NeuroBo Pharmaceuticals, Inc. - Quarter Report: 2016 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

(Mark One)

 

 

OR

 

 

Commission file number 001-37809

 

Gemphire Therapeutics Inc.

(Exact name of Registrant as specified in its charter)

 

(248) 681‑9815

(Registrant’s telephone number, including area code)

 

43334 Seven Mile Road, Suite 1000, Northville, MI 48167

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

 

 

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

 

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

 

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

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Securities Exchange Act of 1934). Yes  ☐  No  ☒

 

The number of outstanding shares of the registrant’s common stock, $0.001 par value, as of September 9, 2016 was 9,270,255

 

 

 

 

Gemphire Therapeutics Inc.

FORM 10-Q

INDEX

 

 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

 

 

Gemphire Therapeutics Inc.

(Formerly Known as Michigan Life Therapeutics, LLC)

Condensed Balance Sheets

(in thousands, except share amounts and par value)

 

 

See accompanying notes to condensed financial statements.

Gemphire Therapeutics Inc.

(Formerly Known as Michigan Life Therapeutics, LLC)

Condensed Statements of Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)

 

 

See accompanying notes to condensed financial statements.

Gemphire Therapeutics Inc.

(Formerly Known as Michigan Life Therapeutics, LLC)

Condensed Statements of Changes in Convertible Preferred Stock and Stockholders’ Deficit

(in thousands, except share amounts)

(unaudited)

 

 

See accompanying notes to condensed financial statements.

Gemphire Therapeutics Inc.

(Formerly Known as Michigan Life Therapeutics, LLC)

Condensed Statements of Cash Flows

(in thousands)

(unaudited)

 

 

See accompanying notes to condensed financial statements.

 

 

Gemphire Therapeutics Inc.

(Formerly Known as Michigan Life Therapeutics, LLC)

Notes to Condensed Financial Statements (unaudited)

 

1. The Company and Basis of Presentation

 

On November 10, 2008, Michigan Life Therapeutics, LLC (MLT) was organized as a limited liability company (LLC) in Michigan. On October 30, 2014, Gemphire Therapeutics Inc. (Gemphire) was incorporated as a C corporation in the state of Delaware. On November 1, 2014, MLT entered into a merger agreement with Gemphire whereby MLT was merged with and into Gemphire with Gemphire as the surviving entity; all outstanding membership interests of MLT were exchanged for shares of Gemphire’s common stock. The purpose of the merger was to change the jurisdiction of MLT from Michigan to Delaware and to convert from an LLC to a corporation. The Company’s headquarters are located in Livonia, Michigan.

 

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

 

The Company has sustained operating losses since inception and expects such losses to continue over the next several years. Management plans to continue financing the operations with equity issuances. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate part or all of its research and development programs.

 

Initial Public Offering

 

On August 4, 2016, the Company’s Registration Statement on Form S-1 (File No 333-210815) relating to its initial public offering (“IPO”) of its common stock was declared effective by the Securities and Exchange Commission (SEC). Pursuant to such Registration Statement, on August 10, 2016, the Company closed its IPO whereby 3,000,000 shares of its common stock were issued and sold at a public offering price of $10.00 per share. On September 8, 2016, the Company closed the sale of 27,755 shares of its common stock at the public offering price of $10.00 per share, representing a partial exercise of the underwriters’ over-allotment option, following which, the IPO terminated. The Company received net proceeds of approximately $26.0 million after deducting underwriting discounts and commissions of $2.1 million and other offering expenses of $2.2 million.

 

Immediately prior to the IPO, the Company amended and restated its certificate of incorporation and bylaws to, among other things, change its authorized capital stock to consist of (i) 100,000,000 shares of common stock and (ii) 10,000,000 shares of undesignated preferred stock.

 

Basis of Presentation

 

The accompanying condensed financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations.  The June 30, 2016 condensed balance sheet was derived from audited financial statements, and may not include all disclosures required by U.S. GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the fiscal year ended December 31, 2015 included in the Company’s final prospectus filed pursuant to Rule 424(b) with the SEC on August 8, 2016.  The condensed balance sheet at December 31, 2015 was derived from the audited financial statements.

 

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

 

Certain prior period balances have been reclassified to conform to the current period presentation. Specifically, the Company reclassified all current deferred tax liabilities as long term in the amount of $10,000 on its December 31, 2015 condensed balance sheet in conformity with the adoption of Accounting Standards Update (ASU) 2015‑17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015‑17).

 

Reverse Stock Split

 

In April 2016, the Board of Directors approved an amendment to the Company’s certificate of incorporation to effect a 1-for-3.119 reverse stock split (the Reverse Stock Split) for all common and Series A preferred stock. The Reverse Stock Split became effective on April 27, 2016 upon the filing of the amendment to the certificate of incorporation. The authorized shares and par value of the common stock and Series A preferred stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding common and Series A preferred stock, options for common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.

 

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

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

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of deposit to be cash equivalents.

 

Fair Value of Financial Instruments

 

The Company’s condensed financial instruments include principally cash and cash equivalents, other current assets, accounts payable, accrued liabilities and debt. The carrying amounts for these condensed financial instruments reported in the balance sheets approximate their fair values. See Note 11 — Fair Value Measurements, for further discussion of fair value.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of personnel‑related costs, including salaries and share‑based compensation costs, for personnel in functions not directly associated with research and development activities. Other significant costs include legal fees related to intellectual property and corporate matters and professional fees for accounting and other services.

 

Research and Development Expenses

 

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

 

Acquired In‑Process Research and Development Expenses

 

The Company includes costs to acquire or in‑license product candidates in acquired in‑process research and development expenses. The Company has acquired the right to develop and commercialize its product candidate gemcabene. These costs are immediately expensed provided that the payments do not also represent processes or activities that would constitute a “business” as defined under GAAP or provided that the product candidate has not achieved regulatory approval for marketing and, and absent obtaining such approval, has no alternative future use. Royalties owed on future sales of any licensed product will be expensed in the period the related revenues are recognized.

 

Income Taxes

 

The Company utilizes the liability method of accounting for income taxes as required by Accounting Standards Codification (ASC) 740, Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Currently, there is no provision for income taxes, as the Company has incurred operating losses to date, and a full valuation allowance has been provided on the net deferred tax assets. MLT was treated as a partnership for federal and state income tax purposes. Accordingly, no provision was made for income taxes for periods prior to November 1, 2014, since the Company’s net loss (subject to certain limitations) was passed through to the income tax returns of its members. Upon incorporation on October 30, 2014, the Company became taxed as a corporation.

