nvls_Current folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

 

 

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

 

For the quarterly period ended September 30, 2015.

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from            to           

Commission file number: 001-37449

 


 

Nivalis Therapeutics, Inc.

(Exact name of Registrant as specified in its charter)

 


 

 

 

 

Delaware

 

20-8969493

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

3122 Sterling Circle, Suite 200
Boulder, Colorado

 

80301

(Address of principal executive offices)

 

(Zip Code)

(720) 945-7700

(Registrant’s telephone number, including area code)

Not Applicable

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

 


 

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

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

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

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

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

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of October 31, 2015 was 15,451,821.

 

 


 

Table of Contents

 

NIVALIS THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

    

    

 

ITEM 1. 

 

FINANCIAL STATEMENTS

 

 

 

 

 

 

Balance Sheets

 

 

 

 

 

 

Statements of Operations and Comprehensive Loss

 

 

 

 

 

 

Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

Statements of Cash Flows

 

 

 

 

 

 

NOTES TO UNAUDITED FINANCIAL STATEMENTS

 

 

 

 

ITEM 2. 

 

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

13 

 

 

 

 

ITEM 3. 

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

22 

 

 

 

 

ITEM 4. 

 

CONTROLS AND PROCEDURES

22 

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

ITEM 1. 

 

LEGAL PROCEEDINGS

23 

 

 

 

 

ITEM 1A. 

 

RISK FACTORS

23 

 

 

 

 

ITEM 2. 

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

58 

 

 

 

 

ITEM 3. 

 

DEFAULTS UPON SENIOR SECURITIES

59 

 

 

 

 

ITEM 4. 

 

MINE SAFETY DISCLOSURES

59 

 

 

 

 

ITEM 5. 

 

OTHER INFORMATION

59 

 

 

 

 

ITEM 6. 

 

EXHIBITS

59 

 

 

 

 

 

 

SIGNATURES

61 

 

 

 

 

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Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

 

Nivalis Therapeutics, Inc.

Balance Sheets

(In thousands, except for share amounts)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2015

    

2014

  

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,555

 

$

27,812

 

Marketable securities

 

 

35,096

 

 

 —

 

Prepaid expenses and other current assets

 

 

996

 

 

630

 

Total current assets

 

 

93,647

 

 

28,442

 

 

 

 

 

 

 

 

 

Property and equipment and other assets, net

 

 

195

 

 

101

 

Total assets

 

$

93,842

 

$

28,543

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,552

 

$

929

 

Accrued direct program expenses

 

 

1,457

 

 

1,244

 

Accrued employee benefits

 

 

1,336

 

 

210

 

Accrued other liabilities

 

 

120

 

 

32

 

Total current liabilities

 

 

4,465

 

 

2,415

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock with liquidation preference; $0.001 par value; zero and 23,228,986 shares authorized, respectively; zero and 19,978,986 shares issued and outstanding, respectively

 

 

 —

 

 

41,880

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 and zero shares authorized, respectively; no shares issued and outstanding

 

 

 —

 

 

 —

 

Common stock, $0.001 par value; 200,000,000 and 35,000,000 shares authorized, respectively; 15,451,821 and 2,211,158 shares issued and outstanding, respectively

 

 

15

 

 

2

 

Additional paid-in capital

 

 

231,621

 

 

110,265

 

Accumulated other comprehensive income

 

 

15

 

 

 —

 

Accumulated deficit

 

 

(142,274)

 

 

(126,019)

 

Total stockholders’ equity (deficit)

 

 

89,377

 

 

(15,752)

 

Total liabilities and stockholders’ equity (deficit)

 

$

93,842

 

$

28,543

 

 

The accompanying notes are an integral part of these financial statements.

 

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Nivalis Therapeutics, Inc.

Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

Revenue

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,279

 

 

2,164

 

 

11,761

 

 

9,378

 

General and administrative

 

 

1,822

 

 

490

 

 

4,507

 

 

1,623

 

Loss from operations

 

 

(6,101)

 

 

(2,654)

 

 

(16,268)

 

 

(11,001)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

12

 

 

35

 

 

13

 

 

296

 

Interest expense

 

 

 —

 

 

(392)

 

 

 —

 

 

(845)

 

Net loss

 

 

(6,089)

 

 

(3,011)

 

 

(16,255)

 

 

(11,550)

 

Gain on extinguishment of convertible debt as a capital transaction

 

 

 —

 

 

378

 

 

 —

 

 

378

 

Net loss attributable to common stockholders

 

$

(6,089)

 

$

(2,633)

 

$

(16,255)

 

$

(11,172)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains (losses) on marketable securities

 

 

15

 

 

 —

 

 

15

 

 

 —

 

Comprehensive loss

 

$

(6,074)

 

$

(2,633)

 

$

(16,240)

 

$

(11,172)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic and diluted

 

 

15,451

 

 

343

 

 

7,322

 

 

223

 

Net loss per share attributable to common stockholders - basic and diluted

 

$

(0.39)

 

$

(7.68)

 

$

(2.22)

 

$

(50.10)

 

 

The accompanying notes are an integral part of these financial statements.

 

 

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Nivalis Therapeutics, Inc.

Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series 1

 

Series 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

Convertible

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

Total

 

 

 

Preferred Stock

 

Preferred Stock

 

 

Common Stock

 

Paid-‑in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

    

Shares

    

Amount

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Equity (Deficit)

 

Balance as of December 31, 2014

 

8,813

 

$

11,945

 

11,166

 

$

29,935

 

 

2,211

 

$

2

 

$

110,265

 

$

 —

 

$

(126,019)

 

$

(15,752)

 

Conversion of convertible preferred stock to common stock

 

(8,813)

 

 

(11,945)

 

(11,166)

 

 

(29,935)

 

 

6,916

 

 

7

 

 

41,873

 

 

 —

 

 

 —

 

 

41,880

 

Issuance of common stock, net of $9.8 million of offering costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 

6,325

 

 

6

 

 

78,765

 

 

 —

 

 

 —

 

 

78,771

 

Employee stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

718

 

 

 —

 

 

 —

 

 

718

 

Change in unrealized gains (losses) on marketable securities

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

15

 

 

 —

 

 

15

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(16,255)

 

 

(16,255)

 

Balance as of September 30, 2015

 

 —

 

$

 —

 

 —

 

$

 —

 

 

15,452

 

$

15

 

$

231,621

 

$

15

 

$

(142,274)

 

$

89,377

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

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Nivalis Therapeutics, Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2015

    

2014

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(16,255)

 

$

(11,550)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

47

 

 

70

 

Loss on disposal of assets

 

 

 —

 

 

2

 

Stock-based compensation expense

 

