TREX WIND-DOWN, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes to the consolidated financial statements and other disclosures included in this Annual Report on Form 10-K. Our financial statements have been prepared in accordance with accounting principles generally accepted inthe United States and are presented inU.S. dollars.
General
Management's discussion and analysis of results of operations and financial condition is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial position of our Company. This discussion and analysis should be read in conjunction with Item 8, "Financial Statements and Supplementary Data." Certain statements in this Item 7 constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, "Risk Factors," may cause our actual results, financial position, and cash used in operations to differ materially from these forward-looking statements
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(chemistry, manufacturing and control) and safety profiles. We are initially
focused on developing non-systemic treatments for rare dermatologic diseases
including congenital ichthyosis ("CI"), facial angiofibromas ("FAs") in tuberous
sclerosis complex ("TSC"), and sclerotic skin diseases. Our lead mid to
late-stage programs are TMB-001 and TMB-002. TMB-003 is our earliest stage
program.
TMB-001, a patented topical formulation of isotretinoin using our patented IPEG™
delivery system, has completed its Phase 2b clinical trial for the treatment of
moderate to severe subtypes of CI, a group of rare genetic keratinization
disorders that lead to dry, thickened, and scaling skin, in Q4 2021. This study
demonstrated clinically meaningful reduction in targeted and overall severity of
CI along with a favorable safety profile. A prior Phase 1/2 study involving 19
patients with CI demonstrated safety and a signal of preliminary efficacy of
TMB-001, as well as minimal systemic absorption. A prior Phase 1/2 study
involving 19 patients with CI demonstrated safety and preliminary efficacy of
TMB-001, as well as minimal systemic absorption.
TMB-002, a proprietary topical formulation of rapamycin, is currently being
evaluated in a Phase 2b clinical trial for the treatment of FAs in TSC, a
multisystem genetic disorder resulting in the growth of hamartomas in multiple
organs. TSC results from dysregulation in the mTOR pathway, and as a topical
mTOR inhibitor, TMB-002 may address FAs in TSC without the systemic absorption
of an oral agent.
The product in its earliest stage in our pipeline is TMB-003, a proprietary
formulation of Sitaxsentan, a new chemical entity in the U.S. , which is a
selective endothelin-A receptor antagonist. It is currently in preclinical
development as a locally applied formulation for the treatment of sclerotic skin
diseases. The two disease areas under consideration include: Lichen Sclerosis
and Localized Scleroderma.
In connection with the Merger (as defined below), we acquired the BPX-01 and
BPX-04 assets. BPX-01 is a Phase 3 ready topical minocycline for the treatment
of inflammatory lesions of acne vulgaris, and BPX-04 is a Phase 3 ready topical
minocycline for the treatment of papulopustular rosacea. We are seeking to
monetize these assets through a license, co-development, or sale.
On May 18, 2020 , BioPharmX Corporation ("BioPharmX") completed its business
combination with Timber Pharmaceuticals LLC , a Delaware limited liability
company ("Timber Sub"), in accordance with the terms of the Agreement and Plan
of Merger and Reorganization, dated as of January 28, 2020 (the "Merger
Agreement"), by and among BioPharmX, Timber Sub and BITI Merger, Inc. , a
Delaware corporation and wholly-owned subsidiary of the Company ("Merger Sub"),
as amended by Amendment No. 1 thereto made and entered into as of March 24, 2020
(the "First Amendment") and Amendment No. 2 thereto made and entered into as of
April 27, 2020 (the "Second Amendment") (the Merger Agreement, as amended by the
First Amendment and the Second Amendment, the "Amended Merger Agreement"),
pursuant to which Merger Sub merged with and into Timber Sub, with Timber Sub
surviving as a wholly-owned subsidiary of the Company (the "Merger"). In
connection with, and immediately prior to the completion of, the Merger,
BioPharmX effected a reverse stock split of the Company's common stock, par
value $0.001 per share (the "Common Stock"), at a ratio of 1-for-12 (the
"Reverse Stock Split"). Immediately after completion of the Merger, BioPharmX
changed its name to "Timber Pharmaceuticals, Inc. " and the officers and
directors of Timber Sub became the officers and directors of the Company.
