gemp_Current_Folio_10Q

Table of Contents 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

(Mark One)

 

 

 

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

 

For the Quarterly Period Ended September 30, 2019

OR

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to          

 

Commission file number 001-37809

 

Gemphire Therapeutics Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

 

Delaware

 

47‑2389984

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

P.O. Box 130235,  Ann  Arbor, MI

 

48113

(Address of principal executive offices)

 

(Zip Code)

(734) 245‑1700

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

 

 

 

 

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange On Which Registered

Common stock, $0.001 par value

 

GEMP

 

The Nasdaq Stock Market LLC

 

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

 

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

 

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

 

 

 

Large accelerated filer  ☐

Accelerated filer  ☒

 

 

Non-accelerated filer  ☐

Smaller reporting company  

 

Emerging growth company  

 

 

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

 

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

 

The number of outstanding shares of the registrant’s common stock, $0.001 par value, as of November 6,  2019 was 14,872,411. 

 

 

 

 

Table of Contents 

 

Gemphire Therapeutics Inc.

FORM 10-Q

INDEX

 

 

 

 

PART I 

FINANCIAL INFORMATION

 

 

 

 

ITEM 1 

Financial Statements

 

 

 

 

 

Condensed Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018

3

 

 

 

 

Condensed Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 (unaudited)

4

 

 

 

 

Condensed Statements of Changes in Stockholders’ (Deficit) Equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)

5

 

 

 

 

Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)

6

 

 

 

 

Notes to Condensed Financial Statements (unaudited)

7

 

 

 

ITEM 2 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

ITEM 3 

Quantitative and Qualitative Disclosures about Market Risk

40

 

 

 

ITEM 4 

Controls and Procedures

40

 

 

 

PART II 

OTHER INFORMATION

41

 

 

 

ITEM 1 

Legal Proceedings

41

 

 

 

ITEM 1A :

Risk Factors

41

 

 

 

ITEM 2 

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

 

ITEM 3 

Default upon Senior Securities

47

 

 

 

ITEM 4 

Mine Safety Disclosures

48

 

 

 

ITEM 5 

Other Information

48

 

 

 

ITEM 6 

Exhibits

49

 

 

 

SIGNATURES 

 

51

 

2

Table of Contents 

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

 

 

Gemphire Therapeutics Inc.

Condensed Balance Sheets

(in thousands, except share amounts and par value)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,855

 

$

18,954

 

Restricted cash

 

 

15

 

 

 —

 

Prepaid expenses

 

 

140

 

 

715

 

Other assets

 

 

38

 

 

17

 

Total current assets

 

 

2,048

 

 

19,686

 

Deposits

 

 

 —

 

 

 8

 

Total assets

 

$

2,048

 

$

19,694

 

Liabilities and stockholders’ (deficit) equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,677

 

$

2,044

 

Accrued liabilities

 

 

396

 

 

438

 

Term loan - current portion

 

 

 —

 

 

9,437

 

Total current liabilities

 

 

3,073

 

 

11,919

 

Long-term liabilities:

 

 

 

 

 

 

 

    Other liabilities

 

 

 —

 

 

 1

 

Total liabilities

 

 

3,073

 

 

11,920

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized as of September 30, 2019 and December 31, 2018, no shares issued or outstanding as of September 30, 2019 and December 31, 2018.

 

 

 —

 

 

 —

 

Common stock, $0.001 par value; 100,000,000 shares authorized as of September 30, 2019 and December 31, 2018, 14,872,411 and 14,265,411 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively.

 

 

23

 

 

22

 

Additional paid–in capital

 

 

93,214

 

 

91,863

 

Accumulated deficit

 

 

(94,262)

 

 

(84,111)

 

Total stockholders’ (deficit) equity

 

 

(1,025)

 

 

7,774

 

Total liabilities and stockholders’ (deficit) equity

 

$

2,048

 

$

19,694

 

 

See accompanying notes to condensed financial statements.

3

Table of Contents 

Gemphire Therapeutics Inc.

