Evofem Biosciences, Inc. - Quarter Report: 2015 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2015
OR
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36754
Neothetics, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
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20-8527075 |
( State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer |
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9171 Towne Centre Drive, Suite 270 San Diego, CA |
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92122 |
(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (858) 750-1008
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 x 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 x No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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¨ |
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Non-accelerated filer |
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¨ (Do not check if a small reporting company) |
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Small reporting company |
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x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 30, 2015, the registrant had 13,671,311 shares of common stock, $0.0001 par value per share, outstanding.
Table of Contents
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Page |
PART I. |
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Item 1. |
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2 |
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2 |
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3 |
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4 |
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5 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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13 |
Item 3. |
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18 |
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Item 4. |
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18 |
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PART II. |
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Item 1. |
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19 |
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Item 1A. |
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19 |
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Item 2. |
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27 |
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Item 3. |
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27 |
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Item 4. |
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28 |
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Item 5. |
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28 |
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Item 6. |
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28 |
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29 |
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30 |
i
Neothetics, Inc.
(Unaudited)
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March 31, |
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December 31, |
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2015 |
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2014 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
70,717,991 |
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$ |
75,947,516 |
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Prepaid expenses and other current assets |
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761,578 |
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925,773 |
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Total current assets |
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71,479,569 |
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76,873,289 |
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Restricted cash |
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200,000 |
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— |
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Property and equipment, net |
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240,996 |
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24,809 |
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Total assets |
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$ |
71,920,565 |
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$ |
76,898,098 |
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Liabilities and stockholders’ equity (deficit) |
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Current liabilities: |
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Accounts payable |
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$ |
1,897,627 |
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$ |
997,269 |
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Accrued expenses |
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1,590,877 |
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912,320 |
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Long-term debt, current portion |
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487,738 |
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— |
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Total current liabilities |
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3,976,242 |
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1,909,589 |
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Long-term debt, net of current portion |
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9,300,188 |
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9,741,080 |
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Stockholders’ equity (deficit): |
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Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding |
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— |
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— |
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Common stock, $0.0001 par value; 300,000,000 shares authorized; 13,671,311 shares issued and outstanding |
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1,366 |
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1,366 |
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Additional paid-in capital |
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135,219,861 |
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134,920,775 |
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Accumulated deficit |
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(76,577,092 |
) |
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(69,674,712 |
) |
Total stockholders’ equity |
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58,644,135 |
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65,247,429 |
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Total liabilities and stockholders’ equity |
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$ |
71,920,565 |
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$ |
76,898,098 |
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The accompanying notes are an integral part of these condensed financial statements.
2
Neothetics, Inc.
Condensed Statements of Operations
(Unaudited)
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For the Three Months Ended March 31, |
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2015 |
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2014 |
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Operating expenses: |
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Research and development |
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$ |
4,700,668 |
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1,383,438 |
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General and administrative |
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1,937,321 |
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1,101,530 |
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Total operating expenses |
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6,637,989 |
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2,484,968 |
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Loss from operations |
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(6,637,989 |
) |
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(2,484,968 |
) |
Interest income |
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7,455 |
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908 |
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Interest expense |
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(271,846 |
) |
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(4,186 |
) |
Gain on change in fair value of preferred stock warrants |
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- |
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886,008 |
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Net loss |
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$ |
(6,902,380 |
) |
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$ |
(1,602,238 |
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Net loss per share, basic and diluted |
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$ |
(0.50 |
) |
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$ |
(3.00 |
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Weighted average shares used to compute basic and diluted net loss per share |
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13,671,311 |
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533,544 |
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The accompanying notes are an integral part of these condensed financial statements.
3
Neothetics, Inc.
Condensed Statements of Cash Flows
(Unaudited)
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For the Three Months Ended March 31, |
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2015 |
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2014 |
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Operating activities |
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Net loss |
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$ |
(6,902,380 |
) |
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$ |
(1,602,238 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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3,802 |
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4,983 |
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Loss on disposal of assets |
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6,139 |
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Noncash interest expense on debt |
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46,846 |
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2,601 |
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Share-based compensation |
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299,086 |
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98,083 |
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Gain on change in fair value of preferred stock warrants |
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- |
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(886,008 |
) |
Changes in operating assets and liabilities: |
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Prepaid expenses and other current assets |
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164,195 |
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12,380 |
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Accounts payable and accrued expenses |
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1,578,915 |
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(412,666 |
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Net cash used in operating activities |
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(4,803,397 |
) |
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(2,782,865 |
) |
Investing activities |
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Restricted cash |
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(200,000 |
) |
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— |
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Purchase of property and equipment |
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(226,128 |
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(2,618 |
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Net cash used in investing activities |
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(426,128 |
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(2,618 |
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Financing activities |
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Principal payments on debt |
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— |
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(117,837 |
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Issuance of common stock from exercise of options |
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— |
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49,400 |
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Issuance of preferred stock for cash, net of offering costs |
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— |
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7,992,718 |
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Net cash provided by financing activities |
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— |
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7,924,281 |
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Net (decrease) increase in cash and cash equivalents |
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(5,229,525 |
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5,138,798 |
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Cash and cash equivalents, beginning of period |
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75,947,516 |
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4,364,007 |
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Cash and cash equivalents, end of period |
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$ |
70,717,991 |
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$ |
9,502,805 |
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Supplemental disclosure of cash flow activity |
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Cash paid for interest |
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$ |
225,000 |
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$ |
2,397 |
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The accompanying notes are an integral part of these condensed financial statements.
4
Neothetics, Inc.
Notes to Unaudited Condensed Financial Statements
1. |
Organization and Basis of Presentation |
Neothetics, Inc. (Neothetics or the Company) was incorporated in Delaware on February 1, 2007, under the name Lipothera, Inc. In September 2008, the Company changed its name to Lithera, Inc. In August 2014, the Company changed its name to Neothetics, Inc. The Company is a clinical-stage specialty pharmaceutical company developing therapeutics for the aesthetic market. The Company’s lead product candidate is a novel injectable treatment for the reduction of central abdominal bulging due to subcutaneous fat in non-obese patients.
In November 2014, the Company completed its initial public offering (IPO) of 4,650,000 shares of common stock at an offering price of $14.00 per share. The Company received net proceeds of approximately $57.7 million, after deducting underwriting discounts and commissions and offering-related transaction costs. In connection with the IPO, all outstanding shares of convertible preferred stock were converted into shares of common stock, all outstanding warrants to purchase convertible preferred stock were converted into warrants to purchase 684,175 shares of common stock and 233,320 shares of common stock were issued upon conversion and net exercise of outstanding convertible preferred stock warrants, the Company’s certificate of incorporation was amended and restated to authorize 300,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock. See Note 6 for additional information.
As of March 31, 2015, the Company has devoted substantially all of its efforts to product development, raising capital, and building infrastructure and has not realized revenues from its planned principal operations.
The accompanying unaudited financial statements of the Company should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K (Annual Report) filed with the Securities and Exchange Commission (SEC). The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that 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 amounts of expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts.
Restricted Cash
Restricted cash as of March 31 2015 represents a $200,000 restricted money market account used to secure the standby letter of credit issued in connection with a lease amendment (see Note 5 “Debt”).
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash due to the financial position of the depository institution in which those deposits are held.
5
Neothetics, Inc.
Notes to Unaudited Condensed Financial Statements — Continued
Fair Value of Financial Instruments
The carrying amounts of prepaid and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items.
Property and Equipment
Property and equipment, which primarily consist of office furniture and equipment and computer equipment, are stated at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method.
Impairment of Long-Lived Assets
The Company periodically re-evaluates the original assumptions and rationale utilized in the establishment of the carrying values and estimated lives of all of its long-lived assets, including property and equipment. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flows in future periods, as well as the strategic significance of the asset to the Company’s business objective. The Company has not recognized any impairment losses as of March 31, 2015.
Research and Development Costs
Research and development expenses consist primarily of salaries and related overhead expenses, fees paid to consultants and contract research organizations, costs related to acquiring and manufacturing clinical trial materials, and costs related to compliance with regulatory requirements.
All research and development costs are charged to expense as incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are recorded when the realizability of such deferred tax assets is not more likely than not.