Under the terms of the Amended Merger Agreement, BioPharmX issued shares of
Common Stock to the holders of common units of Timber Sub. Immediately after the
Merger, there were approximately 11,849,031 shares of Common Stock outstanding
(after the Reverse Stock Split). Pursuant to the terms of the Amended Merger
Agreement, the former holders of common units of Timber Sub (including the
Investors, as defined below, but excluding VARs, as defined below) owned in the
aggregate approximately 88.5% of the outstanding Common Stock, with the
Company's stockholders immediately prior to the Merger owning approximately
11.5% of the outstanding Common Stock. The number of shares of Common Stock
issued to the holders of common units of Timber Sub for each common unit of
Timber Sub outstanding immediately prior to the Merger was calculated using an
exchange ratio of approximately 629.57 shares of Common Stock for each Timber
Sub unit. In addition, the 584 Value Appreciation Rights of Timber Sub ("VARs")
that were outstanding immediately prior to Merger became denoted and payable in
367,670 shares of Common Stock at the effective time of the Merger (the
"Effective Time"). Further, the holder of the 1,819,289 preferred units of
Timber Sub outstanding immediately
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prior to the Merger received 1,819 shares of the newly created convertible Series A preferred stock (the "Series A Preferred Stock") at the Effective Time.
In connection with the Merger Agreement, onMarch 27, 2020 , Timber Sub and BioPharmX entered into a securities purchase agreement (the "Securities Purchase Agreement"), with certain accredited investors (the "Investors") pursuant to which, among other things, Timber Sub issued to the Investors shares of Timber units immediately prior to the Merger and BioPharmX issued to the Investors warrants to purchase shares of BioPharmX common stock on the tenth trading day following the consummation of the Merger (the "Investor Warrants") in a private placement transaction for an aggregate purchase price of approximately$25 million (which amount is comprised of (x) a$5 million credit with respect to the Bridge Notes and (y)$20 million in cash from the Investors) (the "Purchase Price"). We issued to the Investors 8,384,764 Series A Warrants to purchase shares of Common Stock ("Series A Warrants") and 7,042,175 Series B Warrants to purchase shares of Common Stock ("Series B Warrants"). The Series A Warrants have a 5-year term and an exercise price of$2.7953 , subject to the number of shares and exercise price being reset based on our stock price after the Merger. The Series A Warrants were initially exercisable into 8,384,764 shares of Common Stock issued to the Investors, subject to certain adjustments. The Series B Warrants had an exercise price per share of$0.001 , were exercisable upon issuance and were initially convertible into 7,042,175 shares of Common Stock in the aggregate. In addition, pursuant to the terms of the Securities Purchase Agreement, onMay 22, 2020 we issued to the Investors warrants to purchase 413,751 shares of Common Stock (the "Bridge Warrants") which had an exercise price of$2.2362 per share, which was revised to$0.31 per share as a result of theNovember 2021 Offering. OnNovember 19, 2020 the Company entered into a Warrant Waiver Agreement with each of the warrant holders which modified the terms of the original agreement and eliminated further resets. The aggregate number of Series A Warrants issued was fixed at 20,178,214 and the warrant exercise price was fixed at$1.16 . The aggregate number of Series B Warrants was fixed at 22,766,777. The exercise price of the Series B Warrants remained unchanged. In addition, certain restrictions contained in the Warrant Agreement and Securities Purchase Agreement were modified including restrictions on the Company's ability to issue additional equity securities in connection with a financing and the Company's ability to complete a fundamental transaction. Subject to certain restrictions detailed in the Warrant Waiver Agreement, the Company is now able to complete an equity financing or a fundamental transaction at any time afterApril 30, 2021 . However, the Company remains restricted with respect to conducting variable rate transactions untilMay 18, 2023 . Further, in connection with the Warrant Waiver Agreement the Company agreed to immediately register 11,383,389 shares of common stock issuable upon exercise of the Series B Warrants. The warrant holders have additional demand registration rights as described in the Warrant Waiver Agreement. As ofMarch 4, 2021 , the Series B Warrants were exercised in full. As ofDecember 31, 2021 , 16,701,824 shares of common stock remain issuable upon exercise of the Series A Warrants. We have a limited operating history as the Company was formed onFebruary 26, 2019 . Since inception, Timber's operations have focused on establishing its intellectual property portfolio, including acquiring rights to the proprietary formulations of isotretinoin, rapamycin and Sitaxsentan, as described above, organizing and staffing the Company, business planning, raising capital, and conducting clinical trials. We have financed our operations with$33.3 million through capital contributions over the past two years. Since inception, we have incurred significant operating losses. For the year endedDecember 31, 2021 , our net loss was$10.6 million . As ofDecember 31, 2021 , we had an accumulated deficit of approximately$28.9 million . We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we continue to develop the pipeline of programs. Recent Developments TMB-001 Patents