Condensed Statements of Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2019

 

2018

 

2019

 

2018

 

Operating expenses:

    

 

 

    

 

 

    

 

 

    

 

 

    

General and administrative

 

$

1,250

 

$

2,364

 

$

3,772

 

$

7,025

 

Research and development

 

 

1,068

 

 

3,542

 

 

3,695

 

 

12,479

 

Total operating expenses

 

 

2,318

 

 

5,906

 

 

7,467

 

 

19,504

 

Loss from operations

 

 

(2,318)

 

 

(5,906)

 

 

(7,467)

 

 

(19,504)

 

Interest income (expense), net

 

 

 4

 

 

(172)

 

 

(816)

 

 

(476)

 

Other expense, net

 

 

(1,116)

 

 

(1)

 

 

(1,868)

 

 

(1)

 

Loss before income taxes

 

 

(3,430)

 

 

(6,079)

 

 

(10,151)

 

 

(19,981)

 

Provision (benefit) for income taxes

 

 

 

 

 —

 

 

 

 

 —

 

Net loss

 

 

(3,430)

 

 

(6,079)

 

 

(10,151)

 

 

(19,981)

 

Other comprehensive loss, net of tax

 

 

 

 

 —

 

 

 

 

 —

 

Comprehensive loss

 

$

(3,430)

 

$

(6,079)

 

$

(10,151)

 

$

(19,981)

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted (Note 10)

 

$

(0.24)

 

$

(0.43)

 

$

(0.71)

 

$

(1.46)

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

14,265,411

 

 

14,259,691

 

 

14,265,411

 

 

13,650,556

 

 

See accompanying notes to condensed financial statements.

4

Table of Contents 

Gemphire Therapeutics Inc.

Condensed Statements of Changes in Stockholders’ (Deficit) Equity

(in thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A Convertible

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

 

Common Stock

 

Paid–In

 

Accumulated

 

Equity

 

 

    

Shares

    

Amount

  

 

  

Shares

    

Amount

    

Capital

    

Deficit

    

(Deficit)

 

Balance at January 1, 2018

 

 —

 

$

 —

 

 

 

10,633,042

 

$

18

 

$

64,397

 

$

(60,474)

 

$

3,941

 

Issuance of common stock

 

 —

 

 

 —

 

 

 

3,592,858

 

 

 4

 

 

25,146

 

 

 —

 

 

25,150

 

Issuance costs

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

(2,093)

 

 

 —

 

 

(2,093)

 

Exercise of stock options

 

 —

 

 

 —

 

 

 

6,413

 

 

 —

 

 

23

 

 

 —

 

 

23

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

1,019

 

 

 —

 

 

1,019

 

Share–based compensation — non–employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 1

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(7,224)

 

 

(7,224)

 

Balance at March 31, 2018

 

 —

 

$

 —

 

 

 

14,232,313

 

$

22

 

$

88,493

 

$

(67,698)

 

$

20,817

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

908

 

 

 —

 

 

908

 

Share–based compensation — non–employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 1

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(6,678)

 

 

(6,678)

 

Balance at June 30, 2018

 

 —

 

$

 —

 

 

 

14,232,313

 

$

22

 

$

89,402

 

$

(74,376)

 

$

15,048

 

Issuance of common stock

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Issuance costs

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Warrant issuance

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

196

 

 

 —

 

 

196

 

Exercise of stock options

 

 —

 

 

 —

 

 

 

33,098

 

 

 —

 

 

61

 

 

 —

 

 

61

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

1,626

 

 

 —

 

 

1,626

 

Share–based compensation — non–employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 1

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(6,079)

 

 

(6,079)

 

Balance at September 30, 2018

 

 —

 

$

 —

 

 

 

14,265,411

 

$

22

 

$

91,286

 

$

(80,455)

 

$

10,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

 —

 

$

 —

 

 

 

14,265,411

 

$

22

 

$

91,863

 

$

(84,111)

 

$

7,774

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

473

 

 

 —

 

 

473

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(3,801)

 

 

(3,801)

 

Balance at March 31, 2019

 

 —

 

$

 —

 

 

 

14,265,411

 

$

22

 

$

92,336

 

$

(87,912)

 

$

4,446

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

438

 

 

 —

 

 

438

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(2,920)

 

 

(2,920)

 

Balance at June 30, 2019

 

 —

 

$

 —

 

 

 

14,265,411

 

$

22

 

$

92,774

 

$

(90,832)

 

$

1,964

 

Share–based compensation — employee

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

441

 

 

 —

 

 

441

 

Restricted stock issuance

 

 —

 

 

 —

 

 

 

607,000

 

 

 1

 

 

(1)

 

 

      —

 

 

 —

 

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(3,430)

 

 

(3,430)

 

Balance at September 30, 2019

 

 —

 

$

 —

 

 

 

14,872,411

 

$

23

 

$

93,214

 

$

(94,262)

 

$

(1,025)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed financial statements.

