CASSAVA SCIENCES INC - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________



Form 10-Q

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For the Quarterly Period Ended June 30, 2019

or



Commission File Number: 000-29959

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Cassava Sciences, Inc.

 (Exact name of registrant as specified in its charter)





7801 N. Capital of Texas Highway, Suite 260, Austin, TX 78731

(512) 501-2444

(Address, including zip code, of registrant’s principal executive offices and

telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:





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.



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 ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.





 



 

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CASSAVA SCIENCES, INC.



TABLE OF CONTENTS



 



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PART I.  FINANCIAL INFORMATION



Item 1. Financial Statements



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See accompanying notes to condensed financial statements.

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See accompanying notes to condensed financial statements.

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See accompanying notes to condensed financial statements.

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Cassava Sciences, Inc.



Notes to Condensed Financial Statements

(Unaudited)



Note 1.  General and Liquidity



Cassava Sciences, Inc. (the “Company”) develops proprietary drugs that offer significant improvements to patients and healthcare professionals. The Company generally focuses its drug development efforts on disorders of the nervous system.



The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management of the Company, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and six months ended June  30, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the year 2019.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  



Liquidity



The Company has incurred significant net losses and negative cash flows since inception, and as a result has an accumulated deficit of $166.4 million at June 30, 2019.  The Company expects its cash requirements to be significant in the future. The amount and timing of the Company’s future cash requirements will depend on regulatory and market acceptance of its product candidates and the resources it devotes to researching and developing, formulating, manufacturing, commercializing and supporting its products. The Company may seek additional funding through public or private financing in the future, if such funding is available and on terms acceptable to the Company. There are no assurances that additional financing will be available on favorable terms, or at all. However, management believes that the current working capital position will be sufficient to meet the Company’s working capital needs for at least the next 12 months. 





Note 2.  Significant Accounting Policies



Use of Estimates



The Company makes estimates and assumptions in preparing its financial statements in conformity with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue earned and expenses incurred during the reporting period. The Company evaluates its estimates on an ongoing basis, including those estimates related to agreements, research collaborations and investments. Actual results could differ from these estimates and assumptions.



Cash and Cash Equivalents and Concentration of Credit Risk



The Company invests in cash and cash equivalents. The Company considers highly-liquid financial instruments with original maturities of three months or less to be cash equivalents. Highly liquid investments that are considered cash equivalents include money market funds, certificates of deposits, treasury bills and commercial paper.  The carrying value of cash equivalents approximates fair value due to the short-term maturity of these securities. The Company maintains its investments at one financial institution.

 









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Fair Value Measurements



The Company reports its cash and cash equivalents at fair value as Level 1, Level 2 or Level 3 using the following inputs:





If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The fair value of all cash and cash equivalents was based on Level 1 inputs at June  30, 2019 and December 31, 2018.



Awards of and Proceeds from Grants



During the six months ended June  30,  2019, the Company was awarded a National Institutes of Health (“NIH”) grant totaling up to $1.5 million to support the Company’s on-going development of new technology to detect Alzheimer’s disease with a simple blood test.

 

During the three months ended June 30, 2019 and 2018,  the Company received reimbursements totaling $1.4 million and $0.4 million pursuant to previously announced NIH research grants, respectively. During the six months ended June 30, 2019 and 2018, the Company received reimbursements totaling $2.2 million and $0.8 million pursuant to NIH research grants, respectively. The Company records the proceeds from these grants as reductions to its research and development expenses.

 

Non-cash Stock-based Compensation 



The Company recognizes non-cash expense for the fair value of all stock options and other share-based awards. The Company uses the Black-Scholes option valuation model (“Black-Scholes”) to calculate the fair value of stock options, using the single-option award approach and straight-line attribution method. The Company adopted ASU No. 2018-07, Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, on January 1, 2019. Accordingly, for all options granted, it recognizes the resulting fair value as expense on a straight-line basis over the vesting period of each respective stock option, generally four years.



The Company has granted share-based awards that vest upon achievement of certain performance criteria (“Performance Awards”). The Company multiplies the number of Performance Awards by the fair market value of its common stock on the date of grant to calculate the fair value of each award. It estimates an implicit service period for achieving performance criteria for each award. The Company recognizes the resulting fair value as expense over the implicit service period when it concludes that achieving the performance criteria is probable. It periodically reviews and updates as appropriate its estimates of implicit service periods and conclusions on achieving the performance criteria. Performance Awards vest and common stock is issued upon achievement of the performance criteria.