The guidance on accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. During the three months ended March 31, 2015 and 2014, the Company had not recognized interest and penalties in the balance sheets or statements of operations. The Company is subject to taxation in the U.S. and state jurisdictions. The Company’s tax years from inception are subject to examination by the United States and California authorities due to the carryforwards of unutilized net operating losses (NOLs) and research and development credits.
Share-Based Compensation
Share-based compensation expense for stock option grants, restricted stock awards and employee stock purchase plan shares is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the requisite service period of the stock-based award. The estimation of stock options, restricted stock awards and employee stock purchase plan fair value requires management to make estimates and judgments about, among other things, employee exercise behavior, forfeiture rates and volatility of the Company’s common stock. The judgments directly affect the amount of compensation expense that will be recognized.
6
Neothetics, Inc.
Notes to Unaudited Condensed Financial Statements — Continued
Warrants for Preferred Stock
The Company historically issued freestanding warrants exercisable for shares of Series B, B-2, C and D convertible preferred stock. These warrants were classified as a liability in the accompanying balance sheets prior to the completion of the IPO, as the terms for redemption of the underlying security were outside the Company’s control. The fair value of all warrants were remeasured with any changes in fair value being recognized in the gain or loss on change in fair value of preferred stock warrants in the accompanying statement of operations. Effective upon the closing of the IPO, 3,886,418 warrants to purchase shares of convertible preferred stock were converted into warrants to purchase 684,175 shares of common stock. Both the convertible preferred stock and the warrant liability were reclassified into stockholders’ equity as a result of the closing of the Company’s IPO in November 2014.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding during the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities, which include convertible preferred stock, warrants and outstanding stock options and restricted stock awards under the stock compensation plans, have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.
The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive.
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March 31, |
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2015 |
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2014 |
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Conversion of preferred stock based on conversion rights |
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— |
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7,674,695 |
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Warrants for convertible preferred stock issued and outstanding |
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— |
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623,290 |
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Warrants for common stock |
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71,257 |
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— |
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Common stock options and restricted stock awards issued and outstanding |
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1,413,803 |
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937,994 |
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1,485,060 |
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9,235,979 |
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All shares of convertible preferred stock were converted into shares of the Company’s common stock and all warrants were converted into warrants to purchase common stock as a result of the closing of the Company’s IPO in November 2014.
Recent Accounting Pronouncements
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The new standard will require debt issuance costs to be presented on the balance sheet as a direct reduction of the carrying value of the associated debt liability, consistent with the presentation of debt discounts. The recognition and measurement requirements will not change as a result of this guidance. The standard is effective for the annual reporting periods beginning after December 15, 2015 and requires a retrospective application. The Company has elected an early adoption of this guidance and it did not have a material impact on the Company’s financial statements.
In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-15, which defined management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosure. ASU 2014-15 defined the term substantial doubt and requires an assessment for a period of one year after the date of the issuance of the financial statements. It requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The guidance becomes effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company does not believe that the adoption of this guidance will have a material impact on its Financial Statements.
7
Neothetics, Inc.
Notes to Unaudited Condensed Financial Statements — Continued
3. Fair Value Measurements
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts payable, accrued expenses, including warrants issued in connection with financing arrangements, and long-term debt. Fair value estimates of these instruments are made at a specific point in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of cash and cash equivalents, accounts payable, and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of these instruments. The Company believes that the fair value of long-term debt approximates its carrying value based on the borrowing rates currently available to the Company for loans with similar terms.
The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers or sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance prioritizes three levels of inputs into the following hierarchy:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014 are as follows:
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Fair Value Measurements at Reporting Date Using |
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Balance as of March 31, 2015 |
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Quoted Prices in Active Markets for Identical Assets (Level 1) |
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Significant Other Observable Inputs (Level 2) |
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Significant Unobservable Inputs (Level 3) |
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Assets |
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Money market fund(1) |
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$ |
70,237,511 |
|
|
$ |
70,237,511 |
|
|
$ |
— |
|
|
$ |
— |
|
Total assets |
|
$ |
70,237,511 |
|
|
$ |
70,237,511 |
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|
$ |
— |
|
|
$ |
— |
|
(1) |
Included as a component of cash and cash equivalents on accompanying balance sheet. |
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Fair Value Measurements at Reporting Date Using |
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Balance as of December 31, 2014 |
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Quoted Prices in Active Markets for Identical Assets (Level 1) |
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Significant Other Observable Inputs (Level 2) |
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Significant Unobservable Inputs (Level 3) |
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Assets |
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|
|
|
|
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|
|
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|
|
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|
|
Money market fund(1) |
|
$ |
75,231,695 |
|
|
$ |
75,231,695 |
|
|
$ |
— |
|
|
$ |
— |
|
Total assets |
|
$ |
75,231,695 |
|
|
$ |
75,231,695 |
|
|
$ |
— |
|
|
$ |
— |
|
(1) |
Included as a component of cash and cash equivalents on accompanying balance sheet. |
8
Neothetics, Inc.
Notes to Unaudited Condensed Financial Statements — Continued
4. Property and Equipment
Property and equipment consist of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2015 |
|
|
2014 |
|
||
Office furniture and equipment |
|
$ |
281,606 |
|
|
$ |
153,460 |
|
Less accumulated depreciation and amortization |
|
|
(40,610 |
) |
|
|
(128,651 |
) |
|
|
$ |
240,996 |
|
|
$ |
24,809 |
|
5. Debt
Loans
In February 2010, and as amended during 2012, the Company entered into a loan and security agreement (2010 Loan and Security Agreement) with Silicon Valley Bank (SVB), for borrowings of $3,750,000, collateralized by all assets of the Company. In connection with the borrowings, the Company issued warrants to the bank for the purchase of a total of 64,865 shares of Series B convertible preferred stock and warrants to purchase to 75,000 shares of Series C convertible preferred stock, all of which were converted to 24,419 common stock warrants effective upon the completion of the IPO.
In 2013 through the payoff of the loan in June, 2014 the Company paid interest equal to 7.78% above the 24-month Treasury Rate with a floor of 8.00%.
The Company did not have any interest expense related to the 2010 Loan and Security Agreement for the three months ended March 31, 2015 as the loan was repaid during 2014. For the three months ended March 31, 2014, the Company recorded total interest expense of $4,186 related to the 2010 Loan and Security Agreement, as amended.
In June 2014, the Company entered into a Loan and Security Agreement (Loan Agreement) with Hercules Technology Growth Capital Inc. that provided for borrowings up to $10.0 million available to the Company in two tranches. Upon closing of the Loan Agreement, the Company borrowed $4.0 million. In October 2014, the Company entered in to the first amendment of the Loan Agreement and borrowed the remaining $6.0 million available under the agreement.
In connection with the Loan Agreement, in June 2014, the Company issued warrants to purchase shares of Series C convertible preferred stock equal to 4% of the amount advanced under the loan. Effective upon the IPO, this was converted to a warrant to purchase 46,838 shares of common stock at $8.54, which expires eight years after the date of issuance. The fair value of the warrants issued was $207,429, based on the fair value of such Series C warrants at the date of issuance. The warrants’ fair value and financing fees of approximately $133,000 were recorded as a debt discount. The initial value of the fees and warrants are amortized to interest expense over the remaining term using the effective interest method.
9
Neothetics, Inc.
Notes to Unaudited Condensed Financial Statements — Continued
The loan bears interest equal to the greater of either 9.0%, plus the Prime Rate as reported in The Wall Street Journal, less 3.25% or 9.0%. Interest only is due and payable through January 2016, with principal and interest payments due commencing February 2016 through loan maturity in January 2018 and an end of term charge of $300,000. The Company may elect a prepayment option. If elected, the Company will be required to pay the entire principal balance, all accrued and unpaid interest, together with a prepayment charge ranging from 1%-3% of the advance amount being prepaid, as well as the end of term charge. The loan is secured by substantially all assets of the Company. The Company recorded total interest expense of $271,846 related to the Loan Agreement for the three months ended March 31, 2015.
