361

 

 

18

 

 

62,769

 

 

(45,057)

 

 

17,730

 

Issuance of common stock from private placement offering

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Issuance of detachable stock warrants in connection with private placement offering

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Issuance costs of private placement offering

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

(30)

 

 

 —

 

 

(30)

 

Exercise of stock options

 

 —

 

 

 —

 

 

 

10,681

 

 

 —

 

 

28

 

 

 —

 

 

28

 

Exercise of warrants

 

 —

 

 

 —

 

 

 

15,000

 

 

 —

 

 

156

 

 

 —

 

 

156

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

726

 

 

 —

 

 

726

 

Share–based compensation — non–employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

10

 

 

 —

 

 

10

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(8,671)

 

 

(8,671)

 

Balance at September 30, 2017

 

 —

 

$

 —

 

 

 

10,633,042

 

$

18

 

$

63,659

 

$

(53,728)

 

$

9,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

 —

 

$

 —

 

 

 

10,633,042

 

$

18

 

$

64,397

 

$

(60,474)

 

$

3,941

 

Issuance of common stock

 

 —

 

 

 —

 

 

 

3,592,858

 

 

 4

 

 

25,146

 

 

 —

 

 

25,150

 

Issuance costs

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

(2,093)

 

 

 —

 

 

(2,093)

 

Exercise of stock options

 

 —

 

 

 —

 

 

 

6,413

 

 

 —

 

 

23

 

 

 —

 

 

23

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

1,019

 

 

 —

 

 

1,019

 

Share–based compensation — non–employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 1

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(7,224)

 

 

(7,224)

 

Balance at March 31, 2018

 

 —

 

 

 —

 

 

 

14,232,313

 

 

22

 

 

88,493

 

 

(67,698)

 

 

20,817

 

Issuance of common stock

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Issuance costs

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Exercise of stock options

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

908

 

 

 —

 

 

908

 

Share–based compensation — non–employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 1

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(6,678)

 

 

(6,678)

 

Balance at June 30, 2018

 

 —

 

 

 —

 

 

 

14,232,313

 

 

22

 

 

89,402

 

 

(74,376)

 

 

15,048

 

Issuance of common stock

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Issuance costs

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Warrant issuance

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

196

 

 

 —

 

 

196

 

Exercise of stock options

 

 —

 

 

 —

 

 

 

33,098

 

 

 —

 

 

61

 

 

 —

 

 

61

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

1,626

 

 

 —

 

 

1,626

 

Share–based compensation — non–employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 1

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(6,079)

 

 

(6,079)

 

Balance at September 30, 2018

 

 —

 

$

 

 

 

$

14,265,411

 

$

22

 

$

91,286

 

$

(80,455)

 

$

10,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed financial statements.

5


 

Gemphire Therapeutics Inc.

Condensed Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

September 30, 

 

 

 

2018

 

2017

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(19,981)

 

$

(26,669)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Share-based compensation

 

 

3,556

 

 

4,535

 

Non-cash discount amortization on term loan

 

 

247

 

 

58

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(520)

 

 

(150)

 

Accounts payable

 

 

(1,674)

 

 

2,241

 

Accrued and other liabilities

 

 

574

 

 

(156)

 

Net cash used in operating activities

 

 

(17,798)

 

 

(20,141)

 

Investing activities

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

 

         —

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of term loan

 

 

 —

 

 

10,000

 

Issuance costs related to term loan

 

 

(10)

 

 

(33)

 

Exercise of stock options

 

 

84

 

 

41

 

Exercise of warrants

 

 

 —

 

 

156

 

Proceeds from sale of common stock

 

 

25,150

 

 

12,541

 

Issuance costs

 

 

(2,093)

 

 

(1,257)

 

Net cash provided by financing activities

 

 

23,131

 

 

21,448

 

Net increase (decrease) in cash and cash equivalents

 

 

5,333

 

 

1,307

 

Cash and cash equivalents at beginning of period

 

 

18,473

 

 

24,033

 

Cash and cash equivalents at end of period

 

$

23,806

 

$

25,340

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

 

$

 

Cash paid for interest

 

$

358

 

$

46

 

Supplemental non-cash financing transactions:

 

 

 

 

 

 

 

Issuance of warrants in connection with term loan

 

$

196

 

$

 

Issuance costs related to term loan and offering in accounts payable and accrued liabilities

 

$

 

$

89

 

 

See accompanying notes to condensed financial statements.

