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AERPIO PHARMACEUTICALS : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/12/2020 | 08:50am EDT

The following discussion of the financial condition and results of operations of Aerpio Pharmaceuticals, Inc. should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements included in this Quarterly Report on Form 10-Q as of and for the period ended June 30, 2020 and our audited consolidated financial statements and related notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 16, 2020. Some of the information contained in this discussion and analysis including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risk, uncertainties and assumptions. You should read the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as updated by the risk factors contained this Quarterly Report on Form 10-Q and our other filings with the SEC, 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.

Operating Overview

Aerpio Pharmaceuticals, Inc. is a biopharmaceutical company focused on developing compounds that activate Tie2 to treat ocular diseases and diabetic complications, as well as other indications in which the Company believes that activation of Tie2 may have therapeutic potential, including acute respiratory distress syndrome ("ARDS") associated with COVID-19 infections.

In March 2019, we announced topline results from our Phase 2b ("TIME-2b") clinical trial of AKB-9778 (also known as razuprotafib) for the treatment of non-proliferative diabetic retinopathy. Although the results did not meet the study's primary endpoint, the TIME-2b study further supported the reduction of intraocular pressure ("IOP") seen with subcutaneous razuprotafib in the previous TIME-2 study. Importantly, IOP is the only identifiable modifiable risk factor for prevention of vision loss in patients with open angle glaucoma ("OAG") and ocular hypertension ("OHT"). Moreover, recently published mouse and human genetic data implicate the Angpt/Tie2 pathway in maintenance of Schlemm's canal, a critical component of the conventional outflow tract. The conventional outflow tract is the main conduit for the fluid drainage from the front of the eye and the principle regulator of IOP. Based on these findings, we developed a topical ocular formulation of razuprotafib, and observed in preclinical studies activation of Tie2 in Schlemm's canal, IOP reduction via enhanced outflow facility and favorable tolerability.

In June 2019, we initiated a double-masked, multiple-ascending dose Phase 1b clinical trial for OAG. We enrolled four cohorts of 12 subjects each and subjects received increasing daily doses of a topical ocular formulation of razuprotafib or placebo for seven days. The primary endpoint of the trial was ocular safety and tolerability, with IOP lowering as the key pharmacodynamic endpoint. In October 2019, we announced interim results from our Phase 1b clinical trial. The unmasked interim analysis, limited to the first three cohorts, showed the topical ocular administration of razuprotafib was well tolerated. Compared to placebo, there was a dose dependent increase in minimal to mild conjunctival hyperemia with razuprotafib, which was transient and generally considered non-adverse, and a time and dose dependent reduction in IOP that, in the highest once daily ("QD") dose cohort peaked at 4 hours post-dose and was sustained through eight hours on day 7, returning to baseline levels at 24 hours post-dose. Based on these data, a cohort of 43 patients with OHT/OAG (hypertensive eyes) was added to the ongoing study to assess safety and pilot efficacy in the target patient population.

In January 2020, we announced the results of the fifth cohort of subjects noting subjects in cohort five randomized to the active arm exhibited statistically significant decreases in IOP at all post- razuprotafib administration time points on both days 1 and 7 compared with day -1 baseline values when they were being treated with prostaglandin alone. When the change is placebo-corrected, razuprotafib plus prostaglandin versus prostaglandin alone produced a statistically significant decrease in IOP on Day 7 at 0, 4 and 8 hours post dose as compared to placebo. We believe these results suggest a persistent IOP-lowering activity from adding razuprotafib to standard-of-care prostaglandin therapy. Topical ocular administration of razuprotafib was well tolerated over seven days in cohort five. There were no reports of conjunctival hemorrhage or pain on instillation during the seven days of dosing and no systemic/non-ocular AEs were observed.

