WINDTREE THERAPEUTICS INC /DE/ - Quarter Report: 2020 September (Form 10-Q)

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

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 000-26422

 

Windtree Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		94-3171943
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
	2600 Kelly Road, Suite 100
	Warrington, Pennsylvania 18976-3622
	(Address of principal executive offices)

 

(215) 488-9300

(Registrant's telephone number, including area code)

---

 

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	WINT	The Nasdaq Capital Market

 

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

  

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

 

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

 

Large accelerated filer     ☐	Accelerated filer           ☐
Non-accelerated filer      ☒	Smaller reporting company     ☒
Emerging growth company      ☐

 

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

 

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

 

As of November 16, 2020, there were outstanding 16,921,482 shares of the registrant's common stock, par value $0.001 per share.

 

 

 

Table of Contents

 

PART I - FINANCIAL INFORMATION

 

		Page
Item 1.	Financial Statements	4
	CONDENSED CONSOLIDATED BALANCE SHEETS	4
	As of September 30, 2020 (unaudited) and December 31, 2019
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)	5
	For the Three and Nine Months Ended September 30, 2020 and 2019
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited) For the Three and Nine Months Ended September 30, 2020 and 2019	6
	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) For the Three and Nine Months Ended September 30, 2020 and 2019	7
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)	8
	For the Nine Months Ended September 30, 2020 and 2019
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	21

 

PART II - OTHER INFORMATION

 

Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
Signatures		24

 

 

 

 

		September 30, 2020				December 31, 2019
		Unaudited
ASSETS
Current Assets:
Cash and cash equivalents		$	22,356			$	22,578
Prepaid expenses and other current assets			1,692				1,283
Total current assets			24,048				23,861
Property and equipment, net			702				798
Restricted cash			154				154
Operating lease right-of-use assets			855				1,390
Intangible assets			77,090				77,090
Goodwill			15,682				15,682
Total assets		$	118,531			$	118,975
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable		$	726			$	1,708
Collaboration and device development payable, net			-				1,972
Accrued expenses			4,279				3,226
Operating lease liabilities - current portion			605				750
Loans payable - current portion			704				161
Total current liabilities			6,314				7,817
Operating lease liabilities - non-current portion			358				794
Loans payable - non-current portion			2,364				4,608
Restructured debt liability - contingent milestone payments			15,000				15,000
Other liabilities			2,400				-
Deferred tax liabilities			16,370				15,821
Total liabilities			42,806				44,040
Stockholders' Equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2020 and December 31, 2019			-				-
Common stock, $0.001 par value; 120,000,000 shares authorized at September 30, 2020 and December 31, 2019; 16,921,506 and 13,697,419 shares issued at September 30, 2020 and December 31, 2019, respectively; 16,921,482 and 13,697,395 shares outstanding at September 30, 2020 and December 31, 2019, respectively			17				14
Additional paid-in capital			788,996				763,097
Accumulated deficit			(710,234	)			(685,122	)
Treasury stock (at cost); 24 shares			(3,054	)			(3,054	)
Total stockholders' equity			75,725				74,935
Total liabilities & stockholders' equity		$	118,531			$	118,975

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Revenues:
License revenue with affiliate		$	-			$	-			$	-			$	198
Total revenues			-				-				-				198
Expenses:
Research and development			3,882				3,792				11,838				10,547
General and administrative			4,823				3,395				11,518				9,990
Total operating expenses			8,705				7,187				23,356				20,537
Operating loss			(8,705	)			(7,187	)			(23,356	)			(20,339	)
Other (expense) income:
Interest income			21				25				115				124
Interest expense			(46	)			(105	)			(121	)			(358	)
Other (expense) income, net			(290	)			141				(1,750	)			473
Total other (expense) income, net			(315	)			61				(1,756	)			239
Net loss		$	(9,020	)		$	(7,126	)		$	(25,112	)		$	(20,100	)
Net loss per common share
Basic and diluted		$	(0.54	)		$	(0.66	)		$	(1.65	)		$	(1.87	)
Weighted average number of common shares outstanding
Basic and diluted			16,579				10,730				15,228				10,724

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Net loss		$	(9,020	)		$	(7,126	)		$	(25,112	)		$	(20,100	)
Other comprehensive income:
Unrealized (loss) gain on marketable securities			-				(12	)			-				-
Comprehensive loss		$	(9,020	)		$	(7,138	)		$	(25,112	)		$	(20,100	)

 

		Preferred Stock								Common Stock																				Treasury Stock
		Shares				Amount				Shares				Amount				Additional Paid-in Capital				Accumulated Deficit				Accumulated Other Comprehensive Income				Shares				Amount				Total
Balance - December 31, 2018			-			$	-				10,711			$	11			$	728,804			$	(657,647	)		$	-				-			$	(3,054	)		$	68,114
Net loss																							(6,537	)															(6,537	)
Vesting of restricted stock units											18																												-
Withholding tax payments related to net share settlements of restricted stock units																			(151	)																			(151	)
Stock-based compensation expense																			1,530																				1,530
Unrealized gain on marketable securities																											40												40
Balance - March 31, 2019			-			$	-				10,729			$	11			$	730,183			$	(664,184	)		$	40				-			$	(3,054	)		$	62,996
Net loss																							(6,437	)															(6,437	)
Stock-based compensation expense																			1,739																				1,739
Unrealized loss on marketable securities																											(28	)											(28	)
Balance - June 30, 2019			-			$	-				10,729			$	11			$	731,922			$	(670,621	)		$	12				-			$	(3,054	)		$	58,270
Net loss																							(7,126	)															(7,126	)
Stock-based compensation expense																			1,939																				1,939
Unrealized loss on marketable securities																											(12	)											(12	)
Balance - September 30, 2019			-			$	-				10,729			$	11			$	733,861			$	(677,747	)		$	-				-			$	(3,054	)		$	53,071

		Preferred Stock								Common Stock																				Treasury Stock
		Shares				Amount				Shares				Amount				Additional Paid-in Capital				Accumulated Deficit				Accumulated Other Comprehensive Income				Shares				Amount				Total
Balance - December 31, 2019			-			$	-				13,697			$	14			$	763,097			$	(685,122	)		$	-				-			$	(3,054	)		$	74,935
Net loss																							(6,534	)															(6,534	)
Stock-based compensation expense																			1,689																				1,689
Balance - March 31, 2020			-			$	-				13,697			$	14			$	764,786			$	(691,656	)		$	-				-			$	(3,054	)		$	70,090
Net loss																							(9,558	)															(9,558	)
Issuance of common stock and common stock warrants, net of issuance costs											3,172				3				20,243																				20,246
Modification of warrants																			1,112																				1,112
Stock-based compensation expense																			1,566																				1,566
Balance - June 30, 2020			-			$	-				16,869			$	17			$	787,707			$	(701,214	)		$	-				-			$	(3,054	)		$	83,456
Net loss																							(9,020	)															(9,020	)
Vesting of restricted stock units											35				-				-																				-
Exercise of common stock warrants											18				-				141																				141
Stock-based compensation expense																			1,148																				1,148
Balance - September 30, 2020			-			$	-				16,922			$	17			$	788,996			$	(710,234	)		$	-				-			$	(3,054	)		$	75,725

 

		Nine Months Ended
		September 30,
		2020				2019
Cash flows from operating activities:
Net loss		$	(25,112	)		$	(20,100	)
Adjustments to reconcile net loss to net cash used in operating activities:
Recognition of deferred revenue			-				(198	)
Depreciation			123				178
Amortization of debt discount			3				127
Stock-based compensation			4,403				5,208
Non-cash expense related to warrant modifications			1,112				-
Non-cash lease expense			535				741
Realized gain on investments			-				(75	)
Changes in:
Prepaid expenses and other current assets			645				389
Accounts payable			(982	)			(2,813	)
Collaboration and device development payable			(1,975	)			(830	)
Accrued expenses			1,053				(1,166	)
Operating lease liabilities			(581	)			(784	)
Other liabilities			-				119
Net cash used in operating activities			(20,776	)			(19,204	)
Cash flows from investing activities:
Proceeds from sale of marketable securities			-				13,988
Purchase of property and equipment			(27	)			(129	)
Net cash (used in) provided by investing activities			(27	)			13,859
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net of issuance costs			20,246				-
Proceeds from research and development funding arrangement			2,400				-
Proceeds from exercise of common stock warrants			141				-
Proceeds from Payroll Protection Program loan			547				-
Principle payments on Payroll Protection Program loan			(547	)			-
Principle payments on loans payable			(2,877	)			(820	)
Payment for taxes related to net share settlements of restricted stock units			-				(151	)
Net cash provided by (used in) financing activities			19,910				(971	)
Effect of exchange rate changes on cash and cash equivalents			671				(451	)
Net decrease in cash, cash equivalents, and restricted cash			(222	)			(6,767	)
Cash, cash equivalents, and restricted cash - beginning of period			22,732				11,358
Cash, cash equivalents, and restricted cash - end of period		$	22,510			$	4,591
Prepayment of insurance through 3rd party financing		$	1,056			$	708

