Disclosures Regarding Forward-Looking Statements
The following should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report as well as in conjunction with the Risk Factors section in our Annual Report on Form 10-K for the year endedSeptember 30, 2019 as filed with theUnited States Securities and Exchange Commission ("SEC") onJanuary 10, 2020 . This report and our Form 10-K include forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. This report includes "forward-looking statements" within the meaning of Section 21E of the Exchange Act. Those statements include statements regarding the intent, belief or current expectations of the Company and its subsidiaries and our management team. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include but are not limited to those risks and uncertainties set forth in Item 1A - Risk Factors of this Quarterly Report and in Item 1A - Risk Factors of our Annual Report. In light of the significant risks and uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K, the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Further, these forward-looking statements reflect our view only as of the date of this report. Except as required by law, we undertake no obligations to update any forward-looking statements and we disclaim any intent to update forward-looking statements after the date of this report to reflect subsequent developments. Accordingly, you should also carefully consider the factors set forth in other reports or documents that we file from time to time with theSEC . Overview
Restatement of Previously Issued Unaudited Financial Statements
We have restated certain previously reported financial information for the three months endedDecember 31, 2018 in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, including but not limited to information within the Results of Operations section. See Note 2, Significant Accounting Policies-Restatement of Previously Issued Unaudited Financial Statements, in Item 1, Financial Statements, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our unaudited condensed consolidated financial statements. Description of the Company We are a biotechnology company focused on developing next generation therapies to treat rare genetic diseases and cancer caused by mutant genes. Given that perhaps every human disease has a genetic component, we believe that our differentiated platform technology has the potential for broad impact. Mutated proteins resulting from errors in deoxyribonucleic acid ("DNA") sequences cause many rare genetic diseases and cancer. DNA in each cell of the body is transcribed into pre-mRNA, which is then processed (spliced) into mRNA which is exported into the cytoplasm of the cell and translated into protein. This is termed the "central dogma" of biology. Therefore, when errors in a DNA sequence occur, they are propagated to RNAs and can become a damaging protein. The type of therapies that we are developing are termed antisense oligonucleotide ("ASO") therapies. ASOs are short single strands of nucleic acids (traditionally thought of as single stranded RNA molecules) which will bind to defective RNA targets in cells and inhibit their ability to be translated into defective proteins. We believe we are a leader in the discovery and development of the class of RNA-targeted ASO drugs called peptide nucleic acids ("PNAs"). Our proprietary PATrOL™ platform allows for a more efficient discovery of drug product candidates, potentially transforming the treatment paradigm for people affected by rare genetic diseases and cancer. The PATrOL™ platform allows for a potentially more efficient discovery of drug product candidates because of manufacturing consistency and because we are not constrained by folded regions of the target RNA molecule (secondary structures). The peptide backbone of our ASOs is rigid, and once linked together to form a series of backbone subunits, forms a single pre-organized structure. 18 At a more detailed level, each subunit of the peptide backbone has only a single chiral center - a point in the chemical structure where the conformation of the backbone could fluctuate - and this chiral center is locked into one conformation and thus pre-organized to form only a single conformation or stereoisomer. A stereoisomer is a term used in the ASO therapeutics field to mean a string of backbone subunits with nucleo-bases attached that are linked together into a specific sequence that matches (complements) the target sequence, but because of the nature of the backbone subunits used, the drug assumes various conformations often with varying affinity for the target sequence. These stereoisomers often require a manufacturing step to purify the heterogeneous mixture of conformations into a more homogenous mixture or even a single conformation of the drug in order to obtain the hoped-for therapeutic effect. Our PNAs assume only a single conformation with any constellation of nucleo-bases added to the backbone or any oligomer length. This backbone also has a neutral charge, as opposed to the negatively charged backbones of DNA and RNA. This neutral charge allows our ASO to open up RNAs which are folded upon themselves and bind to their target sequence. This potentially accelerates identification of drug candidates which have the desired activity. In addition to the backbone conformational purity which allows for a more efficient discovery of drug product candidates, we also have a kit of proprietary bi-facial (also known as bi-specific) nucleotides (traditional nucleotides only have a single binding face and thus are restricted to only binding single-stranded RNA targets) which can be used in any combination to access RNA secondary structures (double stranded RNA targets which are folded upon themselves) such as hairpins. This allows us to potentially access regions of the target transcript which may be unique in secondary structure to allow enhanced selectivity for the target (mutant) RNA vs. the normal RNA. Enhanced selectivity for mutant RNAs vs. normal RNAs is critical as normal RNAs are likely required for effective functioning of the cell. These bi-specific nucleotides can also target genomic loci and microRNAs in their double-stranded form.