Based on the preclinical proof of concept and the results of the Phase 1b trial showing a reduction in IOP in patients with OHT and OAG, we initiated a Phase 2 clinical trial in June 2020 designed to evaluate the safety and efficacy of a topical formulation of razuprotafib in approximately 195 patients followed over a 28-day period. Patients enrolled in the trial will be administered a baseline of latanoprost ophthalmic solution 0.005%, and then randomized in a 1:1:1 fashion to receive adjunctive therapy consisting of placebo, 40 mg/ml razuprotafib once-daily, or 40 mg/ml razuprotafib twice-daily. The primary endpoint of the study is mean diurnal IOP at 28 days in the razuprotafib treated groups compared to the latanoprost monotherapy group. We expect to have results in the fourth quarter of 2020, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic.

We believe that glaucoma, a serious condition of the eye affecting three million patients in the U.S., is an attractive commercial opportunity. If we develop, obtain marketing approval for and commercialize razuprotafib, our goal is to capture a portion of annual sales for adjunctive glaucoma therapies. We currently estimate that the dollar value of the U.S. glaucoma market is approximately $4



billion dollars per year, and adjunctive therapies represent approximately half of this value. There were approximately 17 million prescriptions written for adjunctive glaucoma therapies in the U.S. in 2019.

Acute Respiratory Distress Syndrome ("ARDS")

Based on results in preclinical studies and observations in patients in TIME-2 and TIME-2b trials, we believe that a vascular endothelial receptor, Tie2, may play a pivotal role in the defense against microvascular breach in ARDS. We hypothesize that razuprotafib, our lead Tie2 activator, may have therapeutic potential for the treatment of COVID-19 associated ARDS. In May 2020, we were selected by Quantum Leap Healthcare Collaborative to participate in the I-SPY COVID Trial (Investigation of Serial studies to Predict Your COVID Therapeutic Response with biomarker Integration and Adaptive Learning) to evaluate razuprotafib for the treatment of COVID-19 related ARDS in adult patients with critical COVID-19. We expect the trial to be initiated during the third quarter of 2020 with trial updates anticipated in the first half of 2021, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic.

On August 4, 2020, we issued a press release announcing the receipt of funding to evaluate subcutaneous razuprotafib in a new randomized, investigational trial for the prevention and treatment of ARDS in adult patients with moderate to severe COVID-19. The trial is part of the MTEC-20-09-COVID-19 Treatment Military Infectious Disease Research Program ("MIDRP"). The Phase 2 clinical trial is expected to be completed in the first quarter of 2021. The Medical Technology Enterprise Consortium ("MTEC"), a non-profit organization primarily funded by the U.S. Army Medical Research and Development Command, will provide up to $5.1 million in funding toward the clinical trial, while we will support the trial with "in-kind" spending in the aggregate amount of $2.8 million.

Diabetic Kidney Disease

In two consecutive trials, TIME-2 and TIME-2b, subcutaneous razuprotafib showed reduction in Urine Albumin-Creatinine Ratio ("UACR"), a measure of progression of diabetic kidney disease. In a post-hoc analysis of the earlier TIME-2 clinical trial, there was a 21% reduction (geometric mean) in UACR from baseline in the razuprotafib treatment arms, but an overall increase in UACR in the placebo arm. The prospective UACR analyses from the recently completed TIME-2b trial largely replicated the results from the previous trial and reinforced the potential beneficial effects of Tie2 activation in diabetic kidney disease. We believe that systemic treatment with razuprotafib could have the potential to change the treatment paradigm for diabetics in the future and potentially address a major societal problem by lowering the cost of care associated generally with diabetes.


ARP-1536, our humanized monoclonal antibody directed at the same target as subcutaneous razuprotafib, is in preclinical development. We are evaluating development options for ARP-1536, including subcutaneous injection for the treatment of diabetic vascular complications, e.g., diabetic nephropathy and intravitreal injection as an adjunctive therapy for diabetic macular edema. We are also developing a bispecific antibody that binds both VEGF and VE-PTP which is designed to inhibit VEGF activation and activate Tie2. We believe this bispecific antibody has the potential to be an improved treatment for wet AMD and diabetic macular edema via intravitreal injection.