 

Share‑Based Compensation

 

The Company accounts for share‑based compensation in accordance with the provisions of ASC 718, Compensation — Stock Compensation (ASC 718). Accordingly, compensation costs related to equity instruments granted are recognized at the grant‑date fair value. Additionally, under the provisions of ASC 718, the Company is required to include an estimate of the number of awards that will be forfeited in calculating compensation costs, which are recognized over the requisite service period of the awards (typically the vesting period of the awards). Share‑based compensation arrangements to non‑employees are accounted for in accordance with the applicable provisions of ASC 718 and ASC 505, Equity, using a fair value approach. The compensation costs of these arrangements are subject to re‑measurement as the equity instruments vest and are recognized as expense over the related service period (typically the vesting period of the awards).

 

Common Stock Valuation

 

Due to the absence of an active market for the Company’s common stock, the Company utilized methodologies in accordance with the framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately‑Held Company Equity Securities Issued as Compensation, to estimate the fair value of its common stock. The valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions affecting the biopharmaceutical industry sector, and the likelihood of achieving a liquidity event, such as an IPO or sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date.

 

Convertible Preferred Stock

 

On March 31, 2015, the Company issued 745,637 shares of Series A convertible preferred stock (the Series A preferred stock). The Series A preferred stock is classified outside of permanent equity, in mezzanine equity, on the Company’s condensed balance sheet. The Company initially records preferred stock that may be redeemed at the option of the holder, or based on the occurrence of events outside of the Company’s control, at the value of the proceeds received. Subsequently, if it is probable that the preferred stock will become redeemable, the Company recognizes changes in the redemption value immediately as they occur and adjusts the carrying amount of the instrument to equal the redemption value at the end of each reporting period. If it is not probable that the preferred stock will become redeemable, the Company does not adjust the carrying value. In the absence of retained earnings, these charges are recorded against

additional paid‑in‑capital, if any, and then to accumulated deficit. See Note 7 — Convertible Series A Preferred Stock for further discussion.

 

Segment Information

 

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

 

Jumpstart Our Business Startups Act Accounting Election

 

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

 

Recent Accounting Pronouncements

 

In November 2015, the FASB issued ASU 2015‑17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015‑17). The new guidance simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015‑17 applies to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax‑paying component of an entity be offset and presented as a single amount is not affected by this ASU. For public entities, ASU 2015‑17 is effective for financial statements issued for annual periods beginning after December 15, 2016 with earlier application permitted. The new guidance may be applied either prospectively or retrospectively to all periods presented. The Company adopted this standard effective April 1, 2016 on a retrospective basis for each period presented. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

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

 

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

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of the new guidance and has not yet determined its impact on the Company’s financial statements.

 

3. Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

 

 

4. Debt

 

Convertible Notes

 

The Company issued a series of convertible note financings with certain investors beginning on November1, 2014 and ending on February 18, 2015 (the Convertible Notes), whereby a total of $2.7 million was loaned to the Company, of which $2.0 million was loaned in 2015. Interest for the Convertible Notes compounded on a daily basis at a rate of 8 percent per annum. The Convertible Notes were converted into shares of the Company’s Series A preferred stock upon close of the preferred stock financing (the Preferred Financing) on March 31, 2015. The conversion equaled 125% of the unpaid principal plus unpaid accrued interest on the Convertible Notes.

 

At the time of their issuance, the Convertible Notes contained a conversion premium with regard to the conversion into the Series A preferred stock. The Company determined that the redemption feature under the Convertible Notes qualified as an embedded derivative and was separated from its debt host. The bifurcation of the embedded derivative from its debt host resulted in a discount to the Convertible Notes. The discount was amortized to interest expense over the term of the Convertible Notes using the straight‑line method. The embedded derivative was accounted for separately on a fair market value basis. The Company recorded the fair value changes of the premium conversion derivative to interest expense that amounted to $0.4 million for the six months ended June 30, 2015. The Convertible Notes were converted into Series A preferred stock on March 31, 2015.

 

Interim Notes

 

On July 31, 2015, the Company entered into a convertible interim note financing (the Interim Notes), pursuant to which certain investors agreed to loan the Company approximately $2.8 million. The Interim Notes accrue interest at a rate of 8% per annum, compounded annually, and automatically convert into shares issued to investors in the Company’s next equity financing round that results in gross proceeds of at least $5.0 million (a Qualified Financing). The conversion would be equal to unpaid principal at 115% plus any unpaid accrued interest. The investors would be paid out principal at 200% if a change of control occurred before the next financing round. In the event that a Qualified Financing, change of control, or an IPO does not occur before July 31, 2016, the parties would then negotiate a price for conversion into a new round of stock.

 

In December 2015, the Company amended the Interim Notes and certain investors agreed to loan the Company an additional $2.7 million for a revised financing total of $5.5 million. The Interim Notes continue to accrue interest at an 8% rate per annum compounded annually, but have been amended to automatically convert into shares of the same class of the Company’s next convertible preferred stock financing round (the Preferred Stock Financing). The conversion into shares issued in the Preferred Stock Financing would be equal to unpaid principal at 115% plus unpaid accrued interest. In the event that either a change of control occurs or the Company completes a public transaction which results in the Company’s stockholders holding securities listed on a national securities exchange, including an IPO, before the Preferred Stock Financing, the Interim Notes, as amended, would automatically convert into shares of the Company’s common stock at a conversion price of $6.70585 per share (which represents the original issue price of the Series A

preferred stock) based on 100% of outstanding principal and unpaid accrued interest. Lastly, if a Preferred Stock Financing, change of control, or public transaction does not occur before December 31, 2016, the parties have agreed to then negotiate a conversion price into a new round of stock.