On
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On
Officer Resignation
OnMarch 4, 2022 ,Zachary Rome stepped down from his positions as the Chief Operating Officer and Executive Vice-President of the Company. As a result of his resignation,Mr. Rome (i) is entitled to 79,326 shares of common stock underlying vested VARs, or$22,528 , at the Company's election, and (ii) forfeited 52,884 VARs.Mr. Rome continues to serve on the Company's board of directors.November 2021 Offering OnNovember 2, 2021 , the Company entered into an underwriting agreement withH.C. Wainwright & Co., LLC , as representative of the several underwriters named in Schedule I thereto, relating to the public offering, issuance and sale of shares of our common stock and, to certain investors, pre-funded warrants to purchase shares of common stock, and accompanying warrants to purchase shares of our common stock. After giving effect to the sale of additional shares pursuant to the exercise of the option byH.C. Wainwright & Co., LLC that closed onNovember 9, 2021 , the total number of shares of common stock (or common stock equivalents) sold by us in the offering was 26,953,125, together with warrants to purchase up to 26,953,125 shares of common stock issued at the closing onNovember 5, 2021 , for total gross proceeds of$17.25 million before deducting underwriting discounts and commissions and other offering expenses, and net proceeds of approximately$15.8 million . As a result of the offering, the exercise price of the Bridge Warrants was adjusted to$0.31 per share. Each share of common stock and pre-funded warrant to purchase one share of common stock was sold together with a warrant to purchase one share of common stock. All the securities sold in the offering were sold by the Company. The public offering price of each share of common stock and accompanying common warrant was$0.64 and$0.639 for each pre-funded warrant and accompanying common warrant. The pre-funded warrants were immediately exercisable at a price of$0.001 per share of common stock and were exercised in full onNovember 5, 2021 . The warrants were immediately exercisable at a price of$0.70 per share of common stock and expire five years from the date of issuance. Asset Purchase Agreements withPatagonia Pharmaceuticals LLC ("Patagonia") OnFebruary 28, 2019 , we acquired the intellectual property rights for a topical formulation of isotretinoin for the treatment of CI and identified as TMB-001, formerly PAT-001 including the IPEGTM brand, from Patagonia (the "TMB-001 Acquisition").Zachary Rome , a member of our board of directors and our former Executive Vice-President and Chief Operating Officer serves as President of Patagonia and also maintains an ownership interest therein. Under the terms of the TMB-001 Acquisition, we paid a one-time upfront payment of$50,000 to Patagonia. Patagonia is entitled to up to$27.0 million of cash milestone payments relating to certain regulatory and commercial achievements of the TMB-001 Acquisition, with the first being$4.0 million from the initiation of a Phase 3 pivotal trial, as agreed with the FDA. In addition, Patagonia is entitled to net sales earn-out payments ranging from low single digits to mid-double digits for the program licensed. We are responsible for all development activities under the license. The potential regulatory and commercial milestones are not yet considered probable, and no milestone payments have been accrued atDecember 31, 2021 or 2020, respectively. OnJune 26, 2019 , we acquired the intellectual property rights for a locally administered formulation of Sitaxsentan for the treatment of cutaneous fibrosis and/or pigmentation disorders, and identified as TMB-003, formerly PAT-S03, from Patagonia (the "TMB-003 Acquisition"). Upon closing of the TMB-003 Acquisition, we paid a one-time upfront payment of$20,000 to Patagonia. Patagonia is entitled to up to$10.25 million of cash milestone payments subject to adjustments relating to certain regulatory and commercial achievements of TMB-003, with the first being a one-time payment of$250,000 upon the opening of an investigational new drug ("IND") with the FDA. In addition, Patagonia is entitled to net sales earn-out payments ranging from low to mid-single digits for the program licensed. We are responsible for all development activities under the license. 56
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The potential regulatory and commercial milestones are not yet considered
probable, and no milestone payments have been accrued at
Acquisition of License from AFT Pharmaceuticals Limited ("AFT")