5

Table of Contents 

Gemphire Therapeutics Inc.

Condensed Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

September 30, 

 

 

 

2019

 

2018

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(10,151)

 

$

(19,981)

 

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

 

 

 

 

 

 

 

Share-based compensation

 

 

1,352

 

 

3,556

 

Non-cash discount amortization on term loan

 

 

822

 

 

247

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

562

 

 

(520)

 

Accounts payable

 

 

633

 

 

(1,674)

 

Accrued and other liabilities

 

 

(43)

 

 

574

 

Net cash used in operating activities

 

 

(6,825)

 

 

(17,798)

 

Investing activities

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

 

 —

 

 

 —

 

Financing activities

 

 

 

 

 

 

 

Repayment of principal

 

 

(10,259)

 

 

(10)

 

Exercise of stock options

 

 

 —

 

 

84

 

Proceeds from sale of common stock

 

 

 —

 

 

25,150

 

Offering costs

 

 

 —

 

 

(2,093)

 

Net cash (used in) provided by financing activities

 

 

(10,259)

 

 

23,131

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(17,084)

 

 

5,333

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

18,954

 

 

18,473

 

Cash, cash equivalents and restricted cash at end of period

 

$

1,870

 

$

23,806

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

 —

 

$

 —

 

Cash paid for interest

 

$

75

 

$

358

 

Supplemental non-cash financing transactions:

 

 

 

 

 

 

 

Issuance of warrants in connection with term loan

 

$

 —

 

$

196

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,855

 

$

23,806

 

Restricted cash

 

 

15

 

 

 —

 

Total cash, cash equivalents and restricted cash

 

$

1,870

 

$

23,806

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed financial statements.

 

 

6

Table of Contents 

Gemphire Therapeutics Inc.

Notes to Condensed Financial Statements (unaudited), continued

 

1. The Company and Basis of Presentation

 

The Company, headquartered in Ann Arbor, Michigan, is a clinical‑stage biopharmaceutical entity focused on developing and commercializing therapies for the treatment of dyslipidemia, a serious medical condition that increases the risk of life threatening cardiovascular disease, particularly orphan indications as well as NAFLD/NASH (nonalcoholic fatty liver disease/non-alcoholic steatohepatitis). The Company’s primary activities to date have been conducting research and development activities, planning and conducting clinical trials, performing business and financial planning, recruiting personnel and raising capital. On July 24, 2019, the Company entered into a definitive agreement (the “Original Merger Agreement” and, as amended on October 29, 2019, the “Merger Agreement”) with GR Merger Sub Inc., a Delaware corporation and the Company’s wholly owned subsidiary (“Merger Sub”), and NeuroBo Pharmaceuticals, Inc., a Delaware corporation (“NeuroBo”), pursuant to which Merger Sub will merge with and into NeuroBo, with NeuroBo surviving as a wholly owned subsidiary of the Company in an all-stock transaction (the “Merger”).   See Note 3–  Merger Agreement for further information.  

 

The Company is subject to certain risks, which include risks related to the proposed Merger and the need to research, develop, and clinically test potentially therapeutic products, initially one product candidate gemcabene (also known as CI‑1027); obtain regulatory approval for its products and commercialize them around the world, if approved; expand its management scientific staff; finance its operations; and find collaboration partners to further advance development and commercial efforts.

 

Follow-On Public Offering

 

On February 12, 2018, the Company completed an underwritten public offering (the Follow-On Offering) of 3,142,858 shares of common stock at the public offering price of $7.00 per share. As part of such offering, the Company issued 450,000 additional shares of common stock representing partial exercise of the underwriters’ overallotment option. The Company received net proceeds of approximately $23.1 million after deducting underwriting discounts and commissions and offering expenses.