At March 31, 2015, the principal balance outstanding under the Loan Agreement was $10.0 million. As of March 31, 2015, the principal and interest payments of the loan over its term are as follows:
2015 |
|
$ |
687,500 |
|
2016 |
|
|
3,575,471 |
|
2017 |
|
|
3,815,968 |
|
2018 |
|
|
4,275,001 |
|
2019 |
|
|
— |
|
Total |
|
|
12,353,940 |
|
Less interest |
|
|
(2,353,941 |
) |
Less debt discount |
|
|
(212,073 |
) |
Less current portion of debt |
|
|
(487,738 |
) |
Long-term debt, net of current portion |
|
$ |
9,300,188 |
|
Letter of Credit
In January 2015, the Company executed a lease amendment with LJ Gateway, LLC for new office space. In connection with this lease amendment the Company issued a stand-by letter of credit in the amount of $200,000 in lieu of a security deposit. The standby letter of credit is secured by a restricted money market account. The terms of the standby letter of credit expire in May 2020 and are subject to automatic yearly renewal prior to this date.
6. Stockholders’ Equity
Warrants
Through October 2014, the Company issued warrants to purchase 3,886,418 shares of series B, B-2, C and D convertible preferred stock in connection with the issuance of debt, equity financing and advisory agreements. Upon completion of the IPO, all of the preferred stock warrants were converted into warrants to purchase 684,175 shares of common stock of which 612,918 were net exercised. As of March 31, 2015, warrants to purchase 71,257 shares of common stock remain outstanding. These warrants have a weighted average exercise price of $9.00 and a weighted average remaining contractual life of approximately 8 years. The fair value of the preferred stock warrants on the dates issued was computed using an option pricing model.
The preferred stock warrants issued in connection with the 2010 Loan and Security Agreement and the Loan Agreement have been accounted for as a debt discount and are recorded to interest expense based on the effective interest method. Upon exercise, any remaining discount is recorded to interest expense. Preferred stock warrants issued in connection with advisory services agreements have been accounted for as a cost of capital. Additionally, preferred stock warrants were accounted for as liabilities based on fair value, and increases or decreases in the fair value of such warrants during the year were recorded as a gain or loss in the statements of operations. The Company performed a final revaluation of warrants in November, 2014 at the date of the IPO closing and reclassified such amount to equity.
Preferred and Common Stock
In January 2014, the Company issued 5,714,288 shares of Series C convertible preferred stock for gross cash proceeds of $8,000,003.
In September 2014, the Company issued 3,333,334 shares of Series D convertible preferred stock for gross cash proceeds of $6,000,001.
10
Neothetics, Inc.
Notes to Unaudited Condensed Financial Statements — Continued
On November 7, 2014, the Company implemented a 1-for-6.1 reserve stock split of its outstanding common stock, which was approved by the Company’s board of directors in June 2014. The reverse stock split resulted in an adjustment to the Series A, B, B-2, C and D preferred stock conversion prices to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion.
In connection with the IPO in November 2014, all 46,990,685 outstanding shares of convertible preferred stock were converted into an aggregate of 8,225,062 shares of common stock.
Stock Compensation Plans
The following table summarizes the Company’s stock compensation plan activity for the three months ended March 31, 2015:
|
|
Options Outstanding |
|
|
Weighted Average Exercise Price |
|
||
Outstanding and exercisable at December 31, 2014 |
|
|
1,198,830 |
|
|
$ |
1.68 |
|
Granted |
|
|
214,973 |
|
|
$ |
6.79 |
|
Outstanding and exercisable at March 31, 2015 |
|
|
1,413,803 |
|
|
$ |
2.46 |
|
The Company recognized non-cash share-based compensation expense related to its 2014 Employee Stock Purchase Plan, restricted stock awards and stock options granted to employees and directors as follows:
|
|
Three Months Ended March 31, |
|
|
|||||
|
|
2015 |
|
|
2014 |
|
|
||
Research and development |
|
$ |
205,310 |
|
|
$ |
56,430 |
|
|
General and administrative |
|
|
93,776 |
|
|
|
41,653 |
|
|
|
|
$ |
299,086 |
|
|
$ |
98,083 |
|
|
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance is as follows:
|
|
March 31, 2015 |
|
|
March 31, 2014 |
|
||
Conversion of preferred stock based on conversion rights |
|
|
— |
|
|
|
7,674,695 |
|
Warrants issued and outstanding |
|
|
71,257 |
|
|
|
623,290 |
|
Stock options and restricted stock awards issued and outstanding |
|
|
1,413,803 |
|
|
|
937,994 |
|
Authorized for future awards under stock compensation plans |
|
|
1,332,625 |
|
|
|
255,508 |
|
Employee Stock purchase plan |
|
|
306,713 |
|
|
|
— |
|
|
|
|
3,124,398 |
|
|
|
9,491,487 |
|
11
Neothetics, Inc.
Notes to Unaudited Condensed Financial Statements — Continued
7. Commitments
Operating Leases
The Company entered into a noncancelable operating lease for its facilities on January 20, 2015. The lease expires in March 2020.
The following table summarizes the minimum lease payments under this commitment:
2015 |
|
$ |
299,967 |
|
2016 |
|
|
399,957 |
|
2017 |
|
|
399,957 |
|
2018 |
|
|
399,957 |
|
2019 and thereafter |
|
|
499,946 |
|
Total |
|
|
1,999,784 |
|
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis and the interim financial statements included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2014 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 26, 2015.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical facts, contained in this document, including statements regarding our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition, are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “potential,” “should,” “target,” “will,” “would,” or the negative of those terms and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this prospectus include, among other things, statements about:
● the initiation, timing, progress and results of ongoing and future preclinical studies and clinical trials, and our research and development programs;
● our expectations regarding timing of results in our U.S. Phase 3 clinical trials of LIPO-202;
● our expectations regarding the timing of our submission of an NDA for approval of LIPO-202 with the FDA and the likelihood and timing of approval of such NDA;
● the potential for commercialization and market acceptance of LIPO-202;
● our expectations regarding the potential market size and opportunity for LIPO-202, if approved for commercial use;
● our plans to commercialize LIPO-202 and our ability to develop and maintain sales and marketing capabilities;
● estimates of our expenses, future revenue, capital requirements and our needs for additional financing;
● implementation of our business model, strategic plans for our business, product candidates and technology;
● the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology and our ability to operate our business without infringing on the intellectual property rights of others;
● regulatory developments in the United States and foreign countries;
● the success of competing procedures that are or become available;
● our ability to maintain and establish collaborations or obtain additional funding;
● our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;
● our use of proceeds from this offering;
● our financial performance; and
● developments and projections relating to our competitors and our industry
The forward-looking statements in this quarterly report are only predictions. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Forward-looking statements should be regarded solely as our current plans, estimates and beliefs. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this document, particularly Part II, Item 1A, “Risk Factors,” that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
13
Overview
We are a clinical-stage specialty pharmaceutical company developing therapeutics for the aesthetic market. Our initial focus is on localized fat reduction and body contouring. Our lead product candidate LIPO-202 is a potential first-in-class injectable formulation of the long-acting ß2-adrenergic receptor agonist, salmeterol xinafoate, which is an active ingredient in the U.S. Food and Drug Administration (FDA), approved inhaled products, SEREVENT DISKUS, ADVAIR HFA and ADVAIR DISKUS. LIPO-202 is currently in Phase 3 clinical development in the U.S. We intend to seek approval of LIPO-202 for the reduction of central abdominal bulging due to subcutaneous fat in non-obese patients. We use the term central abdominal bulging to describe subcutaneous fat in the central abdomen that is often characterized by people as love-handles, a pot-belly, a pouch or stomach rolls. Currently, there is no FDA-approved drug to treat this condition. In Phase 2 clinical trials conducted to date, LIPO-202 has demonstrated statistically significant reductions in central abdominal bulging due to subcutaneous fat in non-obese patients, and a safety profile that is similar to placebo. LIPO-202 is our only product candidate in clinical development and we are substantially dependent on its regulatory approval and successful commercialization.
We have never been profitable and, as of March 31, 2015, we had an accumulated deficit of $76.6 million. We incurred net losses of $6.9 million and $1.6 million for the three months ended March 31, 2015 and 2014, respectively. Since commencing operations in February 2007, we have invested substantially all of our efforts and financial resources in the research and development and commercial planning for LIPO-202, which is currently our lead product candidate. We have not yet filed for approval with the FDA for the commercialization of LIPO-202 and we have not generated any revenue from product sales of LIPO-202. From inception through March 31, 2015, we have primarily financed our operations through sales of equity securities, and, to a lesser extent, debt financings. We expect to continue to incur net operating losses for at least the next several years as we advance LIPO-202 through clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization. We have no manufacturing facilities and all of our manufacturing activities are contracted out to third parties. Additionally, we currently utilize third-party CROs to carry out our clinical development and we do not yet have a sales organization. We will need substantial additional funding to support our operating activities, especially as we approach anticipated regulatory approval in the United States and begin to establish our sales capabilities. Adequate funding may not be available to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations, and financial condition.