In addition to the backbone and modified nuclear bases, the platform toolkit also includes linker technology which, when added to both ends of the PNAs, allow cooperative binding between individual drug molecules once they are engaged with the target RNA to form longer and more tightly bound drugs.
The final component of the platform is a chemical moiety, which is used to decorate the peptide backbone in a proprietary manner and allows the PNAs to penetrate cell membranes and distribute throughout the body when administered systemically.
This relatively simple toolkit of components forms the PATrOL™ platform and allows us to manufacture genome and transcript-specific PNAs quickly for screening.
We are currently focused on therapeutic areas in which we believe our drugs will provide the greatest benefit with a significant market opportunity and intend to utilize our technology to build out a pipeline of custom designed therapeutics for additional high-value disease targets. We are developing several preclinical programs using our PATrOL™ platform, including: NT0100 program, targeted at Huntington's Disease ("HD"), a repeat expansion disorder, and the NT0200 program, targeted at myotonic dystrophy Type 1 ("DM1"). Preclinical studies are being conducted to evaluate the PATrOL™ platform technology and program candidates in the areas of pharmacokinetics and pharmacodynamics, and we expect to report results from those studies in the first calendar quarter and the second calendar quarter of 2020. In addition, the emerging pipeline of other assets that target primary and secondary RNA structure and genomic DNA allows a unique market advantage across a variety of rare diseases and oncology targets. Using our PATrOL™ platform, we believe we can create ASOs that have distinct potential advantages over other chemical entities currently in the market or in development for gene silencing applications. These advantages include, among others: a backbone that has only one chiral center and thus forms only one stereoisomer; the ability of the PNA backbone to invade, open up secondary (RNA folded upon itself) and tertiary structures (RNA molecules that interact with other RNA molecules in the cell) and bind within these double-stranded RNA in a highly selective manner; a proprietary set of engineered nucleo-bases that increase selectivity to specific target sequences including secondary and tertiary structures that has been licensed exclusively fromCarnegie Mellon University ("CMU"); technology to allow self-assembly of our small PNAs at the RNA target to increase selectivity which has been licensed exclusively from CMU; the ability to modulate cell permeability and be broadly distributed throughout the body; the lack of innate or acquired immune responses of similar PNAs in preclinical models; and potential minimal toxicity based on previous in-vivo studies in rodent models. With these advantages, our PATrOL™ platform-enabled therapies can potentially address a multitude of rare genetic diseases and cancer, among other indications. Product Pipeline Huntington's Disease
HD is a devastating rare neurodegenerative disorder. After onset, symptoms such as uncontrolled movements, cognitive impairments and emotional disturbances worsen over time. HD is caused by toxic aggregation of mutant huntingtin protein, leading to progressive neuron loss in the striatum and cortex of the brain. The wildtype huntingtin gene (HTT) has a region in which a three-base DNA sequence, CAG, is repeated many times. When the DNA sequence CAG is repeated 26 or fewer times in this region, the resulting protein behaves normally. While the wildtype function of HTT is largely uncharacterized, the protein is known to be essential for normal brain development. When the DNA sequence CAG is repeated 40 times or more in this region, the resulting protein becomes toxic and causes HD. Every person has two copies, or alleles, of the HTT. Only one of the alleles (the "mutant" allele) needs to bear at least 40 CAG repeats for HD to occur. HD is one of many known repeat expansion disorders, which are a set of genetic disorders caused by a mutation that leads to a repeat of nucleotides exceeding the normal threshold. Current therapies for patients with HD can only manage individual symptoms. There is no approved therapy that has been shown to delay or halt disease progression. There are approximately 30,000 symptomatic patients in theU.S. and more than 200,000 at-risk of inheriting the disease. 19
NT0100 Program - PATrOL™ Enabled PNA for Huntington's Disease
The PATrOL™ platform has the potential to address many dominantly inherited genetic diseases. We will be initially focused on HD, a fatal rare genetic repeat expansion disorder with no viable treatment options.
One especially important advantage of the PATrOL™ platform that makes it promising for the treatment of repeat expansion disorders like HD is the ability of our small ASOs to potentially self-assemble within an RNA hairpin. As the number of repeats increases, the PATrOL™ oligonucleotides bind more tightly to each other and the mutant RNA. This allows our therapies to potentially inactivate mutant HTT mRNA before it can be translated into harmful protein via selective binding to the expanded CAG repeats while leaving the normal HTT mRNA largely unbound to drug and producing functional protein. Achieving mutant allele selectivity would be a key advantage for any RNA-based approach aiming to treat HD. The PATrOL™-enabled NT0100 program is currently in preclinical development for the treatment of HD.