 

In February 2016, certain investors agreed to loan the Company an additional $0.2 million for a revised financing total of $5.6 million. The Interim Notes continue to accrue interest at an 8% rate per annum compounded annually, but have been amended to automatically convert into shares of the same class of the Company’s next Preferred Stock Financing. The conversion into shares issued in the Preferred Stock Financing would be equal to unpaid principal at 115% plus unpaid accrued interest. In the event that either a change of control occurs or the Company completes a public transaction which results in the Company’s stockholders holding securities listed on a national securities exchange, including an IPO, before the Preferred Stock Financing, the Interim Notes, as amended, would automatically convert into shares of the Company’s common stock at a conversion price of $6.70585 per share (which represents the original issue price of the Series A preferred stock as adjusted for the Reverse Stock Split (as defined below)) based on 100% of outstanding principal and unpaid accrued interest. Lastly, if a Preferred Stock Financing, change of control, or public transaction does not occur before December 31, 2016, the parties have agreed to then negotiate a conversion price into a new round of stock

 

In April 2016, the Company amended the Interim Notes and certain investors agreed to loan the Company an additional $5.0 million for a revised financing total, including Interim Notes previously issued, of $10.6 million. The Interim Notes continue to accrue interest at an 8% rate per annum compounded annually, but have been amended so that 125% of the unpaid principal and accrued interest, automatically converts into shares of the same class of the Company’s next convertible preferred stock financing round of at least $5.0 million (the Qualified Financing).  In the event that either a change of control occurs or the Company completes a public transaction which results in the Company’s stockholders holding securities listed on a national securities exchange, including an IPO, before the Qualified Financing, 100% of outstanding principal and unpaid accrued interest on the Interim Notes, as amended, would automatically convert into shares of the Company’s common stock at a conversion price of $6.70585 per share, as adjusted for the Reverse Stock Split. Lastly, if a Qualified Financing, change of control, or public transaction does not occur, the Interim Notes will become payable on demand anytime after December 31, 2016. The Company incurred issuance costs related to the April 2016 financing in the amount of $10,000. The Interim Notes were discounted for the issuance costs, and the discount is being amortized to interest expense over their remaining term using the straight‑line method.

 

At the time of their issuance, the Interim Notes contained a conversion premium with regard to the conversion into shares at the time of the next Qualified Financing. The Company determined that the redemption feature under the Interim Notes qualified as embedded derivative and was separated from its debt host. The bifurcation of the embedded derivative from its debt host resulted in a discount to the Interim Notes. The discount was amortized to interest expense over the term of the Interim Notes using the straight‑line method. The embedded derivative was accounted for separately on a fair market value basis. The fair value of the derivative associated with the Interim Notes was $0.2 million and $0.3 million at June 30, 2016 and December 31, 2015, respectively, and was included as premium conversion derivative on the accompanying condensed balance sheets. The Company recorded the fair value changes of the premium conversion derivative associated with the Interim Notes to interest (income) expense that amounted to $(0.6) million and zero for the three months ended June 30, 2016 and 2015, respectively, and $(0.6) million and $0.4 million for the six months ended June 30, 2016 and 2015, respectively.

 

5. Commitments and Contingencies

 

Pfizer License Agreement

 

In April 2011, the Company and Pfizer Inc. (Pfizer) entered into an exclusive license agreement (the Pfizer Agreement) for the clinical product candidate gemcabene. In exchange for this worldwide exclusive right and license to certain patent rights to make, use, sell, offer for sale and import the clinical product gemcabene, the Company agreed to certain milestone and royalty payments on future sales (See Note 6 — License Agreement). As of June 30, 2016, there was sufficient uncertainty with regard to both the outcome of the clinical trials and the ability to obtain sufficient funding to support any of the cash milestone payments under the license agreement, and as such, no liabilities were recorded related to the license agreement.

 

Series A Preferred Stock Dividends

 

Holders of the Series A preferred stock are entitled to cumulative accruing dividends at a simple rate of 8% per year on the original issue price of the preferred stock of $6.70585 per share, as adjusted for the Reverse Stock Split. The dividends effectively accrue daily on each share of preferred stock. The dividends are payable upon the earliest to occur of (1) the date determined by the Board, (2) the liquidation of the Company (including a deemed liquidation event) or (3) the conversion or redemption of at least a majority of the outstanding shares of Series A preferred stock. If the board reasonably believes that the Company is not legally able to pay the dividends in cash at the payment date, or if elected by the majority of the Series A preferred stockholders or if issued in connection with an IPO, the dividends shall be paid in shares of common stock at the conversion price for the Series A preferred stock in effect at that time, which is the original issue price of the Series A preferred stock as adjusted from time to time for any stock dividends, combinations, splits or recapitalizations. Since the dividends are payable upon a contingent event, the Company has not recorded them in the accompanying condensed financial statements. Cumulative unpaid dividends for the Series A preferred stock totaled $0.5 million and $0.3 million as of June 30, 2016 and December 31, 2015, respectively.

 

Other Agreements

 

A cancellable facility agreement was in place that provided for fixed monthly rent for the quarters ended June 30, 2016 and 2015. The total rent expense was $8,000 and $4,000 for the three months ended June 30, 2016 and 2015, respectively, and $16,000 and $9,000 for the six months ended June 30, 2016 and 2015, respectively. In May 2016, the Company entered into a new lease agreement, commencing in August 2016, for approximately 5,300 square feet to be used as the Company’s headquarters. The initial term of the agreement is 3 years with an initial monthly base rent of approximately $8,400. In conjunction with entering into the new lease agreement, the Company cancelled the existing lease agreement, effective August 31, 2016.

 

 

6. License Agreement

 

In April 2011, the Company entered into the Pfizer Agreement for a worldwide exclusive license to certain patent rights to make, use, sell, offer for sale and import the clinical product candidate gemcabene. In exchange for this license, the Company agreed to issue shares of its common stock to Pfizer representing 15% of the Company’s fully diluted capital at the close of its first arms‑length Series A financing, which occurred on March 31, 2015.

 

The Company agreed to make milestone payments totaling up to $37 million upon the achievement of certain milestones, including the first regulatory submission in any country, regulatory approval in each of the United States, Europe and Japan, the first anniversary of the first regulatory approval in any country, and upon achieving certain aggregate sales levels of gemcabene or any product containing gemcabene. Future milestone payments under the Pfizer Agreement, if any, are not expected to begin for at least several years and extend over a number of subsequent years.

 

The Company also agreed to pay Pfizer tiered royalties on a country‑by‑country basis based upon the annual amount of net sales, as specified in the Pfizer Agreement until expiration of the last valid claim of the licensed patent rights including any patent term extensions or supplemental protection certificates. Under the Pfizer Agreement, the Company is obligated to use commercially reasonable efforts to develop and commercialize gemcabene.