JOBS Act
In April 2012, the Jumpstart Our Business Startups Act of 2012, or JOBS Act, was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable. In addition, we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our IPO or until we no longer meet the requirements of being an “emerging growth company,” whichever is earlier.
Basis of Presentation
Revenues
To date, we have not generated any revenues from product sales.
Our ability to generate revenues from product sales, which we do not expect will occur before 2017, at the earliest, will depend heavily on our obtaining marketing approval from the FDA for, and, subsequent to that, our successful commercialization of, LIPO-202. If we fail to complete the development of LIPO-202 in a timely manner or to obtain regulatory approval, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.
14
Research and Development Expenses
Our research and development expenses consist primarily of:
· |
fees paid to clinical consultants, clinical trial sites and vendors, including CROs in conjunction with implementing and monitoring our preclinical and clinical trials and acquiring and evaluating preclinical and clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis; |
· |
expenses related to preclinical studies, clinical trials and related clinical manufacturing, materials and supplies; |
· |
expenses related to compliance with drug development regulatory requirements in the United States and other foreign jurisdictions; and |
· |
personnel costs, including cash compensation, benefits and share-based compensation expense. |
We expense both internal and external research and development costs in the periods in which they are incurred. To date, substantially all our research and development expenses have related to the development of LIPO-202. For the three months ended March 31, 2015 and 2014, we incurred costs of $4.7 million and $1.4 million, respectively, on research and development expenses.
Conducting significant research and development is central to our business and strategy. 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 greater duration of late stage clinical trials as compared to earlier clinical and preclinical development. We expect our research and development expenses will increase as we complete our Phase 3 clinical trials and seek regulatory approval of LIPO-202 in the United States. The costs of clinical trials may vary significantly over the life of a project owing to a number of factors.
General and Administrative Expenses
Our general and administrative expenses primarily consist of personnel costs, including cash compensation, benefits and share-based compensation expense, associated with our executive, accounting and finance departments. Other general and administrative expenses include costs in connection with patent filing, prosecution and defense, facility, information technology costs and professional fees for legal, consulting, marketing, audit and tax services.
We expect our general and administrative costs will increase as we increase our headcount and expand our staffing and operating activities to support our operations as a public company and support our research and development team as we initiate our Phase 3 clinical trials of LIPO-202 in the United States. Additionally, we anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs associated with being a public company. In addition, if LIPO-202 receives regulatory approval, we expect to incur increased expenses associated with building a sales and marketing team as we prepare for the commercial launch of LIPO-202. Some expenses may be incurred prior to receiving regulatory approval of LIPO-202.
Interest Income
Our interest income consists primarily of interest received or earned on our cash and cash equivalents. We expect interest income to vary each reporting period depending on our average cash and cash equivalents and marketable securities balances during the period and applicable interest rates. To date, our interest income has not been significant in any individual period.
Interest Expense
Our interest expense consists of cash and noncash interest costs related to our borrowings. The noncash interest costs consist of the amortization of the fair value of warrants that were issued in connection with our borrowings, with the initial fair value of the warrants being amortized to interest expense over the term of the governing agreements, and the amortization of other debt issuance costs, primarily legal and banker fees, over the period the related convertible notes were outstanding. We expect interest expense to vary each reporting period depending on our average debt outstanding during the period, as well as applicable interest rates.
15
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 management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to stock-based compensation and warrant liabilities. These estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the recognition of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies Involving Management Estimates and Assumptions”, included in our Annual Report on Form 10-K for the year ended December 31, 2014.
Results of Operations
Comparison of the Three Months Ended March 31, 2015 and 2014
|
|
March 31, |
|
|
Change |
|
||||||
|
|
2015 |
|
|
2014 |
|
|
$ |
|
|||
|
|
(in thousands) |
|
|||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
4,701 |
|
|
$ |
1,383 |
|
|
|
3,318 |
|
General and administrative |
|
|
1,937 |
|
|
|
1,102 |
|
|
|
835 |
|
Total operating expenses |
|
|
6,638 |
|
|
|
2,485 |
|
|
|
4,153 |
|
Loss from operations |
|
|
(6,638 |
) |
|
|
(2,485 |
) |
|
|
(4,153 |
) |
Interest income |
|
|
7 |
|
|
|
1 |
|
|
|
6 |
|
Interest expense |
|
|
(272 |
) |
|
|
(4 |
) |
|
|
(268 |
) |
Gain on change in fair value of convertible preferred stock warrants |
|
|
- |
|
|
|
886 |
|
|
|
(886 |
) |
Net loss |
|
$ |
(6,903 |
) |
|
$ |
(1,602 |
) |
|
|
(5,301 |
) |
Research and Development Expenses. Research and development expenses increased by $3.3 million, to $4.7 million for the three months ended March 31, 2015 from $1.4 million for the three months ended March 31, 2014. Approximately $3.1 million of the increase was due to the start-up costs of our AbCONTOUR1 and AbCONTOUR2 U.S. Phase 3 clinical trials, which will evaluate the safety and efficacy of LIPO-202, as well as the commencement of our LIPO-202-CL-22 open label trial, which will evaluate the long-term safety and efficacy of repeated cycles of treatment. The remainder of the increase is due to the expansion of headcount in our clinical and regulatory departments to support our trials, as well as the formation of a Corporate Advisory Board, or CAB, comprised of plastic surgeons, dermatologists and other physicians, that will provide expertise regarding research, product development, regulatory affairs and product positioning as we advance the development of our lead compound, LIPO-202.
General and Administrative Expenses. General and administrative expenses increased by $835,000, to $1.9 million for the three months ended March 31, 2015, from $1.1 million for the three months ended March 31, 2014. Substantially all of the increase was due to an increase in costs associated with being a publicly traded company, such as, public and investor relations, general legal fees, Directors’ and Officers’ liability insurance, and addition of personnel to assist with Securities and Exchange reporting requirements.
Interest Income. Interest income increased by $6,000, to approximately $7,000 for the three months ended March 31, 2015 from approximately $1,000 for the three months ended March 31, 2014. The increase resulted from an increase in our average cash balance for the three months ended March 31, 2015, as a result of net cash proceeds received from our IPO in November 2014.
Interest Expense. Interest expense increased by $268,000, to approximately $272,000 for the three months ended March 31, 2015 from approximately $4,000 for the three months ended March 31, 2014. The increase resulted from an increase in our average debt outstanding during the three months ended March 31, 2015, as compared to the same period in the prior year, due to the total $10.0 million drawn under the Loan Agreement entered into in June 2014.
Gain on Change in Fair Value of Convertible Preferred Stock Warrants. There was no gain on the change in fair value of convertible preferred stock warrants for the three months ended March 31, 2015 as upon completion of the IPO in November 2014, all convertible preferred stock warrants were converted to common stock warrants and are no longer subject to remeasurement. The gain of approximately $866,000 for the three months ended March 31, 2014 was as a result of a decrease in the fair value of the warrants during that period.
16
Liquidity and Capital Resources
We have incurred losses and negative cash flows from operating activities for the three months ended March 31, 2015 and 2014. As of March 31, 2015, we had an accumulated deficit of $76.6 million. We anticipate that we will continue to incur net losses for the foreseeable future as we continue the development and potential commercialization of LIPO-202 and incur additional costs associated with being a public company.
Prior to our IPO in November 2014, we funded our operations primarily through private placements of our convertible preferred stock, warrants, venture debt and convertible debt. In November 2014, we completed our IPO of 4,650,000 shares of common stock at an offering price of $14.00 per share. We received net proceeds of approximately $57.7 million, after deducting underwriting discounts, commissions and offering-related transaction costs. At March 31, 2015, we had cash and cash equivalents of approximately $70.7 million.
We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for at least the next fifteen months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.
To fund further operations, we will need to raise additional capital. If we are unable to obtain additional financing on commercially reasonable terms, or at all, our business, financial condition and results of operations will be materially adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements. We may obtain additional financing in the future through the issuance of our common stock from other equity or debt financings or through collaborations or partnerships with other companies.