 

Note 1 –

The Company and Description of Business

 

We are a clinical-stage, biopharmaceutical and medical device company focused on the development of novel therapeutics intended to address significant unmet medical needs in important acute care markets. Our development programs are primarily focused in the treatment of acute cardiovascular and pulmonary diseases. Our lead cardiovascular product candidate, istaroxime, a first-in-class, dual-acting agent being developed to improve cardiac function in patients with acute heart failure, or AHF, and early cardiogenic shock with a potentially differentiated safety profile from existing treatments. Istaroxime demonstrated significant improvement in both diastolic and systolic aspects of cardiac function and was generally well tolerated in two phase 2 clinical trials and has been granted Fast Track designation for the treatment of AHF by the U.S. Food and Drug Administration. We have also focused on developing AEROSURF (lucinactant for inhalation), a novel drug/medical device combination for non-invasive delivery of our proprietary aerosolized KL4 surfactant, using our proprietary Aerosol Delivery System, or ADS, technology for the treatment of respiratory distress syndrome in premature infants. Our licensee in Asia, Lee's Pharmaceutical (HK) Ltd., or Lee's (HK), will conduct the clinical development of AEROSURF in Asia. We are exploring potential licensing agreements with companies ex-Asia. We are also conducting a small pilot study of our proprietary KL4 surfactant for treatment of lung injury resulting from severe acute respiratory syndrome coronavirus 2, or SARS-CoV-2, the causative agent in novel coronavirus, or COVID-19, infections. Our other drug product candidates include rostafuroxin, a novel medicine for the treatment of hypertension, in patients with a specific genetic profile. We also have a number of pipeline preclinical product candidates that we are evaluating for progression into clinical development. These include evaluating and pursuing a number of early exploratory research programs to identify potential product candidates, including oral and intravenous SERCA 2a heart failure compounds and other product candidates utilizing our KL4 surfactant and ADS technologies.

 

In December 2018, we acquired CVie Investments Limited, or CVie Investments, an exempted company with limited liability incorporated under the laws of the Cayman Islands, which we refer to herein as the CVie Acquisition. Since the CVie Acquisition, we have operated CVie Investments, and its wholly-owned subsidiary, CVie Therapeutics, a Taiwan corporation organized under the laws of the Republic of China, as a subsidiary focused on the development of drug product candidates for cardiovascular diseases.

 

 In May 2020, upon completing a public financing and meeting listing requirements for The Nasdaq Stock Market LLC, our common stock began trading on the Nasdaq Capital Market.

 

The reader is referred to, and encouraged to read in its entirety, “Item 1 – Business” in our Annual Report on Form 10-K for the year ended December 31, 2019 that we filed with the Securities and Exchange Commission, or the SEC, on April 3, 2020, which contains a discussion of our business and business plans, as well as information concerning our proprietary technologies and our current and planned development programs. 

 

 

Note 2 –

Basis of Presentation

 

These interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or US GAAP, for interim financial information in accordance with the instructions to Form 10-Q and include accounts of Windtree Therapeutics, Inc. and its wholly-owned subsidiaries. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete consolidated financial statements. Intercompany balances and transactions have been eliminated in consolidation. All adjustments (consisting of normally recurring accruals) considered for fair presentation have been included. When necessary, prior year's condensed consolidated financial statements have been reclassified to conform to the current year presentation. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. There have been no changes to our significant accounting policies since December 31, 2019. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with annual audited consolidated financial statements and related notes as of and for the year ended December 31, 2019 contained in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

The interim unaudited condensed consolidated financial statements reflect the 1-for-3 reverse split of our common stock that was approved by our Board of Directors and controlling stockholders and made effective on April 29, 2020. All share and per share information data herein that relates to our common stock prior to the effective date has been retroactively restated to reflect the reverse stock split.

 

 

Note 3 –

Liquidity Risks and Management's Plans

 

We are subject to risks common to companies in the biotechnology industry, including but not limited to, the need for additional capital, risks of failure of preclinical and clinical studies, the need to obtain marketing approval and reimbursement for any drug product candidate that we may identify and develop, the need to successfully commercialize and gain market acceptance of our product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development of technological innovations by competitors, and reliance on third party manufacturers.

 

We have incurred net losses since inception. Our net loss was $9.0 million and $7.1 million, respectively, for the three-month periods ended September 30, 2020 and 2019. Our net loss was $25.1 million and $20.1 million, respectively, for the nine-month periods ended September 30, 2020 and 2019. We expect to continue to incur operating losses for at least the next several years. As of September 30, 2020, we had an accumulated deficit of $710.2 million. Our future success is dependent on our ability to identify and develop our product candidates, and ultimately upon our ability to attain profitable operations. We have devoted substantially all of our financial resources and efforts to research and development and general and administrative expense to support such research and development. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders' equity and working capital, and accordingly, our ability to execute our future operating plans.

 

In May 2020, we received net proceeds of approximately $20.2 million related to a public offering, or the May 2020 Offering, of 3,172,413 units, inclusive of 413,793 units related to a fully exercised over-allotment option, at a price per unit of $7.25. Each unit consisted of one share of our common stock and a warrant to purchase one share of common stock, or the Warrant. The Warrants are immediately exercisable for shares of common stock at a price of $7.975 per share and expire five years from the date of issuance.

 

 

In March 2020, we entered into a binding term sheet, or the Term Sheet, with Lee's (HK), pursuant to which Lee's (HK) will provide financing for the development of AEROSURF. In August 2020, we entered into a Project Financing Agreement with Lee's (HK), or the PF Agreement, dated and effective as of August 12, 2020, formalizing the terms of the Term Sheet, under which we have received payments of $2.8 million. Pursuant to the PF Agreement, Lee's (HK) agreed to pay additional amounts to be set forth in an updated development budget to be agreed between the parties by September 1, 2020 and updated every six months thereafter, to fund the continued development of AEROSURF and to be paid with the payment schedule to be set forth in each updated development budget. On November 12, 2020, Lee's (HK) provided notice of termination of the PF Agreement. Lee's (HK) will conduct clinical development of AEROSURF in Asia and we will wind-down our clinical development of AEROSURF. Lee's (HK) will fund an additional $1.0 million to us in 2021, repayable pursuant to the terms of the PF Agreement, for certain transition and analytical services to be provided by us with respect to the development of AEROSURF.

 

We believe that our cash and cash equivalents as of the filing of our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 are sufficient to fund operations through at least the next twelve months. In the future, we will need to raise additional capital to continue funding our operations. We plan to obtain funding through a combination of public or private equity offerings, or strategic transactions including collaborations, licensing arrangements or other strategic partnerships. There is inherent uncertainty associated with these fundraising activities, and thus they are not considered probable. 

 

Our funding requirements, however, are based on estimates that are subject to risks and uncertainties and may change as a result of many factors currently unknown. Although management continues to pursue the plans described above, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all, including as a result of market volatility following the COVID-19 pandemic. Until such time as we can generate substantial product revenues, if ever, we expect to finance our cash needs through a combination of equity offerings, strategic partnerships and licensing arrangements. The terms of any future financing may adversely affect the holdings or the rights of our existing stockholders.

 

 

Note 4 –

Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The interim unaudited condensed consolidated financial statements are prepared in accordance with US GAAP and include accounts of Windtree Therapeutics, Inc. and its wholly-owned subsidiaries, CVie Investments Limited, CVie Therapeutics Limited; and a presently inactive subsidiary, Discovery Laboratories, Inc. (formerly known as Acute Therapeutics, Inc.).

 

Goodwill and Intangible Assets

 

We record acquired identified intangibles, which includes intangible assets (such as goodwill and other intangibles), based on estimated fair value. The acquired in-process research and development, or IPR&D, assets are considered indefinite-lived intangible assets until completion or abandonment of the associated research and development efforts. IPR&D is not amortized but reviewed for impairment at least annually, or when events or changes in the business environment indicate the carrying value may be impaired. The following table represents identifiable intangible assets as of September 30, 2020 and December 31, 2019:

 

 

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in a business combination and is not amortized. It is reviewed for impairment at least annually or when events or changes in the business environment indicate its carrying value may be impaired. 

 

Foreign Currency Transactions

 

The functional currency for our foreign subsidiaries is US Dollars. We remeasure monetary assets and liabilities that are not denominated in the functional currency at exchange rates in effect at the end of each period. Gains and losses from the remeasurement of foreign currency transactions are recognized in other (expense) income, net. Foreign currency transactions resulted in losses of approximately $0.3 million and gains of approximately $0.1 million for the three-month periods ended September 30, 2020 and 2019. Foreign currency transactions resulted in losses of approximately $0.6 million and gains of approximately $0.4 million for the nine-month periods ended September 30, 2020 and 2019.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

Cash and cash equivalents are held at domestic and foreign financial institutions and consist of liquid investments, money market funds, and U.S. Treasury notes with a maturity from date of purchase of 90 days or less that are readily convertible into cash.

