ALPINE IMMUNE SCIENCES, INC. - Quarter Report: 2017 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

For the quarterly period ended June 30, 2017

For the transition period from to           

Commission file number: 001-37449

 

 

Nivalis Therapeutics, Inc.

(Exact name of Registrant as specified in its charter)

 

 

(720) 600-4740

(Registrant’s telephone number, including area code)

 

 

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, 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.

      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 12b-2 of the Exchange Act).    Yes  ◻     No  ☒

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of July 21, 2017 was 15,656,251.

 

 

 

NIVALIS THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

 

Nivalis Therapeutics, Inc.

Balance Sheets

(In thousands, except for share amounts)

 

 

The accompanying notes are an integral part of these financial statements.

 

Nivalis Therapeutics, Inc.

Statements of Operations and Comprehensive Loss

(In thousands, except per share amounts)

(Unaudited)

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

Nivalis Therapeutics, Inc.

Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

Nivalis Therapeutics, Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

The accompanying notes are an integral part of these financial statements.

 

NIVALIS THERAPEUTICS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

Nivalis Therapeutics, Inc. (the “Company” or “Nivalis”), incorporated in Delaware on August 1, 2012, is a pharmaceutical company that has historically focused on the discovery and development of product candidates for patients with cystic fibrosis, or CF. In November 2016, the Company announced that its Phase 2 trial, evaluating the efficacy and safety of cavosonstat in adult patients with CF, had failed to demonstrate a benefit in its primary endpoint. On January 3, 2017, the Company announced that its board of directors had initiated a process to explore and review a range of strategic alternatives. At that time, the Company also announced that it had engaged a financial advisor and established a Special Committee of the Board to explore strategic alternatives. As a result of this process, on April 18, 2017, the Company, Nautilus Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), and Alpine Immune Sciences, Inc., a Delaware corporation (“Alpine”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), pursuant to which, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Alpine, with Alpine continuing as a wholly owned subsidiary of Nivalis and the surviving corporation of the merger (the “Merger”). See Note 7 below for more information regarding the Merger. 

2. Liquidity Risks

The Company has incurred operating losses and has an accumulated deficit as a result of ongoing research and development spending. As of June 30, 2017, the Company had an accumulated deficit of $192.9 million. For the six months ended June 30, 2017, net loss was $12.6 million and net cash used in operating activities was $11.6 million.

As announced on January 12, 2017, the Company committed to a restructuring plan that consisted primarily of a workforce reduction of 25 positions, to a total of five remaining positions in order to conserve cash while the Company continued to evaluate strategic alternatives. In connection with this restructuring, the Company discontinued a substantial portion of its research and clinical development activities and no longer anticipates expending material resources on any of its drug candidates in order to reduce expenditures. The Company expects to incur significant transaction related expenses relating to the consummation of the Merger. After considering the actions taken by management, the Company has sufficient cash and marketable securities to fund operations for at least the next 12 months.

3. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include all adjustments necessary for the presentation of the Company’s financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes, including accrued liabilities and the fair value-based measurement of equity instruments. Actual results could differ materially from those estimates. The Company evaluates its estimates and assumptions as facts and circumstances dictate.

 

Unaudited Interim Financial Data

The balance sheet at December 31, 2016 was derived from the Company’s audited financial statements, but these interim financial statements do not include all the annual disclosures required by GAAP. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2016. The accompanying interim financial statements as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016, are unaudited. The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements, pursuant to the rules and regulations of the SEC for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in

accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly state the Company’s financial position as of June 30, 2017 and the results of operations and cash flows for the three and six months ended June 30, 2017 and 2016. The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any future interim period.

 

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of deposits with commercial banks in checking, interest-bearing and demand money market accounts.

 

Marketable Securities

The Company has designated marketable securities as available-for-sale securities and accounts for them at their respective fair values. Marketable securities are classified as short-term or long-term based on the nature of the securities and their availability to meet current operating requirements. Securities that are classified as available-for-sale are carried at fair value, including accrued interest, with temporary unrealized gains and losses reported as a component of stockholders’ equity until their disposition. The Company reviews all available-for-sale securities at each period end to determine if they remain available-for-sale based on the Company’s then current intent and ability to sell the security if it is required to do so. The cost of securities sold is based on the specific identification method. All marketable securities are subject to a periodic impairment review. The Company will recognize an impairment charge when a decline in the fair value of the investments below the cost basis is judged to be other-than-temporary.