 

718

 

 

57

 

Change in value of preferred stock warrant liabilities and derivative

 

 

 —

 

 

(296)

 

Amortization of deferred financing costs and noncash interest

 

 

 —

 

 

708

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other

 

 

(366)

 

 

25

 

Accounts payable

 

 

623

 

 

(304)

 

Accrued direct program expenses

 

 

213

 

 

146

 

Accrued employee benefits

 

 

1,126

 

 

(192)

 

Accrued other liabilities

 

 

88

 

 

55

 

Net cash used in operating activities

 

 

(13,806)

 

 

(11,279)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(142)

 

 

(4)

 

Purchases of marketable securities

 

 

(35,081)

 

 

 —

 

Net cash used in investing activities

 

 

(35,223)

 

 

(4)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of offering costs

 

 

78,772

 

 

 —

 

Decrease in restricted cash

 

 

 —

 

 

2,500

 

Proceeds from notes payable, net

 

 

 —

 

 

11,913

 

Principal payment on debt

 

 

 —

 

 

(3,140)

 

Net cash provided by financing activities

 

 

78,772

 

 

11,273

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

29,743

 

 

(10)

 

Cash and cash equivalents, beginning of period

 

 

27,812

 

 

1,098

 

Cash and cash equivalents, end of period

 

$

57,555

 

$

1,088

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

 —

 

$

165

 

Conversion of convertible preferred stock to common stock

 

$

41,880

 

$

 —

 

Conversion of convertible debt and accrued interest to convertible preferred stock, net

 

$

 —

 

$

24,700

 

 

The accompanying notes are an integral part of these financial statements.

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NIVALIS THERAPEUTICS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

Nivalis Therapeutics, Inc., formerly N30 Pharmaceuticals, Inc. (the ‘‘Company’’ or ‘‘Nivalis’’) is a clinical stage pharmaceutical company committed to the discovery, development and commercialization of therapeutics for people with cystic fibrosis. In addition to developing innovative solutions intended to extend and improve the lives of people with cystic fibrosis, Nivalis plans to utilize its proprietary S-nitrosoglutathione reductase (GSNOR) inhibitor portfolio to develop therapeutics for other diseases.

The Company was incorporated on August 1, 2012, under the laws of the State of Delaware, upon the conversion of its predecessor entity N30 Pharmaceuticals, LLC (‘‘N30 LLC’’), from a Delaware limited liability company to a Delaware Corporation (the ‘‘Company Conversion’’). On February 11, 2015, the Company changed its name to Nivalis Therapeutics, Inc.

2. Liquidity Risks

The Company has incurred operating losses and has an accumulated deficit as a result of ongoing research and development spending. As of September 30, 2015, the Company had an accumulated deficit of $142.3 million. Net losses and net cash used in operating activities for the nine months ended September 30, 2015 were $16.3 million and $13.8 million, respectively. The Company anticipates that operating losses and net cash used in operating activities will continue and substantially increase over the next several years as it expands development activities for its N91115 product candidate.

The Company has historically financed its operations primarily through the sale of its equity securities and debt offerings. The Company will continue to be dependent upon such sources of funds until it is able to generate positive cash flows from its operations. Management has determined that the Company’s existing cash, cash equivalents and marketable securities as of September 30, 2015 will be sufficient to fund operations at least through the next twelve months.  

The Company expects to fund future operations through the sale of its equity securities, incurring debt, entering into partnerships, or obtaining grants or other nondilutive sources of financing. There can be no assurance that sufficient funds from these sources will be available to the Company when needed or at all or on terms that are favorable to the Company. If the Company is unable to obtain additional funding from these or other sources when needed, or to the extent needed, it would have a negative impact on the Company’s financial condition and its ability to pursue its business strategy. It could force the Company to delay, limit, reduce or terminate research and development programs and commercialization efforts or cause the Company to cease operations in full.  

3. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include all adjustments necessary for the presentation of the Company’s financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes, including accrued liabilities and the fair value-based measurement of equity instruments. Actual results could differ materially from those estimates. The Company evaluates its estimates and assumptions as facts and circumstances dictate.

Unaudited Interim Financial Data

The balance sheet at December 31, 2014 was derived from audited financial statements, but does not include all the disclosures required by U.S. GAAP. The accompanying interim financial statements as of September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014, are unaudited. The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements, pursuant to the rules and

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regulations of the SEC for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2014. In the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly state the Company’s financial position as of September  30, 2015 and the results of operations and cash flows for the three and nine months ended September  30, 2015 and 2014. The results for the three and nine months ended September  30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015 or for any future interim period.

2014 Stock Conversion and Reverse Stock Split

Effective September 23, 2014, all outstanding shares of preferred stock were converted on an 11.556-for-1 basis into shares of common stock (the ‘‘Stock Conversion’’). Concurrent with this conversion, the Company effected a reverse stock split of its common stock, par value $0.001 per share. Every four shares of common stock were reclassified and combined into one share of common stock. Fractional shares were issued as a result of the reverse stock split. The total number of authorized shares of common stock was also proportionally decreased by a ratio of 1:4 and the par value per share of the common stock continued to be $0.001. 

2015 Stock Conversion and Reverse Stock Split

On May 26, 2015, the Company’s Board of Directors approved a 1-for-2.889 reverse stock split of its common stock. The reverse stock split became effective upon filing of a certificate of amendment to the Company’s amended and restated certificate of incorporation on June 1, 2015. Upon the effectiveness of the reverse stock split, (i) every 2.889 shares of outstanding common stock were decreased to one share of common stock, (ii) the number of shares of common stock into which each outstanding option, right and warrant to purchase common stock is exercisable was proportionally decreased on a 1-for-2.889 basis and the exercise price of each outstanding option, right and warrant to purchase common stock was proportionately increased on a 1-for-2.889 basis, and (iii) the conversion ratio for each share of the Company’s convertible preferred stock which was convertible into common stock was proportionally decreased on a corresponding basis in connection with the 1-for-2.889 reverse split. No fractional shares were issued as a result of the reverse stock split. The total number of authorized shares of common stock and the par value per share of common stock did not change as a result of the reverse stock split.

Effective June 22, 2015, all outstanding shares of convertible preferred stock were converted on a 2.889-for-1 basis into shares of common stock.

All of the share numbers, share prices, exercise prices and other per share information throughout these financial statements for all periods presented have been adjusted, on a retroactive basis, to reflect the 1-for-4 reverse stock split and the 1-for-2.889 reverse stock split.

Comprehensive Loss

Comprehensive loss is comprised of net loss and adjustments for the change in unrealized gains and losses on the Company’s investments in available-for-sale marketable securities. The Company presents comprehensive loss and its components in the statements of operations and comprehensive loss for the three and nine months ended September  30, 2015.