NT0200 Program - PATrOL™ Enabled PNA for Myotonic Dystrophy Type 1
Our pipeline also contains a second near-term, potentially transformative medicine, which we believe has significant potential for a different severe and rare trinucleotide repeat disease, DM1. Myotonic dystrophy type 1 (DM1) is a multisystem disorder that primarily affects skeletal and smooth muscle. DM1 is caused by expansion of a CTG trinucleotide repeat in the noncoding region of the DMPK gene, which captures and sequesters splice proteins. Sequestered splice proteins cannot then fulfill their normal functions. The diagnosis of DM1 is suspected in individuals with characteristic muscle weakness and is confirmed by molecular genetic testing of DMPK. CTG repeat length exceeding 34 repeats is abnormal. Molecular genetic testing detects pathogenic variants in nearly 100% of affected individuals. It is estimated that the global prevalence of DM1 is 1:20,000 individuals. The clinical candidates in development target the DM1 expanded allele with PATrOL™-enabled drug candidates to disrupt and/or open the mutant hairpin and allow release of sequestered splice proteins. Additional Indications In addition, we are in the process of building an early stage pipeline of other therapies that focus on the unique advantages of our technology across a variety of rare diseases.
Critical Accounting Estimates and Policies
The preparation of financial statements in accordance withUnited States generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in our unaudited condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience, market and other conditions, and various other assumptions it believes to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact us in the future, the estimation process is, by its nature, uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our unaudited condensed consolidated financial statements may be materially affected. In addition, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material effect in our unaudited condensed consolidated financial statements. We review our estimates, judgments, and assumptions used in our accounting practices periodically and reflect the effects of revisions in the period in which they are deemed to be necessary. We believe that these estimates are reasonable; however, our actual results may differ from these estimates. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 and there have been no material changes to such policies or estimates during the three months endedDecember 31, 2019 .
Recent Accounting Pronouncements
Please refer to Note 2, Significant Accounting Policies-Recent Accounting Pronouncements, in Item 1, Financial Statements for a discussion of recent accounting pronouncements.
20 Results of Operations
Results of operations for the quarter ended
Three Months Ended December 31, 2019 2018 Change (As Restated) OPERATING EXPENSES
General and administrative expenses$ 2,554,680 $ 422,010 $ 2,132,670 Research and development expenses 1,227,686 4,876 1,222,810 Research and development expense- license acquired - 1,046,965 (1,046,965 ) TOTAL OPERATING EXPENSES 3,782,366
1,473,851 2,308,515
LOSS FROM OPERATIONS (3,782,366 )
(1,473,851 ) (2,308,515 ) OTHER EXPENSE Interest expense (1,311 ) (14,637 ) 13,326
Change in fair value of warrant liabilities (694,134 ) - (694,134 ) Loss on disposal of fixed asset (3,230 ) - (3,230 ) Equity in losses on equity method investment (24,509 )
- (24,509 ) Total other expenses (723,184 ) (14,637 ) (708,547 ) NET LOSS$ (4,505,550 )
$ (1,488,488 ) $ (3,017,062 ) During the quarter endedDecember 31, 2019 , operating loss increased by$2.3 million compared to the quarter endedDecember 31, 2018 . Our net loss increased by$3.0 million for the quarter endedDecember 31, 2019 , as compared to the quarter endedDecember 31, 2018 . Until we are able to generate revenue from product sales, our management expects to continue to incur net losses.
General and Administrative Expenses
General and administrative expenses consist primarily of legal and professional fees, wages and stock-based compensation. General and administrative expenses increased by$2.1 million for the quarter endedDecember 31, 2019 , as compared to the quarter endedDecember 31, 2018 , primarily due to an increase in stock-based compensation expense, employee head count and need for legal and professional services.
Research and Development Expenses
Research and development expenses consist primarily of professional fees, manufacturing expenses, wages and stock-based compensation. Research and development expenses increased by$1.2 million for the quarter endedDecember 31, 2019 , as compared to the quarter endedDecember 31, 2018 , primarily due to an increase in stock-based compensation, employee head count and the ramp up of research and development activities.