 

Accrued Direct Program Expenses

Substantial portions of the Company’s preclinical studies and clinical trials, including the manufacture and packaging of drug supplies, were performed by third-party laboratories, contract manufacturing organizations, medical centers, contract research organizations and other service providers (collectively vendors). These vendors generally bill monthly or quarterly for services performed or upon achieving certain milestones. For preclinical studies and product development and manufacturing, the Company accrues expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon patient enrollment and the duration of the study. The Company monitored patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported by these vendors using software tracking systems, or through clinical site visits and vendor correspondence. The Company’s estimates depend on the timeliness and accuracy of the data provided by these vendors regarding the status of each program and total program spending. The Company periodically evaluates these estimates to determine if adjustments are necessary or appropriate based on information received.

 

Accrued Restructuring Charges

In January 2017, the Company committed to a restructuring plan that consisted primarily of a workforce reduction of 25 positions, to a total of five remaining positions in order to conserve cash while the Company continued to evaluate strategic alternatives. The restructuring was substantially completed during the first quarter of 2017. Total restructuring charges for the six-month period ended June 30, 2017, in connection with the workforce reduction, comprised principally of monthly or one-time severance payments, retention bonuses and benefit continuation costs, were approximately $4.4 million of which approximately $1.2 million and $570,000 was paid during the first and second quarters of 2017, respectively. As of June 30, 2017, approximately $2.6 million was accrued for remaining restructuring-related payments expected to be paid in July 2017.

In accordance with ASC 420, “Exit and Disposal Cost Obligations”, the Company is recognizing the restructuring liabilities related to the five remaining positions over the employees’ anticipated service period, which is expected to be the first seven months of 2017. The Company recognized approximately $864,000 and $1.4 million of

accrued restructuring costs for these remaining employees during the three and six-month periods ended June 30, 2017, respectively. 

 

Comprehensive Loss

Comprehensive loss is comprised of net loss and adjustments for the change in unrealized gains and losses on the Company’s investments in available-for-sale marketable securities. The Company presents comprehensive loss and its components in the statements of operations and comprehensive loss for the three and six months ended June 30, 2017.

 

Net Loss per Share

The Company reports net loss per share in accordance with the standard codification of ASC “Earnings per Share” (“ASC 260”). Under ASC 260, basic earnings per share, which excludes dilution, is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could be exercised or converted into common shares, and is computed by dividing net loss by the weighted average of common shares outstanding plus the dilutive potential common shares. Diluted earnings per share excludes the impact of options to purchase common stock, restricted stock units and warrants to purchase common stock, as the effect would be anti-dilutive. During a loss period, the assumed exercise of in-the-money stock options and other potentially diluted instruments has an anti-dilutive effect and therefore, these instruments are excluded from the computation of dilutive earnings per share.

 

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification within the statement of cash flows. The guidance is effective for the annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this standard as of January 1, 2017 and it did not have a material effect on its financial statements. As part of the adoption of this standard, the Company elected to recognize forfeiture of awards as they occur rather than estimating the expected forfeiture rate, as was previously required.

For additional discussion of recent accounting pronouncements please refer to Note 3, “Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements and Recently Issued Accounting Pronouncements”, in the Company’s previously filed Annual Report on Form 10-K for the year ended December 31, 2016.

 

Fair Value of Financial Instruments

The carrying amounts of cash equivalents and marketable securities approximate their fair value based upon quoted market prices. Certain financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as cash, accounts payable, accrued direct program expenses, accrued restructuring charges, and accrued employee benefits, and other financial instruments included within current assets or current liabilities. 

 

Fair Value Measurements

In general, asset and liability fair values are determined using the following categories:

Level 1 – inputs utilize quoted prices in active markets for identical assets or liabilities.