Gossamer License Agreement

In June 2018, we licensed AKB-4924, a selective stabilizer of hypoxia-inducible factor-1 alpha ("HIF-1 alpha") to Gossamer Bio, Inc. ("Gossamer") AKB-4924, (now called GB004), is being developed for the treatment of inflammatory bowel disease ("IBD"). HIF-1 alpha is involved in mucosal wound healing and the reduction of inflammation in the gastrointestinal tract. Gossamer has completed the Phase 1 multiple ascending dose ("MAD") clinical study and is currently running a Phase 1b clinical study in ulcerative colitis patients. Gossamer has progressed GB004 during 2019 by completing the Phase 1 study in healthy volunteers and initiating a Phase 1b study in ulcerative colitis patients of 28-day duration. Gossamer reported topline results from the Phase 1b study in the second quarter of 2020 and has reported that it is planning for the commencement of its Phase 2 program for GB004 in the first half of 2021, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic. Gossamer is responsible for all remaining development and commercial activities for GB004.

In April 2019, we adopted a realignment plan to reduce operating costs and better align our workforce with the needs of our ongoing business and in October 2019, our Chief Executive Officer and Chief Financial and Business Officer departed from their positions. As a result, we recorded severance expense of $0.9 million during the three and six months ended June 30, 2019 and $1.0 million in the year ended December 31, 2019 for employee related costs, including severance benefits and payment of healthcare insurance premiums. Additionally, we recorded a one-time stock-based compensation cumulative reversal of $1.1 million during the year ended December 31, 2019 for the forfeitures of outstanding equity awards. The total remaining liability under these severance-related actions was $0.3 million as of June 30, 2020 and we anticipate that such employee related costs will be paid by the end of the fourth quarter of 2020.



Our primary source of liquidity to date has been through public and private sales of our common stock, redeemable convertible preferred stock, convertible debt and the proceeds from the License Agreement entered into with Gossamer ("Gossamer License Agreement"). For the three and six months ended June 30, 2020, we generated $15.0 million in revenue pursuant to Amendment No. 1 to the Gossamer License Agreement.

We will need to raise additional funds to further advance our clinical research programs, commence additional clinical trials and commercialize our products, if approved. While we continue to pursue financing alternatives, which may include equity financing, business development arrangements, licensing arrangements and business combination transactions, financing may not be available to us in the necessary time frame, in the amounts that we need, on terms that are acceptable to us or at all. If we are unable to raise the necessary funds when needed or reduce spending on currently planned activities, we may not be able to continue the development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs and other operations and will materially harm our business and consolidated financial position.

We expect to continue to incur significant expenses and operating losses for the foreseeable future as a result of our ongoing activities. We are subject to a number of risks similar to other life science companies in the current stage of our life cycle, including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, competitors developing new technological innovations, and protection of proprietary technology. If we do not successfully mitigate any of these risks, we will be unable to generate revenue or achieve profitability.

Except for the Gossamer License Agreement that we entered into with Gossamer in June 2018 and amended in May 2020, our operations to date have been limited to organizing and staffing our Company, business planning, raising capital, acquiring and developing our technology, identifying potential product candidates and undertaking preclinical and clinical studies. There can be no assurance of future revenues either from future payments related to the Gossamer License Agreement, transition services or from our product candidates. Our product candidates are subject to long development cycles, and there is no assurance we will be able to successfully develop, obtain regulatory approval for, or market our product candidates. As of June 30, 2020, we had an accumulated deficit of $136.9 million and anticipate incurring additional losses for the next several years.

The Company's inability to obtain required funding in the near future could have a material adverse effect on its operations and strategic development plan for future growth. If the Company cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and the Company may have to cease operations. Based on the Company's current cash reserves of $44.9 million at June 30, 2020 and financial condition as of this Quarterly Report on Form 10-Q, we believe our existing cash and cash equivalent will be sufficient to fund currently planned operations through at least the fourth quarter of 2021.