OnJuly 5, 2019 , we entered into a license agreement with AFT which provides us with (i) an exclusive license to certain licensed patents, licensed know-how and AFT trademarks to commercialize the Pascomer® product inthe United States ,Canada andMexico and (ii) a co-exclusive license to develop the Pascomer® product in this territory. Concurrently, we granted to AFT an exclusive license to commercialize the Pascomer® product outside of its territory and co-exclusive sublicense to develop and manufacture the licensed product for commercialization outside of its territory (the "AFT License Agreement"). The AFT License Agreement also provides for the formation of a joint steering committee to oversee, coordinate and review recommendations and approve decisions with respect to the matters related to the development and commercialization of Pascomer® , in which both the Company and AFT have the right to appoint two members. The committee is currently comprised of three members. We have final decision-making authority on all matters relating to the commercialization of Pascomer® pin the specified territory and on all matters related to the development (and regulatory approval) of Pascomer®, with certain exceptions. The development of Pascomer® is being conducted pursuant to a written development plan, written by AFT and approved by the joint steering committee, which is reviewed on at least an annual basis. AFT shall perform clinical trials of Pascomer® in the specified territory and shall perform all CMC (chemistry, manufacturing and controls) and related activities to support regulatory approval. We are responsible for all expenses incurred by AFT during the term of the AFT License Agreement and shall equally share all costs and expenses with AFT, incurred by AFT for development and marketing work performed in furtherance of regulatory approval and commercialization worldwide, outside of the specified territory. We are also entitled to receive a significant percentage of the economics (royalties and milestones) in any licensing transaction that AFT executes outside ofNorth America ,Australia ,New Zealand , andSoutheast Asia . Upon closing of the AFT License Agreement, we were obligated to reimburse AFT for previously spent development costs, subject to certain limitations and were obligated to pay a one-time, irrevocable and non-creditable upfront payment to AFT, payable in scheduled installments. AFT is entitled to up to$25.5 million of cash milestone payments relating to certain regulatory and commercial achievements of TMB-002, with the first payment of$1.0 million upon the successful completion of a Phase 2b trial where the results of such clinical trial meet the clinical trial's primary clinical endpoints. In addition, AFT is entitled to net sales royalties ranging from high single digits to low double digits for the program licensed. The potential regulatory and commercial milestones are not yet considered probable, and no milestone payments have been accrued atDecember 31, 2021 or 2020, respectively. 57 Table of Contents Results of Operations
Comparison of the Years Ended
Year Ended December 31,
2021 2020 Change $ Change %
Grant revenue $ 590,794 $ 453,810 $ 136,984 30 %
Milestone revenue 295,738 - 295,738 N/A %
Total revenue 886,532 453,810 432,722 95 %Research and development 6,149,586 2,733,026 3,416,560 125 % Research and development - license acquired - 12,371,332 (12,371,332) (100) % Transaction costs - 1,501,133 (1,501,133) (100) % Selling, general and administrative 5,387,164 4,060,186
1,326,978 33 %
Loss from operations (10,650,218) (20,211,867) 9,561,649 (47) %
Interest expense (15,551) (4,416,746) 4,401,195 (100) %
Interest income - 816,657 (816,657) (100) %
Change in fair value of investment in
BioPharmX - 559,805 (559,805) (100) %
Change in fair value of warrant
liability - 8,156,770 (8,156,770) (100) %
Gain (loss) on foreign currency
exchange (3,619) 15,609 (19,228) (123) %
Net loss before provision for income
taxes (10,669,388) (15,079,772) 4,410,384 (29) %
(Benefit) provision for income taxes (30,242) 37,842 (68,084) (180) %
Net loss (10,639,146) (15,117,614) 4,478,468 (30) %
Accrued dividend on preferred stock
units - (52,669) 52,669 (100) %
Cumulative dividends on Series A
preferred stock (129,992) (90,516) (39,476) 44 %
Net loss attributable to common
stockholders $ (10,769,138) $ (15,260,799) $ 4,491,661 (29) %
Revenues
For the year endedDecember 31, 2021 , grant revenue was approximately$0.6 million compared to$0.5 million for the year endedDecember 31, 2020 . The increase in revenue of approximately$0.1 million consisted of reimbursements received from the FDA as a result of achieving certain clinical milestones in the development of TMB-001. InSeptember 2018 , Patagonia was awarded a$1.5 million grant (the "Grant") from the FDA as part of the Orphan Products Clinical Trials Grants Program of theOffice of Orphan Products Development . The Grant funds were made available in three annual installments of$500,000 per year, which commenced inSeptember 2018 . The Grant was transferred to Timber pursuant to its TMB-001 Acquisition Agreement with Patagonia inFebruary 2019 . InMarch 2020 andMarch 2021 , the FDA awarded us the second and third tranches of the grant, respectively. Milestone revenue for the year endedDecember 31, 2021 , was approximately$0.3 million . These revenues were related to an upfront milestone payment paid to AFT by Desitin to which Timber was entitled under the terms of the AFT License Agreement. Operating Costs and Expenses
Research and Development Expense
For the year endedDecember 31, 2021 , research and development expenses were$6.1 million compared to$2.7 million for the year endedDecember 31, 2020 . The increase of$3.4 million is primarily related to increased costs incurred related to our Phase 2b and Phase 2a clinical trials of TMB-001 and TMB-002, respectively, such as CRO direct and pass-through expenses and the hire of a new Chief Medical Officer.