Level 2 – inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

Level 3 – inputs are unobservable inputs and include situations where there is little, if any, market activity for the balance sheet items at period end. Pricing inputs are unobservable for the terms and are based on the Company’s own estimates about the assumptions that a market participant would use in pricing an asset.

The Company’s financial instruments, including money market investments, reverse repurchase agreements, corporate debt securities, U.S. Treasury securities and obligations of U.S. government agencies, are measured at fair value on a recurring basis. There were no transfers between levels for the six months ended June 30, 2017.

Assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of June 30, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

4. Cash, Cash Equivalents and Marketable Securities

The following is a summary of cash, cash equivalents and marketable securities as of June 30, 2017 and December 31, 2016 (in thousands):

 

 

 

5. Stockholders’ Equity

Common Stock

On June 22, 2015, the Company completed its IPO of 6,325,000 shares of its common stock, including 875,000 shares from the exercise of the underwriters’ over-allotment option. The Company received proceeds of $78.8 million from its IPO, net of $9.8 million in expenses and underwriters’ discounts and commissions relating to the issuance and distribution of the securities.

On April 18, 2016, in connection with the appointment of the Company’s new Chief Medical Officer, the Company approved a grant of stock options to purchase 108,333 shares of the Company’s common stock (the “Options”)

and 216,667 restricted stock units (“RSUs”). The Options and RSUs were issued pursuant to a separate Notice of Inducement Stock Option Grant and Inducement Stock Option Agreement and Notice of Restricted Stock Unit Inducement Grant and Inducement Restricted Stock Unit Agreement and are considered inducement grants made in accordance with NASDAQ Listing Rule 5635(c)(4). In January 15, 2017, Dr. Rodman’s employment was terminated as part of our workforce reduction when his position was eliminated. As a result of the termination of Dr. Rodman’s employment, all unvested Options were 100% vested and the unvested portion of the RSUs that would have vested in the 12-month period following the termination date vested and the remaining unvested RSUs were forfeited.

 On July 5, 2016, the Company filed a registration statement on Form S-3 that was declared effective on July 14, 2016 registering (i) the offering, issuance and sale of up to $125,000,000 in the aggregate of an indeterminate number of shares of common stock and preferred stock, an indeterminate principal amount of debt securities and an indeterminate number of warrants and (ii) the resale of up to 3,732,412 shares of common stock by selling stockholders pursuant to a base prospectus that forms a part of the registration statement. The registration statement also registers the offering, issuance and sale of the Company’s common stock having up to a maximum aggregate offering price of $20,000,000 that may be issued and sold in an at-the-market offering under a sales agreement the Company entered into with Cowen and Company, LLC on July 5, 2016 pursuant to a sales agreement prospectus that forms a part of the registration statement. The $20,000,000 of common stock that may be sold under the sales agreement prospectus is included in the $125,000,000 that may be sold by the Company under the base prospectus. As of June 30, 2017, approximately 20,000 shares of common stock have been sold at an average sales price of $8.00 per share under the sales agreement, net of offering costs of approximately $140,000.

At June 30, 2017, shares of common stock have been reserved for issuance as follows:

 

Stock-Based Compensation

During the three and six-month periods ended June 30, 2017, the Company recorded approximately $546,000 and $3.2 million, respectively, in stock-based compensation expense for the vesting of stock options and RSUs. For the three and six-month periods ended June 30, 2016, the Company recorded approximately $700,000 and $1.4 million, respectively, in stock-based compensation expense. The Company recorded approximately $2.3 million of stock-based compensation expense during the first quarter of 2017 specifically related to the accelerated vesting of options and RSUs held by employees affected by the restructuring plan and workforce reduction announced on January 12, 2017.

 

 

6. Net Loss per Share

The Company excluded the following common stock equivalents, outstanding as of June 30, 2017 and 2016, from the computation of diluted net loss per share for the applicable quarterly periods because they had an anti-dilutive impact on the computation:

 

 

 

 

7. Plan of Merger and Reorganization

On April 18, 2017, the Company, Merger Sub and Alpine entered into the Merger Agreement pursuant to which, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Alpine, with Alpine continuing as a wholly owned subsidiary of Nivalis and the surviving corporation of the Merger. The merger is intended to qualify for federal income tax purposes as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.