Summary Statement of Cash Flows
The following table sets forth a summary of the net cash flow activity for each of the periods set forth below (in thousands):
|
|
March 31, |
|
|||||
|
|
2015 |
|
|
2014 |
|
||
Net cash used in operating activities |
|
$ |
(4,803 |
) |
|
$ |
(2,783 |
) |
Net cash provided by (used in) investing activities |
|
|
(426 |
) |
|
|
(3 |
) |
Net cash provided by financing activities |
|
|
- |
|
|
|
7,924 |
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
(5,229 |
) |
|
$ |
5,138 |
|
Cash Flows from Operating Activities. Net cash used in operating activities was $4.8 million and $2.8 million for the three months ended March 31, 2015 and 2014, respectively. The increase in cash used in operations for the three months ended March 31, 2015 compared to March 31, 2014 is due to an increased net loss of $5.3 million for the three months ended March 31, 2015, offset by an increase in share-based compensation of approximately $200,000, an increase in accounts payable and accrued expenses of $2.0 million for the three months ended March 31, 2015 and the gain on change in fair value of preferred stock warrants for the three months ended March 31, 2014.
Cash Flows from Investing Activities. Net cash used in investing activities was $426,000 and $3,000 for the three months ended March 31, 2015 and 2014, respectively. During the three months ended March 31, 2015, cash used for investing activities consisted primarily of the purchase of property and equipment of $226,000 and an increase in restricted cash of $200,000. During the three months ended March 31, 2014, cash used for investing activities consisted of primarily of the purchase of furniture and equipment for our new office.
Cash Flows from Financing Activities. There were no financing activities for the three months ended March 31, 2015. During the three months ended March 31, 2014, cash provided by financing activities consisted primarily of approximately $8.0 million of net proceeds from the issuance of preferred stock for cash, offset by $118,000 in repayments for debt.
Operating and Capital Expenditure Requirements
Our future capital requirements are difficult to forecast and will depend on many factors, including:
· |
the initiation, progress, costs and results of our planned Phase 3 clinical trials of LIPO-202; |
· |
the outcome, timing and cost of regulatory approvals; |
· |
the costs and timing of establishing sales, marketing and distribution capabilities, if LIPO-202 is approved; |
17
· |
delays that may be caused by changing regulatory requirements; |
· |
the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims; and |
· |
the extent to which we acquire or invest in businesses, products or technologies. |
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic partnerships and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic partnerships or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, our other technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market LIPO-202 even if we would otherwise prefer to develop and market LIPO-202 ourselves.
Contractual obligations and commitments
During the three months ended March 31, 2015, the Company entered into a noncancelable operating lease (see Note 7 “Commitments”). Other than described in Note 7 there have been no material changes outside the ordinary course of our business to the contractual obligations we reported in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual obligations and commitments” in our annual report on Form 10-K for the year ended December 31, 2014.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as defined by applicable regulations of the Securities and Exchange Commission) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of March 31, 2015, there have been no material changes in our market risk from that described in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our annual report on Form 10-K for the year ended December 31, 2014.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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We are currently not a party to any material legal proceedings.
The risk factors set forth below contain material changes to the risk factors previously disclosed and included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. An investment in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K, as updated in this Item 1A (collectively, Risk Factors) together with all other information contained or incorporated by reference in this report before you decide to invest in our common stock. If any of the Risk Factors were to actually occur, our business, financial condition, results of operations and our future growth prospects could be materially and adversely affected. Under the circumstances, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
We are substantially dependent on the success of our lead product candidate, LIPO-202.
To date, we have invested substantially all of our efforts and financial resources in the research and development and commercial planning for LIPO-202, which is currently our lead product candidate. In particular, we have completed a Phase 2 RESET clinical trial, or RESET, and are making a substantial investment in Phase 3 clinical trials, which are on-going. Our near-term prospects, including our ability to finance our company and generate revenue, as well as our future growth, will depend heavily on the successful development, regulatory approval and commercialization of LIPO-202. The clinical and commercial success of LIPO-202 will depend on a number of factors, including the following:
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any unexpected results from further analysis beyond the top-line data of our recently completed RESET clinical trial; |
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initiating and obtaining favorable results from our planned Phase 3 clinical program for LIPO-202, which may be slower or cost more than we currently anticipate; |
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whether the FDA considers the design of our Phase 3 studies sufficient to demonstrate the safety and effectiveness of LIPO-202, taking into consideration that, at our July 23, 2014 End-of-Phase 2 meeting and in subsequent correspondence, the FDA expressed certain concerns regarding the design of our planned Phase 3 clinical trials, and, even if we believe our Phase 3 clinical trials are successful, there can be no assurance that the FDA will agree that we have satisfactorily addressed these concerns or that the FDA will not raise new issues regarding the design of our clinical trials; |
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our ability to demonstrate the safety of LIPO-202 to the satisfaction of the FDA and other applicable foreign regulatory bodies; |
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our ability to demonstrate efficacy of LIPO-202 to the satisfaction of the FDA and other applicable foreign regulatory bodies, including our ability to utilize FDA-acceptable endpoint tools for measuring efficacy of LIPO-202 in our clinical trials; |
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whether we are required by the FDA or other applicable foreign regulatory bodies to conduct additional clinical trials to support the approval of LIPO-202; |
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whether the FDA or other applicable foreign regulatory bodies grant a deferral for submission of some or all pediatric data until after the approval of LIPO-202 or grant full or partial waivers from the pediatric data requirements taking into consideration that the FDA has recommended that we include pediatric data in our Phase 3 clinical trials and address pharmacokinetics for adolescents ages 13-17; |
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whether the institutional review board s, or IRBs, approve and allow us to include adolescent patients in our Phase 3 clinical trials or to gather pharmacokinetic data in that population, as requested by the FDA; |
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the acceptance by the FDA of our proposed parameters for regulatory approval, including our proposed indication, endpoints and endpoint measurement tools relating to LIPO-202; |
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the approval by the FDA of a product label that will permit commercially desirable promotional claims for LIPO-202; |
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whether we are able to secure a partner or partner(s) for the development and commercialization of LIPO-202 outside of the United States and if so, whether such partners will be required to conduct additional studies for the approval of LIPO-202 in such markets in a timely manner; |
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our success in educating physicians and patients about the benefits, administration and use of LIPO-202; |
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the incidence, duration and severity of adverse side effects; |
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the timely receipt of necessary marketing approvals from the FDA and similar regulatory bodies around the world; |
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achieving and maintaining compliance with all regulatory requirements applicable to LIPO-202; |
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the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments; |
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the effectiveness of our and our potential partners’ marketing, sales and distribution strategy and operations in the United States and other markets around the world; |
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the ability of our third-party manufacturers and potential partners to manufacture clinical trial and commercial supplies of LIPO-202 to remain in good standing with regulatory bodies, and to develop, validate and maintain commercially viable manufacturing processes that are compliant with Current Good Manufacturing Practice, or cGMP, regulations; |
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our ability to successfully commercialize LIPO-202 in the United States, if approved for marketing; |
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our potential partners’ ability to successfully commercialize LIPO-202 in other markets outside of the United States; |
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our ability to enforce our intellectual property rights in and to LIPO-202; |
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our ability to avoid third-party patent interference, patent infringement claims, and challenges by third parties to our intellectual property rights; |
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acceptance of LIPO-202 as safe and effective by patients and the medical community; and |
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a continued acceptable safety profile of LIPO-202 following approval. |
Many of these factors are beyond our control. For instance, although we may obtain what we consider to be favorable results from our on-going Phase 3 clinical program, the FDA recently has reiterated a number of comments and recommendations related to our investigational new drug application, or IND, for salmeterol xinafoate for injection that leave open whether the FDA will ultimately agree with our analysis regarding whatever data we obtain. We continue to meet and correspond with the FDA regarding our on-going Phase 3 clinical program and continue discussions involving the identification of the condition to be treated related to our proposed study design and method of analysis. Accordingly, we cannot assure you that we will ever be able to obtain approval of LIPO-202 or generate revenue through the sale of LIPO-202. Any one of these factors or other factors discussed in this document could affect our ability to successfully commercialize LIPO-202, which could impact our ability to earn sufficient revenues to transition from a developmental stage company and continue our business. If we are not successful in obtaining regulatory approval of and commercializing LIPO-202, or are significantly delayed in doing so, our business will be materially harmed.