Capital Requirements

 

The Company has sustained operating losses since inception and expects such losses to continue over the next several years. Management plans to continue financing the Company’s operations with equity and/or debt issuances. The Company’s management believes the Company’s cash and cash equivalents on hand are not adequate to fund the Company’s operations for at least the next 12 months (see Going Concern section below). If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate part or all of its research and development programs or discontinue its operations.

 

Basis of Presentation

 

The accompanying condensed financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed financial statements may not include all disclosures required by U.S. GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the fiscal year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 18, 2019. The condensed balance sheet at December 31, 2018 was derived from the audited financial statements.

 

In the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.

7

Table of Contents 

Gemphire Therapeutics Inc.

Notes to Condensed Financial Statements (unaudited), continued

 

 

Going Concern

The accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), the Company has disclosed its conclusions regarding whether there is substantial doubt about the entity’s ability to continue as a going concern within one year from the date of the issuance of these financial statements.

 

In the course of its activities, the Company has incurred losses and negative cash flows from operations since its inception. As of September 30, 2019, the Company had an accumulated deficit of $94.3 million and a total stockholders’ deficit of $1 million. The Company expects to incur losses for the foreseeable future. The Company believes that its cash and cash equivalents of $1.9 million at September 30, 2019 are not sufficient to fund the Company's current operating plan for at least twelve months after the date the condensed financial statements are issued. The Company has no current source of revenue to sustain its present activities and does not expect to generate revenue until, and unless, the Food and Drug Administration (FDA) or other regulatory authorities approve, and the Company successfully commercializes, gemcabene or any other product candidate it may pursue in the future or unless certain development and commercialization milestones are met under the Beijing SL Agreement (See Note 7 – License Agreements). Until such time, if ever, the Company expects to finance its cash needs through a combination of equity and debt financings as well as collaborations, strategic alliances and licensing arrangements. The Company does not have any committed external source of funds beyond the non-refundable upfront gross payment under the Beijing SL Agreement, which was received in October 2019, and there can be no assurance that the Company will be successful in acquiring additional funding at levels sufficient to fund its operations.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable to it, or the proposed Merger is not consummated, the Company may have to significantly reduce or terminate its operations or delay, further scale back or discontinue the development of gemcabene or the board of directors may elect to dissolve and liquidate the Company’s assets. The condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying notes. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of deposit to be cash equivalents. The Company invests excess cash in readily available checking and savings accounts and invests in highly liquid investments in money market accounts.

 

 

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Restricted Cash

 

The Company considers the cash security requirement related to a commercial credit card arrangement with Silicon Valley Bank as restricted cash (See Note 5 – Debt).

 

Fair Value of Financial Instruments

 

The Company’s financial instruments include principally cash and cash equivalents, other assets, accounts payable, accrued liabilities and debt. The carrying amounts for these financial instruments reported in the balance sheets approximate their fair values. See Note 11 — Fair Value Measurements, for further discussion of fair values.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of personnel‑related costs, including salaries and share‑based compensation costs, for personnel in functions not directly associated with research and development activities. Other significant costs include legal fees related to intellectual property and corporate matters and professional fees for accounting and other services.

 

Research and Development Expenses

 

Research and development expenses consist of costs incurred in performing research and development activities, including compensation for research and development employees, costs associated with preclinical studies and trials, regulatory activities, manufacturing activities to support clinical activities, license fees, non‑legal patent costs, fees paid to external service providers that conduct certain research and development activities, clinical costs and an allocation of overhead expenses. Research and development costs are expensed as incurred.

 

Revenue Recognition

 

Beginning January 1, 2018, the Company has followed the provisions of Accounting Standards Codification  (ASC) Topic 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is recognized. The Company to date has not recognized any revenue, but has entered into a license transfer and collaboration agreement in July 2019 that will have revenue recognition implications in future reporting periods. See Note 7 – License Agreements.

 

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. Performance obligations may include license rights, development services, and services associated with regulatory submission and approval processes. Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations are either completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.

 

As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines,

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reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. The Company allocates the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation.

 

Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer, and the customer can use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

 

Milestone payments: At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission) is included in the transaction price. Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until those approvals are received. When our assessment of probability of achievement changes and variable consideration becomes probable, any additional estimated consideration is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation and recorded in license, collaboration, and other revenues based upon when the customer obtains control of each element.