Net Loss per Share

The Company reports net loss per share in accordance with the standard codification of ASC “Earnings per Share” (“ASC 260”). Under ASC 260, basic earnings per share, which excludes dilution, is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could be exercised or converted into common shares, and is computed by dividing net loss available to common stockholders by the weighted average of common shares outstanding plus the dilutive potential common shares.  Diluted earnings per share excludes the impact of convertible preferred stock, employee stock options, restricted stock and stock purchase rights, as the effect would be anti-dilutive. During a loss period, the assumed exercise of in-the-money stock options and other potentially diluted instruments has an anti-dilutive effect and therefore, these instruments are excluded from the computation of dilutive earnings per share.

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Fair Value of Financial Instruments

The carrying amounts of cash equivalents and marketable securities approximate their fair value based upon quoted market prices. Certain financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as cash, accounts payable, accrued direct program expenses, and accrued employee benefits, and other financial instruments included within current assets or current liabilities. 

The Company accounted for warrants to purchase its redeemable preferred stock pursuant to ASC Topic 480, Distinguishing Liabilities from Equity, and classified them as liabilities. The fair value of the outstanding preferred stock warrant liabilities at December 31, 2013 was $267,750.  Subsequent to the completion of the Stock Conversion on September 23, 2014, whereby all outstanding shares of preferred stock were converted into shares of common stock, the fair value of the preferred stock warrant liabilities was remeasured and reclassified into equity. During the three and nine months ended September 30, 2014 a remeasurement gain of $4,000 and $265,750, respectively, was recognized in other income, net in the statement of operations and comprehensive loss. Upon the Stock Conversion, the remaining balance of $2,000 was reclassified from liabilities to equity. 

Marketable Securities

 

The Company has designated marketable securities as available-for-sale securities and accounts for them at their respective fair values. Marketable securities are classified as short-term or long-term based on the nature of the securities and their availability to meet current operating requirements. Securities that are classified as available-for-sale are carried at fair value, including accrued interest, with temporary unrealized gains and losses reported as a component of stockholders' equity (deficit) until their disposition. The Company reviews all available-for-sale securities at each period end to determine if they remain available-for-sale based on the Company’s then current intent and ability to sell the security if it is required to do so. The cost of securities sold is based on the specific identification method. All marketable securities are subject to a periodic impairment review. The Company will recognize an impairment charge when a decline in the fair value of the investments below the cost basis is judged to be other-than-temporary. 

Recent Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern and to provide disclosures when certain criteria are met. The guidance is effective for annual periods beginning in 2016 and interim reporting periods starting in the first quarter of 2017. Early application is permitted. The Company does not expect the standard will have a material impact on its disclosures. 

Fair Value Measurements

In general, asset and liability fair values are determined using the following categories:

Level 1 – inputs utilize quoted prices in active markets for identical assets or liabilities.

Level 2 – inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

Level 3 – inputs are unobservable inputs and include situations where there is little, if any, market activity for the balance sheet items at period end. Pricing inputs are unobservable for the terms and are based on the Company’s own estimates about the assumptions that a market participant would use in pricing as asset.  

The Company’s financial instruments, including money market investments, corporate debt securities, and obligations of U.S. government agencies, are measured at fair value on a recurring basis. There were no transfers between levels for the nine months ended September 30, 2015.

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Assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of September 30, 2015 and December 31, 2014 (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted prices

 

Quoted prices

 

 

 

 

Quoted prices

 

 

 

 

 

 

in active

 

for similar assets

 

 

 

 

in active

 

 

 

 

 

 

markets for

 

observable in the

 

 

 

 

markets for

 

 

 

September 30, 

 

identical assets 

 

marketplace

 

December 31, 

 

identical assets 

 

Description

    

2015

    

(Level 1)

    

(Level 2)

    

2014

    

(Level 1)

 

Assets measured at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market investments

 

$

16,305

 

$

16,305

 

$

 —

 

$

26,926

 

$

26,926

 

Obligations of U.S. government agencies and corporate debt securities

 

 

75,248

 

 

 —

 

 

75,248

 

 

 —

 

 

 —

 

 

 

 

4. Cash, Cash Equivalents and Marketable Securities

The following is a summary of cash, cash equivalents and marketable securities as of September 30, 2015 and December 31, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross unrealized

 

Gross unrealized

 

Fair market

 

 

    

Amortized Cost

    

gains

    

losses

    

value

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

1,098

 

$

 -

 

$

 -

 

$

1,098

 

Money market funds

 

 

16,305

 

 

 -

 

 

 -

 

 

16,305

 

Obligations of U.S. government agencies

 

 

22,094

 

 

3

 

 

 -

 

 

22,097

 

Corporate debt securities

 

 

53,139

 

 

16

 

 

(4)

 

 

53,151

 

Total for September 30, 2015

 

$

92,636

 

$

19

 

$

(4)

 

$

92,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

886

 

$

 –

 

$

 –

 

$

886

 

Money market funds

 

 

26,926

 

 

 –

 

 

 –

 

 

26,926

 

Total for December 31, 2014

 

$

27,812

 

$

 –

 

$

 –

 

$

27,812

 

 

 

5. Notes Payable

As of September 30, 2015, the Company has no debt outstanding.

Loan and Security Agreement

During February 2011, the Company entered into a $5.0 million loan and security agreement (“Loan Agreement”) with Horizon Technology Finance (“Horizon”). The interest rate for these loans was 11.25%.  The Loan Agreement required that the Company maintain $2.5 million in an account that was subject to an Account Control Agreement and restricted the Company from withdrawing the funds from this account without Horizon’s prior written consent. During July 2014, the entire outstanding balance under the Loan Agreement was paid in full and the remaining restricted cash held by the Company was fully released. The payment also released all previously pledged assets held as collateral under the loan.

Convertible Debt

During February, March, April, June, July, August and September 2014 (the “2014 Notes”), the Company issued subordinated secured convertible debt to two investors totaling $12.0 million at an interest rate of 8.0% per annum. The outstanding principal and accrued and unpaid interest was convertible at the option of the investor into preferred shares in the Company. 

The 2014 Notes included a change in control redemption which was deemed an embedded derivative. This redemption right and the right to convert at 75% of the price at which a new series of preferred stock was issued required the Company to bifurcate and separately account for the embedded derivatives, however the amount recorded and the impact on net loss was not material.