Subject to the terms and conditions of the Merger Agreement, at the closing of the Merger, each outstanding share of Alpine’s capital stock will be converted into the right to receive shares of Nivalis’ common stock (subject to the payment of cash in lieu of fractional shares and after giving effect to a reverse stock split of Nivalis’ common stock if determined necessary or appropriate by Nivalis, Alpine and Merger Sub) such that, immediately following the effective time of the Merger, preexisting Nivalis stockholders, optionholders and warrantholders are expected to own, or hold rights to acquire, approximately 26% of the fully-diluted common stock of Nivalis, and preexisting stockholders, optionholders and warrantholders of Alpine are expected to own, or hold rights to acquire, approximately 74% of the fully-diluted common stock of Nivalis.

Prior to the execution and delivery of the Merger Agreement, and as a condition of the willingness of Nivalis to enter into the Merger Agreement, certain existing stockholders of Alpine have entered into agreements with Alpine pursuant to which such stockholders have agreed, subject to the terms and conditions of such agreements, to purchase prior to the consummation of the Merger shares of Alpine’s capital stock for an aggregate purchase price of approximately $17.0 million. The consummation of the transactions contemplated by such agreements is conditioned upon the satisfaction or waiver of the conditions set forth in the Merger Agreement.

Consummation of the Merger is subject to certain closing conditions, including, among other things, approval by the stockholders of Nivalis and Alpine, and satisfaction of minimum net cash thresholds by each of Nivalis and Alpine.  In accordance with the terms of the Merger Agreement, (i) certain executive officers, directors and stockholders of Alpine (solely in their respective capacities as Alpine stockholders) have entered into support agreements with Nivalis to vote all of their shares of Alpine’s capital stock in favor of adoption of the Merger Agreement and approval of the transactions contemplated therein, including the Merger and (ii) certain executive officers, directors and stockholders of Nivalis (solely in their respective capacities as Nivalis stockholders) have entered into support agreements with Alpine to vote all of their shares of Nivalis’ common stock in favor of approval of the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger and the issuance of shares of Nivalis’ common stock to Alpine’s stockholders.

The Merger Agreement contains certain termination rights for both Nivalis and Alpine, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $2.5 million, or in some circumstances reimburse the other party’s expenses up to a maximum of $1.0 million.

At the effective time of the Merger, the board of directors of Nivalis is expected to consist of six members, four of whom will be designated by Alpine and are expected to be Mitchell H. Gold, M.D., Peter Thompson, M.D., James N. Topper, M.D., Ph.D., and Jay Venkatesan, M.D., and two of whom will be designated by Nivalis and are expected to be Robert E. Conway and Paul Sekhri, two existing directors of Nivalis. Following consummation of the Merger, it is anticipated that the size of the board of directors will be increased to seven and that a person, unaffiliated with Nivalis or Alpine, will be designated by a majority of the other members of the board of directors.

 

8. Subsequent Events

On July 19, 2017, the Company held a special meeting of stockholders in order to obtain the stockholder approvals necessary to complete the Merger. The required approval of the Company’s stockholders were obtained for each of the matters submitted to the stockholders for approval at the meeting as follows:

The closing of the Merger and the other approved actions are expected to occur on July 24, 2017.

  

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Quarterly Report on Form 10-Q and the information incorporated herein by reference includes statements that are, or may be deemed, “forward-looking statements” (including within the meaning of Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended).  In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, expectations regarding our liquidity and financial condition, prospects and strategies, and the timing of and our ability to consummate the Merger.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. These risks and uncertainties include, without limitation, the risk that the conditions to the closing of the Merger are not satisfied, including the failure to timely or at all obtain stockholder approval for the transaction; uncertainties as to the timing of the consummation of the transaction and the ability of each of Nivalis and Alpine to consummate the transaction; risks related to our ability to correctly estimate our operating expenses and our expenses associated with the transaction; risks related to the market price of our common stock relative to the exchange ratio under the Merger Agreement; the ability of Nivalis or Alpine to protect their respective intellectual property rights; competitive responses to the transaction; unexpected costs, charges or expenses resulting from the transaction; potential adverse reactions or changes to business relationships resulting from the announcement or completion of the transaction; and legislative, regulatory, political and economic developments. We caution you that forward-looking statements are not guarantees of future performance or events and that actual performance or events may differ materially from the forward-looking statements contained herein. Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of this report, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