Net Loss per Share



The Company computes basic net loss per share on the basis of the weighted-average number of common shares outstanding for the reporting period. Diluted net loss per share is computed on the basis of the weighted-average number of common shares outstanding plus potential dilutive common shares outstanding using the treasury-stock method. Potential dilutive common shares consist of outstanding common stock options and warrants.  There is no difference between the Company’s net loss and comprehensive loss.

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The Company included the following in the calculation of basic and diluted net loss per share (in thousands, except per share data):



The Company excluded common stock options and warrants outstanding from the calculation of net loss per share, diluted, because the effect of including options and warrants outstanding would have been anti-dilutive.



Fair Value of Financial Instruments   

Financial instruments include cash and cash equivalents, accounts payable and accrued liabilities. The estimated fair value of certain financial instruments may be determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value; therefore, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amounts. The carrying amounts of cash and cash equivalents, accounts payable and accrued liabilities are at cost, which approximates fair value due to the short maturity of those instruments.



Income Taxes 



The Company makes estimates and judgments in determining the need for a provision for income taxes, including the estimation of its taxable income or loss for each full fiscal year.



The Company has accumulated significant deferred tax assets that reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax assets is dependent upon future earnings. The Company is uncertain about the timing and amount of any future earnings. Accordingly, it offsets these deferred tax assets with a valuation allowance.



The Company may in the future determine that certain deferred tax assets will likely be realized, in which case it will reduce its valuation allowance in the period in which such determination is made. If the valuation allowance is reduced, the Company may recognize a benefit from income taxes in its statement of operations in that period.

The Company classifies interest recognized pursuant to its deferred tax assets as interest expense, when appropriate. 

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Recently Adopted Accounting Pronouncements 



The Company has a single non-cancelable operating lease for approximately 6,000 square feet of office space in Austin, Texas that expires on December 31, 2020, which is used for the development of novel drugs. Prior to January 1, 2019, the Company accounted for leases in accordance with the provisions of ASC Topic 840. Under the previous leasing guidance, the Company expensed lease payments over the term of the lease and did not give recognition to any lease related assets or liabilities on its balance sheet.



On January 1, 2019, the Company adopted ASU No. 2016-02, Leases (ASC 842) which, as permitted by ASC Topic 842, is the date of initial application. The core principle of ASC Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases.  For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position.  The Company recognized a right-of-use asset and operating lease liability upon the adoption of ASU 2016-02 which increased total assets and total liabilities relative to such amounts prior to adoption. The Company utilized a discount rate of 5.5% to determine the present value of the future lease payments which represents the Company’s incremental borrowing rate.



The impact of adopting ASC 842 on  assets and liabilities recorded as of January 1, 2019 were as follows (in thousands):







The Company recorded a reduction of the non-current portion of the lease liability and an offsetting reduction in the right-of-use assets of $22,500 and $45,000 during the three and six months ended June  30, 2019, respectively.  There was no change to the statement of operations or statement of cash flows during the three and six months ended June  30, 2019 as a result of the adoption of ASC Topic 842.  See additional information regarding leases in Note 5 – Commitments.



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Note 3.  Stockholders’ Equity and Stock-Based Compensation Expense



Stockholders’ Equity Activity during the Six Months Ended June  30, 2019 and 2018



During the six months ended June  30, 2019 and 2018,  the Company’s common stock outstanding and stockholders’ equity changed as follows:







At-the-Market Common Stock Issuance



On February 8, 2018, the Company entered into a Capital on Demand™ Sales Agreement (the “ATM Agreement”) with JonesTrading. In accordance with the terms of the ATM Agreement, the Company was able to offer and sell shares of its common stock, from time to time in one or more public offerings of its common stock, with JonesTrading acting as agent, in transactions pursuant to a shelf registration statement that was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on July 31, 2017.  On August 16, 2018, the Company suspended sales of its common stock under its ATM Agreement.



There were no common stock sales under the ATM Agreement during the six months ended June  30, 2019. During the six months ended June  30, 2018, the Company sold a total of 300,000 shares of its common stock under the ATM Agreement, in the open market at an average gross selling price of $6.70 per share for net proceeds of $1.9 million. The Company expensed approximately $0.1 million of cost for the offering, excluding JonesTrading commissions.