We cannot be certain that LIPO-202 or any of our other current and future product candidates will receive regulatory approval, and even with regulatory approval they may never achieve market acceptance or commercial success.
We have invested a significant portion of our efforts and financial resources in the development of LIPO-202, and our ability to generate significant revenue related to product sales will depend on the successful development and regulatory approval of LIPO-202. In our End-of-Phase 2 meeting and in subsequent correspondence, the FDA expressed concerns regarding our proposed endpoint tools used to assess efficacy of LIPO-202 and specifically questioned whether a more appropriate physical measure of reduction of central abdominal bulging due to subcutaneous fat could be obtained using other measurement tools, such as 2-D ultrasound. Based on the results of a preliminary evaluation meeting with the FDA we have initiated an additional exploratory evaluation of 2-D ultrasound as a secondary measure of the reduction of central abdominal bulging due to subcutaneous fat in a limited number of clinical sites in our Phase 3 pivotal trials.
Even if we obtain FDA or other foreign regulatory approvals, LIPO-202 or any of our other current and future product candidates may not achieve market acceptance among physicians and patients, and may not be commercially successful. Market acceptance of LIPO-202 or any of our other current and future product candidates for which we receive regulatory approval depends on a number of factors, including:
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the safety and efficacy of LIPO-202 or any of our other current and future product candidates as demonstrated in clinical trials; |
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acceptance by physicians and patients of LIPO-202 or any of our other current and future product candidates as safe and effective treatments; |
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the clinical indications for which LIPO-202 or any of our other current and future product candidates are approved and whether our desired labeling is approved; |
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proper training and administration of LIPO-202 or any of our other current and future product candidates by physicians; |
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the potential and perceived advantages of LIPO-202 or any of our other current and future product candidates over alternative treatments; |
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acceptance by physicians and patients that the duration of effect of LIPO-202 or any of our other current and future product candidates are significant and have advantages over alternative treatments; |
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the cost of treatment in relation to alternative treatments and willingness to pay for LIPO-202 or any of our other current and future product candidates, if approved, on the part of physicians and patients; |
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the willingness of patients to pay for LIPO-202 or any of our other current and future product candidates and other aesthetic treatments in general, relative to other discretionary items, especially during economically challenging times; |
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relative convenience and ease of administration and the ability of patients to commit to an eight-week treatment period; |
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the incidence, duration and severity of adverse side effects; |
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the effectiveness of our sales and marketing efforts; and |
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the degree to which the approved labeling supports promotional initiatives for commercial success. |
Any failure by our product candidates that obtain regulatory approval to achieve market acceptance or commercial success would adversely affect our results of operations.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.
Clinical testing is expensive, and can take many years to complete, and its outcome is inherently uncertain. Furthermore, we rely on clinical research organizations, or CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their committed activities, we have limited influence over their actual performance. The costs of clinical trials may vary significantly over the life of a project owing to factors that include but are not limited to the following:
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per patient trial costs; |
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salaries and related overhead expenses, including share-based compensation and benefits for personnel in research and development functions; |
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fees paid to third-party professional consultants and service providers; |
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costs to develop and manufacture preclinical study and clinical trial materials; |
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costs for laboratory supplies; |
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the number of patients that participate in the trials; |
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the number of sites included in the trials; |
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the number of trials required for approval; |
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the countries in which the trials are conducted; |
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the length of time required to enroll eligible patients; |
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the number of doses that patients receive; |
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the drop-out or discontinuation rates of patients; |
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the phase of development of the product candidate; |
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requests by regulatory agencies for pediatric data; |
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potential additional safety monitoring or other studies requested by regulatory agencies; |
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the duration of patient follow-up; and |
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the efficacy and safety profile of the product candidate. |
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Failure can occur at any time during the clinical trial process. For example, we have in the past terminated early-stage development and clinical programs for other potential product candidates due to a lack of sufficient efficacy or the potential for unacceptable adverse reactions to a particular product candidate, as well as our desire to concentrate our efforts on the development of LIPO-202. The results of preclinical and clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. For example, the positive results generated to date in clinical trials for LIPO-202 do not ensure that later clinical trials will demonstrate similar results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through preclinical studies and initial clinical trials. A number of companies in the specialty pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier studies, and we cannot be certain that we will not face similar setbacks. Even if our ongoing or future clinical trials are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.
We may experience delays in our ongoing clinical trials, including the planned Phase 3 development of LIPO-202, and we do not know whether future clinical trials, if any, will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. Clinical trials can be delayed or aborted for a variety of reasons, including:
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delay or failure in obtaining regulatory approval to commence a trial; |
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inability to reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; |
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regulatory objections to commencing a clinical trial or proceeding to the next phase of investigation, including inability to reach agreement with the FDA or other countries’ regulators regarding the scope, design or implementation of our clinical trials or for other reasons such as safety concerns identified during preclinical development or early stage clinical trials; |
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inability to qualify for exemptions from infringement of intellectual property rights for clinical trial testing of products in countries where we want to conduct clinical trials outside the United States; |
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inability to identify, add and maintain a sufficient number of trial sites; |
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withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials; |
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difficulty identifying and engaging qualified clinical investigators; |
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failure to obtain institutional review board, or IRB, approval at each site; |
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difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including failure to meet the enrollment criteria for our study and competition from other clinical trial programs; |
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requirement to include adolescent or other pediatric patients in our clinical trials; |
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inability to retain patients in clinical trials due to the treatment protocol, personal issues, side effects from the therapy or lack of efficacy; |
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failure to have clinical sites observe trial protocol or continue to participate in a trial; |
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failure to address any patient safety concerns that arise during the course of a trial; |
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failure to address any conflicts with new or existing laws or regulations; |
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failure to manufacture sufficient quantities of product candidates or placebos for use in clinical trials; or |
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inability to obtain sufficient funding to commence or finish a clinical trial. |
We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions at which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with the relevant regulatory filing (including the terms of the clinical protocol and compliance with regulatory requirements for manufacturing investigational product), inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial due to unforeseen costs resulting from enrollment delays, requirements to conduct additional trials and studies, increased expenses associated with the services of our CROs and other third parties or other reasons.
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If we experience delays in the completion of, or terminate, any clinical trial of our current or future product candidates, if any, the commercial prospects of these product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed or not realized at all. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects significantly.
Changes in regulatory requirements and guidance may occur and we or any of our partners may be required by appropriate regulatory authorities to amend clinical trial protocols to reflect these changes. Amendments may require us or any of our partners to resubmit clinical trial protocols to independent review boards for re-examination, which may impact the costs, timing or successful completion of a clinical trial. If we or any of our partners experience delays in the completion of, or if we or our partners terminate, clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate revenue from sales of our products will be prevented or delayed. In addition, many of the factors that may cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.
LIPO-202, if approved, will face significant competition, and the failure by us to compete effectively may prevent us from achieving significant market acceptance.
The aesthetic procedure market is highly competitive and dynamic, and is characterized by rapid and substantial technological development and product innovations. We are seeking regulatory approval of LIPO-202 for the reduction of central abdominal bulging due to subcutaneous fat in non-obese patients. A substantial portion of our target physician market is comprised of dermatologists, primary care physicians, OB/GYNs, and members of other specialties, some of whom perform liposuction, non-invasive fat reduction and other procedures for fat reduction. Such physicians may find it more advantageous to utilize these surgical and non-surgical procedures to remove localized fat deposits rather than a cosmetic injectable therapy such as LIPO-202. In addition, we expect that LIPO-202, if approved, will compete for the attention and discretionary income of patients with new and existing therapies for the treatment of localized fat, including liposuction and other procedures, as well as other technologies aimed at fat reduction, including other injections and laser energy-based, cryolipolysis, and ultrasound energy-based products.
If approved, LIPO-202 may also compete with unregulated, unapproved and off-label fat reduction and body contouring treatments. For example, we are aware that there are entities such as compounding pharmacies that have manufactured quantities of phosphatidylcholine and deoxycholic acid-based formulations, which are being sold as fat reduction treatments without drug approval from the FDA. In order to compete successfully in the aesthetics market, we will have to demonstrate that the reduction of central abdominal bulging due to subcutaneous fat with LIPO-202 is a worthwhile aesthetic treatment and is a superior alternative to existing therapies. There may be other drug or device products or injectable therapies currently under development or being considered for development for the reduction of central abdominal bulging due to subcutaneous fat of which we are not currently aware, but which upon approval would compete directly with LIPO-202.