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As part of the Stock Conversion on September 23, 2014, the holders of the 2014 Notes agreed to the issuance of shares of a newly created Series 1 convertible preferred stock in settlement of the 2014 Notes. The Company issued 8,813,203 Series 1 convertible preferred shares at a price of $1.40 per share through the settlement of $12,373,741 of convertible debt and related interest held by two separate investors.  This transaction resulted in a gain on extinguishment of $378,251, which was recognized through equity during the three months ended September 30, 2014, as this was a transaction with stockholders.

6. Stockholders’ Equity

During February 2014, the Company increased its authorized number of shares of convertible preferred stock to 30,233,694 shares. During March 2014, the Company increased its authorized number of shares of convertible preferred stock to 60,503,445 shares and increased its authorized number of shares of common stock to 25,000,000 shares.

Immediately following the Stock Conversion and the one-for-four reverse stock split effected in September 2014, the Company reestablished its authorized number of shares of convertible preferred stock to 8,866,753 shares and its authorized number of shares of common stock to 15,742,382 shares.

During November 2014, the Company increased its authorized number of shares of convertible preferred stock to 23,228,986 shares and increased its authorized number of shares of common stock to 35,000,000 shares.

Concurrent with the Company’s initial public offering completed in June 2015  (the IPO”), the Company increased its authorized number of shares of common stock to 200,000,000 shares, eliminated its authorized shares of convertible preferred stock and authorized 10,000,000 shares of preferred stock for future issuance.

Convertible Preferred Stock

Immediately prior to the Stock Conversion, the Company had six series of outstanding convertible preferred stock: Series A-1 convertible preferred stock, Series A-2 convertible preferred stock, Series C-1 convertible preferred stock, Series C-2 convertible preferred stock, Series D  convertible preferred stock and Series E convertible preferred stock. The convertible preferred stock was initially recorded at the issuance price on the date of issuance, net of issuance costs. On September 23, 2014 all outstanding preferred stock was converted into shares of common stock on an 11.556-for-1 basis. Concurrent with the Stock Conversion, a newly created Series 1 convertible preferred stock was issued in the settlement of the 2014 Notes. In November and December 2014, the Company raised $31.0 million gross proceeds in a private placement of Series 2 convertible preferred stock.

On June 22, 2015, prior to the closing of the Company’s IPO, all outstanding shares of convertible preferred stock, amounting to 19,978,986 shares, were automatically converted into 6,915,525 shares of common stock in accordance with the terms of the Company’s amended and restated certificate of incorporation then in existence.  

As of September 30, 2015, the Company had no preferred stock or convertible preferred stock outstanding.

Common Stock

On June 22, 2015, the Company completed its IPO of 6,325,000 shares of its common stock, including 875,000 shares from the exercise of the underwriters’ over-allotment option. The Company received proceeds of $78.8 million from its IPO, net of $9.8 million in expenses and underwriters’ discounts and commissions relating to the issuance and distribution of the securities. 

At September 30, 2015, shares of common stock have been reserved for issuance as follows (in thousands):

 

 

 

 

Options to purchase common stock - issued

    

1,804

 

Options to purchase common stock - unissued

 

588

 

Employee stock purchase plan

 

232

 

Common stock warrants

 

19

 

 

 

2,643

 

 

 

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7. Net Loss per Share

The Company excluded the following common stock equivalents, outstanding as of the three and nine months ended September 30, 2015 and 2014, from the computation of diluted net loss per share for these same periods because they had an anti-dilutive impact on the computation (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

    

2015

    

2014

 

Options to purchase common stock - issued

 

1,804

 

112

 

Unvested restricted common stock

 

1

 

5

 

Convertible preferred stock

 

 —

 

3,051

 

Warrants to purchase convertible preferred and common stock

 

19

 

19

 

Total

 

1,824

 

3,187

 

 

 

8. Subsequent Events

The Company has evaluated events up to the filing date of these interim financial statements and determined that no subsequent event activity required disclosure.

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

Forward-Looking Information

This Quarterly Report on Form 10-Q and the information incorporated herein by reference includes statements that are, or may be deemed, “forward-looking statements.” In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned preclinical studies and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, the degree of clinical utility of our products, particularly in specific patient populations, expectations regarding clinical trial data, our liquidity and future funding needs, our results of operations, financial condition, prospects, growth and strategies, the industry in which we operate and the trends that may affect the industry or us.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industry in which we operate may differ materially from the forward-looking statements contained herein. You should also read carefully the factors described in the “Risk Factors” section of this Quarterly Report on Form 10-Q to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of this report, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

Overview

We are a clinical stage pharmaceutical company committed to the discovery, development and commercialization of therapeutics for people with cystic fibrosis. In addition to developing innovative solutions intended to extend and improve the lives of people with cystic fibrosis, we plan to utilize our proprietary S-nitrosoglutathione reductase, or GSNOR, inhibitor portfolio to develop therapeutics for other diseases.

Cystic fibrosis, or CF, is a life-shortening genetic disease that affects an estimated 70,000 people worldwide, predominately in the United States and Europe. CF is characterized by a defect in the chloride channel of human cells known as the “cystic fibrosis transmembrane conductance regulator,” or CFTR, which is caused by mutations in the CFTR gene. N91115 works through a novel mechanism of action called GSNOR inhibition to modulate the unstable and defective CFTR protein responsible for CF. GSNOR inhibition restores GSNO levels thereby modifying the chaperones responsible for CFTR protein degradation. This stabilizing effect increases the amount of CFTR protein at the cell surface and the function of the CFTR chloride channel which, in turn, leads to an increase in net chloride secretion. Nivalis discovered and owns exclusive rights to N91115 in the United States and all other major markets, including U.S. composition of matter patent protection until at least 2031.

Our Phase 1b clinical trial of N91115 in people having CF and having two copies of the F508del mutation was completed in September 2015. The randomized, double-blind, placebo-controlled, study of orally administered N91115 demonstrated favorable safety, tolerability and pharmacokinetics of various doses of N91115 (50, 100 and 200 mg twice daily) in a total of 51 people with CF. Furthermore, a trend toward a modest reduction in sweat chloride, a marker of CFTR activity, was observed in the highest dose tested.  

A Phase 2 study of N91115 in people with CF who have two copies of the F508del mutation is planned to be initiated in the fourth quarter of 2015. This Phase 2 study is anticipated to be a twelve-week randomized, double-blind

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placebo-controlled clinical trial to demonstrate safety and efficacy of N91115 when added to Orkambi™ (lumacaftor/ivacaftor),  which is owned by Vertex Pharmaceuticals, Inc. 