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Stock Option and Performance Award Activity in 2019



During the six months ended June  30, 2019, stock options and unvested Performance Awards outstanding under the Company’s 2018 Plan (defined below) changed as follows:









The weighted average exercise price of options outstanding at June  30, 2019 was $13.89. As outstanding options vest over the current remaining vesting period of 2.5 years, the Company expects to recognize non-cash expense of $2.2 million. If and when outstanding Performance Awards vest, the Company would recognize non-cash expense of $2.3 million over the implicit service period.



Stock-based Compensation Expense in 2019



During the three and six months ended June  30, 2019 and 2018,  the Company’s non-cash stock-based compensation expenses were as follows (in thousands):

 

2018 Equity Incentive Plan

  

On January 31, 2018, the Company’s Board of Directors approved the Company’s 2018 Omnibus Incentive Plan (the “2018 Plan”). The Company’s Board of Directors or a designated committee of the Board of Directors is responsible for administration of the 2018 Plan and determines the terms and conditions of each option granted, consistent with the terms of the 2018 Plan. The Company’s employees, directors, and consultants are eligible to receive awards under the 2018 Plan, including grants of stock options and performance awards. Share-based awards generally expire ten years from the date of grant. The 2018 Plan provides for issuance of up to 1,000,000 shares of common stock, par value $0.001 per share under the 2018 Plan, subject to adjustment as provided in the 2018 Plan.

  

When stock options or performance awards are exercised net of the exercise price and taxes, the number of shares of stock issued is reduced by the number of shares equal to the amount of taxes owed by the award recipient and that number of shares are cancelled. The Company then uses its cash to pay tax authorities the amount of statutory taxes owed by and on behalf of the award recipient.





Note 4.  Income Taxes 



The Company did not provide for income taxes during the six months ended June  30, 2019, because it has projected a net loss for the full year 2019. There was also no provision for income taxes for the six months ended June  30, 2018.



 

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Note 5.  Commitments



The Company conducts its product research and development programs through a combination of internal and collaborative programs that include, among others, arrangements with universities, contract research organizations and clinical research sites. The Company has contractual arrangements with these organizations that are cancelable. The Company’s obligations under these contracts are largely based on services performed.



The Company has a non-cancelable operating lease for approximately 6,000 square feet of office space in Austin, Texas that expires on  December 31, 2020. Minimum lease payments as of June  30, 2019 were as follows (in thousands):







Building rent expense for the three months ended June 30, 2019 and 2018 totaled $24,000 and $22,000, respectively. Building rent expense for the six months ended June  30, 2019 and 2018 totaled $48,000 and $45,000, respectively.  These amounts were equal to the Company’s operating cash outflow from operating leases.

 



6.  Collaboration Agreements 

  

Durect Corporation 

 

The Company had formerly entered into a Development and License Agreement (the “License Agreement”) with Durect Corporation around certain controlled-release technology. On March 20, 2019, the Company gave notice of termination to Durect Corporation for such License Agreement.  This and other actions effectively ended the Company’s development of any product candidates related to such technology. There were no payments made to Durect Corporation during the six months ended June  30, 2019 and 2018.





Note 7.  Recently Issued Accounting Pronouncements



In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2018-13 on its consolidated financial statements.  





Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations



This discussion and analysis should be read in conjunction with Cassava Sciences, Inc.’s (the “Company,”, “we,” “us,” or “our”) financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. Operating results are not necessarily indicative of results that may occur in future periods.



This Quarterly Report on Form 10-Q contains certain statements that are considered forward-looking statements within the meaning of the Private Securities Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some

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cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negatives of these terms or other comparable terminology.



The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to statements about:



Such forward-looking statements and our business involve risks and uncertainties, including, but not limited to the following:  

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Please also refer to the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as such risk factors may be amended, updated or modified periodically in our reports filed with the SEC for further information on these and other risks affecting us.

 

We caution you not to place undue reliance on forward-looking statements because our future results may differ materially from those expressed or implied by them. We do not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this prospectus, except as required by law.



Overview



Cassava Sciences, Inc. is a clinical-stage drug development company. Our expertise is to develop new product candidates and guide such candidates through various regulatory and development pathways in preparation for their potential commercialization. Since our inception, we have generally focused our drug development efforts on disorders of the central nervous system. We are currently conducting a Phase 2 clinical program for patients with Alzheimer’s disease.  By necessity, the conduct of drug development is complex, lengthy, expensive and risky. The U.S. Food and Drug Administration (the “FDA”) has not yet established the safety or efficacy of our product candidates.