Research and Development Expense- licenses acquired
Research and development expense- licenses acquired during the quarter endedDecember 31, 2018 consists of the license acquired from CMU. Research and development expense- licenses acquired decreased by$1.0 million , for the quarter endedDecember 31, 2019 , as compared to the quarter endedDecember 31, 2018 , due to our acquisition of license rights in the 2018 period. 21 Interest Expense Interest expense consists primarily of interest on convertible notes and notes payable. Interest expense decreased by$0.01 million for the quarter endedDecember 31, 2019 , as compared to the quarter endedDecember 31, 2018 , primarily due to the outstanding convertible notes in the quarter endedDecember 31, 2019 , which were converted prior to the quarter endedDecember 31, 2019 .
Change in fair value of warrant liabilities
Change in fair value of warrant liabilities reflects the changes in the fair value of outstanding warrants which is primarily driven by changes in our stock price. Change in fair value of warrant liabilities was$0.7 million for the quarter endedDecember 31, 2019 , as compared to the quarter endedDecember 31, 2018 , due to the change in valuation of warrants acquired in the Merger with Ohr, which did not exist in the comparative prior.
Equity in losses on equity method investment
The Company accounts for its investment in DepYmed common shares using the equity method of accounting and records its proportionate share of DepYmed's net income and losses. Equity in losses for the three months endedDecember 31, 2019 was approximately$0.02 million .
Liquidity, Capital Resources and Financial Condition
We have limited working capital reserves with which to fund our continuing operations. We are reliant, at present, upon our capital reserves for ongoing operations and have no product revenue.
Net working capital decreased fromSeptember 30, 2019 to the quarter endedDecember 31, 2019 by$2.8 million (to$5.7 million from$8.5 million ) primarily due to development of our PATrOL™ platform technology and lead programs. Our quarterly cash burn has increased significantly compared to prior periods due to increased research and development activities. We anticipate that our cash needs in the future will increase relative to prior periods as we proceed with our research and development objectives. We believe that our current cash balance will provide sufficient capital to continue operations to the end of fiscal 2020. We are closely monitoring ongoing developments in connection with the COVID-19 pandemic, which may negatively impact our commercial prospects and projected cash position in fiscal 2020. We will continue to assess our cash and cash equivalents and, if circumstances warrant, we will make appropriate adjustments to our operating plan. At present, however, we have no bank line of credit or other fixed source of capital reserves. Should we need additional capital in the future, we will be primarily reliant upon private or public placement of our equity or debt securities, or a strategic transaction, for which there can be no warranty or assurance that we may be successful in such efforts. If the Company is unable to maintain sufficient financial resources, its business, financial condition and results of operations will be materially and adversely affected. This could affect future development and business activities and potential future clinical studies and/or other future ventures. Failure to obtain additional equity or debt financing will have a material, adverse impact on the Company's business operations. There can be no assurance that the Company will be able to obtain the needed financing on acceptable terms or at all. Additionally, equity or debt financings will likely have a dilutive effect on the holdings of the Company's existing stockholders. Accordingly, there are material risks and uncertainties that raise substantial doubt about the Company's ability to continue as a going concern. Cash Flow Summary The following table summarizes selected items in our condensed consolidated statements of cash flows: Three Months EndedDecember 31, 2019 2018 (As Restated)
Net cash used in operating activities
(68,400 ) (97,463 ) Net used in financing activities (73,426 )
(14 )
Net decrease in cash and cash equivalents
Operating Activities Net cash used in operating activities was approximately$2.4 million for the quarter endedDecember 31, 2019 , as compared to approximately$0.02 million for the quarter endedDecember 31, 2018 . Net cash used in operating activities in the quarter endedDecember 31, 2019 was primarily the result of our net loss, offset by our stock-based compensation expense and the change in fair value of warrant liabilities. Net cash used in operating activities in the quarter endedDecember 31, 2018 was primarily the result of our net loss, offset by research and development expense-licenses acquired. Investing Activities Net cash used in investing activities was approximately$0.07 million for the quarter endedDecember 31, 2019 , as compared to$0.1 million for the quarter endedDecember 31, 2018 . Net cash used in investing activities in the quarter endedDecember 31, 2019 was primarily the result of purchases of laboratory equipment. Net cash used in investing activities in the quarter endedDecember 31, 2018 was primarily the result of costs paid in connection with the acquisition of the CMU License. 22 Financing Activities Net cash used in financing activities was approximately$0.07 million for the quarter endedDecember 31, 2019 , as compared to approximately$14 for the quarter endedDecember 31, 2018 . Net cash used in financing activities for the quarter endedDecember 31, 2019 reflects the principal payments of financed insurance. Net cash used in financing activities for the quarter endedDecember 31, 2018 reflects the repurchase of common stock.
Off-Balance Sheet Arrangements
As of
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