 

 

Severance

 

In July 2020, we entered into separation agreements with two executives, which provide that the former employees will be entitled to receive: (i) a severance amount equal to the sum of their respective base salaries then in effect and their respective annual target bonus amounts, payable in equal installments through August 2021 and (ii) subject to certain exceptions, a pro rata bonus commensurate with the bonus of other contract executives for the year 2020, prorated for the number of days of their respective employment during 2020, and payable at the time that other contract executives are paid bonuses with respect to 2020. The severance amount related to the departure of these executives is approximately $0.9 million, was accrued at the date of the separations, and will be paid ratably through August 2021. During the three months ended September 30, 2020, $0.2 million was paid.

 

Restructured Debt Liability – Contingent Milestone Payment

 

In conjunction with the November 2017 restructuring and retirement of long-term debt (see Note 8 – Restructured Debt Liability), we have established a $15.0 million long-term liability for contingent milestone payments potentially due under the Exchange and Termination Agreement dated as of October 27, 2017, or the Exchange and Termination Agreement, between ourselves and affiliates of Deerfield Management Company L.P., or Deerfield. The liability has been recorded at full value of the contingent milestones and will continue to be carried at full value until the milestones are achieved and paid or milestones are not achieved and the liability is written off as a gain on debt restructuring.

 

Research and Development

 

We account for research and development expense by the following categories: (a) product development and manufacturing, (b) medical and regulatory operations, and (c) direct preclinical and clinical development programs. Research and development expense includes personnel, facilities, manufacturing and quality operations, pharmaceutical and device development, research, clinical, regulatory, other preclinical and clinical activities and medical affairs. Research and development costs are charged to operations as incurred in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 730, Research and Development.

 

Net Loss per Common Share

 

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive securities outstanding for the period. As of September 30, 2020 and 2019, the number of shares of common stock potentially issuable upon the exercise of certain stock options and warrants was 9.8 million and 5.2 million shares, respectively. For the three and nine months ended September 30, 2020 and 2019, all potentially dilutive securities were anti-dilutive and therefore have been excluded from the computation of diluted net loss per share.

 

Income Taxes

 

We account for income taxes in accordance with ASC Topic 740, Accounting for Income Taxes, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities.

 

We use a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Because we have never realized a profit, management has fully reserved the net deferred tax asset since realization is not assured.

 

COVID-19

 

We are subject to risks and uncertainties as a result of the COVID-19 pandemic. As of the date of issuance of these interim unaudited condensed consolidated financial statements, our operations, capital and financial resources and overall liquidity position and outlook have not been materially impacted by COVID-19, while our operations have experienced delays, including in clinical study initiation and productivity. For example, certain of our ongoing clinical trials have experienced delays, including our phase 2 study of istaroxime for early cardiogenic shock in heart failure patients. In addition, travel restrictions and other COVID-19 mitigation efforts have impacted our business development activities with respect to out-licensing certain of our product candidates for which we are seeking partnership. The full extent, duration, or impact that the COVID-19 pandemic will have, directly or indirectly, on our financial condition and operations, including ongoing and planned clinical trials, will depend on future developments that are highly uncertain and cannot be accurately predicted. These potential future developments include new information that may emerge concerning the severity of the COVID-19 outbreak, including any regional resurgences in one or more markets where our current or intended clinical trial sites, our principal executive offices, research and development laboratories or other facilities are located, and the actions taken to contain it or treat its impact, which may include, among others, the timing and extent of governments reopening activities and the economic impact on local, regional, national, and international markets. The strategic re-implementation of mitigating COVID-19 measures in one or more markets where our clinical trial sites, principal executive offices, research and development laboratories or other facilities are located remains possible and we believe there could be further impact on the clinical development of our product candidates, which may include potential delays, halts or modifications to our ongoing and planned trials in the fourth quarter of 2020 and beyond.

 

We are not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities as of the date of issuance of these interim unaudited condensed consolidated financial statements. These estimates may change, as new events occur and additional information is obtained. Actual results may differ from these estimates under different assumptions or conditions and such differences may be material.

 

Recently Issued Accounting Standards

 

Recent Accounting Pronouncements

 

In December 2019, the FASB issued Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, or ASU 2019-12. ASU 2019-12 simplifies the accounting for income taxes by removing exceptions within the general principles of Topic 740 regarding the calculation of deferred tax liabilities, the incremental approach for intra-period tax allocation, and calculating income taxes in an interim period. In addition, the ASU adds clarifications to the accounting for franchise tax (or similar tax). which is partially based on income, evaluating tax basis of goodwill recognized from a business combination, and reflecting the effect of any enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The ASU is effective for fiscal years beginning after December 15, 2020 and will be applied either retrospectively or prospectively based upon the applicable amendments. Early adoption is permitted. We are still evaluating the impact this standard will have on our consolidated financial statements and related disclosures, but do not believe there will be a material impact upon adoption.

 

 

 

Note 5 –

Fair Value of Financial Instruments

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

 

	●	Level 1 – Quoted prices in active markets for identical assets and 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.

 

Fair Value on a Recurring Basis

 

The tables below categorize assets and liabilities measured at fair value on a recurring basis for the periods presented:

 

 

 

 

Note 6 –

Collaboration and Device Development Payable

 

Restructuring of the Battelle Payables

 

In March 2020, we entered into the first amendment to the December 2018 payment restructuring agreement, or the Amendment, with Battelle Memorial Institute, or Battelle, in which we agreed to amend the payment terms of two milestone payments previously due no later than January 2020. Under the Amendment, we agreed that (i) the first milestone payment would continue to be due upon enrollment of the first patient in the next AEROSURF clinical study but no later than April 15, 2020; and, (ii) the second milestone payment would continue to be due upon completion of technology transfer of our device manufacturing process for the phase 3 ADS to our new medical device manufacturer but no later than September 1, 2020. The Amendment was treated as a debt modification and, in accordance with debt modification accounting, no gain or loss was recognized.

 

In April 2020, we made the first milestone payment of $0.8 million to Battelle and announced enrollment of the first patient into the AEROSURF phase 2 bridging study. In September 2020, we made the final milestone payment of $0.8 million to Battelle.

 

 

Note 7 –

Loans Payable

 

Loans Payable – Current Portion

 

Loan payable to Bank Direct Capital Finance

 

In May 2019, we entered into an insurance premium financing and security agreement with Bank Direct Capital Finance, or Bank Direct. Under the agreement, we financed $0.7 million of certain premiums at a 5.35% annual interest rate. As of December 31, 2019, the outstanding principal of the loan was $0.2 million. The balance of the loan was repaid during the quarter ended March 31, 2020.

 

In June 2020, we entered into an insurance premium financing and security agreement with Bank Direct. Under the agreement, we financed $1.1 million of certain premiums at a 4.26% annual interest rate. Payments of approximately $117,000 are due monthly from July 2020 through March 2021. As of September 30, 2020, the outstanding principal of the loan was $0.7 million.

 

 

Loans Payable – Non-current Portion

 

Assumption of bank debt as part of the CVie Acquisition

 

In September 2016, CVie Therapeutics Limited entered into a 12-month revolving credit facility of approximately $2.9 million with O-Bank Co., Ltd., or O-Bank, to finance operating activities, or the O-Bank Facility. The O-Bank Facility was later renewed and increased to approximately $5.8 million in September 2017. The O-Bank Facility is guaranteed by Lee's Pharmaceutical Holdings Limited, or Lee's, which pledged bank deposits in the amount of 110% of the actual borrowing amount. Interest, payable in cash on a monthly basis, is determined based on the 90-day Taipei Interbank Offer Rate, or TAIBOR, plus 0.91%. The O-Bank Facility expired on September 11, 2019 and the loans were set to mature six months after the expiration date, on March 11, 2020. In March 2020, the O-Bank Facility was amended, among other things, to extend the maturity date to March 2022, to decrease the total amount of the O-Bank Facility to approximately $5.0 million, to change the applicable interest rate to the TAIBOR plus 1.17% and to adjust the term to 24-month non-revolving.

 

As of September 30, 2020 and December 31, 2019, the outstanding principal of the O-Bank Facility was approximately $2.4 million and $4.6 million, respectively. In the second quarter of 2020, we were informed by Lee's of their desire to reduce the amount of pledged bank deposits with O-Bank by 50%. To remain in compliance with the terms of the O-Bank Facility, we repaid approximately $2.3 million of the outstanding principal in August 2020. In November 2020, Lee's committed to maintain the required level of pledged bank deposits with O-Bank through the date of full repayment of the O-Bank Facility.