  

Our overall strategy is to leverage our unique scientific/clinical platform to develop a first-in-class program for treating neurodegeneration.  Our goal is to address Alzheimer’s disease and other neurodegenerative diseases, particularly those with a strong neuroinflammation component, with PTI-125, our drug product candidate to treat Alzheimer’s disease, and PTI-125Dx, our diagnostic product candidate to detect Alzheimer’s disease. 

  

We seek to develop and gain regulatory approval for PTI-125 for the treatment of Alzheimer’s disease and PTI-125Dx for the diagnosis of Alzheimer’s disease.  The following is a summary of our clinical-stage biopharmaceutical assets:

  

PTI-125 – PTI-125 is the name of our product candidate for the treatment of Alzheimer’s disease.  This proprietary small molecule drug represents an entirely new approach to treat Alzheimer’s disease.  PTI-125 benefits from a strong scientific rationale, peer-reviewed publications in prestigious academic journals and multiple peer-

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reviewed research grant awards from the National Institutes of Health (“NIH”), the primary agency of the U.S. government for biomedical research. 

  

In 2018, we initiated a Phase 2 clinical program for patients with Alzheimer’s disease using PTI-125.  On April 15, 2019, we announced completion of patient enrollment for a Phase 2a study for PTI-125. We expect to announce top-line results of our Phase 2a study in the second half of 2019. We also expect to initiate a Phase 2b study in approximately the third quarter of 2019. Our Phase 2 clinical program with PTI-125 is substantially funded by research grant awards from NIH.  PTI-125 was discovered and designed in-house and was characterized by our academic collaborators during research activities that were conducted from approximately 2008 to date.  We own exclusive, worldwide rights to PTI-125, without royalty obligations to any third party.

  

PTI-125Dx – We are developing PTI-125Dx as a blood-based biomarker/diagnostic to detect Alzheimer’s disease. The goal of PTI-125Dx is to make the detection of Alzheimer’s disease as simple as getting a blood test. This clinical-stage program is substantially funded by research grant awards from NIH. PTI-125Dx was discovered and designed in-house and was characterized by our academic collaborators during research activities that were conducted from approximately 2008 to date.  We own exclusive, worldwide rights to PTI-125Dx, without royalty obligations to any third party.

  

Our scientific approach is different. 

 

For over 100 years, scientists have ascribed various neurodegenerative diseases to pathological proteins that misfold.  Misfolded proteins are also altered or they aggregate, such as amyloid and tau in the case of Alzheimer’s disease. Destruction of neuronal synapses, accelerated nerve cell death, and dysfunction of the brain support cells, are all widely believed to be a direct consequence of misfolded proteins. 

  

Historically, the drug industry has attempted to treat Alzheimer’s disease by developing drugs that block the synthesis of, or remove or dis-aggregate, beta amyloid and, more recently, tau. Essentially, the prevailing doctrine said that amyloid must be cleared out of the brain.  This scientific approach – known as the amyloid hypothesis - has been repeatedly tested by our competitors in late stage clinical trials using a variety of antibody backbones, epitopes, target conformations, biomarkers and in various stages of disease.  Such studies have all failed to yield therapeutic benefit for patients with Alzheimer’s disease.  More recently, experimental efforts have been proposed to ramp up the brain’s immune system in people with Alzheimer’s disease to remove amyloid or tau, an approach known as immunotherapy. Current attempts to use immunotherapy to treat Alzheimer’s disease may yet work, but for over 20 years this approach has also consistently failed due to lack of efficacy and/or for safety reasons. For example, older adults who receive active immunotherapy treatment often show reduced responsiveness of the immune system, and patients who do improve sometimes develop a life-threatening brain inflammation called aseptic meningitis. More generally, even when active or passive immunization against amyloid beta has reduced the brain’s amyloid load, such effects resulted in no therapeutic benefit to patients with Alzheimer’s disease. 

  

Since drug innovation is a trial-and-error process, clinical failures represent important learning opportunities.  In the case of Alzheimer’s disease, we believe the biopharmaceutical industry’s track record of persistent failure reflects a need to consider more recent and innovative approaches regarding the neurobiology of Alzheimer’s disease. We believe such scientific approaches may broaden the range of possible treatment approaches.

  

Over the last ten years, we have developed a new and promising scientific approach for the treatment and diagnosis of neurodegeneration, particularly Alzheimer’s disease. 

  

Importantly, we do not seek to clear amyloid out of the brain.  Our approach is to stabilize a critical protein in the brain.