LIPO-202, if approved, will also compete for patient and physician resources and mindshare with products and technologies that are not primarily related to fat reduction and body contouring, such as skin tightening, anti-aging, dispigmentation and other aesthetic technologies. The medical technology and aesthetic companies that offer these products tend to have a broad range of other product offerings, large direct sales forces, and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts.
In addition, a large portion of our target physician market is comprised of plastic surgeons who utilize surgical methods for fat reduction. Such physicians may find it more advantageous to utilize surgical techniques to remove localized fat deposits rather than a cosmetic injectable therapy such as LIPO-202. Additionally, some non-invasive technologies for the reduction of fat or “body contouring” have received marketing clearance from the FDA. For example, in September 2010, Zeltiq Aesthetics, Inc. received clearance for their body contouring system, CoolSculpting, which utilizes controlled cooling to reduce the temperature of fat cells in the treated area for the selective reduction of fat around the flanks. Zerona, a laser energy-based product marketed by Erchonia Corporation, and Liposonix, an ultrasound energy-based product marketed by Valeant Pharmaceuticals, Inc., have also received FDA marketing clearance. In April 2015, Kythera, Inc. received FDA approval for KYBELLA, for improvement in the appearance of moderate to severe convexity or fullness associated with submental fat, or chin fat, in adults. KYBELLA may be used off-label by physicians in the abdomen, the expected treatment indication for LIPO-202, which may decrease the market available for LIPO-202 if approved.
Many of these potential competitors are large and/or experienced companies that have substantially greater resources and brand recognition than we do. Competing in the aesthetic market could result in price-cutting, reduced profit margins, and limited market share, any of which would harm our business, financial condition, and results of operations.
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Risks Related to our Intellectual Property
If our efforts to protect the intellectual property related to our product candidates are not adequate, we may not be able to compete effectively in our market.
We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our product candidates and technology.
The patent application process, also known as patent prosecution, is expensive and time-consuming, and we and any future licensors and licensees may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we or our current licensors, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, these and any of our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. It is possible that defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, for example with respect to proper priority claims, inventorship, etc., although we are unaware of any such defects that we believe are of material import. If we or any future licensors or licensees, fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our current licensors, or any future licensors or licensees, are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised. If there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be invalid and unenforceable. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.
The strength of patents in the specialty pharmaceutical field involves complex legal and scientific questions and can be uncertain. This uncertainty includes changes to the patent laws through either legislative action to change statutory patent law or court action that may reinterpret existing law in ways affecting the scope or validity of issued patents. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our product candidates in the United States or foreign countries with claims that cover our product candidates. Even if patents do successfully issue from the patent applications that we own or in-license, third parties may challenge the validity, enforceability or scope of such patents, which may result in such patents being narrowed, invalidated or held unenforceable. For example, patents granted by the European Patent Office may be challenged, also known as opposed, by any person within nine months from the publication of their grant. Any successful challenge to our patents could deprive us of exclusive rights necessary for the successful commercialization of our product candidates. Furthermore, even if they are unchallenged, our patents may not adequately protect our intellectual property, provide exclusivity for our product candidates, or prevent others from designing around our claims. If the breadth or strength of protection provided by the patents we hold or pursue with respect to our product candidates is challenged, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize our product candidates.
In September 2014, a law firm representing one or more unidentified third parties filed with the USPTO two separate Requests for Ex Parte Reexamination against two of our issued US patents: one against each claim of our U.S. Pat. No. 8,420,625, or the ’625 patent, and one against each claim of our U.S. Pat. No. 8,404,750, or the ’750 patent. Third party challenges, including for example ex parte reexamination proceedings, to patents in the specialty pharmaceutical field are not uncommon. The reexamination process is provided for by law and requires the USPTO to consider the scope and validity of issued patents if requested. All of the claims of a patent remain valid and in force during any reexamination proceeding and all appeals.
On October 7, 2014, the USPTO granted the request for reexamination of the ’625 patent. On November 19, 2014, the USPTO granted the request for reexamination of the ’750 patent. On March 13, 2015, the USPTO issued a communication as a non-final rejection of each claim of the ’625 patent on the basis that the claims are allegedly obvious in view of prior art. On March 23, 2015, the USPTO issued a communication as a non-final rejection of each claim of the ’750 patent on the basis that the claims are allegedly obvious in view of prior art and unpatentable for obviousness-type double patenting. In each instance, the USPTO invited the Company to respond to the non-final rejections of each claim of the ’625 and ’750 patents.
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We believe that we have meritorious positions to uphold the patentability of each claim of the ’625 patent and the ’750 patent during the ensuing reexamination of each patent before the USPTO. Both of the respective office communications rely on references that the original examiner already considered during patent prosecution of each patent. We intend to vigorously defend our patent rights during the entirety of both reexamination proceedings and any and all appeals. On May 6, 2015, Company counsel met with the examiners assigned to the reexamination proceedings for the ’625 and ’750 patents in-person at the USPTO. On May 11, 2015, the Company filed its formal response to each of the communications the Company received with respect to the ’625 and ’750 patents. During the May 6, 2015 meeting and in the May 11, 2015 responses, the Company explained its positions to the USPTO to uphold each and every claim of the ’625 and ’750 patents. While we believe that we have sufficient patent claims that will be maintained at the conclusion of the reexamination proceedings, we cannot predict whether we will ultimately succeed in maintaining the scope and validity of the claims of the ’625 and ’750 patents during either reexamination proceeding. If any of the patent claims in the ’625 or the ’750 patents are ultimately invalidated or narrowed during prosecution before the USPTO, the extent of the patent coverage afforded to LIPO-202 could be impaired or eliminated, which may have a negative impact with respect to preventing others from copying our technology or competing with us.
Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after the first non-provisional filing in the patent family, subject to any applicable terminal disclaimer, patent term adjustment and/or patent term extension. Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Without patent protection for our product candidates, we may be open to competition from generic or follow-on versions of our product candidates. Further, if we encounter delays in our development efforts, including our clinical trials, the period of time during which we could market our product candidates under patent protection would be reduced.
The majority of our patents and patent applications are entitled to effective filing dates prior to March 16, 2013. For U.S. patent applications in which patent claims are entitled to a priority date before March 16, 2013, an interference proceeding can be provoked by a third-party, for example a competitor, or instituted by the USPTO, to determine who was the first to invent any of the subject matter covered by those patent claims. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our participation in an interference proceeding may fail and, even if successful, may result in substantial costs and distract our management and other employees.
In addition to the protection afforded by patents, we also rely on trade secret protection to protect proprietary know-how that may not be patentable or that we elect not to patent, processes for which patents may be difficult to obtain or enforce, and any other elements of our product candidates, and our product development processes (such as a manufacturing and formulation technologies) that involve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, trade secrets can be difficult to protect if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating any trade secrets. Misappropriation or unauthorized disclosure of our trade secrets could significantly affect our competitive position and may have a material adverse effect on our business. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. Furthermore, trade secret protection does not prevent competitors from independently developing substantially equivalent information and techniques and we cannot guarantee that our competitors will not independently develop substantially equivalent information and techniques. The FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Further, if we were to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets.
Moreover, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the non-patented intellectual property related to our technologies to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.
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In an effort to protect our trade secrets and other confidential information, we require our employees, consultants, advisors, and any other third parties that have access to our proprietary know-how, information or technology, for example, third parties involved in the formulation and manufacture of our product candidates, and third parties involved in our clinical trials to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. However, we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed despite having such confidentiality agreements. Adequate remedies may not exist in the event of unauthorized use or disclosure of our trade secrets. In addition, in some situations, these confidentiality agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, or advisors have previous employment or consulting relationships. To the extent that our employees, consultants or contractors use any intellectual property owned by third parties in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. If we are unable to prevent unauthorized material disclosure of our trade secrets to third parties, we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.
Risks Related to Government Regulation
The regulatory approval process is highly uncertain and we may not obtain regulatory approval for the commercialization of LIPO-202 or any of our current and future product candidates.