 

 

Note 8 –

Restructured Debt Liability

 

On November 1, 2017, we and Deerfield entered into the Exchange and Termination Agreement pursuant to which (i) promissory notes evidencing a loan with affiliates of Deerfield in the aggregate principal amount of $25.0 million and (ii) warrants to purchase up to 8,333 shares of our common stock at an exercise price of $2,360.40 per share held by Deerfield were cancelled in consideration for (i) a cash payment in the aggregate amount of $2.5 million, (ii) 23,703 shares of common stock, representing 2% of fully-diluted shares outstanding (as defined in the Exchange and Termination Agreement) on the closing date, and (iii) the right to receive certain milestone payments based on achievement of specified AEROSURF development and commercial milestones, which, if achieved, could potentially total up to $15.0 million. In addition, a related security agreement, pursuant to which Deerfield held a security interest in substantially all of our assets, was terminated. We established a $15.0 million long-term liability for the contingent milestone payments potentially due to Deerfield under the Exchange and Termination Agreement (see Note 5 – Accounting Policies and Recent Accounting Pronouncements). The liability has been recorded at full value of the contingent milestones and will continue to be carried at full value until the milestones are achieved and paid or milestones are not achieved and the liability is written off as a gain on debt restructuring.

 

As of September 30, 2020 and December 31, 2019, the restructured debt liability balance was $15.0 million.

 

 

Note 9 –

Stockholders' Equity

 

Warrant Amendments

 

On April 24, 2020, we and each of the holders of our Series F Warrants dated as of December 24, 2018, or the Series F Warrants, entered into Amendment No. 1 to the Series F Warrant to Purchase Common Stock whereby the expiration date of the Series F Warrants was extended from June 24, 2020 to December 24, 2020 in consideration for the holders agreeing to be bound by a lock-up provision with respect to any shares of our common stock or securities convertible, exchangeable or exercisable into shares of our common stock that are beneficially owned, held or acquired by the holders. The lock-up provision provides that the holders will not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of any shares of our common stock or securities convertible, exchangeable or exercisable into shares of our common stock that are beneficially owned, held or acquired by the holders for a period of 90 days following the earlier of (i) the closing date of our next public offering of securities, or (ii) December 24, 2020. The lock-up provision commenced on May 22, 2020 upon closing of the May 2020 Offering discussed below and has expired.

 

On May 6, 2020, we and certain holders of our Series I Warrants dated as of December 6, 2019, or the Series I Warrants, entered into Amendment No. 1 to the Series I Warrant to Purchase Common Stock pursuant to which the exercise price of the Series I Warrants was amended from $12.09 to $9.67 if the Series I Warrants are exercised, in whole or in part, prior to December 5, 2021. In addition, the certain holders of the Series I Warrants agreed to be bound by a lockup provision with respect to any shares of our common stock or securities convertible, exchangeable or exercisable into shares of our common stock that are beneficially owned, held or acquired by such holders for a period of 90 days following the earlier of (i) the closing date of our next public offering of securities, or (ii) December 24, 2020. During the lock-up period, the certain holders of the Series I Warrants will not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of any shares of our common stock or securities convertible, exchangeable or exercisable into shares of our common stock. The lock-up provision commenced on May 22, 2020 upon closing of the May 2020 Offering discussed below and has expired.

 

While there is no specific guidance that addresses the modification of an equity-classified contract, such as the amendments to the Series F Warrants and the Series I Warrants, it is the practice to determine the accounting for such modifications based on analogy to the share-based compensation guidance. The model for a modified share-based payment award that is classified as equity and remains classified in equity after the modification is addressed in ASC 718-20, Compensation – Stock Compensation, or ASC 718-20. Pursuant to that guidance, the incremental fair value from the modification (the change in the fair value of the instrument before and after the modification) is recognized as an expense in the income statement to the extent the modified instrument has a higher fair value. 

 

For the Series F Warrants, the amendment to the terms related to a six-month extension of the expiration date and the incremental fair value from the modification was determined by comparing the Black-Scholes value before and after the modification. The amendment to the Series I Warrants related to a reduced exercise price for an 18-month period and the reversion after that period to the initial exercise price. As a result, the incremental fair value was determined by comparing the Black-Scholes value before the modification to a Monte Carlo valuation after the modification.

 

We have determined, based on the guidance in ASC 718-20 and our valuation of the Series F Warrants and the Series I Warrants, that the incremental fair value resulting from the modifications is $1.1 million, which was recorded as an increase to equity, with a corresponding expense recognized in the interim unaudited condensed consolidated statement of operations as other expense.

 

 

May 2020 Public Offering

 

On May 20, 2020, we entered into an underwriting agreement, or the Underwriting Agreement, with Ladenburg Thalmann & Co. Inc., or Ladenburg, as representative for the several underwriters named therein, or collectively, the Underwriters, relating to the May 2020 Offering for an aggregate of 2,758,620 units with each unit consisting of one share of our common stock and a Warrant. The Warrants are immediately exercisable for shares of common stock at a price of $7.975 per share and expire five years from the date of issuance. The shares of common stock and the Warrants were immediately separable and were issued separately in the May 2020 Offering.

 

In addition, we granted the Underwriters a 45-day option, or the Overallotment Option, to purchase up to 413,793 additional shares of common stock and/or Warrants to purchase up to 413,793 additional shares of common stock, which such Overallotment Option was exercised in full.

 

The closing of the May 2020 Offering occurred on May 22, 2020, inclusive of the Overallotment Option. The offering price to the public was $7.25 per unit. After deducting underwriting discounts and commissions and offering expenses of $2.8 million payable by us, and excluding the proceeds, if any, from the exercise of the Warrants issued pursuant to this May 2020 Offering, the net proceeds to us were approximately $20.2 million.

 

We have determined that the appropriate accounting treatment under ASC 480, Distinguishing Liabilities from Equity, or ASC 480, is to classify the common stock and the Warrants issued in the May 2020 Offering as equity. We have also determined that the Warrants are not in their entirety a derivative under the scope of ASC 815, Derivatives and Hedging, or ASC 815, due to the scope exception under ASC 815-10-15-74, nor are there any material embedded derivatives that require separate accounting. We allocated the net proceeds from the May 2020 Offering based on the relative fair value of the common stock and the Warrants.

 

At-The-Market Program

 

On September 17, 2020, we entered into an At-The-Market Offering Agreement with Ladenburg, pursuant to which we may offer and sell, from time to time at our sole discretion, up to a maximum of $10.0 million of shares of our common stock through Ladenburg as agent and/or principal through an at-the-market program, or the ATM Program. We are not obligated to make any sales under the ATM Program, and as of November 16, 2020, we have not sold any shares under the ATM Program. If we issue a sale notice to Ladenburg, we will designate the maximum amount of shares to be sold by Ladenburg daily and the minimum price per share at which shares may be sold. Ladenburg may sell shares by any method permitted by law deemed to be an "at-the-market offering" as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, or in privately negotiated transactions. Sales under the ATM Program will be made pursuant to our "shelf" registration statement on Form S-3 (No. 333-248874) filed with the SEC on September 17, 2020, and declared effective on September 29, 2020, including the base prospectus and the ATM Prospectus filed therein, or the Universal Shelf. 

 

Either party may suspend the offering under the ATM Program by notice to the other party. The ATM Program will terminate upon the earlier of (i) the sale of all shares subject to the ATM Program or (ii) termination of the ATM Program in accordance with its terms. Either party may terminate the ATM Program at any time upon five business days' prior written notification to the other party in accordance with the related agreement.

 

We agreed to pay Ladenburg a commission of 3% of the gross sales price of any shares sold pursuant to the ATM Program. The rate of compensation will not apply when Ladenburg acts as principal. We also agreed to reimburse Ladenburg for the fees and disbursements of its counsel in an amount not to exceed $50,000, in addition to certain ongoing disbursements of its legal counsel up to $3,000 per calendar quarter.

 

 

Note 10 –

Stock Options and Stock-Based Employee Compensation

 

We recognize in our condensed consolidated financial statements all stock-based awards to employees and non-employee directors based on their fair value on the date of grant, calculated using the Black-Scholes option-pricing model. Compensation expense related to stock-based awards is recognized ratably over the vesting period, which for employees is typically three years. We recognize restricted stock unit awards to employees and non-employee directors based on their fair value on the date of grant. Compensation expense related to restricted stock unit awards is recognized ratably over the vesting period, which typically has been between approximately six to 18 months.

 

A summary of activity under our long-term incentive plan is presented below:

 

 

During the nine months ended September 30, 2020, 35,000 restricted stock units vested. As of September 30, 2020, there were no unvested restricted stock units.