  

“Proteopathy” refers to a disease in which a protein becomes structurally abnormal, assembles and aggregates, and therefore loses its normal function and disrupts or injures the function of surrounding cells, tissues and organs.  Through years of basic research, we have identified a structurally altered protein in the brain. We believe our experimental evidence demonstrates that this proteopathy plays a critical role in the development of neurodegenerative diseases, including the neurodegeneration observed in Alzheimer’s disease.  Using scientific insight and advanced tools in biochemistry, bioinformatics and imaging, we have elucidated this protein dysfunction. We have engineered a family of high-affinity small molecules to target the structurally altered protein and restore the protein to its normal

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shape and function. This family of small molecules, including PTI-125, was designed in-house and characterized by our academic collaborators.

  

The target of PTI-125 is an altered form of a scaffolding protein called filamin A (“FLNA”). Altered FLNA causes a cascade of toxic effects in the brain.  Altered FLNA is a proteopathy, which means that this protein is no longer capable of executing a stable, beneficial and protective role and instead becomes harmful and destructive to the brain.  By reversing the alteration of FLNA, its pathology ceases to adversely affect surrounding cells in the brain. In animal models of disease, restoring normal FLNA resulted in a multitude of therapeutic effects, including normalizing neurotransmission, decreasing neuroinflammation and restoring memory and cognition. By restoring function to multiple receptors and exerting powerful anti-inflammatory effects, we believe our approach has potential to slow the progression of neurodegeneration in humans.  Thus, we have designed product candidates, such as PTI-125, with the goal of slowing or, potentially, even reversing the deterioration of brain cells. We believe the ability to simultaneously improve many vital functions in the brain represents a new, different and crucial approach to address neurodegeneration.

  

Importantly, since PTI-125 has a unique mechanism of action, we believe its potential therapeutic effects may be additive or synergistic with that of other therapeutic candidates aimed at the treatment of neurodegeneration.



Our mission is to detect and treat Alzheimer’s disease.

  

Our lead therapeutic product candidate, called PTI-125, is initially aimed at Alzheimer’s disease.  PTI-125 is a small molecule drug with a novel mechanism of action.  This drug candidate has demonstrated both cognitive improvement and slowing of disease progression in animal models of disease.  PTI-125 is in Phase 2 clinical stage of development, with substantial support from the National Institute on Aging (“NIA”), a division of NIH.

  

The target of PTI-125 is an altered form of filamin A (“FLNA”).  FLNA is a scaffold protein that is widely found throughout the body.  The function of a scaffold protein is to bring multiple other proteins together for them to interact.  However, an altered, and highly toxic, form of FLNA is found in the Alzheimer’s brain. Altered FLNA contributes to Alzheimer’s disease by disrupting the normal function of neurons, leading to neurodegeneration and brain inflammation. Our product candidate, PTI-125, is aimed at countering the altered and toxic form of FLNA in the brain, thus restoring the normal function of this critical protein.

  

PTI-125 binds to altered FLNA with very high affinity.  In doing so, PTI-125 restores the normal shape of FLNA and the normal function of three brain receptors: the alpha-7 nicotinic acetylcholine receptor; the N-methyl-D-aspartate (“NMDA”) receptor; and the insulin receptor.  These receptors have pivotal roles in brain cell survival, cognition and memory.  In animal models, treatment with PTI-125 resulted in dramatic improvements in brain health, such as reduced amyloid and tau deposits, improved insulin receptor signaling and improved learning and memory.  In addition, PTI-125 has another beneficial treatment effect of significantly reducing inflammatory cytokines in the brain. In animal models of disease, treatment with PTI-125 abolished IL-6 production and suppressed TNF-alpha and IL-1beta levels by 86% and 80%, respectively, illustrating a powerful anti-neuroinflammatory effect.

  

Our science is published in peer-reviewed academic journals.  In addition, our research has been supported by NIH under multiple research grant awards. Each grant was awarded following an in-depth, competitive, peer-reviewed evaluation of our approach for scientific and technical merit by a panel of outside experts in the field.  Strong, long-term support from NIH has allowed us to advance our two product candidates for neurodegeneration, PTI-125 and PTI-125Dx, into clinical development.

  

Our science is based on stabilizing a critical protein in the brain. 