On March 11, 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus, ("COVID-19"), as a global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, stay-at-home orders, travel restrictions, mandated business closures and other public health safety measures. In addition, in response to the spread of COVID-19, we have continued to keep our executive offices closed with our employees continue to work outside of our offices. We are closely monitoring the impact of COVID-19 on all aspects of our business, including how it may impact our planned Phase 2 clinical trial for our glaucoma program, expected timelines and costs on an ongoing basis. We do not yet know the full extent of potential delays or the impact on our business, our planned clinical trial, our research programs, healthcare systems or the global economy and we cannot presently predict the scope and severity of any potential business shutdowns or disruptions. The extent to which COVID-19 ultimately impacts our business, results of operations and financial condition will depend on future developments, which remain highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 or the effectiveness of actions to contain COVID-19 or treat its impact, among others. Although some states are starting to relax stay-at-home orders, quarantines and similar restrictions, the regulations vary on a state by state basis and the impact of loosening of those restrictions is not yet known. If we or any of the third parties with whom we engage were to experience additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could have a material adverse impact on our business, results of operation and financial condition.

Basis of Presentation

The following discussion highlights the Company's results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the condensed consolidated balance sheets and the condensed consolidated statements of operation and comprehensive income (loss) presented herein. The following discussion and analysis are based on the Company's condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q, which we have prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP" or "GAAP"). You should read the discussion and analysis together with such condensed consolidated financial statements and the related notes thereto.



Components of Statements of Operations and Comprehensive Income (Loss)

License Revenue

License revenue relates to payments received pursuant to the license agreement with Gossamer.

Operating Expenses

Research and Development

Research and development expenses are expensed as incurred. Research and development expenses consist primarily of (i) employee-related expenses, including salaries, benefits, travel, and stock-based compensation expense, (ii) external research and development expenses incurred under arrangements with third parties, such as contract research organizations ("CRO's") and consultants, (iii) the cost of acquiring, developing, and manufacturing clinical study materials, and (iv) costs associated with preclinical, clinical and regulatory activities.

Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and clinical sites.

As we continue to invest in basic research and clinical development of our product candidates, we expect research and development expenses to increase in absolute dollars.

General and Administrative

General and administrative expenses consist primarily of compensation and related costs for our finance, human resources and other administrative personnel, including stock-based compensation, employee benefits and travel. In addition, general and administrative expenses include third-party consulting, legal, patent, audit, accounting services and facilities costs. We expect to continue to incur general and administrative expenses due to additional legal, accounting, insurance, investor relations and other costs associated with being a public company, as well as other costs associated with growing our business.

Interest Income

Interest income consists primarily of interest income received on cash and cash equivalents.

Restructuring Expense

Restructuring expense consists primarily of severance related expenses of employees terminated as a result of the Company's restructuring efforts. Expenses include continued payroll, benefits and outplacement services (collectively "severance") as defined and agreed upon by the respective employees' severance agreement. Total severance was recognized as Restructuring expense on April 2, 2019, the date when employees were notified of the restructuring event. A corresponding restructuring accrual was also recorded and will be reduced as payments are made to the employees.

Grant Income

Grant income is recognized as earned based on contract work performed.



Results of Operations

The following table presents the results of operations for the periods

                              Three Months Ended June 30,          Six Months Ended June 30,
                                2020               2019              2020             2019
License revenue            $    15,000,000     $           -     $ 15,000,000     $           -
Operating expenses:
Research and development         3,548,572         2,264,255        5,377,614         7,850,506
General and
administrative                   2,195,515         2,799,570        4,481,406         6,054,612
Restructuring expense                    -           915,094                -           915,094
Total operating expenses         5,744,087         5,978,919        9,859,020        14,820,212
Income (loss) from
operations                       9,255,913        (5,978,919 )      5,140,980       (14,820,212 )
Grant income                             -             4,924           79,900            20,272
Interest income                     20,119           290,379          136,489           623,499
Total other income                  20,119           295,303          216,389           643,771
Net and comprehensive
income (loss)              $     9,276,032$  (5,683,616 )$  5,357,369$ (14,176,441 )

Comparison of the Three and Six Months Ended June 30, 2020 and 2019

License Revenue

License revenue for the three and six months ended June 30, 2020 reflects the $15.0 million payment received as consideration pursuant to the amendment to the Gossamer License Agreement. This revenue was recognized when cash was received on May 12, 2020.

No such license agreement amendment was executed in 2019, nor were any milestones of the Gossamer license agreement achieved in 2019.