 

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula based on the following weighted average assumptions: 

 

 

The table below summarizes the total stock-based compensation expense included in the interim unaudited condensed consolidated statements of operations for the periods presented:

 

 

 

Note 11 –

Collaboration, Licensing and Research Funding Agreements

 

In March 2020, we entered into the Term Sheet with Lee's (HK), pursuant to which Lee's (HK) will provide financing for the development of AEROSURF and in August 2020, we entered into the PF Agreement with Lee's (HK), under which we have received payments of $2.4 million as of September 30, 2020. We received the final payment under the agreement of $0.4 million in October 2020. Pursuant to the PF Agreement, Lee's (HK) agreed to pay additional amounts to be set forth in an updated development budget to be agreed between the parties by September 1, 2020 and updated every six months thereafter, to fund the continued development of AEROSURF and to be paid with the payment schedule to be set forth in each updated development budget. On November 12, 2020, Lee's (HK) provided notice of termination of the PF Agreement. Lee's (HK) will conduct clinical development of AEROSURF in Asia and we will wind-down our clinical development of AEROSURF. Lee's (HK) will fund an additional $1.0 million to us in 2021, repayable pursuant to the terms of the PF Agreement, for certain transition and analytical services to be provided by us with respect to the development of AEROSURF.

 

To repay the funds provided under the terms of the PF Agreement, until such time as we have repaid 125% of the amounts funded by Lee's (HK) for the development of AEROSURF, we will pay to Lee's (HK) 50% of all revenue amounts and payments received by us for any sale, divestiture, license or other development and/or commercialization of the KL4/AEROSURF patent portfolio, excluding (i) payments for bona fide research and development services; (ii) reimbursement of patent expenses and (iii) all amounts paid to us under the License, Development and Commercialization Agreement between us and Lee's (HK) dated as of June 12, 2017, as amended, or the License Agreement, minus certain deductions and certain reductions for any payments made by us with respect to third party intellectual property not previously funded by Lee's (HK).

 

We have determined that the Term Sheet is within the scope of ASC 730-20, Research and Development Arrangements, or ASC 730-20. We concluded that there has not been a substantive and genuine transfer of risk related to the Term Sheet as there is a presumption that we are obligated to repay Lee's (HK) based on the significant related party relationship that exists at the time the parties entered into the Term Sheet, including Lee's (HK)'s approximate 29% ownership of the outstanding shares of our common stock.

 

We have determined that the appropriate accounting treatment under ASC 730-20 is to record the proceeds received from Lee's (HK) as cash and cash equivalents, as we have the ability to direct the usage of funds, and a long-term liability on our condensed consolidated balance sheet when received. The liability will remain on the balance sheet until we repay such amounts as a result of any revenues and payments received by us for any sale, divestiture, license or other development and/or commercialization of the KL4/AEROSURF patent portfolio.

 

We have also determined that the Term Sheet is not in its entirety a derivative under the scope of ASC 815, due to the scope exception under ASC 815-10-15-59, nor are there any embedded derivatives that require separate accounting.

 

As of September 30, 2020, the liability balance related to the non-refundable payment was $2.4 million and is recorded in other liabilities.

 

 

 

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

 

Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing activities, includes forward-looking statements that involve risks, uncertainties and assumptions. These statements are based on our beliefs and expectations about future outcomes and are subject to risks and uncertainties that could cause our actual results to differ materially from anticipated results. We undertake no obligation to publicly update these forward-looking statements, whether as a result of new information, future events or otherwise. The reader should review the Forward-Looking Statements section, any risk factors discussed elsewhere in this Quarterly Report on Form 10-Q, which are in addition to and supplement the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 that we filed with the Securities and Exchange Commission, or SEC, on April 3, 2020, our Quarterly Reports on Form 10-Q filed thereafter, and our other filings with the SEC, and any amendments thereto, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis or elsewhere in this Quarterly Report on Form 10-Q.

 

This Management's Discussion and Analysis, or MD&A, is provided as a supplement to the accompanying interim unaudited Condensed Consolidated Financial Statements (including the notes thereto) to help provide an understanding of our financial condition and changes in our financial condition and our results of operations. This item should be read in connection with our accompanying interim unaudited Condensed Consolidated Financial Statements (including the notes thereto) and our Annual Report on Form 10-K for the year ended December 31, 2019. Unless otherwise specified, references to Notes in this MD&A shall refer to the Notes to Condensed Consolidated Financial Statements (unaudited) in this Quarterly Report on Form 10-Q.

 

OVERVIEW

 

We are a clinical-stage, biopharmaceutical and medical device company focused on the development of novel therapeutics intended to address significant unmet medical needs in important acute care markets. Our development programs are primarily focused in the treatment of acute cardiovascular and pulmonary diseases. Our lead cardiovascular product candidate istaroxime, a first-in-class, dual-acting agent being developed to improve cardiac function in patients with acute heart failure, or AHF, and early cardiogenic shock with a potentially differentiated safety profile from existing treatments. Istaroxime demonstrated significant improvement in both diastolic and systolic aspects of cardiac function and was generally well tolerated in two phase 2 clinical trials and has been granted Fast Track designation for the treatment of AHF by the U.S. Food and Drug Administration, or FDA. We have also focused on developing AEROSURF (lucinactant for inhalation), a novel drug/medical device combination for non-invasive delivery of our proprietary aerosolized KL4 surfactant, using our proprietary aerosol delivery system, or ADS, technology for the treatment of respiratory distress syndrome, or RDS, in premature infants. Our licensee in Asia, Lee's Pharmaceutical (HK) Ltd., or Lee's (HK), will conduct the development of AEROSURF in Asia. We are exploring potential licensing agreements with companies ex-Asia. We are conducting a small pilot study of our proprietary KL4 surfactant for the treatment of lung injury resulting from severe novel coronavirus, or COVID-19, infections. Our other drug product candidates include rostafuroxin, a novel medicine for the treatment of hypertension in patients with a specific genetic profile. We also have a number of pipeline preclinical product candidates that we are evaluating for progression into clinical development. These include evaluating and pursuing a number of early exploratory research programs to identify potential product candidates, including oral and intravenous SERCA 2a heart failure compounds and other product candidates utilizing our KL4 surfactant and ADS technologies.

 

Business and Program Updates

 

The reader is referred to, and encouraged to read in its entirety, Item 1 – Business in our Annual Report on Form 10-K for the year ended December 31, 2019 that we filed with the SEC on April 3, 2020, which contains a discussion of our business and business plans, as well as information concerning our proprietary technologies and our current and planned development programs. 

 

Istaroxime (AHF)

 

In April 2020, we announced the presentation at the American College of Cardiology 2020 virtual meeting of a new subset analysis from a phase 2b study of istaroxime in patients hospitalized with AHF. We previously presented the overall results of the study where the primary endpoint demonstrated a significant improvement (p<0.05) in cardiac function at both istaroxime study doses. This post-hoc analysis characterized the responses between Caucasian and Asian patients. The istaroxime dose of 0.5 µg/kg/min produced a similar response on E/e', the primary study endpoint, and stroke volume index, an important measure of cardiac performance, in Asian and Caucasian patients. 

 

Istaroxime (Early Cardiogenic Shock)

 

We have initiated the study of istaroxime for the treatment of early cardiogenic shock in patients with severe heart failure, a presentation of heart failure characterized by very low blood pressure and hypo-perfusion to critical organs which is associated with high mortality and morbidity and is not well treated with current therapies. We believe istaroxime may fulfill an unmet need in early cardiogenic shock based on the profile observed in our phase 2 clinical studies in AHF. Because of the unmet need in the treatment of early cardiogenic shock, we believe there may be an opportunity with a breakthrough therapy designation, which may provide an expedited development program. Receipt of either Fast Track or breakthrough therapy designation may increase the likelihood of receiving priority review of a marketing application, which would provide for an expedited review timeframe.

 

In October 2020, we announced that we had dosed the first patient in our phase 2 study of istaroxime for the acute treatment of early cardiogenic shock in heart failure patients to evaluate the potential to improve blood pressure and organ perfusion. The study will also evaluate the safety and side effect profile of istaroxime in this patient population. Due to the current global outbreak of COVID-19 and its effect on hospital intensive care units, the location of this study, and the study staff and resources, our study has been impacted and we have experienced some delays in anticipated timelines and milestones.