  

Our scientific approach is to treat neurodegeneration by targeting an altered form of a scaffolding protein called filamin A (“FLNA”).  Scaffolding proteins are essential for cell function because they participate in virtually every process within the cell.  If their function is impaired, the consequences can be devastating. Technological advances in medicine and improvements in lifestyle are making our lives longer.  But with age, genetic mutations and other factors conspire against healthy cells, resulting in altered proteins.  Sometimes a cell can rid itself of altered proteins. However, when disease changes the shape and function of critical proteins, multiple downstream processes are impaired.  There are many clinical conditions in which proteins become structurally altered and impair the normal

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function of cells, tissues and organs, leading to disease.   Conversely, restoring altered proteins back to health – which is called proteostasis – is a well-accepted therapeutic strategy in clinical medicine.

  

Accumulation of altered proteins is common in age-related brain disorders.  The most common is Alzheimer’s disease.  Altered proteins observed in the aging brain include hyperphosphorylated tau and beta amyloid, both hallmarks of Alzheimer’s disease.  Our scientists and outside collaborators have demonstrated that an altered, and highly toxic, form of the scaffolding protein FLNA exists in the Alzheimer’s brain. Critically, altered FLNA enables the toxicity of both beta amyloid and tau proteins.  This toxic cascade impairs brain health, leading to worsening symptoms of Alzheimer’s disease over time.  In addition to impairing brain cell function, altered FLNA enables persistent inflammation in the Alzheimer’s brain. We have shown that altered FLNA also promotes neuroinflammation via toll-like receptor 4 (“TLR4”), an immune receptor that causes release of pro-inflammatory cytokines.  Our therapeutic approach is designed to counteract these brain pathologies by restoring altered FLNA protein back to its normal, non-diseased conformation with PTI-125.   Treatment with PTI-125 has been shown to restore the normal function of three brain receptors critical to brain cell survival, cognition and memory, i.e., the alpha-7 nicotinic acetylcholine receptor; the NMDA receptor; and the insulin receptor. Treatment with PTI-125 has also been shown to dramatically reduce inflammatory cytokine levels in brains of mice with Alzheimer’s disease mutations, thus reducing the neuroinflammation that also characterizes Alzheimer’s disease.



Financial Overview



We have yet to generate any revenues from product sales. We have an accumulated deficit of $166.4 million at June  30, 2019. These losses have resulted principally from costs incurred in connection with research and development activities, salaries and other personnel-related costs and general corporate expenses. Research and development activities include costs of preclinical and clinical trials as well as clinical supplies associated with our drug candidates. Salaries and other personnel-related costs include non-cash stock-based compensation associated with options and other equity awards granted to employees and non-employees. Our operating results may fluctuate substantially from period to period as a result of the timing of preclinical activities, enrollment rates of clinical trials for our drug candidates and our need for clinical supplies.



We expect to continue to use significant cash resources in our operations for the next several years. Our cash requirements for operating activities and capital expenditures may increase substantially in the future as we:





Product revenue will depend on our ability to receive regulatory approvals for, and successfully market, our product candidates. If our development efforts result in regulatory approval and successful commercialization of our product candidates, we will generate revenue from direct sales of our products and/or, if we license our products to future collaborators, from the receipt of license fees and royalties from sales of licensed products. We conduct our research and development programs through a combination of internal and collaborative programs. We rely on arrangements with universities, our collaborators, contract research organizations and clinical research sites for a significant portion of our product development efforts.



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We focus substantially all of our research and development efforts in the area of neurology. The following table summarizes expenses which have been reduced for reimbursements received for NIH grants (in thousands):



Research and development expenses include compensation, contractor fees and supplies as well as allocated common costs. Contractor fees and supplies generally include expenses for preclinical studies and clinical trials and costs for formulation and manufacturing activities. Other common costs include the allocation of common costs such as facilities. During the three months ended June  30, 2019 and 2018, we received $1.4 million and $0.4 million from research grants from NIH, respectively.  During the six months ended June 30, 2019 and 2018, we received $2.2 million and $0.8 million from research grants from NIH, respectively. These reimbursements were recorded as a reduction to our research and development expenses.



Our technology has been applied across certain of our drug candidates. Data, know-how, personnel, clinical results, research results and other matters related to the research and development of any one of our drug candidates also relate to, and further the development of, our other drug candidates. As a result, costs allocated to a specific drug candidate may not necessarily reflect the actual costs surrounding research and development of that drug candidate due to cross application of the foregoing.



Estimating the dates of completion of clinical development, and the costs to complete development, of our drug candidates would be highly speculative, subjective and potentially misleading. Pharmaceutical products take a significant amount of time to research, develop and commercialize. The clinical trial portion of the development of a new drug alone usually spans several years. We expect to reassess our future research and development plans based on our review of data we receive from our current research and development activities. The cost and pace of our future research and development activities are linked and subject to change.