 

On March 31, 2015, upon the closing of the Series A preferred stock financing, the Company issued 675,250 shares of its common stock, at a fair market value of $0.9 million, to Pfizer in connection with the first equity payment, pursuant to which Pfizer became the owner of more than 5% of the Company’s capital stock. The transaction was recorded as acquired in‑process research and development expenses based on the fair market value of the common shares issued since no processes or activities that would constitute a “business” were acquired and none of the rights and underlying assets acquired had alternative future uses or reached a stage of technological feasibility. None of the other milestone or royalty payments were triggered as of June 30, 2016.

 

The Pfizer Agreement will expire upon expiration of the last royalty term. Either party may terminate the Pfizer Agreement for the other party’s uncured material breach or upon specified bankruptcy events. Pfizer may terminate the Pfizer Agreement if the Company or any of its sublicenses challenge the validity, enforceability or ownership of the licensed patents. Additionally, Pfizer may revoke the license if the Company is unable to adequately commercialize gemcabene by April 2021.

 

7. Convertible Series A Preferred Stock

 

On March 31, 2015, the Company issued 745,637 shares of Series A preferred stock at a per share price of $6.70585, as adjusted for the Reverse Stock Split, or $5.0 million in the aggregate, consisting of $1.5 million in cash and $3.5 million representing 125% of the principal and accrued and unpaid interest on the Convertible Notes, all of which converted into shares of Series A preferred stock.

 

The Series A preferred stock has the following rights and preferences:

 

Dividend Rights

 

Dividends effectively accrue on a daily basis at a simple rate of 8% per annum on the sum of the original per share issue price. Dividends are effectively deemed declared daily and are payable upon the occurrence of certain events. In addition, the holders of the Series A preferred stock have rights to participate in common stock dividends, entitling holders of Series A preferred stock to a dividend payable at the same time as the dividend paid on common stock based on the number of shares of common stock each share of Series A preferred stock would convert into if such shares had converted on the record date. There were no dividends deemed payable and accrued, but unpaid dividends were $0.5 million and $0.3 million as of June 30, 2016 and December 31, 2015, respectively (See Note 5 — Commitments and Contingencies).

 

Voting Rights

 

Each share of Series A preferred stock shall be entitled to vote together with the common stock on all actions to be taken by the stockholders of the Company, based on the number of shares of common stock into which each share of Series A preferred stock could be converted. A separate vote of a majority of the outstanding shares of Series A preferred stock is required to (1) issue or authorize any class or series of equity securities or equivalents, (2) effect any transaction that results in a change in control, (3) change the principal business of the Company, enter new lines of business, or exit the current line of business, (4) issue of convertible debt above a certain threshold, or (5) materially sell, transfer, license, pledge or encumber technology or intellectual property. A management stock option plan approved by the board of directors, however, is not subject to a separate vote of the Series A preferred stockholders, but any subsequent increases to the authorized option pool are subject to approval by the Series A preferred stock holders via a separate vote.

 

Liquidation Rights

 

In the event of any liquidation, dissolution, or winding‑up of the Company, whether voluntary or involuntary, merger, consolidation or transaction in which over 50% of the Company’s voting power is transferred, or a sale, lease, transfer, exclusive license or disposition of all or substantially all of the assets of the Company, the Series A preferred stock holders shall be entitled to the assets of the Company legally available for distribution before any distribution or payment is made to the holders of common stock. The distribution amount shall equal the original issue price of the Series A preferred stock (as adjusted for any stock dividends, combinations, splits or other recapitalizations since issuance), plus any accrued or declared but unpaid dividends thereon. After payment of the full liquidation preference to the Series A preferred stock holders, the remaining assets legally available for distribution shall be distributed to the holders of common stock and holders of the Series A preferred stock pro rata based on the number of shares of common stock each share of Series A preferred stock would convert into if such shares had converted immediately prior to such liquidation, dissolution, or winding‑up.

 

Conversion Rights

 

Shares of Series A preferred stock, at the option of the holder, may be converted at any time into shares of common stock. The conversion rate shall be obtained by dividing the Series A preferred stock original issue price of $6.70585 per share, as adjusted for the Reverse Stock Split, by the conversion price per share in effect at the time of conversion. The Series A conversion price is initially equal to the original issue price, but shall be adjusted on a broad‑based weighted average basis in connection with certain dilutive events. The conversion price for the Series A preferred stock was $6.70585 per share at June 30, 2016 and December 31, 2015 (as adjusted for the Reverse Stock Split). The Series A holder would also be entitled to receive additional shares of common stock for any unpaid Series A dividends (whether or not declared).

 

Shares of Series A preferred stock shall automatically be converted into common stock based upon the then‑effective Series A conversion price upon the affirmative vote or consent of the holders of at least a majority of the outstanding shares of the Series A preferred stock, or at the closing of a firmly underwritten public offering whereby the common stock of the Company is listed on a U.S. national securities exchange and with a public offering price of at least 1.5 times the Series A original issue price of $6.70585 and net cash proceeds before underwriting discounts of at least $50 million.

 

Redemption Rights

 

The holders of at least 80% of the outstanding shares of Series A preferred stock may require the Company to redeem all outstanding shares of Series A preferred stock at any time on or after December 31, 2020 at a redemption price equal to the greater of 150% of the liquidation preference of the Series A preferred stock or the fair market value per share plus any unpaid declared dividends. The liquidation preference of the Series A preferred stock is defined as an amount per share equal to $6.70585, as adjusted from time to time for any stock dividends, combinations, splits or recapitalizations, plus any accrued or declared but unpaid dividends thereon.

 

The redemption value for redeemable preferred stock may at times be based on fair market value. The assumptions used in calculating the estimated fair market value at each reporting period represent the Company’s best estimate, however, inherent uncertainties are involved. As a result, if factors or assumptions change, the estimated fair value could be materially different. As of June 30, 2016, the estimated fair value of the Series A preferred stock was $7.2 million.

 

The Company recognizes changes in the redemption value immediately as they occur and adjusts the carrying amount of the instrument to equal the redemption value at the end of each reporting period since it is probable that the instruments will become redeemable. In the absence of retained earnings, these charges are recorded against additional paid‑in‑capital, if any, and then to accumulated deficit.