We are not permitted to market LIPO-202 or any of our other current and future product candidates in the United States until we receive approval of an NDA from the FDA. Similar regulatory approvals are required in other countries. To gain approval to market a drug product like LIPO-202, we must provide the FDA and any applicable foreign regulatory authorities with, among other things, data from well controlled clinical trials that adequately demonstrate the safety and efficacy of the product candidate for the intended indication applied for in the NDA or other respective regulatory filing, as well as information demonstrating manufacturing that meets regulatory requirements. We have not submitted an application or obtained marketing approval for LIPO-202 anywhere in the world. Obtaining regulatory approval of an NDA can be a lengthy, expensive and uncertain process. Furthermore, we rely upon NovaMedica to help obtain regulatory approval for LIPO-202 in certain territories outside the United States, and we cannot guarantee that they will be successful in doing so.
Prior to obtaining approval to commercialize a product candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from well controlled clinical trials, and to the satisfaction of the FDA or other foreign regulatory bodies, that such product candidates are safe and effective for their intended uses. Regulatory approval of an NDA or NDA supplement, or foreign equivalents, is not guaranteed, and the approval process is expensive and may take several years. The FDA and other foreign regulatory authorities also have substantial discretion in the approval process. Despite the time and expense exerted, failure can occur at any stage, and we or our collaborators could encounter problems that cause us to abandon or repeat clinical trials, or perform additional preclinical studies and clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in clinical trials and manufacturing, even after promising results in earlier preclinical studies or clinical trials. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were underway and safety or efficacy observations made in clinical trials, including previously unreported adverse events. Results from preclinical studies and clinical trials can be interpreted in different ways. Even if we and collaborators we may be working with believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA or other regulatory authorities. Administering product candidates to humans may produce undesirable side effects, which could interrupt, delay or halt clinical trials and result in the FDA or other regulatory authorities denying approval of a product candidate for any or all targeted indications. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the results of clinical trials by other parties may not be indicative of the results in trials we may conduct. The number of preclinical studies and clinical trials that will be required for approval varies depending on the product candidate, the disease or condition that the product candidate is designed to address, and the regulations applicable to any particular product candidate.
The FDA and other foreign regulatory authorities can delay, limit or deny approval of a product candidate for many reasons, including, but not limited to, the following:
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our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory body that the product candidate is safe and effective for the requested indication; |
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the FDA’s or the applicable foreign regulatory body’s disagreement with design or implementation of our clinical trials or the interpretation of data from preclinical studies or clinical trials; |
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serious and unexpected drug-related side effects experienced by participants in our clinical trials or by individuals using drugs similar to our product candidates; |
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our inability to demonstrate that the clinical and other benefits of the product candidate outweigh any safety or other perceived risks; |
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the FDA’s or the applicable foreign regulatory body’s requirement for additional preclinical studies or clinical trials; |
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the FDA’s or the applicable foreign regulatory body’s non-approval of the product candidate’s chemistry, manufacturing or controls or labeling; |
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the FDA’s or the applicable foreign regulatory body’s failure to approve the manufacturing processes or facilities of third-party manufacturers and testing labs with whom we contract; or |
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the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for approval. |
If LIPO-202, or any of our other or future product candidates, fails to demonstrate safety and efficacy in clinical trials or does not gain regulatory approval, our business and results of operations will be materially and adversely harmed. Of the large number of drugs in development, only a small percentage successfully complete the FDA or other regulatory approval processes and are commercialized. Further, we are not conducting our clinical trials under a Special Protocol Assessment, or SPA. In the absence of an agreed SPA, there can be no assurance that the FDA will agree with our clinical trial protocol.
We continue to meet and correspond with the FDA regarding our on-going Phase 3 clinical program and continue discussions involving the identification of the condition to be treated, our proposed study design and method of analysis. There are no assurances that the FDA will approve our NDA for LIPO-202, will agree that the effects are meaningful to patients and the benefits of LIPO-202 outweigh its risks, or will not raise new concerns regarding our clinical designs. Even if we eventually complete clinical testing and receive approval of an NDA for LIPO-202, LIPO-102 or any other product candidate, the FDA or other regulatory bodies may grant approval contingent on the performance of costly additional clinical trials which may be required after approval. The FDA or other regulatory bodies also may approve a product candidate for a more limited indication or a narrower patient population than we originally requested, and the FDA or other regulatory bodies may not approve the labeling that we believe is necessary or desirable for the successful commercialization of the product candidate.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
None.
Use of Proceeds
On November 19, 2014, our registration statement on Form S-1 (File No. 333-199449), which registered an aggregate amount of up to $74.1 million shares of our common stock, was declared effective by the SEC for our IPO. Also, on November 19, 2014, we filed a Registration Statement pursuant to Rule 462(b) (File No. 333-200381), which registered an additional aggregate amount of up to $690,000 of our common stock. At the closing of the IPO in November 2014, we sold 4,650,000 shares of common stock at an IPO price of $14.00 per share and received gross proceeds of $65.0 million, which resulted in net proceeds to us of approximately $57.7 million, after underwriting discounts and commissions of approximately $4.6 million and offering-related transaction costs of approximately $2.7 million. None of the expenses associated with the IPO were paid to directors, officers, persons owning ten percent or more of any class of equity securities, or to their associates, or to our affiliates.
The net proceeds from the offering are currently invested in money market funds. We have used the proceeds from the IPO for the advancement of our U.S. Phase 3 clinical trials and other supplemental studies in support of a potential NDA filing as follows:
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approximately $1.1 million to fund our LIPO-202-CL-18, or AbCONTOUR1, clinical pivotal trial; |
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approximately $922,000 to fund our LIPO-202-CL-19, or AbCONTOUR2, clinical pivotal trial; and |
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approximately $558,000 to fund our LIPO-202-CL-22 clinical trial to support registration; |
Additionally, we have used $2.6 million to fund our general and administrative expenses and general research and development operations. We currently intend to use the remainder of the net proceeds from the IPO for further advancement of our U.S. Phase 3 clinical trials and other supplemental studies of LIPO-202 to support the registration of LIPO-202 for the reduction of central abdominal bulging due to subcutaneous fat in non-obese patients.
Item 3. Defaults Upon Senior Securities.
None.
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Item 4. Mine Safety Disclosures.
Not applicable.
None.
A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this quarterly report on Form 10-Q and is incorporated herein by reference.
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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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Company Name |
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Date: May 14, 2015 |
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By: |
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/s/ George W. Mahaffey |
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George W. Mahaffey |
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President and Chief Executive Officer (Principal Executive Officer) |
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Date: May 14, 2015 |
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By: |
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/s/ Susan A. Knudson |
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Susan A. Knudson |
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Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) |
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Exhibit |
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Filed with |
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Incorporated by Reference |
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Exhibit Title |
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Form 10‑Q |
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Form |
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File No. |
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Date Filed |
3.1 |
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Amended and Restated Certificate of Incorporation. |
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S‑1 |
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333‑199449 |
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10/17/2014 |
3.2 |
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Amended and Restated Bylaws. |
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S‑1 |
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333‑199449 |
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10/17/2014 |
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4.2 |
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Warrant to Purchase Stock, dated February 23, 2010, issued to Silicon Valley Bank. |
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S‑1 |
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333‑199449 |
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10/17/2014 |
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4.3 |
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Warrant to Purchase Stock, dated March 30, 2012, issued to Silicon Valley Bank. |
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S‑1 |
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333‑199449 |
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10/17/2014 |
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4.4 |
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Warrant to Purchase Stock, dated August 17, 2012, issued to Silicon Valley Bank. |
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S‑1 |
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333‑199449 |
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10/17/2014 |
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4.5 |
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Warrant Agreement, dated June 11, 2014, by and between the Registrant and Hercules Technology III, L.P. |
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S‑1 |
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333‑199449 |
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10/17/2014 |
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4.6 |
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Fourth Amended and Restated Investors’ Rights Agreement, dated September 22, 2014, by and between the Registrant and the investors listed therein. |
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S‑1 |
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333‑199449 |
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10/17/2014 |
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10.26 |
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Office Lease Agreement, date January 20, 2015, by and between the Registrant and LJ Gateway Office, LLCS. |
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10-K |
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001-36754 |
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03/26/2015 |
31.1‡ |
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Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended. |
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X |
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31.2‡ |
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Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended. |
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X |
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32.1‡ |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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X |
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32.2‡ |
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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X |
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101.INS |
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XBRL Instance Document |
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X |
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101.SCH |
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XBRL Taxonomy Extension Schema Document |
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X |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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X |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
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X |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
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X |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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X |
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