Our operations to date have focused on discovery and development of our portfolio of GSNOR inhibitors, including N91115 and N6022. N6022 was the first product candidate to emerge from our GSNOR inhibitor portfolio and was optimized for inhaled delivery with low oral bioavailability. In order to provide translational evidence of GSNOR’s role in lung disease, we initially explored the effects of N6022 in patients with mild asthma using an intravenous formulation. N6022 demonstrated a significant, beneficial effect on the airways in these patients, thus confirming the beneficial effects of N6022 observed in our preclinical studies of asthma. N6022 paved the way for N91115 by establishing initial safety of the class in healthy subjects and patients with CF. Because an oral dosage form is preferable in CF, a systemic disease that is not confined to the lungs, we elected to discontinue further development of N6022 in the chronic management of CF, but we may pursue development of N6022 in an inhaled dosage form for other potential indications.

During June 2015, we completed our initial public offering, or IPO, of an aggregate 6,325,000 shares of common stock at a price to the public of $14.00 per share for aggregate gross proceeds of $88.6 million, before underwriting commission and discounts and offering expenses. Our common stock is listed on the NASDAQ Global Market under the symbol “NVLS”.

To date, we have not generated any revenue. Based on our current plans, we do not expect to generate any revenue for the foreseeable future. Since inception, we have financed our operations primarily through the proceeds from our IPO, as well as private placements of equity, debt and convertible debt. From our inception in July 2003 to September 30, 2015, we raised $225.0 million in net proceeds from these sources, of which all $5.0 million in debt has been repaid. As of September 30, 2015, we had cash, cash equivalents and marketable securities of $92.7 million and no debt.

We have incurred losses from operations in each year since our inception. Our net losses were $6.1 million and $16.3 million for the three and nine months ended September 30, 2015, respectively. As of September 30, 2015, we had an accumulated deficit of $142.3 million. We expect to continue incurring losses for the foreseeable future as we advance our lead product candidate, N91115, through clinical development, regulatory approval and, if approved, commercialization. We expect that research and development expenses will increase as we continue to develop our product candidates, and general and administrative costs will increase as we operate as a public company. We anticipate that we will need to raise additional capital in addition to the recently raised IPO proceeds prior to the commercialization of N91115 or any other potential product candidate. Until such time that we can generate revenue from product sales, which, based on our current development plans, we do not expect to occur until 2018 at the earliest, we expect to finance our operating activities primarily through selling equity, incurring debt, entering into partnerships, and obtaining grants or seeking other nondilutive sources of financing. However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, if at all. Our failure to raise capital when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. It could force us to delay, limit, reduce or terminate our research and development programs and commercialization efforts or cause us to cease operations in full.

Financial Operations Overview

Revenue

To date, we have not generated any revenue. In the future, we may generate revenue from sales or licensing of N91115 or other potential product candidates. Based on our current development plans, however, we do not expect to generate product revenue until 2018 at the earliest. If we fail to complete the clinical development of an N91115-based therapy, our ability to generate future revenue, and our results of operations and financial position, will be adversely affected.

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Research and Development Expense

Research and development expense consists of costs incurred for the development of our product candidates, which include:

·

employee-related expenses, including salaries, benefits, travel and other compensation expenses;

·

expenses incurred for contract research organizations, or CROs, clinical investigators, clinical consultants and clinical sites that will conduct our preclinical studies and clinical trials as well as costs associated with acquiring, developing and manufacturing preclinical and clinical supplies, which we refer to collectively as direct program expenses;

·

costs associated with regulatory filings; and

·

costs of laboratory supplies, facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other operating costs related to research and development.

Research and development costs are expensed as incurred. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development primarily due to the increased size and duration of later-stage clinical trials. We plan to increase our research and development expenses for the foreseeable future as we seek to advance clinical development of our lead product candidate, N91115.

The following table identifies direct program expenses on a program-specific basis for our product candidates. All other research and development costs, including salaries, benefits and stock-based compensation, consulting and outsourced services, facilities and depreciation, and other expenses are not allocated to specific programs as they are deployed across a number of projects under development. Other expenses include travel, lab and office supplies, business insurance and other miscellaneous expenses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(in thousands)

 

Direct program expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

N91115 for cystic fibrosis

 

$

2,534

 

$

814

 

$

6,969

 

$

2,795

 

N6022 for cystic fibrosis

 

 

 —

 

 

 —

 

 

 —

 

 

1,603

 

Total direct program expenses

 

 

2,534

 

 

814

 

 

6,969

 

 

4,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel and other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, benefits and stock-based compensation

 

 

1,209

 

 

1,153

 

 

3,548

 

 

3,936

 

Consulting and outsourced services

 

 

107

 

 

8

 

 

244

 

 

318

 

Facilities and depreciation

 

 

68

 

 

69

 

 

203

 

 

213

 

Other expenses

 

 

361

 

 

120

 

 

797

 

 

513

 

Total research and development expenses

 

$

4,279

 

$

2,164

 

$

11,761

 

$

9,378

 

All of our research and development expenses for the three and nine months ended September 30, 2015 and 2014 relate to the development of N91115 and, to a lesser extent, N6022. We have expended an aggregate of approximately $14.4 million for direct program expenses related to N91115 from inception through September 30, 2015. The successful development of N91115 or any other potential product candidate is uncertain. We cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when the period in which we receive material net cash inflows may commence, from N91115 or any other potential product candidate. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials which vary significantly over the life of a project as a result of differences arising during clinical development, including:

·

the number and results of our clinical trials;

·

the number of clinical sites included in the trials;

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·

the number of patients that ultimately participate in the trials;

·

the length of time required to enroll suitable patients; and

·

the ability to obtain a drug supply for our trials.

Our expenditures are subject to additional uncertainties, including the commercial uptake of Vertex’s Orkambi, our preclinical study and clinical trial expenses, our costs to acquire, develop and manufacture preclinical study and clinical trial materials, the timing of regulatory approval for N91115 and post-commercialization and other incremental research and development costs for N91115 or any other potential product candidate. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. Changes in variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S. Food and Drug Administration, or FDA, or other regulatory authorities were to require us to conduct preclinical studies or clinical trials beyond those which we anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the clinical development of our product candidates.

General and Administrative Expense

General and administrative expense consists principally of salaries and related costs not included in research and development expenses, including stock-based compensation, for personnel in executive, finance, business development and information technology functions. Other general and administrative expenses include facility costs and professional fees for legal, patent review, consulting and accounting services.

We anticipate that our general and administrative expense will increase during the next two fiscal years due to many factors. The most significant of these factors include:

·

increased personnel expenses, other than research and development personnel, to support the clinical development of N91115;

·

increased patent filing and prosecution costs related to maintaining our patent portfolio; and

·

increased expenses related to becoming and operating as a publicly traded company, including increased legal and accounting services, addition of new headcount to support stock exchange and SEC reporting compliance, public and investor relations and communication needs and increased insurance premiums.