 

 

6


 

Table of Contents 

Gemphire Therapeutics Inc.

Notes to Condensed Financial Statements (unaudited)

 

1. The Company and Basis of Presentation

 

The Company, headquartered in Livonia Michigan, is a clinical‑stage biopharmaceutical entity focused on developing and commercializing therapies for the treatment of dyslipidemia, a serious medical condition that increases the risk of life threatening cardiovascular disease, including orphan indications as well as NAFLD/NASH (nonalcoholic fatty liver disease). The Company’s primary activities to date have been conducting research and development activities, planning and conducting clinical trials, performing business and financial planning, recruiting personnel and raising capital. The Company is subject to certain risks, which include the need to research, develop, and clinically test potentially therapeutic products, initially one product candidate gemcabene (also known as CI‑1027); obtain regulatory approval for its products and commercialize them around the world, if approved; expand its management scientific staff; finance its operations; and find collaboration partners to further advance development and commercial efforts.

 

Initial Public Offering

 

On August 4, 2016, the Company’s Registration Statement on Form S-1 (File No 333-210815) relating to its initial public offering (IPO) of its common stock was declared effective by the Securities and Exchange Commission (SEC). Pursuant to such Registration Statement, on August 10, 2016, the Company closed its IPO whereby 3,000,000 shares of its common stock were issued and sold at a public offering price of $10.00 per share. On September 8, 2016, the Company closed the sale of 27,755 shares of its common stock at the public offering price of $10.00 per share, representing a partial exercise of the underwriters’ over-allotment option, following which, the IPO terminated. The Company received net proceeds of approximately $26.1 million after deducting underwriting discounts and commissions of $2.1 million and other offering expenses of $2.1 million.

 

Immediately prior to the IPO, the Company amended and restated its certificate of incorporation and bylaws to, among other things, change its authorized capital stock to consist of (i) 100,000,000 shares of common stock and (ii) 10,000,000 shares of undesignated preferred stock. Both the common stock and the preferred stock have a par value of $0.001 per share.

 

Private Placement Offering

 

On March 10, 2017, the Company entered into a securities purchase agreement for a private placement (the Private Placement) with a select group of accredited investors whereby, on March 15, 2017 the Company issued and sold 1,324,256 units at a price of $9.47 per unit for gross proceeds of approximately $12.5 million. Each unit consists of one share of the Company’s common stock and a warrant to purchase 0.75 shares of common stock. The warrants have an exercise price of $10.40 per share and are exercisable for a period of five years from the date of issuance. On April 20, 2017, the registration statement on Form S-1 (File No 333-217296) for the resale of the shares of common stock issued in the Private Placement and the shares of common stock to be issued upon exercise of the warrants issued in the Private Placement was declared effective by the SEC, and on September 1, 2017, the Company filed a  post-effective amendment to convert the registration statement into Form S-3 for the registration of any unsold Private Placement shares, which included an updated prospectus relating to such unsold shares.

 

Follow-On Public Offering

 

On February 12, 2018, the Company completed an underwritten public offering (the Follow-On Offering) of 3,142,858 shares of common stock at the public offering price of $7.00 per share. As part of such offering, the Company issued 450,000 additional shares of common stock representing partial exercise of the underwriters’ overallotment option. The

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Company received net proceeds of approximately $23.1 million after deducting underwriting discounts and commissions and offering expenses.

Capital Requirements

 

The Company has sustained operating losses since inception and expects such losses to continue over the next several years. Management plans to continue financing the Company’s operations with equity and/or debt issuances. The Company’s management believes the Company’s cash and cash equivalents on hand, are adequate to fund the Company’s operations for at least the next 12 months. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate part or all of its research and development programs.

 

Basis of Presentation

 

The accompanying condensed financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed financial statements may not include all disclosures required by U.S. GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the fiscal year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 20, 2018. The condensed balance sheet at December 31, 2017 was derived from the audited financial statements.

 

In the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying notes. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of deposit to be cash equivalents. The Company invests excess cash in readily available checking and savings accounts and invests in highly liquid investments in money market accounts.