 

 

AEROSURF (lucinactant for inhalation)

 

In April 2020, as part of the phase 2 clinical program, we enrolled the first patient and commenced our small, approximately 90-patient, phase 2b bridging study in premature infants with RDS to prepare to transition to a phase 3 clinical program by demonstrating the performance of our new ADS, in the neonatal intensive care unit as well as a more intensive dosing regimen. The AEROSURF phase 2b bridging study is a multicenter, randomized, controlled study with masked treatment assignment in up to 90 premature infants 26 to 32 weeks gestational age receiving nasal continuous airway pressure, or nCPAP, for RDS. The trial will leverage the favorable safety profile from the previous phase 2 studies to evaluate higher and more frequent dosing of aerosolized KL4 surfactant compared to premature infants receiving standard care of nCPAP alone. The trial will utilize the new ADS and bridge to data generated in the phase 2 program utilizing a prototype device on the following endpoints: time to nCPAP failure (the need for intubation and delayed surfactant therapy), incidence of nCPAP failure and physiological parameters indicating the effectiveness of lung function. In June 2020, we announced that all initial European trial sites were active and enrolling or able to enroll patients into the phase 2b bridging study. Most recently, the European study sites were affected by increased rates of COVID-19, which has impacted key study personnel, and resulted in periodic holds on screenings for new patients and dosing. Following termination of the PF Agreement (as defined below), these European trial sites will no longer enroll patients and Lee's (HK) will conduct a clinical trial in Asia. As a result, Asia will be the only location to complete the phase 2b bridging study. Lee's (HK) will conduct, fund and execute the AEROSURF phase 2b bridging study while we focus on the study of lucinactant to prevent lung injury in patients with COVID-19, as described below.  

 

Lyophilized KL4 Surfactant – Lung Injury and Other Studies

 

We are initiating a study of our proprietary KL4 surfactant for the treatment of lung injury resulting from severe COVID-19 infection. In September 2020, the FDA accepted our investigational new drug, or IND, application for a phase 2 clinical trial to assess the ability of our proprietary KL4 surfactant to impact key respiratory parameters in ventilated COVID-19 patients. The small pilot study will evaluate changes in physiological parameters in patients who are intubated and mechanically ventilated for COVID-19 associated lung injury and acute respiratory distress syndrome, or ARDS. The study will evaluate the dosing regimen, tolerability, and functional changes in gas exchange and lung compliance after KL4 surfactant administration. We plan to enroll up to 20 patients with COVID-19 and ARDS, who are on mechanical ventilation, from four to five U.S. sites. We plan to start the study during the fourth quarter of 2020. We applied to the Biomedical Advanced Research and Development Authority, or BARDA, requesting funding for our development plans of KL4 surfactant in COVID-19 patients and we were granted a meeting to review our proposal with BARDA representatives. With the acceptance of the IND by the FDA and planned start of the trial, we plan to reengage with the federal government on the program. There is no assurance that we will receive funding from BARDA.

 

Impact of COVID-19

 

The COVID-19 pandemic continues to evolve, and we are closely monitoring the situation, including its potential impact on our clinical development plans and timelines. As of the date of the filing of this Quarterly Report on Form 10-Q, however, our operations, capital and financial resources and overall liquidity position and outlook have not been materially impacted by COVID-19, while our operations have experienced delays, including in clinical study initiation and early productivity. For example, certain of our ongoing clinical trials have experienced delays, including our phase 2 study of istaroxime for early cardiogenic shock in heart failure patients. In addition, travel restrictions and other COVID-19 mitigation efforts have impacted our business development activities with respect to out-licensing certain of our product candidates for which we are seeking partnership. The full extent, duration, or impact that the COVID-19 pandemic will have, directly or indirectly, on our financial condition and operations, including ongoing and planned clinical trials, will depend on future developments that are highly uncertain and cannot be accurately predicted. These potential future developments include new information that may emerge concerning the severity of the COVID-19 outbreak, including any regional resurgences in one or more markets where our current or intended clinical trial sites, our principal executive offices, research and development laboratories or other facilities are located, and the actions taken to contain it or treat its impact, which may include, among others, the timing and extent of governments reopening activities and the economic impact on local, regional, national, and international markets. The strategic re-implementation of mitigating COVID-19 measures in one or more markets where our clinical trial sites, principal executive offices, research and development laboratories or other facilities are located remains possible and we believe there could be further impact on the clinical development of our product candidates, which may include potential delays, halts or modifications to our ongoing and planned trials in the fourth quarter of 2020 and beyond.

 

CRITICAL ACCOUNTING POLICIES

 

There have been no changes to our critical accounting policies since December 31, 2019. For a discussion of our accounting policies, see Note 4 – Summary of Significant Accounting Policies and, in the Notes to Consolidated Financial Statements (Notes) in our Annual Report on Form 10-K for the year ended December 31, 2019, Note 5 – Accounting Policies and Recent Accounting Pronouncements. Readers are encouraged to review those disclosures in conjunction with this Quarterly Report on Form 10-Q.

 

RESULTS OF OPERATIONS

 

Operating Loss and Net Loss

 

The operating loss for the three months ended September 30, 2020 and 2019 was $8.7 million and $7.2 million, respectively. The increase in operating loss from 2019 to 2020 was due to a $1.5 million increase in operating expenses.

 

The operating loss for the nine months ended September 30, 2020 and 2019 was $23.4 million and $20.3 million, respectively. The increase in operating loss from 2019 to 2020 was due to a $2.8 million increase in operating expenses and a $0.2 million decrease in license revenue with affiliate.

 

The net loss for the three months ended September 30, 2020 and 2019 was $9.0 million and $7.1 million, respectively. The net loss for the nine months ended September 30, 2020 and 2019 was $25.1 million and $20.1 million, respectively. Included in the net loss for the three and nine months ended September 30, 2020 is $1.1 million in non-cash expenses related to the modification of certain warrants.

 

 

Research and Development Expenses

 

Our research and development expenses are charged to operations as incurred and we account for such costs by category rather than by project. As many of our research and development activities likely form the foundation for the potential development of multiple product candidates, including istaroxime, our KL4 surfactant and drug delivery technologies, and rostafuroxin, they are expected to benefit more than a single project. For that reason, we cannot reasonably estimate the costs of our research and development activities on a project-by-project basis. We believe that tracking our expenses by category is a more accurate method of accounting for these activities. Our research and development costs consist primarily of expenses associated with (a) product development and manufacturing, (b) clinical, medical and regulatory operations, and (c) direct preclinical and clinical development programs. We also account for research and development and report annually by major expense category as follows: (i) salaries and benefits, (ii) contracted services, (iii) raw materials, aerosol devices and supplies, (iv) rents and utilities, (v) depreciation, (vi) contract manufacturing, (vii) travel, (viii) stock-based compensation and (ix) other.

 

Research and development expenses by category are as follows: 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)		2020				2019				2020				2019
Product development and manufacturing		$	1,002			$	1,165			$	3,610			$	3,262
Clinical, medical and regulatory operations			1,591				1,734				5,009				5,339
Direct preclinical and clinical programs			1,289				893				3,219				1,946
Total research and development expenses		$	3,882			$	3,792			$	11,838			$	10,547

 

Research and development expenses include non-cash charges associated with stock-based compensation and depreciation of $0.3 million and $0.6 million, respectively, for the three months ended September 30, 2020 and 2019 and $1.7 million and $1.7 million, respectively, for the nine months ended September 30, 2020 and 2019.

 

Product Development and Manufacturing

Product development and manufacturing includes (i) manufacturing operations, both in-house and with contract manufacturing organizations, validation activities, quality assurance and analytical chemistry capabilities that support the manufacture of our drug products used in research and development activities, and our medical devices, including our ADS, (ii) design and development activities related to our ADS for use in our AEROSURF clinical development program; and (iii) pharmaceutical and manufacturing development activities of our drug product candidates including development of istaroxime, lyophilized KL4 surfactant, and rostafuroxin. These costs include employee expenses, facility-related costs, depreciation, costs of drug substances (including raw materials), supplies, quality control and assurance activities, analytical services, and expert consultants and outside services to support pharmaceutical and device development activities.

 

Product development and manufacturing expenses decreased $0.2 million for the three months ended September 30, 2020 compared to the same period in 2019 due to a decrease in analytical testing costs related to our AEROSURF clinical development program. Product development and manufacturing expenses increased $0.3 million for the nine months ended September 30, 2020 compared to the same period in 2019 due to a $0.4 million purchase of raw materials during the second quarter of 2020, partially offset by a decrease in analytical testing costs related to our AEROSURF clinical development program.

 

Clinical, Medical and Regulatory Operations

 

Clinical, medical and regulatory operations include (i) medical, scientific, preclinical and clinical, regulatory, data management and biostatistics activities in support of our research and development programs; and (ii) medical affairs activities to provide scientific and medical education support for our KL4 surfactant and aerosol delivery systems under development. These costs include personnel, expert consultants, outside services to support regulatory and data management, symposiums at key medical meetings, facilities-related costs, and other costs for the management of clinical trials.

 

Clinical, medical and regulatory operations expenses decreased $0.1 million for the three months ended September 30, 2020 compared to the same period in 2019 due to a decrease of $0.2 million in non-cash, stock compensation expense, partially offset by an increase of $0.1 million in personnel costs. Clinical, medical and regulatory operations expenses decreased $0.3 million for the nine months ended September 30, 2020 compared to the same period in 2019 due to (i) a decrease of $0.2 million in personnel and travel costs and (ii) a decrease of $0.2 million in employee-related incentive bonus expense, partially offset by (iii) an increase of $0.1 million in non-cash, stock compensation expense.