Research and development costs were primarily attributable to costs incurred in connection with our research activities and include costs associated with clinical trials, consultants, clinical trial materials, regulatory filings, facilities, laboratory expenses and other supplies.
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Research and development costs are expensed as incurred. Costs for certain activities, such as preclinical studies and clinical trials, are generally recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and collaborators.
Research and Development Expense - License Acquired
For the year endedDecember 31, 2020 , research and development expense - license acquired was$12.4 million related to our acquisition of BioPharmX. There were no acquired licenses for the year endedDecember 31, 2021 .
Transaction Costs
For the year ended
General and Administrative Expense
For the year endedDecember 31, 2021 , general and administrative expenses were$5.4 million compared to$4.1 . million for the year endedDecember 31, 2020 . The increase in general and administrative expenses of approximately$1.3 million was due to increased personnel and related costs including stock-based compensation of$0.4 . million and increased in salary and benefits expense of$0.6 million due to increased headcount and other overhead expenses of$0.3 million of increased insurance costs of approximately$0.2 million .
Other Income (Expense)
Interest Expense
Interest expense was$0.02 million for the year endedDecember 31, 2021 , which was due to interest charged for the Redeemable Series A convertible preferred stock under redemption, which started inNovember 2021 . For the year endedDecember 31, 2020 , interest expense was$4.4 million due to the amortization of the original issue discount related to the Bridge Notes.
Interest Income
For the year endedDecember 31, 2020 , the interest income was$0.8 million due to the accrued interest and amortization of the OID related to the BioPharmX loan. There was no interest income in 2021.
Change in Fair Value of BioPharmX
For the year ended
Change in Fair Value of Warrant Liability
For the year ended
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Comparison of the Quarters Ended
Three Months Ended December 31,
2021 2020 Change $ Change %
Grant revenue $ 190,005 $ 102,382 $ 87,623 86 %
Milestone revenue - - - N/A
Total revenue 190,005 102,382 87,623 86 %
Research and development 1,525,775 493,399 1,032,376 209 %
Selling, general and administrative 1,475,452 1,314,478 160,974 12 %
Loss from operations (2,811,222) (1,705,495) (1,105,727) 65 %
Interest Expense (15,551) - (15,551) 100 %
Change in fair value of warrant
liability - 2,549,477 (2,549,477) (100) %
Gain (loss) on foreign currency
exchange (3,075) 3,958 (7,033) (178) %
Net (loss) income before provision for
income taxes (2,829,848) 847,940 (3,677,788) (434) %
(Benefit) Provision for income taxes (30,242) 37,842 (68,084) (180) %
Net (loss) income (2,799,606) 810,098 (3,609,704) (446) %
Cumulative dividends on Series A
preferred stock (21,134) (36,685) 15,551 (42) %
Net (loss) income attributable to
common stockholders $ (2,820,740) $ 773,413 $ (3,594,153) (465) %
Revenues
For the quarter ended December 31, 2021 , grant revenue was approximately $0.2
million compared to $0.1 million for the year ended December 31, 2020 . The
increase in revenue of approximately $0.1 million is due to timing of
reimbursements received from the FDA as a result of achieving certain clinical
milestones in the development of TMB-001. In September 2018 , Patagonia was
awarded a $1.5 million grant (the "Grant") from the FDA as part of the Orphan
Products Clinical Trials Grants Program of the Office of Orphan Products
Development . The Grant funds were made available in three annual installments of
$500,000 per year, which commenced in September 2018 . The Grant was transferred
to Timber pursuant to its TMB-001 Acquisition Agreement with Patagonia in
February 2019 . In March 2020 and March 2021 , the FDA awarded us the second and
third tranches of the grant, respectively.