 

The Company evaluated the Series A preferred stock and determined that it is considered an equity host under ASC 815,  Derivatives and Hedging. In making this determination, the Company’s analysis followed the whole instrument approach that compared an individual feature against the entire Series A preferred stock instrument that included that feature. The Company’s analysis was based on a consideration of the economic characteristics and risks of the Series A preferred stock. More specifically, the Company evaluated all of the stated and implied substantive terms and features of the Series A preferred stock, including: (1) redemption features and their underlying exercisability, (2) existence of any protective covenants, (3) nature of dividends rights, (4) nature of voting rights, and (5) the existence and nature of any conversion rights. As a result of the above, the Company concluded that the Series A preferred stock represented an equity host, and as such, the redemption and/or conversion features of the Series A preferred stock were considered to be clearly and closely related to the associated Series A preferred stock host instrument. Accordingly, the redemption and/or conversion features of the Series A preferred stock were not considered an embedded derivative that required bifurcation.

 

8. Stockholders’ and Members’ Deficit

 

Common Stock

 

The Company had 3,758,488 shares of its common stock issued and outstanding as of June 30, 2016 and December 31, 2015. Voting, dividend and liquidation rights of the holders of the common stock are subject to the Company’s articles of incorporation, corporate bylaws and underlying shareholder agreements.

 

Dividend Rights

 

Common stock holders are entitled to receive dividends at the sole discretion of the board of directors of the Company. There have been no dividends declared on common stock as of June 30, 2016.

 

Voting Rights

 

The holders of common stock are entitled to one vote for each share of common stock along with all other classes and series of stock of the Company on all actions to be taken by the stockholders of the Company, including actions that would amend the certificate of incorporation of the Company to increase the number of authorized shares of the common stock.

 

Liquidation Rights

 

In the event of any liquidation, dissolution, or winding‑up of the Company, the holders of common stock shall be entitled to share in the remaining assets of the Company available for distribution post preferential distributions made to the Series A preferred stockholders.

 

Deferred Offering Costs

 

Deferred offering costs, primarily consisting of legal, accounting and other direct fees and costs relating to the IPO, are capitalized. There were $1.7 million and $0.8 million in deferred offering costs capitalized as of June 30, 2016 and December 31, 2015, respectively. The deferred offering costs were offset against the Company’s IPO proceeds upon the closing of the offering in August 2016.

 

9. Share‑Based Compensation

 

The Company recognized $95,000 and $64,000 of share‑based compensation related to employees and non‑employees for the three months ended June 30, 2016 and 2015, respectively, and recognized $0.2 million and $87,000 of share‑based compensation related to employees and non‑employees for the six months ended June 30, 2016 and 2015, respectively. Share-based compensation expense was included in general and administrative expense in the accompanying condensed statements of comprehensive loss.

 

Restricted Stock Awards

 

During the three and six months ended June 30, 2016, the Company did not grant any restricted stock awards (RSAs).  During the three and six months ended June 30, 2015, the Company granted an aggregate of zero and 44,567 RSAs, respectively, to certain of its employees, members of its board of directors and consultants subject to a 2014 Shareholders Agreement (the Agreement). The RSAs are subject to various vesting schedules and generally vest ratably over a six to 24 month period coinciding with their respective service periods. During the three and six months ended June 30, 2016, 106,369 and 271,874 RSAs vested, respectively and no RSAs were forfeited during these periods. During the three and six months ended June 30, 2015, 174,776 and 349,017 RSAs vested, respectively, and no RSAs were forfeited during these periods.

 

The grant‑date fair value of the RSAs issued during each of the three and six months ended June 30, 2016 was zero, and the grant‑date fair value of the RSAs issued during the three and six months  ended June 30, 2015 was zero and $9,000, respectively. Grant date fair market value was based on traditional valuation techniques and methods in determining the fair value of the Company’s equity as a private company including market, income, and cost valuation approaches. A number of objective and subjective factors were considered including contemporaneous and retrospective valuations of its common stock performed by an unrelated valuation specialist, sales of the Company’s convertible preferred stock to unrelated third parties, valuations of comparable peer public companies, the lack of liquidity of the Company’s capital stock and general and industry‑specific economic outlook. The fair value of the Company’s common stock will be determined by the Company’s board of directors until such time as the Company’s common stock is listed on an established stock exchange.

 

Stock Options

 

In April 2015, the Company adopted a 2015 Equity Incentive Plan (the 2015 Plan) under which 320,615 shares of the Company’s common stock were reserved for issuance to employees, directors and consultants. The 2015 Plan permits the grant of incentive and non‑statutory stock options, appreciation rights, restricted stock, restricted stock units, performance stock and cash awards, and other stock‑based awards. No stock options were granted during the three and six months ended June 30, 2016, and 102,130 stock options were granted during the three and six months ended June 30, 2015. During the three and six months ended June 30, 2016, 28,107 and 63,492 stock options vested, respectively, and no stock options were forfeited. During the three and six months ended June 30, 2015, 37,215 stock options vested and no stock options were forfeited. As of June 30, 2016, 15,337 shares were available for future issuance under the 2015 Plan.

 

Unrecognized share‑based compensation cost for the RSAs and stock options issued under the Agreement and the 2015 Plan was $0.3 million (net of estimated forfeitures) as of June 30, 2016. Approximately $34,000 of the unrecognized compensation cost was related to the RSAs and $0.3 million was related to the stock options. The non‑employee portion of the unrecognized compensation cost was estimated utilizing the Company’s fair market value for its common stock as of June 30, 2016. The unrecognized share‑based expense is expected to be recognized over a weighted average period of 0.4 years for the RSAs and 1.2 years for the stock options.

 

Amendment and Restatement of 2015 Equity Incentive Plan

 

In April 2016 the Company’s board of directors approved the Company’s amended and restated 2015 Plan (the A&R 2015 Plan). The Company’s stockholders also approved the A&R 2015 Plan in April, to become effective immediately upon the execution and delivery of the underwriting agreement related to the IPO. The A&R 2015 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards and other forms of equity awards, as well as performance cash awards. The Company initially reserved 2,400,000 shares of common stock for issuance under the A&R 2015 Plan. In April 2016, the compensation committee of the board of directors of the Company approved the award of options to purchase an aggregate of 1,818,000 shares of common stock to the Company’s officers, directors and employees, with an exercise price equal to the per share price of the IPO, to be granted in connection with the IPO. As of June 30, 2016, the A&R 2015 Plan was not effective.