 

Direct Preclinical and Clinical Development Programs

 

Direct preclinical and clinical development programs include: (i) development activities, toxicology studies and other preclinical studies; and (ii) activities associated with conducting clinical trials, including patient enrollment costs, clinical site costs, clinical device and drug supply, and related external costs, such as consultant fees and expenses.

 

Direct preclinical and clinical development programs expenses increased $0.4 million and $1.3 million, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in 2019 due to an increase in costs related to our continued clinical development of istaroxime and AEROSURF.

 

General and Administrative Expenses

 

		Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)		2020				2019				2020				2019
General and administrative expenses		$	4,823			$	3,395			$	11,518			$	9,990

 

General and administrative expenses consist of costs for executive management, business development, intellectual property, finance and accounting, legal, human resources, information technology, facility, and other administrative costs.

 

 

General and administrative expenses increased $1.4 million and $1.5 million, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in 2019 due to (i) an increase of $1.0 million and $1.8 million, respectively, in professional fees, taxes, and insurance and (ii) severance costs of $0.8 million and $0.9 million, respectively, (iii) an increase of $0.1 million and a decrease of $0.4 million, respectively, in employee-related incentive bonus expense, partially offset by (iv) a decrease of $0.5 million and $0.8 million, respectively, in non-cash, stock compensation expense.

 

Other (Expense) Income

 

		Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)		2020				2019				2020				2019
Interest income			21				25				115				124
Interest expense			(46	)			(105	)			(121	)			(358	)
Other (expense) income, net			(290	)			141				(1,750	)			473
Total other (expense) income, net		$	(315	)		$	61			$	(1,756	)		$	239

 

Interest income relates to interest on our money market account and U.S. Treasury notes.

 

For the three and nine months ended September 30, 2020 and 2019, interest expense consists of interest expense associated with the collaboration and device development payables and with the loans payable. The decrease of $0.1 million and $0.2 million, respectively, in interest expense for the three and nine months ended September 30, 2020 to the comparable periods in 2019 is related to the repayment of $2.1 million in loans payable during the year ended December 31, 2019.

 

For the three months ended September 30, 2020, other (expense) income, net primarily consists of losses on foreign currency translation of $0.3 million. For the nine months ended September 30, 2020, other (expense) income, net primarily consists of $1.1 million in non-cash expenses related to the modification of certain warrants and losses on foreign currency translation of $0.6 million.

 

For the three and nine months ended September 30, 2019, other (expense) income, net primarily consists of $0.1 million and $0.4 million, respectively, in gains on foreign currency translation.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We are subject to risks common to companies in the biotechnology industry, including but not limited to, the need for additional capital, risks of failure of preclinical and clinical studies, the need to obtain marketing approval and reimbursement for any drug product candidate that we may identify and develop, the need to successfully commercialize and gain market acceptance of our product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development of technological innovations by competitors, and reliance on third party manufacturers.

 

We have incurred net losses since inception. Our net loss was $9.0 million and $7.1 million, respectively, for the three-month periods ended September 30, 2020 and 2019. Our net loss was $25.1 million and $20.1 million, respectively, for the nine-month periods ended September 30, 2020 and 2019. We expect to continue to incur operating losses for at least the next several years. As of September 30, 2020, we had an accumulated deficit of $710.2 million. Our future success is dependent on our ability to identify and develop our product candidates, and ultimately upon our ability to attain profitable operations. We have devoted substantially all of our financial resources and efforts to research and development and general and administrative expense to support such research and development. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders' equity and working capital, and accordingly, our ability to execute our future operating plans.

 

In May 2020, we received net proceeds of approximately $20.2 million related to a public offering, or the May 2020 Offering, of 3,172,413 units, inclusive of 413,793 units related to a fully exercised over-allotment option, at a price per unit of $7.25. Each unit consisted of one share of our common stock and a warrant to purchase one share of common stock, or the Warrant. The Warrants are immediately exercisable for shares of common stock at a price of $7.975 per share and expire five years from the date of issuance.

 

In March 2020, we entered into a binding term sheet, or the Term Sheet, with Lee's (HK), pursuant to which Lee's (HK) will provide financing for the development of AEROSURF and in August 2020, we entered into a Project Financing Agreement with Lee's (HK), or the PF Agreement, under which we have received payments of $2.8 million. Pursuant to the PF Agreement, Lee's (HK) agreed to pay additional amounts to be set forth in an updated development budget to be agreed between the parties by September 1, 2020 and updated every six months thereafter, to fund the continued development of AEROSURF and to be paid with the payment schedule to be set forth in each updated development budget. On November 12, 2020, Lee's (HK) provided notice of termination of the PF Agreement. Lee's (HK) will conduct clinical development of AEROSURF in Asia and we will wind-down our clinical development of AEROSURF. Lee's (HK) will fund an additional $1.0 million to us in 2021, repayable pursuant to the terms of the PF Agreement, for certain transition and analytical services to be provided by us with respect to the development of AEROSURF.

 

We believe that our cash and cash equivalents as of the filing of our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 are sufficient to fund operations through at least the next twelve months. In the future, we will need to raise additional capital to continue funding our operations. We plan to obtain funding through a combination of public or private equity offerings, or strategic transactions including collaborations, licensing arrangements or other strategic partnerships. There is inherent uncertainty associated with these fundraising activities, and thus they are not considered probable. 

 

Our funding requirements, however, are based on estimates that are subject to risks and uncertainties and may change as a result of many factors currently unknown. Although management continues to pursue the plans described above, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all, including as a result of market volatility following the COVID-19 pandemic. Until such time as we can generate substantial product revenues, if ever, we expect to finance our cash needs through a combination of equity offerings, strategic partnerships and licensing arrangements. The terms of any future financing may adversely affect the holdings or the rights of our existing stockholders.

 

 

Cash Flows

 

Cash outflows for the nine months ended September 30, 2020 consist of $20.8 million used in ongoing operating activities and $19.9 million provided by financing activities. Cash outflows for the nine months ended September 30, 2019 consist of $19.2 million used in ongoing operating activities and $1.0 million used in financing activities, offset by cash inflows for the nine months ended September 30, 2019 of $13.9 million for investing activities.

 

Operating Activities

 

Net cash used in operating activities for the nine months ended September 30, 2020 and 2019 was $20.8 million and $19.2 million, respectively. Net cash used in operating activities is a result of our net losses for the period, adjusted for non-cash items and changes in working capital. The increase in net cash used in operating activities from 2019 to 2020 is due to (i) a $5.0 million increase in net loss for the nine months ended September 30, 2020 compared to the same period in 2019;  and (ii) a $1.1 million increase in payments related to our collaboration and device development payable with Battelle Memorial Institute as a result of contractual milestone payments during the nine months ended September 30, 2020; partially offset by (iii) costs related to the acquisition of CVie Investments Limited, or the CVie Acquisition, costs from the December 2018 private placement financing and the payment of pre-existing obligations with the proceeds of the December 2018 private placement financing during the nine months ended September 30, 2019. 

 

Investing Activities

 

Net cash used in investing activities for the nine months ended September 30, 2019 represents $14.0 million related to the sale of marketable securities, partially offset by $0.1 million in purchase of property and equipment compared with a de minimis amount of net cash used in investing activities for the nine months ended September 30, 2020.

 

Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2020 was $19.9 million and includes the following: (i) $20.2 million in net proceeds from the May 2020 Offering; (ii) $2.4 million in proceeds from our research and development funding arrangement with Lee's (HK); (iii) $0.1 million in proceeds from the exercise of common stock warrants; and (iv) $2.9 million of principal payments on loans payable. Net cash used in financing activities for the nine months ended September 30, 2019 was $1.0 million and represents $0.8 million in principal payments on our loans payable and $0.2 million related to withholding tax payments for net share settlements of restricted stock units.

 

The following sections provide a more detailed discussion of our available financing facilities.

 

Loans Payable

 

Loan payable to Bank Direct Capital Finance

 

In May 2019, we entered into an insurance premium financing and security agreement with Bank Direct Capital Finance, or Bank Direct. Under the agreement, we financed $0.7 million of certain premiums at a 5.35% annual interest rate. As of December 31, 2019, the outstanding principal of the loan was $0.2 million. The balance of the loan was repaid during the quarter ended March 31, 2020.

 

In June 2020, we entered into an insurance premium financing and security agreement with Bank Direct. Under the agreement, we financed $1.1 million of certain premiums at a 4.26% annual interest rate. Payments of approximately $117,000 are due monthly from July 2020 through March 2021. As of September 30, 2020, the outstanding principal of the loan was $0.7 million.