There were no Milestone revenues for the quarters ended
Operating Costs and Expenses
Research and Development Expense
For the quarter endedDecember 31, 2021 , research and development expenses were$1.5 million compared to$0.5 million for the quarter endedDecember 31, 2020 . The increase of$1.0 million is primarily related to increased costs incurred related to our Phase 2b and Phase 2a clinical trials of TMB-001 and TMB-002, respectively, such as CRO direct and pass-through expenses.
Research and development costs were primarily attributable to costs incurred in connection with our research activities and include costs associated with clinical trials, consultants, clinical trial materials, regulatory filings, facilities, laboratory expenses and other supplies.
General and Administrative Expense
For the quarter endedDecember 31, 2021 , general and administrative expenses were$1.5 million compared to$1.3 million for the quarter endedDecember 31, 2020 . The increase in general and administrative expenses of approximately$0.2 million was due to increased personnel and related costs including stock-based compensation of$0.2 million due to increased headcount. 60 Table of Contents Other Income (Expense) Interest Expense
Interest expense was
Change in Fair Value of Warrant Liability
For the quarter endedDecember 31, 2020 , the change in fair value of warrant liability resulted in an unrealized gain of$2.5 million due to the decrease in share price during the period.
Liquidity and Capital Resources
Since inception, we have not generated revenue from product sales and have incurred net losses and negative cash flows from its operations. AtDecember 31, 2021 , we had working capital of approximately$12.9 million , which included cash and cash equivalents of$16.8 million . We reported a net loss of$10.6 million , during the year endedDecember 31, 2021 . During the year endedDecember 31, 2021 , we raised net proceeds of$15.8 million from our offering of common stock and prefunded warrants. Our management believes that the Company's existing cash and cash equivalents as ofDecember 31, 2021 are sufficient to satisfy our operating cash needs into the fourth quarter of 2022. Inflation has not had a significant impact on our historical operations, and we while we do not expect it to have a significant impact on our results of operations or financial condition in the near term, we have monitored and will continue to monitor, the cost of clinical trials and our operating expenses for the potential impact of inflation.
Cash Flows for the Year Ended
Year Ended December 31,
2021 2020
Cash provided by (used in) continuing operations:
Operating activities $ (9,314,160) $ (8,293,313)
Investing activities (17,804) (2,659,214)
Financing activities 15,791,810 21,244,147
Net increase in cash and cash equivalents $ 6,459,846 $ 10,291,620
Operating Activities
For the year endedDecember 31, 2021 , net cash used in operating activities was$9.3 million , which primarily consisted of our net loss of$10.6 million , adjusted for non-cash expenses of$0.9 million primarily consisting of,$0.6 of stock-based compensation and$0.3 million of amortization of the right of use assets. The change in assets and liabilities of$0.4 million is primarily due to increases in accounts payable and accrued expenses of$0.6 million and a reduction in the lease liability of$0.3 million . For the year endedDecember 31, 2020 net cash used in operating activities was$8.3 million , which primarily consisted of our net loss of$15.1 million , adjusted for non-cash expenses of$7.7 million primarily consisting of,$12.4 million of research and development - licenses acquired,$4.2 million of amortization of debt discount related to the Bridge Notes, offset by$8.2 million for the change in fair value of our warrant liability,$0.8 million for the amortization of our loan discount, and$0.6 million for the change in fair value of our investment in BioPharmX. The change in assets and liabilities of$0.9 million is primarily due to increases in other current assets and a decrease in accounts payable, accrued expenses and other liabilities of$0.6 million . 61 Table of Contents Investing Activities
For the year endedDecember 31, 2020 , net cash used in investing activities was approximately$2.7 million which primarily consisted of our loan to BioPharmX of$2.3 million and our payment of$0.8 million for research and development licenses, offset by the cash acquired with our acquisition of BioPharmX of
$0.3 million . Financing Activities For the year endedDecember 31, 2021 , net cash provided by financing activities was approximately$15.8 million which consisted of the net proceeds received from the issuance of common stock and pre-funded warrants from theNovember 2021 Offering. For the year endedDecember 31, 2020 , net cash provided by financing activities was approximately$21.2 million , which consisted of the net proceeds received from the issuance of common stock related to our financing of$17.5 million and the proceeds received from our Bridge Notes of$3.7 million .
Funding Requirements
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of our pipeline of programs. Our expenses related to clinical trials are expected to increase in 2022. Furthermore, we expect to continue to incur costs as a public company. Accordingly, we will need to obtain additional funding. If we are unable to raise capital or otherwise obtain funding when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
We expect that our research and development expenses in connection with our development programs for our various product candidates will continue to be significant. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future.