Operating Expenses

                                Three Months Ended June 30,            Six Months Ended June 30,
                                  2020                2019               2020              2019
Research and development     $     3,548,572$   2,264,255$    5,377,614$   7,850,506
General and administrative         2,195,515          2,799,570          4,481,406         6,054,612
Restructuring expense                      -            915,094                  -           915,094
Total operating expenses     $     5,744,087$   5,978,919$    9,859,020$  14,820,212

Research and Development

Research and development expenses for the three months ended June 30, 2020, increased by approximately $1.3 million or 56.7%, compared to the three months ended June 30, 2019. This was the result of increased spending on clinical trials during the three months ended June 30, 2020, specifically planning for the Phase 2 program for glaucoma and the I-SPY program for ARDS, compared to spending related to the glaucoma Phase 1b clinical trial during the same period in 2019.

Research and development expenses for the six months ended June 30, 2020, decreased approximately $2.5 million or 31.5%, compared to the six months ended June 30, 2019. This was the result of decreased spending on clinical trials during the first half of 2020 compared to the two trials in process during the first half of 2019, completion of razuprotafib TIME-2b and glaucoma Phase 1b clinical trials.

General and Administrative

General and administrative expenses for the three months ended June 30, 2020, decreased by approximately $0.6 million, or 21.6%, compared to the three months ended June 30, 2019. This decrease was primarily attributable to a decrease in employee related expenses of $0.2 million and stock-based compensation of $0.4 million.



General and administrative expenses for the six months ended June 30, 2020, decreased by approximately $1.6 million, or 26.0%, compared to the six months ended June 30, 2019. This decrease was primarily attributable to a decrease in employee related expenses of $0.5 million, legal expenses of $0.3 million, stock-based compensation of $0.6 million and general office expenses of $0.2 million.

Restructuring Expense

Restructuring expense for the three and six months ended June 30, 2019 of $0.9 million is the result of a reduction of headcount during the second quarter of 2019. No such actions were taken in 2020.

Other Income

                          Three Months Ended June 30,           Six Months Ended June 30,
                          2020                 2019               2020               2019
 Grant income         $           -       $         4,924     $      79,900$   20,272
 Interest income             20,119               290,379           136,489          623,499
 Total other income   $      20,119$       295,303$     216,389$  643,771

Grant Income

Grant income is recognized as earned based on contract work performed. Grant income amounts can vary greatly from period to period depending on the funding and needs of the party for whom we perform the requested services.

Interest Income

Interest income in the three and six months ended June 30, 2020, reflects interest earned on short term money market instruments. The net proceeds from our underwritten public offering in June 2018 and payments received in conjunction with the execution of the Gossamer Agreement in June 2018 and Amendment No. 1 to the Gossamer License Agreement in May 2020, less cash used in operations, were available for investment. The decrease in interest income was due to lower interest rates compared to the prior year.

Liquidity and Capital Resources

Since inception, we have incurred significant net and comprehensive losses and negative cash flows from operations. For the six months ended June 30, 2020 and 2019, we had net and comprehensive income (loss) of $5.4 million and ($14.2) million, respectively. At June 30, 2020 and December 31, 2019, we had an accumulated deficit of $136.9 million and $142.2 million, respectively.

At June 30, 2020, we had cash and cash equivalents of $44.9 million. To date, we have financed our operations principally through private and public offerings of our equity securities, private placements of our redeemable convertible preferred stock, common stock, issuances of secured convertible promissory notes and proceeds from the Gossamer License Agreement and Amendment No. 1 thereto. Based on our current plans, we expect that our existing cash and cash equivalents, will enable us to conduct our planned operations through at least the fourth quarter of 2021.

In February 2018, we filed a shelf registration statement on Form S-3 with the SEC which was declared effective by the Securities and Exchange Commission on April 11, 2018 (the "Form S-3"). The shelf registration statement allows us to sell from time-to-time up to $150.0 million of common stock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for our own account in one or more offerings. The shelf registration statement is intended to provide us flexibility to conduct registered sales of our securities, subject to market conditions and our future capital needs. The terms of any offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering.