 

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

 

Income Taxes

 

The Company utilizes the liability method of accounting for income taxes as required by ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Currently, there is no provision for income taxes, as the Company has incurred operating losses to date, and a full valuation allowance has been provided on the net deferred tax assets.

 

Share‑Based Compensation

 

The Company accounts for share‑based compensation in accordance with the provisions of ASC 718, Compensation — Stock Compensation (ASC 718). Accordingly, compensation costs related to equity instruments granted are recognized at the grant‑date fair value. The Company records forfeitures when they occur. Share‑based compensation arrangements to non‑employees are accounted for in accordance with the applicable provisions of ASC 718 and ASC 505, Equity, using a fair value approach.

Segment Information

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s  Chief Executive Officer views the Company’s operations and manages its business in one operating segment, which is the business of development and commercialization of therapeutics for the treatment of dyslipidemia, a serious medical

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condition that increases the risk of life threatening cardiovascular disease particularly orphan indications. Accordingly, the Company has a single reportable segment.

Jumpstart Our Business Startups Act Accounting Election

 

As an emerging growth company under the Jumpstart Our Business Startups Act (JOBS Act), the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. The Company has irrevocably elected not to avail itself of this exemption and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Recent Accounting Pronouncements

 

Recent Accounting Pronouncements Adopted

In January 2016, the FASB issued ASU No. 2016‑01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. This pronouncement is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted for the accounting guidance on financial liabilities under the fair value option. The Company adopted this standard on January 1, 2019 and it did not have a material impact on the Company’s financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequently amended the guidance relating largely to transition considerations under the standard in January 2017,  July 2018 and March 2019. The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods. The Company adopted the standard on January 1, 2019, and applied the modified retrospective approach to each lease in existence at the adoption date. As such, the Company did not restate comparative periods and did not recognize any cumulative adjustment to retained earnings on the date of the adoption given that no difference in operating expense resulted upon adoption. The Company elected the package of practical expedients provided under the standard. The Company recognized approximately $0.1 million of lease assets and liabilities on the balance sheet as of January 1, 2019. The new standard did not have an impact on the Company’s statements of comprehensive loss or statements of cash flows.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The objective of this ASU is to eliminate the diversity in practice related to the classification of restricted cash or restricted cash equivalents in the statement of cash flows. For public business entities, this ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The amendments in this update should be applied retrospectively to all periods presented. The Company adopted this standard on January 1, 2018 and it did not have a material impact on the Company’s financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation  – Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2016-09), which provides guidance about which changes to the terms or conditions of a share-based payment awards require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard on January 1, 2018 and it did not have a material impact on the Company’s financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should generally apply the requirements of Topic 718 to nonemployee awards except in circumstances where there is specific guidance on inputs to an option pricing model and the attribution of cost. ASU 2018-07 specifies that Topic 718 applies to all share-based

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Notes to Condensed Financial Statements (unaudited), continued

 

payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The guidance also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606. This guidance is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted, but no earlier than an entity’s adoption date of Topic 606. The Company adopted this standard on January 1, 2019 and it did not have an impact on the Company’s financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). The new guidance modifies the disclosure requirements in Topic 820 as follows:

 

·

Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.

·

Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

·

Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

This guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the impact of the new guidance on its financial statements.

3. Merger Agreement

 

Merger Agreement with NeuroBo

 

On July 24, 2019, the Company entered into the Merger Agreement with NeuroBo pursuant to which, the Company’s wholly owned subsidiary, Merger Sub, will merge with and into NeuroBo, with NeuroBo surviving as a wholly owned subsidiary of the Company, in an all-stock transaction. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), (a) each share of NeuroBo common stock outstanding immediately prior to the Effective Time (excluding shares held as treasury stock, held by NeuroBo and dissenting shares) will be converted into the right to receive shares of Gemphire common stock equal to the Exchange Ratio described below; and (b) each outstanding NeuroBo stock option that has not previously been exercised prior to the Effective Time will be assumed by the Company.