OnJuly 17, 2020 , we entered into an Amended and Restated Registration Rights Agreement (as amended, the "Registration Rights Agreement") with the Investors. Pursuant to the Registration Rights Agreement, we agreed to provide certain demand registration rights to the Investors relating to the registration of the shares underlying the Investor Warrants and the Bridge Warrants. In connection with the entry into the Registration Rights Agreement and pursuant to the Securities Purchase Agreement, we were restricted from various financing activities untilAugust 16, 2022 . OnNovember 19, 2020 we entered into a warrant waiver agreement with the investors revising the restriction date toApril 30, 2021 , except with respect to variable rate transactions. We remain restricted with respect to conducting variable rate transactions untilMay 18, 2023 . OnJuly 5, 2019 , we entered into a license agreement with AFT which provides us with (i) an exclusive license to certain licensed patents, licensed know-how and AFT trademarks to commercialize the Pascomer® product inthe United States ,Canada andMexico and (ii) a co-exclusive license to develop the Pascomer® product in this territory. Concurrently, we granted to AFT an exclusive license to commercialize the Pascomer® product outside of its territory and co-exclusive sublicense to develop and manufacture the licensed product for commercialization outside of its territory (the "AFT License Agreement"). Upon closing of the AFT License Agreement, we were obligated to reimburse AFT for previously spent development costs, subject to certain limitations and were obligated to pay a one-time, irrevocable and non-creditable upfront payment to AFT, payable in scheduled installments. AFT is entitled to up to$25.5 million of cash milestone payments relating to certain regulatory and commercial achievements of TMB-002, with the first payment of$1.0 million upon the successful completion of a Phase 2b trial where the results of such clinical trial meet the clinical trial's primary clinical endpoints. In addition, AFT is entitled to net sales royalties ranging from high single digits to low double digits for the program licensed. The potential regulatory and commercial milestones are not yet considered probable, and no milestone payments have been accrued atDecember 31, 2021 or 2020, respectively. Management believes that in 2022 AFT may achieve certain regulatory achievements that would require the Company to make a$1.0 million milestone payment, but certainty of regulatory achievement is not assured. 62 Table of Contents
The Company has a class of Series A Preferred Stock as to which the holder TardiMed has demanded redemption. The redemption price is equal to approximately$2.1 million in the aggregate, atDecember 31, 2021 , including accumulated and unpaid dividends which accrue dividends at the rate of 8% per annum. Redemption is subject to certain limitations underDelaware corporate law due to our current financial condition. As a result of the call for redemption, the Series A Preferred Stock has been reclassified as a liability atDecember 31, 2021 . Dividends will continue to accrue and will be recorded as non-cash interest expense in the Statement of Operations rather than to additional-paid-in-capital in 2022. In addition, under the terms of the TMB 001 Acquisition, we paid a one-time upfront payment of$50,000 to Patagonia. Patagonia is entitled to up to$27.0 million of cash milestone payments relating to certain regulatory and commercial achievements of the TMB 001 Acquisition, with the first being$4.0 million from the initiation of a Phase 3 pivotal trial, as agreed with the FDA. In addition, Patagonia is entitled to net sales earn-out payments ranging from low single digits to mid-double digits for the program licensed. We are responsible for all development activities under the license. The potential regulatory and commercial milestones were not yet considered probable atDecember 31, 2021 andDecember 2020 , respectively, and no milestone payments have been accrued atDecember 31, 2021 or 2020, respectively. Management believes that the first$4.0 million milestone payment will likely become payable during 2022. We have evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year beyond the filing of this Annual Report on Form 10-K. Based on such evaluation and the Company's current plans, which are subject to change, management believes that the Company's existing cash and cash equivalents as ofDecember 31, 2021 are sufficient to satisfy our operating cash needs into the fourth quarter of 2022.