Other Income, Net

Other income, net consists primarily of the gain on the change in the fair value of preferred stock warrant liabilities. When all outstanding shares of preferred stock converted into shares of common stock on September 23, 2014, warrants exercisable for shares of our preferred stock automatically adjusted to become exercisable for shares of common stock, and therefore changes in the fair value of preferred stock warrant liabilities will no longer impact other income, net.

Interest Expense

Interest expense consists primarily of interest accrued on our previously outstanding convertible debt and interest paid on our previously outstanding Loan and Security Agreement with Horizon Technology Finance dated February 18, 2011, or the Horizon Loan. We repaid all outstanding principal and interest under the Horizon Loan in full in July 2014 and all principal and accrued interest under our convertible debt converted into equity in September 2014. Also included in interest expense is the amortization of the discount on the Horizon Loan and convertible debt during 2014.

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2015 and 2014.

Research and Development Expenses.  Research and development expenses for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(in thousands)

 

Research and development expenses

 

$

4,279

 

$

2,164

 

$

11,761

 

$

9,378

 

Increase from prior period

 

$

2,115

 

$

 —

 

$

2,383

 

$

 —

 

% change from prior period

 

 

97.7

%  

 

 

 

 

25.4

%  

 

 

 

The increase in research and development expenses for the three months ended September 30, 2015 compared to the same period in the prior year was primarily due to an increase in direct program expenses for N91115 including clinical trial expenses which increased by $950,000 during the comparable periods due to the Phase 1b trial that was initiated during the first quarter of fiscal 2015 and completed in September 2015. The remaining increase in direct program expenses of approximately $770,000 was attributed to the production of N91115 for clinical trials and initiation of long-term toxicology studies.

The increase in research and development expenses for the nine months ended September 30, 2015 compared to the same period in the prior year was primarily due to an increase in direct program expenses of $2.6 million which was partially offset by decreased personnel and other expenses of $188,000. The increase in direct program expenses was largely driven by clinical trial expenses increasing by $2.7 million during the comparable periods due to the Phase 1b trial that was initiated during the first quarter of fiscal 2015 and completed in September 2015. During the first nine months of fiscal 2014, a smaller Phase 1a safety trial was in process. The remaining increase in direct program expenses of approximately $1.5 million was attributed to the production of N91115 for clinical trials and initiation of long-term toxicology studies. Partially offsetting these increases were decreased clinical trial expenses for N6022 of $1.6 million during the comparable periods as the Phase 1b trial of N6022 in people with CF was completed in April 2014. The decrease in personnel and other expenses during the nine months ended September 30, 2015 compared to the same period in the prior year was primarily attributable to a decrease in headcount as a result of a reduction in force that was implemented in July 2014.

General and Administrative Expenses.  General and administrative expenses for the three and nine months ended September 30, 2015 and 2014 were as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(in thousands)

 

General and administrative expenses

 

$

1,822

 

$

490

 

$

4,507

 

$

1,623

 

Increase from prior period

 

$

1,332

 

$

 —

 

$

2,884

 

$

 —

 

The increase in general and administrative expenses for the three and nine months ended September 30, 2015 compared to the same periods in the prior year was primarily due to increased expenses related to becoming and operating as a publicly-traded company, including increased salary expense, employee benefits and stock-based compensation expense tied to a revised employee incentive plan and the hiring of a new CEO and CFO during the early part of 2015. Additionally, audit fees, legal support costs, patent expenses, travel costs and various marketing and investor relations expenses increased by approximately $745,000 and  $1.5 million during the three and nine months ended September 30, 2015, respectively, compared with the same periods in the prior year.

Other Income, Net.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The decrease in other income, net for the three and nine months ended September 30, 2015 compared to the same periods in the prior year was primarily due to approximately $4,000 and $266,000 recorded as a gain during the three and nine months ended September 30, 2014, respectively, due to the change in the fair value of preferred stock warrant liabilities that were adjusted to fair market value. These preferred stock warrant liabilities were reclassified as a component of equity during September 2014. Therefore no similar mark‑to‑market adjustment was recorded during 2015. 

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Interest Expense. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There was no interest expense for the three and nine months ended September 30, 2015 due to repayment of the Horizon Loan in July 2014 and conversion of the convertible debt in September 2014 compared to the same periods in the prior year in which interest was paid on the outstanding Horizon Loan and interest accrued on the convertible debt outstanding.  

Liquidity and Capital Resources

We have funded our operations primarily through the proceeds from our IPO in June 2015 as well as private placements of equity, convertible debt and the Horizon Loan. We received  $78.8 million in net proceeds from the IPO, $88.8 million in net proceeds from the issuance of convertible preferred stock, $52.4 million of net proceeds through the issuance of convertible debt and $5.0 million of gross proceeds from the issuance of the Horizon Loan, which was fully repaid in July 2014.  As of September 30, 2015, we had cash, cash equivalents and marketable securities of $92.7 million.

The following table sets forth the primary sources and uses of cash for the nine months ended September 30, 2015 and 2014: 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2015

    

2014

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(13,806)

 

$

(11,279)

 

Net cash used in investing activities

 

 

(35,223)

 

 

(4)

 

Net cash provided by financing activities

 

 

78,772

 

 

11,273

 

Net increase (decrease) in cash and cash equivalents

 

$

29,743

 

$

(10)

 

Operating Activities

During the nine months ended September 30, 2015, our net loss of $16.3 million included noncash charges of $765,000, primarily associated with stock‑based compensation. During this same period, our net operating liabilities, excluding cash, cash equivalents and marketable securities,  increased by approximately $1.7 million and thus decreased our net cash used in operating activities to $13.8 million. Net operating liabilities increased primarily because of higher accrued employee benefits of  $1.1 million,  increases in accounts payable and accrued direct program expenses of  $836,000,  and were slightly offset by increases in prepaid expenses of $366,000. Accrued employee benefit costs increased due to implementation of the 2015 employee incentive plan that was initiated at the beginning of the year. Increases in accounts payable and accrued direct program expenses were directly related to research and development costs for our Phase 1b clinical trial which began in the first quarter of 2015. Prepaid expenses increased due to higher prepaid premium costs for Directors and Officers insurance, upon becoming a public company.

During the first half of fiscal 2014, our net loss of $11.6 million included noncash charges of $541,000. During the same period, our net operating assets, excluding cash, cash equivalents and marketable securities,  increased by $270,000, largely the result of decreased accounts payable and decreased employee benefits. 

Investing Activities

The net cash used in investing activities of $35.2 million for the nine months ended September 30, 2015 was primarily related to the purchase of marketable securities. 