 

Fair Value of Financial Instruments

 

The Company’s condensed financial instruments include principally cash and cash equivalents, other assets, accounts payable, accrued liabilities and debt. The carrying amounts for these condensed financial instruments reported in the balance sheets approximate their fair values. See Note 10 — Fair Value Measurements, for further discussion of fair value.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of personnel‑related costs, including salaries and share‑based compensation costs, for personnel in functions not directly associated with research and development activities. Other

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significant costs include legal fees related to intellectual property and corporate matters and professional fees for accounting and other services.

 

Research and Development Expenses

 

Research and development expenses consist of costs incurred in performing research and development activities, including compensation for research and development employees, costs associated with preclinical studies and trials, regulatory activities, manufacturing activities to support clinical activities, license fees, non‑legal patent costs, fees paid to external service providers that conduct certain research and development, clinical costs and an allocation of overhead expenses. Research and development costs are expensed as incurred.

 

Income Taxes

 

The Company utilizes the liability method of accounting for income taxes as required by Accounting Standards Codification (ASC) 740, Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Currently, there is no provision for income taxes, as the Company has incurred operating losses to date, and a full valuation allowance has been provided on the net deferred tax assets.

 

Share‑Based Compensation

 

The Company accounts for share‑based compensation in accordance with the provisions of ASC 718, Compensation — Stock Compensation (ASC 718). Accordingly, compensation costs related to equity instruments granted are recognized at the grant‑date fair value. The Company records forfeitures when they occur. Share‑based compensation arrangements to non‑employees are accounted for in accordance with the applicable provisions of ASC 718 and ASC 505, Equity, using a fair value approach. The compensation costs of these arrangements are subject to re‑measurement as the equity instruments vest and are recognized as expense over the related service period (typically the vesting period of the awards).

Segment Information

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s  Chief Executive Officer views the Company’s operations and manages its business in one operating segment, which is the business of development and commercialization of therapeutics for the treatment of dyslipidemia, a serious medical condition that increases the risk of life threatening cardiovascular disease including orphan indications and NAFLD/NASH. Accordingly, the Company has a single reporting segment.

Jumpstart Our Business Startups Act Accounting Election

 

As an emerging growth company under the Jumpstart Our Business Startups Act (JOBS Act), the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. The Company has irrevocably elected not to avail itself of this exemption and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Recently Adopted Accounting Pronouncements

 

In November 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The objective of this ASU is to eliminate the diversity in practice related to the classification of restricted cash or restricted cash equivalents in the statement of cash flows. For public business entities, this ASU is

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effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The amendments in this update should be applied retrospectively to all periods presented. The Company adopted this standard on January 1, 2018 and it did not have a material impact on the Company’s financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2016-09), which provides guidance about which changes to the terms or conditions of a share-based payment awards require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company has adopted this standard on January 1, 2018 and it did not have a material impact on the Company’s financial statements.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740), that codified the SEC Staff Accounting Bulletin 118 (SAB 118) issued on December 22, 2017, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the TCJA).  SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete, but for which they are able to determine a reasonable estimate, it must record a provisional amount in the financial statements. Provisional treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. If a company cannot determine a provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA. The Company has applied this guidance to its financial statements.

In May 2014, the FASB issued ASU 2014‑09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in FASB ASC 605. The new guidance primarily states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In January 2017 and September 2017, the FASB issued several amendments to ASU 2014‑09, including updates stemming from SEC Accounting Staff Announcement in July 2017. The amendments and updates included clarification on accounting for principal versus agent considerations (i.e., reporting gross versus net), licenses of intellectual property and identification of performance obligations. These amendments and updates do not change the core principle of the standard but provide clarity and implementation guidance. The Company has adopted this standard on January 1, 2018 and selected the modified retrospective transition method. The Company modified its accounting policies to reflect the requirements of this standard; however, the planned adoption will not affect the Company’s financial statements and related disclosures for these periods or future periods until the Company generates revenues.

Recent Accounting Pronouncements Not Yet Adopted

In January 2016, the FASB issued ASU No. 2016‑01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective in the first quarter of fiscal 2019. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. The Company is currently evaluating the impact of the new guidance on its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequently amended the guidance relating largely to transition considerations under the standard in January 2017 and July 2018. The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a modified retrospective approach. The Company is currently evaluating the new guidance to determine the impact it may have on its financial statements.