Our future liquidity and capital funding requirements will depend on numerous factors, including:
? our ability to raise additional funds to finance our operations;
the outcome, costs and timing of clinical trial results for our current or
future product candidates, including the timing, progress, costs and results of
? our planned Phase3 clinical trial of TMB-001 for the treatment of congenital
ichthyosis as well as its ongoing Phase 2b clinical trial of TMB-002 for the
treatment of facial angiofibromas in tuberous sclerosis complex;
? the outcome, timing and cost of meeting regulatory requirements established by
the FDA and other comparable foreign regulatory authorities;
? the emergence and effect of competing or complementary products;
our ability to maintain, expand and defend the scope of its intellectual
property portfolio, including the amount and timing of any payments we may be
? required to make, or that it may receive, in connection with the licensing,
filing, prosecution, defense and enforcement of any patents or other
intellectual property rights;
? the cost and timing of completion of commercial-scale manufacturing activities
, if any of our products are approved for commercial sale;;
the cost of establishing sales, marketing and distribution capabilities for the
? Company's products in regions where we choose to commercialize our products on
our own if approved for commercial sale;
? the initiation, progress, timing and results of the commercialization of our
product candidates, if approved for commercial sale;
? our ability to retain our current employees and the need and ability to hire
additional management and scientific and medical personnel; and
? the terms and timing of any collaborative, licensing or other arrangements that
we have or may establish.
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We will need to raise substantial additional funds through one or more of the
following: issuance of additional debt or equity and/or the completion of a
licensing or other commercial transaction for one or more of our product
candidates. If we are unable to maintain sufficient financial resources, our
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. There can be
no assurance that we will be able to obtain the needed financing on acceptable
terms or at all. Additionally, equity or convertible debt financings will likely
have a dilutive effect on the holdings of our existing stockholders.
The impact of the worldwide spread of COVID-19 has been unprecedented and
unpredictable. Site activation and patient enrollment have recently been
impacted by the COVID-19 pandemic in the larger and longer TMB-002 study,
especially at our contracted test sites in Western Europe . We are continuing to
assess the effect on our operations by monitoring the spread of COVID-19 and the
actions implemented to combat the virus throughout the world and our assessment
of the impact of COVID-19 may change.
Critical Accounting Policies and Significant Estimates
Research and Development
Research and development costs, including in-process research and development acquired as part of an asset acquisition for which there is no alternative future use, are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Certain research and development costs are estimated based on contractual arrangements.
Accrued Outsourcing Costs
Substantial portions of the Company's preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors (collectively "CROs"). These CROs generally bill monthly or quarterly for services performed, or bill based upon milestone achievement. For preclinical studies, the Company accrues expenses based upon estimated percentage of work completed and the contract milestones remaining. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. The Company outsources a substantial portion of its clinical trial activities, utilizing external entities such as CROs, independent clinical investigators, and other third-party service providers to assist the Company with the execution of its clinical studies. For each clinical trial that the Company conducts, certain clinical trial costs are expensed immediately, while others are expensed over time based on the number of patients in the trial, the attrition rate at which patients leave the trial, and/or the period over which clinical investigators or CROs are expected to provide services. The Company's estimates depend on the timeliness and accuracy of the data provided by the CROs regarding the status of each program and total program spending. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information it receives.
Valuation of Warrant Liabilities
The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The Company issued Series A Warrants to purchase 8,384,764 shares of its common stock to investors in connection with the$20 million financing inMay 2020 , and recorded these outstanding warrants as a liability at fair value utilizing a Monte Carlo simulation model. As further described in Note 6, the fair value of the warrants issued by the Company in connection with the$5.0 million Bridge Notes has been estimated using a probability-weighted Black-Scholes option pricing model. Upon consummation of the Merger the Series B Warrants were classified as equity.
Pursuant to the waiver agreement related to the Company's Series A Warrants (see
Note 1), on
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Stock-Based Compensation
The Company expenses stock-based compensation to employees, non-employees and
board members over the requisite service period based on the estimated
grant-date fair value of the awards and actual forfeitures. The Company accounts
for forfeitures as they occur. Stock-based awards with graded-vesting schedules
are recognized on a straight-line basis over the requisite service period for
each separately vesting portion of the award. The Company estimates the fair
value of stock option grants using the Black-Scholes option pricing model, and
the assumptions used in calculating the fair value of stock-based awards
represent management's best estimates and involve inherent uncertainties and the
application of management's judgment. All stock-based compensation costs are
recorded in general and administrative or research and development costs in the
consolidated statements of operations based upon the underlying individual's
role at the Company.
The Company estimates the fair value of VARs using the Black-Scholes option
pricing model, and the assumptions used in calculating the fair value of
equity-based awards represented management's best estimates and involve inherent
uncertainties and the application of management's judgment. All equity-based
compensation costs are recorded in general and administrative or research and
development costs in the statements of operations.
Recently Issued and Adopted Accounting Pronouncements
See Note 2 to our financial statements beginning on page F-1 of this Form 10-K for a description of recent accounting pronouncements applicable to our financial statements.
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