You should also read carefully the factors described in the “Risk Factors” section of our annual report on Form 10-K filed with the SEC for the year ended December 31, 2016 and in this Quarterly Report on Form 10-Q to better understand the risks and uncertainties we face and underlying any forward-looking statements including statements we make in our other reports filed with the SEC. You may obtain a copy of all reports we file with the SEC on our website at www.nivalis.com. Our website and the information contained on, or that can be accessed through, the website will not be deemed to be incorporated by reference in, and are not considered part of, this report.

Overview

We are a pharmaceutical company that has historically been focused on the discovery and development of product candidates for patients with cystic fibrosis, or CF. In November 2016, we announced that a Phase 2 clinical trial of cavosonstat had failed to achieve its primary endpoint of lung function improvement and a key secondary endpoint of sweat chloride reduction. In February 2017, we announced that a second Phase 2 clinical trial of cavosonstat had also failed to achieve its primary endpoint of lung function improvement and a key secondary endpoint of sweat chloride reduction. We currently do not have any drugs that are commercially available and none of our drug candidates have obtained the approval of the FDA, or any similar foreign regulatory authority.

Strategic Process

Following the failure of the Phase 2 clinical trial in CF patients to meet its primary endpoint in November 2016, we announced on January 3, 2017 the initiation of a process to explore and review a range of strategic alternatives focused on maximizing stockholder value from our clinical assets and cash resources and our intent to streamline our operations in order to conserve capital. We also announced that we had engaged a financial and strategic advisor, Ladenburg Thalmann & Co., Inc., to advise us on strategic alternatives and appointed a Special Committee of our board

of directors to investigate and evaluate strategic alternatives. In January 2017, our board of directors also approved a workforce reduction that took place between January 15 and March 31, 2017, that affected a total of 25 employees, including our former President and Chief Executive Officer, and our former Chief Medical Officer, each of whose employment was terminated effective January 15, 2017. As of the date hereof, we have five full-time employees and all research and development activities have ceased.

Merger Agreement

After conducting a diligent and extensive process of evaluating strategic alternatives for Nivalis and identifying and reviewing potential candidates for a strategic acquisition or other transaction, which included the receipt of more than 80 non-binding proposals from interested parties and careful evaluation and consideration of those proposals, and following extensive negotiation with Alpine, on April 18, 2017, we, Merger Sub and Alpine entered into the Merger Agreement. Pursuant to the Merger Agreement, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Alpine, with Alpine continuing as a wholly owned subsidiary of Nivalis and the surviving corporation of the Merger.

The Merger is intended to qualify for federal income tax purposes as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.

 

Subject to the terms and conditions of the Merger Agreement, at the closing of the Merger, each outstanding share of Alpine’s capital stock will be converted into the right to receive shares of Nivalis’ common stock (subject to the payment of cash in lieu of fractional shares and after giving effect to a reverse stock split of Nivalis’ common stock if determined necessary or appropriate by Nivalis, Alpine and Merger Sub) such that, immediately following the effective time of the Merger, preexisting Nivalis stockholders, optionholders and warrantholders are expected to own, or hold rights to acquire, approximately 26% of the fully-diluted common stock of Nivalis, and preexisting stockholders, optionholders and warrantholders of Alpine are expected to own, or hold rights to acquire, approximately 74% of the fully-diluted common stock of Nivalis.

 

Prior to the execution and delivery of the Merger Agreement, and as a condition of the willingness of Nivalis to enter into the Merger Agreement, certain existing stockholders of Alpine have entered into agreements with Alpine pursuant to which such stockholders have agreed, subject to the terms and conditions of such agreements, to purchase prior to the consummation of the merger shares of Alpine’s capital stock for an aggregate purchase price of approximately $17.0 million. The consummation of the transactions contemplated by such agreements is conditioned upon the satisfaction or waiver of the conditions set forth in the Merger Agreement.