Adoption of 2016 Employee Stock Purchase Plan

 

In April 2016 the Company’s board of directors approved the 2016 Employee Stock Purchase Plan (the ESPP) in order to enable eligible employees to purchase shares of the Company’s common stock at a discount following the effective date of the IPO. The Company’s stockholders also approved the ESPP in April, which will become effective immediately upon the execution and delivery of the underwriting agreement related to the IPO.  The Company initially reserved 150,000 shares of common stock for issuance under the ESPP. As of June 30, 2016, the ESPP was not effective.

 

10. Net Loss Per Common Share

 

Basic earnings or loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The holders of the Series A preferred stock have rights to participation in common stock dividends, entitling the holders of Series A preferred stock to a dividend payable at the

same time and rate per share as the dividend paid on common stock based the number of shares of common stock each share of Series A preferred stock would convert into if such shares had converted on the record date. The Series A preferred stock, however, does not have a contractual obligation to share in the losses of the Company, and as such, no losses were allocated to the Series A preferred stock for the purposes of the basic loss per share calculation. Prior to the Company’s incorporation, no common shares were outstanding when the Company operated as MLT.

 

Diluted earnings or loss per share of common stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents, if dilutive. The Company’s RSAs, stock options, shares of Series A preferred stock and convertible notes are considered common stock equivalents for this purpose. Diluted earnings is computed utilizing the treasury method for the RSAs and stock options, and in the case of the Series A preferred stock, either the two‑class method or the if‑converted method, whichever is more dilutive. Diluted earnings with respect to the convertible notes utilizing the if‑converted method was not applicable during the three and six months ended June 30, 2016 and 2015 as no conditions required for conversion have occurred during these periods. No incremental common stock equivalents were included in calculating diluted loss per share because such inclusion would be anti‑dilutive given the net loss reported for the three and six months ended June 30, 2016 and 2015. The following table sets forth the computation of basic and diluted loss per share (in thousands, except share and per share amounts):

 

 

The following potential common shares were not considered in the computation of diluted net loss per share as their effect would have been anti‑dilutive:

 

 

 

11. Fair Value Measurements

 

The Company follows accounting guidance that emphasizes that fair value is a market‑based measurement, not an entity specific measurement. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value measurements are defined on a three level hierarchy:

 

Level 1 inputs:  Unadjusted quoted prices for identical assets or liabilities in active markets;

 

Level 2 inputs:  Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, weather directly or indirectly, for substantially the full term of the asset or liability;

 

Level 3 inputs:  Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.

 

As of June 30, 2016 and December 31, 2015, the fair values of cash and cash equivalents, other assets, accounts payable and accrued liabilities approximated their carrying values because of the short‑term nature of these assets or liabilities. The estimated fair value of the Company’s Interim Notes was based on amortized cost which was deemed to approximate fair value. The derivative liability associated with the conversion premium on the Interim Notes was based on cash flow models discounted at current implied market rates evidenced in recent arms‑length transactions representing expected returns by market participants for similar instruments which were based on Level 3 inputs. There were no transfers between fair value hierarchy levels during the three and six months ended June 30, 2016 and 2015.

 

The fair value of financial instruments measured on a recurring basis is as follows (in thousands):

 

 

 

 

The following table provides a roll‑forward of the Company’s premium conversion derivative liabilities measured at fair value on a recurring basis using unobservable level 3 inputs (in thousands):

 

 

There were no financial instruments measured on a non‑recurring basis for any of the periods presented.

 

12. Income Taxes

 

The effective tax rate for the three and six months ended June 30, 2016 and 2015 was zero percent.  As a result of the analysis of all available evidence as of June 30, 2016 and December 31, 2015, the Company recorded a full valuation allowance on its net deferred tax assets.  Consequently, the Company reported no income tax benefit for the three or six month period ended June 30, 2016, or for the comparable periods in 2015. If the Company’s assumptions change and the Company believes that it will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be recognized as a reduction of future income tax expense.  If the assumptions do not change, each period the Company could record an additional valuation allowance on any increases in the deferred tax assets.

 

13. Related Party Transactions

 

The Company rented an office in Northville, Michigan from an LLC owned by two officers under a short‑term agreement during the three and six month periods ended June 30, 2016 and 2015. Rent expense under the related party

agreement was $8,000 and $4,000 during the three months ended June 30, 2016 and 2015, respectively, and $16,000 and $9,000 during the six months ended June 30, 2016 and 2015, respectively. A prepaid rent balance related to the short‑term agreement amounted to $3,000 as of June 30, 2016 and December 31, 2015. 

 

During the first quarter of 2015, the Company issued $2.0 million of additional Convertible Notes (the 2015 Notes) as part of the Convertible Notes described in Note 4 — Debt. The 2015 Notes included four notes in the aggregate of $0.3 million issued to investors who were related to one board member and three officers of the Company. On March 31, 2015, all of the Convertible Notes (including the 2015 Notes) were converted into 516,421 shares of Series A preferred stock. The conversion included a total of 68,649 shares of Series A preferred stock issued to two officers of the Company, and 63,967 shares of Series A preferred stock issued to investors related to one board member and three officers of the Company.

 

During the third quarter of 2015, the Company issued $2.8 million of Interim Notes as described in Note 4 — Debt. The Interim Notes included five notes issued to two officers and three board members (or entities they control) in the amount of $0.5 million. In addition, the Interim Notes included four notes to investors who were related to three of the Company’s officers and to one of the Company’s key employees in the amount of $0.3 million.

 

In December 2015, the Company issued an additional $2.7 million of Interim Notes, as described in Note 4 — Debt, which included six notes issued to two officers and four board members in the amount of $0.6 million. The December 2015 Interim Note issuances also included five notes to investors who were related to three of the Company’s officers in the amount of $0.2 million.

 

In February 2016, the Company issued an additional $0.2 million of Interim Notes, as described in Note 4 — Debt, which included two notes issued to two board members (or entities they control) in the amount of $81,000. The February 2016 Interim Note issuances also included a $20,000 note to an investor who is related to an officer of the Company

 

The April 2016 Interim Note issuances of $5.0 million included two notes to investors who were related to two of the Company’s officers in the aggregate amount of $0.2 million. The April 2016 Interim Notes issuances also included three notes to investors who were related to three of the Company’s directors in the aggregate amount of $2.3 million.