Financing Activities

The cash provided by financing activities for the nine months ended September 30, 2015 resulted from  $78.8 million of net proceeds for the sale of common stock in our IPO that closed during June 2015. The cash provided by financing activities for the nine months ended September 30, 2014 was primarily the result of $11.9 million received from the issuance of convertible debt and $2.5 million from the release of restricted cash associated with the Horizon Loan. These increases were partially offset by the full repayment during July 2014 of the then outstanding balance of  $3.1 million on the Horizon Loan.

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Funding Requirements

We believe our existing cash, cash equivalents and marketable securities will provide resources to complete the Phase 2 clinical trial and to fund our operating expenses and capital expenditure requirements to mid-2017 when we expect to be enrolling patients in our Phase 3 clinical program for N91115. We have based these estimates on assumptions that may prove to be incorrect, and given the risks and uncertainties associated with drug development and commercialization, we could use our capital resources sooner than expected. Our present and future funding requirements will depend on many factors, including but not limited to:

·

personnel-related expenses, including salaries, benefits, travel and other compensation expenses;

·

our ability to advance the clinical development program for our lead product candidate, N91115;

·

the scope, progress, results and costs of preclinical development and clinical trials of N91115 and any other product candidate;

·

the costs, timing and outcome of regulatory review of N91115 or any other potential product candidate;

·

the revenue, if any, received from commercial sales of N91115 or any other potential product candidate for which we, or any future partner, may receive marketing approval;

·

the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for N91115 or any other potential product candidate for which we receive marketing approval and do not partner for commercialization; and

·

the extent to which we acquire, in-license or out-license other products and technologies.

Existing cash, cash equivalents and marketable securities will not be sufficient to fund our operations through successful development and commercialization of N91115 or any other potential product candidate. If we were unable to obtain additional financing, we may be required to reduce the scope of, delay, or eliminate some or all of our planned development and commercialization activities, which could harm our business. For more information as to the risks associated with our future funding requirements, see Item 1A. – “Risk Factors.”

Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Accrued Direct Program Expenses

Substantial portions of our preclinical studies and clinical trials are performed by third parties, such as CROs, laboratories, medical centers and other vendors. As part of the process of preparing our financial statements, we are required to estimate our accrued direct program expenses. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our direct program expenses as of each balance sheet

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date in our financial statements based on facts and circumstances known to us. Examples of direct program expenses include:

·

fees owed to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

·

fees owed to investigative sites in connection with clinical trials;

·

fees owed to contract manufacturers in connection with the production of drug supply materials; and

·

other fees owed in relation to direct programs.

We have not had any material adjustments to estimated amounts recorded in previous periods. At September 30, 2015 and December 31, 2014, we had accrued direct program expenses of $1.5 million and $1.2 million, respectively.

Convertible Debt

We have entered into, and may in the future enter into, debt financing transactions whereby such debt is convertible into preferred or common shares. We account for such instruments under Accounting Standards Codification, or ASC, 470-20 “Debt with Conversion and Other Options” which require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. We account for convertible debt instruments that have been determined to be free standing derivative financial instruments in accordance with ASC 815 “Derivatives and Hedging”. Under ASC 815, a portion of the proceeds received upon the issuance of the convertible debt is allocated to the fair value of the derivative and a corresponding discount is recorded on the convertible debt. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.

During 2014, we issued an aggregate of $12.0 million of convertible debt to investors. The 2014 convertible debt instruments contained a change in control redemption, which was deemed an embedded derivative and required us to bifurcate and separately account for the embedded derivative as a liability. These derivatives were recognized at fair value with an immaterial mark-to-market gain recognized in other income, net in the Statements of Operations and Comprehensive Loss during the three and nine months ended September 30, 2014. The discount on the debt was amortized through interest expense for which an immaterial amount was recognized in the Statements of Operations and Comprehensive Loss during the three and nine months ended September 30, 2014. All of this debt converted into shares of Series 1 convertible preferred stock in September 2014.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

 

 

(in thousands)

 

 

 

(unaudited)

 

 

 

Total

 

Less than 1 year

 

1-3 years

 

3-5 years

 

More than 5 years

 

Purchase obligations

 

$

6,824

 

$

5,828

 

$

996

 

$

 —

 

$

 —

 

Operating leases

 

 

696

 

 

278

 

 

279

 

 

139

 

 

 —

 

Total obligations

 

$

7,520

 

$

6,106

 

$

1,275

 

$

139

 

$

 —

 

We have entered into contracts with third parties to provide future services, which include research and development, clinical development support and testing services. These purchase obligations include both cancellable and non-cancellable amounts. We also have an operating lease obligation for office and laboratory space, which will expire on March 31, 2018. We have the option to renew the lease for an additional three-year term and the option to terminate the lease at any time after March 31, 2017, for a termination fee of $25,000.

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Related Party Transactions

At various points during 2014, we issued an aggregate of $12.0 million of convertible debt to certain existing investors. Interest accrued on these loans until the loans and all accrued interest were converted in full on September 23, 2014 to Series 1 convertible preferred stock.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet activities, as defined in Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern and to provide disclosures when certain criteria are met. The guidance is effective for annual periods beginning in 2016 and interim reporting periods starting in the first quarter of 2017. Early application is permitted. We do not expect the standard will have a material impact on our disclosures.

Other accounting standards that have been issued or proposed by the FASB or other standards- setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act, which allows us to delay adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we irrevocably chose to “opt out” of such extended transition period, and as a result, we plan to comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt such standards.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates. As of September 30, 2015, we had cash, cash equivalents and marketable securities of $92.7 million, consisting of deposits with commercial banks in checking, interest-bearing and demand money market accounts, corporate debt securities and obligations of U.S. government agencies. The primary objectives of our investment policy are to preserve principal and maintain proper liquidity to meet operating needs.

Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

 

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rule 13a−15(e) promulgated under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. In connection with the filing of this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2015.

Changes in Internal Control over Financial Reporting

This Quarterly Report on Form 10-Q does not include a report on changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter due to a transition period established by the Exchange Act for newly public companies. 

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PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

We are not currently a party to any legal proceedings.

ITEM 1A.RISK FACTORS

Investing in our common stock involves a high degree of risk. In evaluating our business, investors should carefully consider the following risk factors, together with all other information included in this Quarterly Report, before deciding whether to invest in shares of our common stock. These risk factors contain, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. The order in which the following risks are presented is not intended to reflect the magnitude of the risks described. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and prospects. In that case, the trading price of our common stock could decline, and an investor may lose part or all of his, her or its investment.

Risks Relating to Our Financial Condition and Need for Additional Capital

We have incurred significant losses since our inception. We anticipate that we will continue to incur significant losses for the foreseeable future.