Additionally, on February 21, 2018, and pursuant to the Form S-3, we entered into a Controlled Equity Offering Sales Agreement (the "Sales Agreement") with Cantor Fitzgerald & Co. ("Cantor"), pursuant to which we may issue and sell, from time to time, shares of our common stock having an aggregate offering price of up to $75.0 million through Cantor as our sales agent. Cantor may sell our common stock by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415(a)(4) of the Securities Act, including sales made directly on or through the Nasdaq Capital Market or any other existing trade market for our common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to prevailing market prices, or any other method permitted by law. The shares of our common stock to be sold under the Sales Agreement will be sold and issued pursuant to the Form S-3 and the related prospectus and one or more prospectus supplements. We will pay Cantor 3.0% of the aggregate gross proceeds from each sale of shares of common stock under the Sales Agreement.



As of June 30, 2020, no shares of common stock had been sold under this Sales Agreement. On August 5, 2020, we sold 1,480,000 shares of common stock under this Sales Agreement and received net proceeds of $2.3 million, after deducting expenses of approximately $186,000 (including sales agent compensation of approximately $75,000).

In October 2019, we announced the engagement of Evercore, Ladenburg Thalmann & Co. Inc. and Duane Nash, M.D., J.D., M.B.A. to explore a range of strategic alternatives focused on maximizing stockholder value from our clinical assets and cash resources. Such alternatives may include the potential for an acquisition, company sale, merger, business combination, asset sale, in-license, out-license or other strategic transaction. The Company continues to explore strategic alternatives; however, there can be no assurance that the exploration of strategic alternatives will result in any transaction or other alternative.

We could potentially use our available financial resources sooner than we currently expect, and we may incur additional indebtedness to meet future operation liquidity. We continuously evaluate our needs for additional capital and consider opportunities on an ongoing basis, including capital from many different sources including equity capital, strategic alliances, business development debt, collaborations and business combinations. Adequate additional funding may not be available to us on acceptable terms or at all. Market volatility resulting from COVID-19 or other factors could also adversely impact our ability to access capital as and when needed. In addition, although we anticipate being able to obtain additional financing through non-dilutive means, we may be unable to do so. Our failure to raise capital as and when needed could have significant negative consequences for our business, financial condition and results of operations.

The following table summarizes our cash flows for the periods presented:

                                                         Six Months Ended June 30,
                                                           2020             2019

Net cash provided by (used in) operating activities $ 6,351,946$ (14,224,328 ) Net cash used in investing activities

                       (12,198 )        (232,672 )
Net cash provided by financing activities                         -                 -

Net increase (decrease) in cash and cash equivalents $ 6,339,748$ (14,457,000 )

Operating Activities

We have historically experienced negative cash outflows as we developed razuprotafib and our pipeline programs. Our net cash generated by and used in operating activities primarily results from our net income (loss) adjusted for non-cash expenses, changes in working capital components, amounts due to contract research organizations to conduct our clinical programs and employee-related expenditures for research and development and general and administrative activities. Our cash flows from operating activities will continue to be affected by spending to advance and support our product candidates in the clinic and other operating and general administrative activities.

For the six months ended June 30, 2020, operating activities generated $6.4 million in cash as result of net income of $5.4 million, non-cash expenses of $0.7 million related to stock-based compensation and depreciation expense and an increase in working capital of $0.3 million. For the six months ended June 30, 2019, operating activities used $14.2 million in cash as a result of a net loss of $14.2 million and a decrease of $1.3 million in working capital, offset by $1.3 million in non-cash expenses related to stock-based compensation expense and depreciation expense.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2020 and 2019, was related to capital expenditures to support operations.

Financing Activities

There were no financing cash flows during the six months ended June 30, 2020 and 2019.

Contractual Obligations and Commitments

There have been no material changes outside the ordinary course of business during the period covered by this Quarterly Report on Form 10-Q from the contractual obligations and commitments as of December 31, 2019 as described in our Annual Report on Form 10-K filed with the SEC on March 16, 2020.

Off-Balance Sheet Arrangements

As of June 30, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements as defined by applicable SEC regulations.



Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

For further information on all our significant accounting policies, see the notes to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on March 16, 2020.

JOBS Act Accounting Election

We are an "emerging growth company" within the meaning of the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies that are not emerging growth companies.

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