 

14. Subsequent Events

 

On August 4, 2016, the Company’s Registration Statement on Form S-1 (File No 333-210815) relating to its IPO of its common stock was declared effective by the SEC. Pursuant to such Registration Statement, on August 10, 2016, the Company closed its IPO whereby 3,000,000 shares of its common stock were issued and sold at a public offering price of $10.00 per share. On September 8, 2016, the Company closed the sale of 27,755 shares of its common stock at the public offering price of $10.00 per share, representing a partial exercise of the underwriters’ over-allotment option, following which, the IPO terminated. The Company received net proceeds of approximately $26.0 million after deducting underwriting discounts and commissions of $2.1 million and other offering expenses of $2.2 million.

 

The IPO included 154,450 shares sold to 3 officers and 5 board members, totaling $1.5 million. In addition, 500,000 shares were sold to 1 investor who is related to 1 of the Company’s directors, totaling $5.0 million, and 47,000 shares totaling $0.5 million were sold to 14 investors who are related to 5 officers of the Company.

 

Immediately prior to the IPO, the Company amended and restated its certificate of incorporation and bylaws to, among other things, change its authorized capital stock to consist of (i) 100,000,000 shares of common stock and (ii) 10,000,000 shares of undesignated preferred stock

 

 

In connection with the pricing of the IPO, on August 4, 2016, the Company’s A&R 2015 Plan and ESPP became effective, and the Company granted an aggregate of 1,825,200 stock options to its officers, directors, employees and consultants, generally vesting over a four-year period, with an exercise price equal to $10 per share. On August 10, 2016, immediately prior to the closing of the IPO, the Company’s Series A preferred stock, together with accrued dividends thereon, converted into 827,205 shares of common stock, and the principal and accrued and unpaid interest on the Company’s Convertible Notes and Interim Notes converted into 1,656,807 shares of common stock. Lastly, 145,833 shares of restricted stock held by certain employees, with a grant date fair value of approximately $4,000,  vested in full upon the closing of the IPO.

 

 

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

 

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes included in Part I “Financial Information”, Item I “Financial Statements” of this Quarterly Report on Form 10-Q and the audited financial statements and related footnotes included in our final prospectus filed pursuant to Rule 424(b) with the SEC on August 8, 2016. 

 

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance.  We may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes to identify these forward‑looking statements.

 

These forward‑looking statements reflect our management’s beliefs and views with respect to future events, are based on estimates and assumptions as of the date of this report and are subject to risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in these forward-looking statements. We discuss many of these risks in greater detail under Part II, Item 1A “Risk Factors” in this report and subsequent reports filed with or furnished to the SEC. 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. Given these uncertainties, you should not place undue reliance on these forward‑looking statements.

Any forward-looking statement made by us in this report speaks only as of the date hereof or as of the date specified herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable laws or regulations. 

Overview

 

We are a clinical‑stage biopharmaceutical company focused on developing and commercializing therapies for the treatment of dyslipidemia, a serious medical condition that increases the risk of life threatening cardiovascular disease. Dyslipidemia is generally characterized by an elevation of LDL‑C, or bad cholesterol, triglycerides, or fat in the blood, or both. We are developing our product candidate gemcabene, a novel, once‑daily, oral therapy, for patients who are unable to achieve normal levels of LDL‑C or triglycerides with currently approved therapies, primarily statin therapy. Gemcabene’s mechanism of action is designed to enhance the clearance of VLDLs in the plasma and inhibit the production of fatty acids and cholesterol in the liver. Gemcabene has been tested as monotherapy and in combination with statins and other drugs in 895 subjects, which we define as healthy volunteers and patients, across 18 Phase 1 and Phase 2 clinical trials and has demonstrated promising evidence of efficacy, safety and tolerability.

 

We are initially pursuing gemcabene in the following four indications as a treatment in addition to maximally tolerated statin therapy for patients who are unable to reach their lipid‑lowering goals: HoFH, HeFH, ASCVD and SHTG. We believe we can design an efficient development plan to provide a new treatment alternative for HoFH patients. Furthermore, we believe that gemcabene’s potential ability to treat patients in the most severe segment of the dyslipidemia market will enhance brand awareness among key thought leaders and physicians. We are developing gemcabene for HeFH, ASCVD and SHTG given gemcabene’s: (1) promising clinical data in these indications; (2) cost‑effective manufacturing process; (3) convenient oral dosing; (4) viability as adjunct combination therapy; and (5) large commercial potential. In the next twelve months, we expect to initiate three late stage clinical trials for gemcabene in HoFH, hypercholesterolemia, including HeFH and ASCVD patients on maximally tolerated statins, and SHTG. Upon completion of one or more of these clinical trials, we intend to request an End of Phase 2 (EOP2) meeting

with the FDA to reach an agreement on the design of Phase 3 registration trials and long term safety exposure for our target indications. We intend to pursue similar discussions with Canadian and European health authorities.

 

Our Company was co‑founded in November 2008 as a limited liability company under the name Michigan Life Therapeutics, LLC (MLT) by former Pfizer employees, Dr. Charles Bisgaier and Mr. David Lowenschuss, who were responsible for licensing exclusive worldwide rights to gemcabene from Pfizer in April 2011. In October 2014, we incorporated a new entity under the name Gemphire Therapeutics Inc. in Delaware. In November 2014, we entered into a merger agreement with Gemphire whereby MLT was merged with and into Gemphire, with Gemphire as the surviving entity and all outstanding units of membership interest in MLT were exchanged for shares of common stock of Gemphire. The purpose of the merger was to change the jurisdiction of our incorporation from Michigan to Delaware and to convert from a limited liability company to a corporation.

 

In April 2016, our Board of Directors approved an amendment to our certificate of incorporation to effect a 1-for-3.119 reverse stock split (the Reverse Stock Split) for all common and Series A preferred stock. The Reverse Stock Split became effective on April 27, 2016 upon the filing of the amendment to the certificate of incorporation. The authorized shares and par value of the common stock and Series A preferred stock were not adjusted as a result of the Reverse Stock Split.

 

On August 4, 2016, our Registration Statement on Form S-1 (File No 333-210815) relating to our initial public offering (“IPO”) of our common stock was declared effective by the Securities and Exchange Commission. Pursuant to such Registration Statement, on August 10, 2016, we closed our IPO whereby 3,000,000 shares of our common stock were sold at a public offering price of $10.00 per share. On September 8, 2016, we closed the sale of 27,755 shares of our common stock at the public offering price of $10.00 per share, representing a partial exercise of the underwriters’ over-allotment option, following which, the IPO terminated. We received net proceeds of approximately $26.0 million after deducting underwriting discounts and commissions of $2.1 million and other offering expenses of $2.2 million.