Critical Accounting Policies



The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and interest income in our financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those estimates related to agreements, research collaborations and investments. We base our estimates on historical experience and various other assumptions that we believe 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. The following items in our financial statements require significant estimates and judgments:





We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. We multiply the number of Performance Awards by the fair market value of our common stock on the date of grant to calculate the fair value of each award. We estimate an implicit service period for achieving performance criteria for each award. We recognize the resulting fair value as expense over the implicit service period when we conclude that achieving the performance criteria is probable. We

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periodically review and update as appropriate our estimates of implicit service periods and conclusions on achieving the performance criteria. Performance Awards vest and common stock is issued upon achievement of the performance criteria.







Results of Operations – Three and Six Months ended June 30, 2019 and 2018 



Research and Development Expense



Research and development expense consists primarily of costs of drug development work associated with our drug candidates, including:





Research and development expenses were $0.3 million and $1.5 million during the three months ended June 30, 2019 and 2018, respectively. The decrease was due primarily to an increase in grant funding received from NIH compared to the prior year period as well as a decrease in non-cash stock-based compensation expenses. Receipts from NIH grants are recorded as a reduction in research and development expenses. During the three months ended June 30, 2019 and 2018, we received $1.4 million and $0.4 million from research grants from NIH, respectively. Research and development expenses included non-cash stock-based compensation expenses were $0.1 million and $0.3 million during the three months ended June  30, 2019 and 2018, respectively.



Research and development expenses were $0.9 million and $2.5 million during the six months ended June 30, 2019 and 2018, respectively. The 65% decrease was due primarily to an increase in grant funding received from NIH as well as a decrease in non-cash stock-based compensation expenses. Receipts from NIH grants are recorded as a reduction in research and development expenses. During the six months ended June 30, 2019 and 2018, we received $2.2 million and $0.8 million from research grants from NIH, respectively. Research and development expenses included non-cash stock-based compensation expenses were $0.3 million and $0.7 million during the six months ended June 30, 2019 and 2018, respectively.



Our research and development expenses may fluctuate from period to period due to the timing and scope of our development activities and the results of clinical trials and pre-clinical studies.



General and Administrative Expense



General and administrative expenses consist of personnel costs, allocated expenses and other expenses for outside professional services, including legal, human resources, audit and accounting services. Personnel costs consist of salaries, bonus, benefits and stock-based compensation. Allocated expenses consist primarily of facility costs. We incur expenses associated with operating as a public company, including expenses related to compliance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and Nasdaq Stock Market LLC (“Nasdaq”), additional insurance expenses, additional audit expenses, investor relations activities, Sarbanes-Oxley compliance expenses and other administrative expenses and professional services.

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General and administrative expenses were $0.8 million and $1.0 million during the three months ended June 30, 2019 and 2018, respectively. The 15%  decrease was due primarily to a decrease in non-cash stock-based compensation related expense partially offset by an increase in compensation costs from the hiring of a chief financial officer in October 2018. General and administrative expenses included non-cash stock-based compensation expenses of $0.2 million and $0.4 million during the three months ended June 30, 2019 and 2018, respectively.  



General and administrative expenses were $1.7 million and $2.1 million during the six months ended June 30, 2019 and 2018, respectively. The 18% decrease was due primarily to a decrease in non-cash stock-based compensation related expense partially offset by an increase in compensation costs from the hiring of a chief financial officer in October 2018. General and administrative expenses included non-cash stock-based compensation expenses of $0.4 million and $0.8 million during the six months ended June 30, 2019 and 2018, respectively.



We expect our general and administrative expenses during the remainder of 2019 to decrease as compared to 2018 activities due to decreases in non-cash stock-based compensation expense.



Interest Income



Interest and other income, net, was $94,000 and $9,000 during the three months ended June  30, 2019 and 2018, respectively.  Interest and other income, net, was $186,000 and $16,000 during the six months ended June 30, 2019 and 2018, respectively. The increase was due primarily to higher cash balances from our August 2018 stock offering as well as an increase in interest rates. We expect interest income to increase in 2019 compared to 2018 due to our higher cash and cash equivalent balances as well as a higher interest rate environment.



Liquidity and Capital Resources



Since inception, we have financed our operations primarily through public and private stock offerings, payments received under collaboration agreements and interest earned on our investments. We intend to continue to use our capital resources to fund research and development activities, capital expenditures, working capital requirements and other general corporate purposes. As of June 30, 2019, cash and cash equivalents were $18.5 million.