 

Consummation of the Merger is subject to certain closing conditions, including, among other things, approval by the stockholders of Nivalis and Alpine, and satisfaction of minimum net cash thresholds by each of Nivalis and Alpine. In accordance with the terms of the Merger Agreement, (i) certain executive officers, directors and stockholders of Alpine (solely in their respective capacities as Alpine stockholders) have entered into support agreements with Nivalis to vote all of their shares of Alpine’s capital stock in favor of adoption of the Merger Agreement and approval of the transactions contemplated therein, including the Merger and (ii) certain executive officers, directors and stockholders of Nivalis (solely in their respective capacities as Nivalis stockholders) have entered into support agreements with Alpine to vote all of their shares of Nivalis’ common stock in favor of approval of the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger and the issuance of shares of Nivalis’ common stock to Alpine’s stockholders.

 

The Merger Agreement contains certain termination rights for both Nivalis and Alpine, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $2.5 million, or in some circumstances reimburse the other party’s expenses up to a maximum of $1.0 million.

At the Effective Time, the board of directors of Nivalis is expected to consist of six members, four of whom will be designated by Alpine, and two of whom will be designated by Nivalis. Following consummation of the Merger, it is anticipated that the size of the board of directors will be increased to seven and that a person unaffiliated with Nivalis or Alpine will be designated by a majority of the other members of the board of directors.

Nivalis’ future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to:

Financial Operations Overview

Revenue

To date, we have not generated any revenue and may never do so. We have determined to cease further development of cavosonstat and our other GSNOR inhibitors while we identified and evaluated strategic alternatives and pursue the merger with Alpine, and, therefore, do not anticipate generating revenue ourselves from our potential product candidates.

Research and Development Expense

Research and development expense consists of costs incurred for the development of our product candidates, which include:

Research and development costs are expensed as incurred. 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.

Below is a summary of our research and development expenses by categories of costs for the periods presented. The other expenses category includes travel, lab and office supplies, clinical trial management software license fees, business insurance and other miscellaneous expenses.

 

 

All of our research and development expenses for the three and six months ended June 30, 2017 and 2016 relate to the development of cavosonstat and, more recently, to the wind-down of development of cavosonstat. We have expended an aggregate of approximately $30.4 million for direct program expenses related to cavosonstat from inception through June 30, 2017. We anticipate that overall research and development costs will decrease significantly for the foreseeable future as compared to prior periods due to the near-term conclusion of our currently planned program expenses and our workforce reduction that occurred during the first quarter of 2017 resulting from our determination to cease further development of cavosonstat and our other GSNOR inhibitors and to seek to conserve cash resources while we identify and evaluate strategic alternatives. We have not incurred, nor do we expect to incur, significant cancellation charges with our vendors during the wind-down of research and development activities.

General and Administrative Expense

General and administrative expense consists principally of salaries and related costs not included in research and development expenses, including stock-based compensation for personnel in executive, finance, business development and information technology functions, facility costs and professional fees for legal, patent review, consulting and accounting services.

We anticipate that overall general and administrative costs will decrease during the remainder of 2017 compared with prior periods due to lower personnel-related costs and stock-based compensation due to the workforce reduction. Partially offsetting these decreases will be increased legal and financial advisory costs in connection with pursuing and completing the merger or another potential strategic transaction involving the company.

Interest Income

Interest income for the three and six months ended June 30, 2017 and 2016 consists of interest earned on marketable securities and money market funds.

 

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2017 and 2016

Research and Development Expenses.  Research and development expenses for the three and six months ended June 30, 2017 and 2016 were as follows:

 

The decrease in research and development expenses for the three months ended June 30, 2017 compared to the same period in the prior year was the result of winding down all research and development activities effective January 2017. During the second quarter of the prior year we incurred approximately $2.9 million for cavosonstat Phase 2 clinical trials in CF and approximately $900,000 for clinical drug manufacturing and long-term toxicology studies combined. Salaries, benefits and stock-based compensation expenses decreased by $1.4 million during the second quarter of 2017 compared to the prior year due to the workforce reduction.