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In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity and Derivatives and Hedging, which changes the accounting and earnings per share for certain instruments with down round features. The amendments in this ASU should be applied using a cumulative-effect adjustment as of the beginning of the fiscal year or retrospective adjustment to each period presented and is effective for annual periods beginning after December 15, 2018, and interim periods within those periods. The Company is currently evaluating the requirements of this new guidance and has not yet determined its impact on the Company’s financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should generally apply the requirements of Topic 718 to nonemployee awards except in circumstances where there is specific guidance on inputs to an option pricing model and the attribution of cost. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The guidance also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606. This guidance is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact of the new guidance on its financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). The new guidance modifies the disclosure requirements in Topic 820 as follows:

 

·

Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.

·

Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

·

Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

This guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the impact of the new guidance on its financial statements.

 

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3. Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30, 

 

December 31,

 

 

 

2018

 

2017

 

Accrued compensation and other payroll liabilities

 

$

368

 

$

306

 

Workforce reduction severance

 

 

360

 

 

 —

 

Legal costs

 

 

109

 

 

91

 

Accrued interest

 

 

42

 

 

38

 

Other research and development expenses

 

 

674

 

 

522

 

Other general and administrative expenses

 

 

32

 

 

53

 

Total

 

$

1,585

 

$

1,010

 

The workforce reduction severance resulted from the Company’s Board of Directors approval on September 18, 2018 of a workforce reduction involving 5 employees (or 33% of the workforce at that time) to lower costs and conserve cash resources in light of the previously announced request by the Food and Drug Administration (FDA) for additional pre-clinical data required in order to schedule an End of Phase 2 (EOP2) meeting for gemcabene in the Company’s target indications. Related expenses recognized during the quarter totaled approximately $1.3 million, of which approximately $0.6 million was recorded as general and administrative expense and $0.7 million was recorded as research and development expense. $360,000 remained unpaid at the end of the third quarter.

 

4. Debt

 

Term Loan

 

On July 24, 2017, the Company entered into a Loan and Security Agreement (the Loan Agreement) with Silicon Valley Bank (SVB) for a term loan of up to $15.0 million (the Term Loan), subject to funding in several tranches. The Company drew the initial tranche of $10.0 million on July 24, 2017. An additional tranche of $5.0 million (Tranche C) may have been available to be drawn by the Company through July 31, 2018 conditioned on the occurrence of certain clinical and pre-clinical milestones. Certain provisions of the Loan Agreement were conditioned on a pre-clinical event (as defined below) occurring by July 31, 2018. A pre-clinical event had not occurred as of July 31, 2018 and, on such date, the Company and SVB amended the Loan Agreement (the Loan Amendment). 

 

As amended by the Loan Amendment, all amounts advanced under the Term Loan mature on February 1, 2021 and have an interest-only monthly payment period through November 1, 2018 (previously August 1, 2018); the interest-only period may be extended to February 1, 2019 conditioned on the occurrence of both a positive clinical trial event (evidence of which was provided to SVB on November 10, 2017) and a pre-clinical event. Following the interest-only payment period, the Company must begin making monthly payments of principal and interest until the maturity date. A pre-clinical event had not occurred as of November 1, 2018, and the Company began making monthly payments of principal and interest. See Note 14 – Subsequent Events

 

Interest will accrue on the unpaid principal balance at a floating per annum rate equal to the prime rate, except that, following an event of default, interest will accrue at a rate up to 5% above the rate that is otherwise applicable. The prime rate in effect for the nine month period ending September 30, 2018 ranged from 4.5% to 5.25%. Lastly, debt issue costs that were incurred upon the July 2017 issuance of the Term Loan in the amount of $0.1 million were recorded as a discount to the Term Loan and are being amortized ratably to interest expense over the term of the loan.

 

The Company’s obligations under the Loan Agreement may be accelerated by SVB upon the occurrence of an event of default. An event of default includes customary events for a financing arrangement of this type, including, without limitation, payment defaults, defaults in the performance of affirmative or negative covenants, bankruptcy or related

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defaults, defaults on certain other indebtedness, defaults under certain other agreements, the imposition of judgments or penalties, the material inaccuracy of representations or warranties, material adverse changes and revocations of government approvals.