 

To date, our primary activities have been conducting research and development activities, planning clinical trials, performing business and financial planning, recruiting personnel and raising capital. We do not have any products approved for sale and have not generated any revenue. We do not expect to generate revenue until, and unless, the FDA or other regulatory authorities approve gemcabene and we successfully commercialize gemcabene. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity and debt financings as well as collaborations, strategic alliances and licensing arrangements. Through June 30, 2016, we have funded our operations primarily through the issuance of preferred stock and convertible notes, totaling $14.8 million in gross proceeds. Our net losses were $1.4 million and $3.5 million during the three and six months ended June 30, 2016, respectively, as compared to $1.6 million and $3.9 million during the three and six months ended June 30, 2015, respectively. As of June 30, 2016, we had an accumulated deficit of $16.0 million. We anticipate that our expenses will increase substantially as we:

 

 

 

 

 

 

 

 

 

Our net losses may fluctuate significantly from quarter‑to‑quarter and year‑to‑year, depending on the timing of our preclinical studies, clinical trials and our expenditures on other research and development activities.

 

Financial Operations Overview

 

Revenue

 

To date, we have not generated any revenue. We do not expect to generate revenue unless or until we obtain regulatory approval of and commercialize gemcabene. If we fail to complete the development of gemcabene, or any other product candidate we may pursue in the future, in a timely manner, or fail to obtain regulatory approval, our ability to generate future revenue would be compromised.

 

Operating Expenses

 

Our operating expenses are classified into three categories: general and administrative, research and development and acquired in‑process research and development.

 

General and Administrative

 

General and administrative expenses consist primarily of personnel‑related costs, including salaries and share‑based compensation costs, for personnel in functions not directly associated with research and administrative activities. Other significant costs include legal fees relating to intellectual property and corporate matters and professional fees for accounting and other services. We anticipate that our general and administrative expenses will significantly increase in the future to support our continued research and development activities, potential commercialization of gemcabene, if approved, and any future product candidates we may develop and the increased costs of operating as a public company. These increases will include increased costs related to the hiring of additional personnel and fees for legal and professional services, significantly increased share-based compensation costs related to stock options issued in conjunction with IPO, as well as other public‑company related costs.

 

Research and Development

 

To date, our research and development expenses have related primarily to the clinical stage development of gemcabene. Research and development expenses consist of costs incurred in performing research and development activities, including compensation for research and development employees, costs associated with preclinical studies and trials, regulatory activities, manufacturing activities to support clinical activities, license fees, nonlegal patent costs, fees paid to external service providers that conduct certain research and development, clinical costs and an allocation of overhead expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed. We accrue for costs incurred as the services are being provided by monitoring the status of the study or project, and the invoices received from our external service providers. We adjust our accrual as actual costs become known. Research and development activities are central to our business model.

 

We expect that gemcabene will have higher development costs during its later stages of clinical development, as compared to costs incurred during its earlier stages of development, primarily due to the increased size and duration of the later‑stage clinical trials, so we expect our research and development expenses to significantly increase in the future as we continue to conduct preclinical studies and clinical trials for gemcabene and potentially develop other product candidates. However, it is difficult to determine with certainty the duration, costs and timing to complete our current or future preclinical programs and clinical trials of gemcabene. The duration, costs and timing of clinical trials and development of gemcabene will depend on a variety of factors that include, but are not limited to, the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired In‑Process Research and Development

 

We include costs to acquire or in‑license product candidates in acquired in‑process research and development expenses. When we acquire the right to develop and commercialize a new product candidate, any up‑front payments, or any future milestone payments that relate to the acquisition or licensing of such a right are immediately expensed as acquired in‑process research and development in the period in which they are incurred. These costs are immediately expensed provided that the payments do not also represent processes or activities that would constitute a “business” as defined under generally accepted accounting principles in the United States (GAAP), or provided that the product candidate has not achieved regulatory approval for marketing and, and absent obtaining such approval, has no alternative future use. Royalties owed on future sales of any licensed product will be expensed in the period the related revenues are recognized.

 

Interest Income (Expense)

 

Interest income (expense) consists of interest income (expense) activity related to the convertible notes as well as interest income (expense) activity associated with the underlying premium conversion derivative related to the convertible notes. The convertible notes we have issued have an annual interest rate of 8%. The interest on the convertible notes issued subsequent to February 2015 compound on an annual basis while the interest on the convertible notes issued in or prior to February 2015 compounded daily. All of the convertible notes issued in or prior to February 2015 were converted to Series A preferred stock in March 2015.

 

We expect to earn interest income in future periods from the investment of net proceeds from the IPO and a significant decrease in interest income (expense) given the conversion of the convertible notes into shares of our common stock upon the closing of the IPO in August 2016.

 

Other Expense

 

Other expense relates to foreign currency exchange gains and losses. Foreign currency exchange gains and losses relate to transactions and monetary asset and liability balances denominated in currencies other than the U.S. dollar. Foreign currency gains and losses may continue to fluctuate in the future due to changes in foreign currency exchange rates.

 

Provision for Income Taxes

 

Provision for income taxes consists of federal and state income taxes in the United States, as well as deferred income taxes and changes in related valuation allowance reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Currently, there is no provision for income taxes, as we have incurred operating losses to date, and a full valuation allowance has been provided on the net deferred tax assets as of June 30, 2016 and December 31, 2015.

 

Results of Operations

 

The following table summarizes our operating results for the periods indicated:

 

 

Comparison of Three Months Ended June 30, 2016 and 2015

 

General and Administrative

 

General and administrative expenses for the three months ended June 30, 2016 were $1.1 million compared to $0.7 million for the three months ended June 30, 2015. The $0.4 million increase was primarily attributable to an increase in staffing and professional services. General and administrative expenses included $95,000 and $64,000 in share‑based compensation expense during the three months ended June 30, 2016 and 2015, respectively.

 

Research and Development

 

Research and development expenses for the three months ended June 30, 2016 were $0.8 million compared to $1.0 million for the three months ended June 30, 2015. The $0.2 million decrease was primarily attributable to the timing of preclinical studies and manufacturing activities to support clinical advancement of gemcabene and fees paid to external service providers for clinical trial development and regulatory consulting.