 

Assumption of bank debt as part of the CVie Acquisition

 

In September 2016, CVie Therapeutics Limited entered into a 12-month revolving credit facility of approximately $2.9 million with O-Bank Co., Ltd., or O-Bank, to finance operating activities, or the O-Bank Facility. The O-Bank Facility was later renewed and increased to approximately $5.8 million in September 2017. The O-Bank Facility is guaranteed by Lee's Pharmaceutical Holdings Limited, or Lee's, which pledged bank deposits in the amount of 110% of the actual borrowing amount. Interest, payable in cash on a monthly basis, is determined based on the 90-day Taipei Interbank Offer Rate, or TAIBOR, plus 0.91%. The O-Bank Facility expired on September 11, 2019 and the loans were set to mature six months after the expiration date, on March 11, 2020. In March 2020, the O-Bank Facility was amended, among other things, to extend the maturity date to March 2022, to decrease the total amount of the O-Bank Facility to approximately $5.0 million, to change the applicable interest rate to the TAIBOR plus 1.17% and to adjust the term to 24-month non-revolving.

 

As of September 30, 2020 and December 31, 2019, the outstanding principal of the O-Bank Facility was approximately $2.4 million and $4.6 million, respectively. In the second quarter of 2020, we were informed by Lee's of their desire to reduce the amount of pledged bank deposits with O-Bank by 50%. To remain in compliance with the terms of the O-Bank Facility, we repaid approximately $2.3 million of the outstanding principal in August 2020. In November 2020, Lee's committed to maintain the required level of pledged bank deposits with O-Bank through the date of full repayment of the O-Bank Facility.

 

 

Common Stock Offerings

 

Historically, we have funded, and expect that we will continue to fund, our business operations through various sources, including financings in the form of common stock offerings. In September 2020, we filed with the SEC a "shelf" registration statement on Form S-3 (No. 333-248874), or the Universal Shelf, that was declared effective on September 29, 2020, for the proposed offering from time to time of up to $75.0 million of our securities, including common stock, preferred stock, debt securities, warrants, units, subscription rights, or any combination of the foregoing, on terms and conditions that will be determined at the time of an offering. As of September 30, 2020, approximately $75.0 million remained available under the Universal Shelf. The Universal Shelf will expire upon the earlier to occur of (i) the sale of $75.0 million of our securities or (ii) September 29, 2023.

 

At-The-Market Program

 

On September 17, 2020, we entered into an At-The-Market Offering Agreement with Ladenburg Thalmann & Co. Inc., or Ladenburg, pursuant to which we may offer and sell, from time to time at our sole discretion, up to a maximum of $10.0 million of shares of our common stock through Ladenburg as agent and/or principal through an at-the-market program, or the ATM Program. We are not obligated to make any sales under the ATM Program, and as of November 16, 2020, we have not sold any shares under the ATM Program. If we issue a sale notice to Ladenburg, we will designate the maximum amount of shares to be sold by Ladenburg daily and the minimum price per share at which shares may be sold. Ladenburg may sell shares by any method permitted by law deemed to be an "at-the-market offering" as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, or in privately negotiated transactions. Sales under the ATM Program will be made pursuant to the Universal Shelf.

 

Either party may suspend the offering under the ATM Program by notice to the other party. The ATM Program will terminate upon the earlier of (i) the sale of all shares subject to the ATM Program or (ii) termination of the ATM Program in accordance with its terms. Either party may terminate the ATM Program at any time upon five business days' prior written notification to the other party in accordance with the related agreement.

 

We agreed to pay Ladenburg a commission of 3% of the gross sales price of any shares sold pursuant to the ATM Program. The rate of compensation will not apply when Ladenburg acts as principal. We also agreed to reimburse Ladenburg for the fees and disbursements of its counsel in an amount not to exceed $50,000, in addition to certain ongoing disbursements of its legal counsel up to $3,000 per calendar quarter.

 

Off-Balance Sheet Arrangements

 

We did not have any material off-balance sheet arrangements at September 30, 2020 and 2019 or during the periods then ended.

 

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4.      Controls and Procedures

 

Evaluation of disclosure controls and procedures 

 

Our management, including our President and Chief Executive Officer (principal executive officer) and our Senior Vice President and Chief Financial Officer (principal financial officer), does not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, to allow for timely decisions regarding required disclosures, and recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

 

Changes in internal control

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation described above that occurred during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

We are not aware of any pending legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.

 

We have from time to time been involved in disputes and proceedings arising in the ordinary course of business, including in connection with the conduct of our clinical trials. In addition, as a public company, we are also potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations and financial condition.

 

ITEM 1A.

RISK FACTORS

 

Investing in our securities involves risks. In addition to any risks and uncertainties described elsewhere in this Quarterly Report on Form 10-Q, stockholders and potential investors should carefully consider the risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A Risk Factors in our Quarterly Reports on Form 10-Q filed thereafter. These risks are not the only risks that could materialize. Additional risks and uncertainties not presently known to us or that we currently consider to be immaterial may also impair our business operations and development activities. Should any of the risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2019 or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 actually materialize, our business, financial condition and/or results of operations could be materially adversely affected, the trading price of our common stock could decline and a stockholder could lose all or part of his or her investment. In particular, the reader's attention is drawn to the discussion in Part I, Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

ITEM 3.

Defaults Upon Senior Securities

 

None.

 

ITEM 4.

Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.

Other Information

 

 

As previously disclosed, we entered into the Term Sheet with Lee's (HK), pursuant to which the parties agreed that Lee's (HK) would provide financing for the continued development of our product candidate, AEROSURF. On August 12, 2020, we and Lee's (HK) entered into the PF Agreement, formalizing the terms of the Term Sheet, under which we have received payments of $2.8 million.

 

Pursuant to the PF Agreement, Lee's (HK) agreed to pay additional amounts to be set forth in an updated development budget to be agreed between the parties by September 1, 2020 and updated every six months thereafter, to fund the continued development of AEROSURF and to be paid with the payment schedule to be set forth in each updated development budget. On November 12, 2020, Lee's (HK) provided notice of termination of the PF Agreement. Lee's (HK) will conduct clinical development of AEROSURF in Asia and we will wind-down our clinical development of AEROSURF. Lee's (HK) will fund an additional $1.0 million to us in 2021, for certain transition and analytical services to be provided by us with respect to the development of AEROSURF. We remain responsible for repayment of all amounts received under the PF Agreement pursuant to the terms thereof.

 

ITEM 6.

Exhibits

 

Exhibits are listed on the Index to Exhibits at the end of this Quarterly Report on Form 10-Q. The exhibits required by Item 601 of Regulation S-K, listed on such Index in response to this Item, are incorporated herein by reference.

 

 

INDEX TO EXHIBITS

 

The following exhibits are included with this Quarterly Report on Form 10-Q.

 

Exhibit No.	Description		Method of Filing
10.1†	Collaboration Agreement dated as of October 10, 2014, by and between Battelle Memorial Institute and Discovery Laboratories, Inc. (predecessor-in-interest to Windtree).		Filed herewith.
10.2†	Amended and Restated Supply Agreement, dated as of December 3, 2004, by and between Discovery Laboratories, Inc. (predecessor-in-interest to Windtree) and Laboratorios Del Dr. Esteve S.A.		Filed herewith.
10.3†	Amended and Restated Sublicense and Collaboration Agreement, dated December 3, 2004, by and between Discovery Laboratories, Inc. (predecessor-in-interest to Windtree) and Laboratorios Del Dr. Esteve S.A.		Filed herewith.
10.4†	Project Financing Agreement, dated August 12, 2020, by and between Windtree and Lee’s Pharmaceutical (HK) Ltd.		Filed herewith.
10.5#	Employment Agreement, dated July 20, 2020, by and between Windtree and John P. Hamill		Incorporated by reference to Exhibit 10.1 to Windtree's Current Report on Form 8-K, as filed with the SEC on July 23, 2020.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.		Filed herewith.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.		Filed herewith.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Furnished herewith.
101.1	The following condensed consolidated financial statements from Windtree Therapeutics, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Extensive Business Reporting Language (XBRL): (i) Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019, (ii) Statements of Operations (unaudited) for the three and nine months ended September 30, 2020 and September 30, 2019, (iii) Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2020 and September 30, 2019, (iv) Statements of Cash Flows (unaudited) for the nine months ended September 30, 2020 and September 30, 2019, and (v) Notes to Condensed Consolidated Financial Statements.
101.INS	Instance Document.		Filed herewith.
101.SCH	XBRL Taxonomy Extension Schema Document.		Filed herewith.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.		Filed herewith.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.		Filed herewith.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.		Filed herewith.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.		Filed herewith.

 

# Compensation Related Contract.

† Certain confidential portions have been omitted from this exhibit pursuant to Item 601(b)(10)(iv) of Regulation S-K.

 

 

SIGNATURES

 

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

 

		Windtree Therapeutics, Inc.
		(Registrant)
Date: November 16, 2020		By: /s/ Craig Fraser
		Craig Fraser
		President and Chief Executive Officer
Date: November 16, 2020		By: /s/ John P. Hamill
		John P. Hamill
		Senior Vice President and Chief Financial Officer