 

As amended by the Loan Amendment, the Loan Agreement requires the Company to pay the following fees: (i) upon the maturity, acceleration or prepayment of the Term Loan, a final payment fee of 10% of the funded principal amount of the Term Loan which was recorded as a liability upon issue and then discounted to be subsequently amortized ratably to interest expense over the term of the loan, (ii) a success fee of 3.5% of the funded principal amount of the Term Loan in the event any of the following occur prior to 5:00 pm Eastern Time on July 24, 2024: (a) the Company receives FDA approval for any new drug application for gemcabene, (b) a sale or other transfer of all or substantially all of the assets of the Company occurs, (c) a merger or consolidation of the Company with or into another person or entity occurs where the holders of the Company’s outstanding voting equity securities immediately prior to such merger or consolidation hold less than a majority of the issued and outstanding voting equity securities of the successor immediately following such transaction or (d) any sale by the holders of the Company’s outstanding voting equity securities where such holders do not continue to hold at least a majority of the Company’s issued and outstanding voting equity securities, and (iii) upon termination of the Loan Agreement prior to the maturity date for any reason, a prepayment fee equal to 2% (if such prepayment occurs prior to the first anniversary of the Loan Amendment) or 1% (if such prepayment occurs thereafter) of the funded principal amount of the Term Loan.

 

Subject to certain exceptions, the Loan Agreement contains covenants prohibiting the Company from, among other things: (a) disposing of properties or assets; (b) liquidating or dissolving; (c) engaging in any business other than the business currently engaged in by the Company or reasonably related thereto; (d) engaging in business combinations or acquisitions or permitting or suffering any change in control; (e) incurring any additional indebtedness; (f) allowing any lien or encumbrance on any property; (g) paying any dividends or distributions; (h) entering into transactions with affiliates; and (i) making payment on subordinated debt.

 

In the event a positive clinical trial event had not occurred by March 31, 2018, on such date, the Company would have been required to (i) provide cash security and maintain a cash balance in a restricted account at SVB in an amount of at least 50% of the amounts the Company owes to SVB or (ii) prepay the Term Loan in its entirety. On November 10, 2017, the Company provided SVB evidence of a Positive Clinical Trial Event.

 

If a  pre-clinical event does not occur on or prior to September 30, 2019 (previously July 31, 2018) or, pursuant to the Loan Amendment, if at any time prior to a pre-clinical event, the Company’s unrestricted cash balance at SVB is less than $18 million, on such date, the Company must either (i) provide cash security and maintain a cash balance in a restricted account at SVB in an amount of at least 100% of the amounts the Company owes to SVB or (ii) prepay the Term Loan in its entirety. In the event that cash security is provided, it would be presented as restricted cash on our balance sheet.

 

In each case, if the Company chooses to prepay the Term Loan, in addition to the repayment of the outstanding principal and accrued and unpaid interest, the Company is required to pay the final payment fee and, if applicable, the success fee, but not the prepayment fee.

 

As amended by the Loan Amendment, Tranche C is now available through November 30, 2018 (previously available through July 31, 2018). Tranche C is now conditioned upon, in addition to the occurrence of a positive clinical trial event (evidence of which was provided to SVB on November 10, 2017) and a pre-clinical event, the occurrence of a positive Phase 2 NASH event. “Pre-clinical event” means the receipt by SVB of a written electronic communication from our chief executive officer or chief financial officer, together with supporting documentation from the FDA, that the FDA has lifted the partial clinical hold with respect to clinical trials of longer than six months in duration for gemcabene. “Positive Phase 2 NASH event” means public disclosure by the Company of evidence satisfactory to SVB, in its sole but reasonable discretion, that the Company has received positive Phase 2 interim data on either its adult familial partial lipodystrophy proof-of-concept clinical trial or its pediatric NAFLD proof-of-concept clinical trial. The Company does not expect to meet the two remaining conditions before November 30, 2018 and thus will not access Tranche 3.

 

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In connection with the Loan Amendment, the Company issued a warrant to SVB (the Warrant) to purchase 36,000 shares of the Company’s common stock at an exercise price of $7.47 per share on July 31, 2018. The Warrant is immediately exercisable and has a term of ten years. The exercise price and number and type of shares underlying the Warrant are subject to adjustment upon specified events, including any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described therein. The Warrant contains a “cashless exercise” feature that allows SVB to exercise the Warrant w