We are a clinical stage pharmaceutical company focused primarily on developing our lead product candidate, N91115, for CF. We have incurred significant net losses in each year since our inception, including net losses of $16.3 million and $11.6 million for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, we had an accumulated deficit of $142.3 million.

To date, we have financed our operations primarily through sales of our equity securities and convertible debt. We have devoted most of our financial resources to research and development, including our preclinical research and development activities and clinical trials. We have not completed the development of any product candidate. We expect to continue to incur significant and increasing losses and negative cash flows for the foreseeable future. The size of our losses will depend, in part, on the rate of future expenditures and our ability to generate revenue. We expect to incur substantial and increased expenses arising from the clinical development of N91115 or any other potential product candidate, including, in particular, as we:

·

prepare for and execute on the Phase 2 and Phase 3 clinical programs for N91115;

·

scale up development, including contracted manufacturing processes and quantities to prepare for larger clinical trials and the commercialization of N91115;

·

seek to obtain regulatory approvals for N91115;

·

prepare for the commercialization of N91115, including establishing an infrastructure for the sales, marketing and distribution of N91115 for any indications for which we receive regulatory approval;

·

expand our research and development activities to identify and potentially advance other product candidates;

·

maintain, expand and protect our intellectual property portfolio; and

·

add operational, financial and management information systems and personnel to support our clinical development, commercialization efforts and operations as a public company.

Our recurring losses from operations have raised substantial doubt regarding our ability to continue as a going concern.

We have had recurring losses from operations and previous reports on our financial statements by our independent registered public accounting firm have included an explanatory paragraph with respect to our ability to continue as a going concern. We will likely not generate meaningful revenue until and unless N91115 or another potential product candidate is approved by the FDA or comparable regulatory agencies in other countries and

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successfully marketed, either by us or a partner, an outcome which may not occur. We believe that our existing cash, cash equivalents and marketable securities and interest thereon will be sufficient to fund our projected operating requirements to mid‑2017. However, if we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation and dissolution could be significantly lower than the values reflected in our financial statements. The perception that we may not be able to continue as a going concern may have an adverse impact on our business due to concerns about our ability to meet our contractual obligations. If we are unable to continue as a going concern, an investor could lose all or part of their investment in our company.

Our ability to generate future revenue and achieve and maintain profitability is uncertain and depends upon our ability to successfully develop, obtain regulatory approval for and commercialize N91115 or any other potential product candidate.

Our ability to generate revenue and achieve profitability depends on our ability, alone or with collaborators, to successfully complete the development of, obtain the necessary regulatory approvals for, and commercialize, a product candidate. We have never obtained approval for or commercialized a product candidate. Our N91115 development program is currently focused on demonstrating the clinical benefit of a triple therapy for CF patients. This triple therapy includes N91115, a CFTR stabilizer, administered with Vertex’s co‑formulated CFTR modulators, lumacaftor with ivacaftor, or lumacaftor/ivacaftor. We do not anticipate generating revenue from sales of N91115 or any other potential product candidate for the foreseeable future, if ever. Our ability to generate future revenue depends heavily on:

·

obtaining regulatory approval in the United States for N91115 in CF and equivalent foreign regulatory approvals;

·

the commercial launch of lumacaftor/ivacaftor in the U.S. and in other geographic regions;

·

the continued commercial viability of lumacaftor/ivacaftor as a leading therapy in CF;

·

whether N91115 may be combined with other future commercially successful therapies, if any, that could influence the standard of care in CF, and the age groups and geographic regions in which these other therapies are available;

·

launching and commercializing N91115, including establishing an infrastructure for the sales, marketing and distribution of N91115;

·

achieving broad market acceptance of N91115 in the medical community and with third party payers;

·

obtaining favorable results for and continuing to develop N91115, including successfully initiating and completing our planned Phase 2 clinical program, as well as future trials thereafter; and

·

generating a pipeline of product candidates other than N91115.

Conducting preclinical testing and clinical trials is a time‑consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data required to obtain regulatory approval and generate revenue. Our anticipated development costs would likely increase if we do not obtain favorable clinical results or if development of N91115 or any other potential product candidate is delayed. In particular, if the commercialization of Vertex’s lumacaftor/ivacaftor is delayed or abandoned and/or we are required by the U.S. Food and Drug Administration, or FDA, or comparable regulatory authorities in other countries, to perform studies or trials in addition to those that we currently anticipate, we would likely incur higher costs than we currently anticipate. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to predict the timing or amount of any increase in our anticipated development costs.

In addition, N91115 or any other potential product candidate, if approved, may not achieve commercial success. Our commercial revenue, if any, will be derived from sales of products that we do not expect to be commercially available until at least 2018, if at all. Even if a product candidate is approved for commercial sale, we anticipate incurring significant costs in connection with commercialization. As a result, we cannot assure that we will be able to generate revenue, or that we will achieve or maintain profitability even if we do generate revenue.

Even if N91115 or any other potential product candidate receives regulatory approvals or is commercialized, if it later shows unanticipated properties, or if revenue is insufficient, we will not achieve or maintain profitability and our

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business may fail. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the value of our company could cause an investor to lose all or part of his, her or its investment.

We will need to raise additional funding to launch and commercialize N91115 or any other potential product candidate, which may not be available on acceptable terms, if at all. If we fail to obtain additional financing, we could be forced to delay, reduce or eliminate development efforts for N91115 and any other potential product candidate, seek corporate partners or relinquish or license on unfavorable terms our rights to technologies or product candidates.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time‑consuming, expensive and uncertain process that takes years to complete. We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we advance our clinical program for N91115.

Based upon our current operating plan, we expect that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements to mid‑2017 when we expect to be enrolling patients in our Phase 3 clinical trial for N91115. We will require additional funding prior to the completion of development, approval and commercialization of N91115. However, changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. For example, our clinical trials may encounter technical, enrollment or other difficulties that could increase our development costs more than we expected, or the FDA may require us to perform studies or trials in addition to those that we currently anticipate. We will need to raise additional funds if we choose to initiate clinical trials for a potential product candidate other than N91115 or to administer N91115 with drugs other than lumacaftor/ivacaftor. We will also need to raise additional funds if we need to obtain regulatory approval to expand the label for N91115 in distinct CF populations. In any event, we will require additional capital to obtain regulatory approval for, and the commercialization of, our product candidates.

Securing additional financing may divert our management from our day‑to‑day activities, which may adversely affect our ability to develop and commercialize N91115 or any other potential product candidate. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

·

significantly delay, scale back or discontinue the development or commercialization of N91115 or any other potential product candidate;

·