At-the-Market Common Stock Issuance



On February 8, 2018, we entered into a Capital on Demand™ Sales Agreement  (the “ATM Agreement”) with JonesTrading. In accordance with the terms of the ATM Agreement,  we  were able to offer and sell shares of our common stock, from time to time in one or more public offerings of our common stock, with JonesTrading acting as agent, in transactions pursuant to a shelf registration statement that was declared effective by the SEC on July 31, 2017.  On August 16, 2018, we suspended sales of our common stock under our ATM Agreement.



There were no common stock sales under the ATM Agreement during the six months ended June  30, 2019. During the six months ended June  30, 2018, we sold a total of 300,000 shares of our common stock under the ATM Agreement, in the open market at an average gross selling price of $6.70 per share for net proceeds of $1.9 million. We expensed approximately $0.1 million of cost for the offering, excluding JonesTrading commissions.



Net cash used in operating activities was $1.2 million for the six months ended June 30, 2019, resulting primarily from the net loss reported of $2.4 million partially offset by non-cash stock-based compensation expense of $0.7 million and changes in operating assets and liabilities of $0.5 million.



 Net cash used in operating activities was $2.8 million for the six months ended June  30, 2018, resulting primarily from the net loss reported of $4.6 million partially offset by non-cash stock-based compensation expense of $1.5 million and changes in operating assets and liabilities of $0.3 million.



Net cash used in investing activities was $18,000 for the six months ended June  30, 2019, resulting primarily from the purchase of equipment.  There was no cash from investing activities during the six months ended June 30, 2018.  



Net cash used in financing activities during the six months ended June  30, 2019 was $0.1 million, resulting primarily from the issuance costs incurred during the period.  Net cash provided by financing activities during the six 

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months ended June 30, 2018 was $1.9 million. Cash provided in 2018 was related to sale common stock, net of issuance costs,  under our ATM facility.



Realization of our other deferred tax assets is dependent on future earnings, if any. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these net deferred tax assets with a full valuation allowance. Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions may restrict our ability to use our net operating loss credit carryforwards due to ownership change limitations occurring in the past or that could occur in the future. These ownership changes may also limit the amount of net operating loss credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. Any limitation may result in the expiration of a portion of the net operating loss carryforwards before utilization and any net operating loss carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the Company’s valuation allowance. Due to the existence of a valuation allowance, it is not expected that such limitations, if any, will have an impact on the Company’s results of operations or financial position.



We have a non-cancelable operating lease for approximately 6,000 square feet of office space in Austin, Texas that expires on December 31, 2020. Future minimum lease payments total $47,000 for the six months ending December 31, 2019 and $99,000 for the full year ending December 31, 2020.



We have an accumulated deficit of $166.4 million as of June 30, 2019. We expect our cash requirements to be significant in the future. The amount and timing of our future cash requirements will depend on regulatory and market acceptance of our drug candidates, the resources we devote to researching and developing, formulating, manufacturing, commercializing and supporting our products and other corporate needs. We believe that our current resources will be sufficient to fund our operations for at least the next 12 months. We may seek additional future funding through public or private financing in the future, if such funding is available and on terms acceptable to us. However, there are no assurances that additional financing will be available on favorable terms, or at all.





Off-balance Sheet Arrangements



As of June 30, 2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.



 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk



Per Item 305(e) of Regulation S-K, the information called for by this Item 3 is not required. 



 

Item 4. Controls and Procedures



Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer,  evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer (as Principal Executive Officer) and our Chief Financial Officer (as Principal Financial Officer) have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.



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Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June  30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.



Changes in internal control over financial reporting.  There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified during the six months ended June  30, 2019 that has material affected, or is reasonable likely to materially affect, our internal control over financial reporting. 



 

PART II – OTHER INFORMATION



Item 1.  Legal Proceedings



None.



Item 1A.  Risk Factors



There have been no material changes to our risk factors from those disclosed under “Risk Factors” in Part I, Item 1A of our 2018 Annual Report on Form 10‑K. The risks and uncertainties described in our 2018 Annual Report on Form 10‑K are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition or results of operations. 





Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds



None.





Item 3.  Defaults Upon Senior Securities



None.





Item 4.  Mine Safety Disclosures



Not applicable.





Item 5.  Other Information



None.



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Item 6.  Exhibits



The following exhibits have been filed with this report:









 

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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

























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