The decrease in research and development expenses for the six months ended June 30, 2017 compared to the same period in the prior year was the result of winding down all research and development activities during the first half of 2017. During the first half of the prior year we incurred approximately $5.4 million for cavosonstat Phase 2 clinical trials in CF and approximately $1.7 million for clinical drug manufacturing and long-term toxicology studies combined. Salaries and benefit expenses decreased by $1.8 million during the first half of 2017 compared to the prior year due to the workforce reduction. Partially offsetting these decreases were increased stock-based compensation expenses of approximately $915,000 related to the accelerated vesting of options and RSUs held by employees affected by the restructuring plan and workforce reduction.

 

General and Administrative Expenses.    General and administrative expenses for the three and six months ended June 30, 2017 and 2016 were as follows: 

 

The increase in general and administrative expenses for the three months ended June 30, 2017 compared to the same period in the prior year was primarily due to increased legal, printing and financial advisory expenses of $1.2 million in support of our pursuing and completing a potential strategic transaction of the company. During this same period, marketing and patent expenses combined decreased by approximately $538,000 due to the wind-down in drug-development activities, while salaries and benefit expenses decreased by approximately $318,000 during the second quarter of 2017 compared to the prior year due to the workforce reduction that took effect in early 2017.

The increase in general and administrative expenses for the six months ended June 30, 2017 compared to the same period in the prior year was primarily due to increased stock-based compensation expense of approximately $916,000 related to the accelerated vesting of options held by employees affected by the restructuring plan and workforce reduction during the first quarter of 2017. During this same period, marketing and patent expenses combined decreased by $1.0 million due to the wind-down in drug-development activities, while legal, printing and financial advisory expenses increased by $1.4 million in support of our pursuing and completing a potential strategic transaction of the company. Salaries and benefit expenses decreased by approximately $555,000 during the first half of 2017 compared to the prior year due to the workforce reduction.

 

Restructuring charges.  Restructuring charges for the three and six months ended June 30, 2017, were approximately $864,000 and $4.4 million, respectively. We did not have any restructuring charges during the prior year periods. In November 2016, we announced that our Phase 2 trial, evaluating the efficacy and safety of cavosonstat in adult patients with CF, had failed to demonstrate a benefit in its primary endpoint. On January 3, 2017, we announced

that our board of directors had initiated a process to explore and review a range of strategic alternatives. At that time, we engaged a financial advisor and established a Special Committee of the board of directors to explore strategic alternatives.

In January 2017, we committed to a restructuring plan that consisted primarily of a workforce reduction of 25 positions, to a total of five remaining positions in order to conserve cash while we continued to evaluate strategic alternatives. We entered into severance and release agreements with employees affected by the workforce reduction and retention agreements with key employees if these employees remained with us until terminated by the company without cause prior to such date. All employees affected by the workforce reduction received either a lump-sum severance payment or monthly severance payments per the terms of their employment agreements with us. Certain of these employees also received retention bonus payments that were expensed upon payment and separation from Nivalis during the first quarter of 2017. In accordance with ASC 420, “Exit and Disposal Cost Obligations”, we are recognizing the restructuring liabilities related to the five remaining positions over the employees’ anticipated service period, which is expected to be the first seven months of 2017. We recognized approximately $864,000 and $1.4 million of accrued restructuring costs for these remaining employees during the three and six-month periods ended June 30, 2017, respectively.

Total restructuring charges for the six-month period ended June 30, 2017, in connection with the workforce reduction, comprised principally of monthly or one-time severance payments, retention bonuses and benefits continuation costs, were approximately $4.4 million of which approximately $1.2 million and $570,000 was paid during the first and second quarters of 2017, respectively. As of June 30, 2017, approximately $2.6 million was accrued in remaining restructuring-related payments expected to be paid in July 2017. As mentioned in the previous paragraph, approximately $234,000 of unrecognized restructuring charges are expected to be expensed and paid in July 2017 related to the remaining employee positions. 

 

Interest Income.  Interest income for the three and six months ended June 30, 2017 and 2016 were as follows:

 

The decrease in interest income during the three months ended June 30, 2017 compared with the prior year period was due to interest income earned on a lower investment balance. Interest income for the six months ended June 30, 2017 was equivalent to the amount earned in the prior year as higher investment interest rates offset the effect of a lower investment base.

 

Liquidity and Capital Resources

Since inception, we have funded our operations primarily through the proceeds from our initial public offering in June 2015 as well as private placements of equity and convertible debt prior to the initial public offering. As of June 30, 2017, we had cash, cash equivalents and marketable securities of $49.5 million and no debt.

 

The following table sets forth the primary  uses of cash for the six months ended June 30, 2017 and 2016: 

 

Operating Activities

During the first half of fiscal 2017, our net cash used in operating activities was $11.6 million. Our net cash used in operating activities reflects adjustments to our net loss of $12.6 million for noncash charges of $3.3 million, primarily associated with stock-based compensation, and reflects lower net operating liabilities, excluding cash, cash equivalents and marketable securities, which decreased by $2.3 million. Net operating liabilities decreased primarily because of lower accounts payable and accrued direct program expenses of $3.7 million and decreases in accrued employee benefits of $1.7 million. Slightly offsetting these decreases were increases in accrued restructuring charges of $2.6 million and decreases in prepaid expenses of $596,000. Decreases in accounts payable and accrued direct program expenses were directly related to the wind-down of all research and development operations and related payments of vendor obligations. Accrued employee benefits decreased due to payment of annual employee performance bonuses during January 2017. Accrued restructuring charges increased by $2.6 million specifically related to the accounting for severance payments, retention bonuses and benefit continuation costs for employees affected by the workforce reduction.

During the first half of fiscal 2016, our net cash used in operating activities was $13.6 million. Our net cash used in operating activities reflects adjustments to our net loss of $16.3 million for noncash charges of $1.5 million, primarily associated with stock-based compensation, and reflects higher net operating liabilities, excluding cash, cash equivalents and marketable securities, which increased by $1.3 million. The increase in net operating liabilities is primarily related to higher accounts payable and accrued direct program expenses of $2.3 million, slightly offset by decreases in accrued employee benefits of $690,000, decreases in accrued other liabilities of $159,000 and increases in prepaid expenses of $168,000. Increases in accounts payable and accrued direct program expenses were directly related to research and development costs for our two Phase 2 clinical trials. Accrued employee benefit costs decreased due to payment of 2015 employee performance bonuses during February 2016, slightly offset by accrued bonus expense for the 2016 period.

Investing Activities

The net cash provided by investing activities for the six months ended June 30, 2017 and 2016 was primarily related to proceeds from maturities and sales of marketable securities outweighing our purchases of replacement securities during the period.

Financing Activities

The net cash provided by financing activities for the six months ended June 30, 2016 was related to proceeds from employee stock purchases and stock options exercised.

Funding Requirements

Based on our current operating plan, and expectations regarding significantly lower operating expenses following the discontinuation of almost all of our research and development activities and the subsequent restructurings in the first half of 2017, we expect our $49.5 million in cash and cash equivalents and marketable securities as of June 30, 2017 will be sufficient to fund operations for at least the next twelve months. This estimate assumes no additional funding from equity financings or debt and is subject to numerous risks and uncertainties. Our present and future funding requirements will depend on many factors, including but not limited to:

For more information as to the risks associated with our future funding requirements see the risk factors under Item 1A. – “Risk Factors” of this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 that we have filed with the SEC.

 

Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Accrued Restructuring Charges

As described above under “Results of Operations – Restructuring Charges”, in January 2017, we committed to a restructuring plan that consisted primarily of a workforce reduction of 25 positions, to a total of five remaining positions in order to conserve cash while the Company continued to evaluate business alternatives. All employees affected by the workforce reduction received either a lump-sum severance payment or monthly severance payments and certain of these employees also received retention bonus payments that were expensed upon payment and separation from the company during the first quarter of 2017. In accordance with ASC 420, “Exit and Disposal Cost Obligations”, we are recognizing the restructuring liabilities related to the five remaining positions over the employees’ anticipated service period which is expected to be the first seven months of 2017.

For a description of our other critical accounting policies, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 that we have filed with the SEC. There have not been any material changes to our critical accounting policies since December 31, 2016.