 

For accounting purposes, NeuroBo is considered to be acquiring the Company even though the Company will be the issuer of the common stock in the merger due to various considerations, including the expected ownership positions of Gemphire and NeuroBo post-merger. Substantially all the fair value of the Company is concentrated in one asset, in-

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Notes to Condensed Financial Statements (unaudited), continued

 

process research and development IP, and therefore the merger is expected to be accounted for as an asset acquisition by NeuroBo.

 

Under the exchange ratio formula in the Merger Agreement (the “Exchange Ratio”), upon the closing of the Merger, on a pro forma basis and based upon the number of shares of common stock expected to be issued in the Merger, former Company security holders immediately prior to the Merger are expected to own, or hold rights to acquire, approximately 3.74% of the combined company and former NeuroBo security holders immediately prior to the Merger are expected to own, or hold rights to acquire, approximately 96.26% of the combined company, on a fully-diluted basis and assuming that the Company has a net cash amount of negative $3,400,000 at closing and that NeuroBo raises the minimum required amount of $24,240,000 in its Series B Preferred Stock financing described below. The ownership percentages are subject to adjustment to the extent that the Company’s net cash at the Effective Time is negative or to reflect aggregate gross proceeds received by NeuroBo in its financing before the closing of the Merger above the minimum required amount and up to and including $50 million.

 

Consummation of the Merger is subject to certain closing conditions, including, among other things, approval by the Company’s stockholders and NeuroBo’s stockholders, the continued listing of the common stock on the Nasdaq Capital Market, the conversion of all NeuroBo preferred stock and NeuroBo convertible notes into NeuroBo common stock and satisfaction by the Company of a minimum parent cash amount of negative $3.75 million at closing.

 

Prior to signing the Merger Agreement, NeuroBo entered into subscription agreements with investors for a Series B Preferred Stock financing for approximate gross proceeds of $24,240,000, the minimum required amount under the Merger Agreement, and may enter into additional subscription agreements and receive additional proceeds between signing and closing of the Merger.

 

The Merger Agreement contains certain termination rights for both the Company and NeuroBo, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $1,000,000, or in some circumstances reimburse the other party’s expenses up to a maximum of $500,000.

 

Following the closing of the Merger, it is expected that NeuroBo’s Chief Executive Officer, John L. Brooks III, will serve as Chief Executive Officer of the Company and the board of directors of the Company will be comprised of ten directors, consisting of nine directors designated by NeuroBo and Steven Gullans, the Company’s current President and Chief Executive Officer. In addition, upon completion of the merger, Gemphire will change its name to NeuroBo Pharmaceuticals, Inc., and plans to change its ticker symbol on the Nasdaq Capital Market to “NRBO”. The merged company will focus on the development of NeuroBo’s clinical-stage drug candidates for the treatment of neurodegenerative diseases.

The Merger is expected to close in the fourth quarter of 2019, subject to approval by the Company’s stockholders at an annual meeting to be held on December 6, 2019 and other closing conditions.

Contingent Value Rights Agreement

At the Effective Time, the Company will enter into a Contingent Value Rights Agreement (the “CVR Agreement”). Pursuant to the Merger Agreement and the CVR Agreement, for each share of the Company’s common stock held, stockholders of record as of immediately prior to the Effective Time will receive one contingent value right (“CVR”) entitling such holders to receive in the aggregate, 80% of the Gross Consideration (as defined in the CVR Agreement which contemplates the post-Merger combined company’s prior retention of an aggregate of $500,000) less other Permitted Deductions (each as defined in the CVR Agreement) received during the 15-year period after the closing of the Merger (the “CVR Term”) from the grant, sale or transfer of rights to the Company’s product candidate gemcabene (other than a grant, sale or transfer of rights involving a sale or disposition of the post-Merger combined company) that is entered into during the 10-year period after the closing of the Merger or pursuant to the Beijing SL Agreement, but not 

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Notes to Condensed Financial Statements (unaudited), continued

 

including the $2.5 million non-refundable upfront gross payment pursuant to the Beijing SL Agreement, which was paid in October 2019. Under the CVR Agreement, the combined company agreed to commit $1 million to support the further development of gemcabene through the quarter ending March 31, 2020, the funding of which was conditioned on receipt by the Company of the $2.5 million non-refundable upfront gross payment payable under the Beijing SL Agreement. The CVRs are not transferable, except in certain limited circumstances, will not be certificated or evidenced by any instrument, will not accrue interest and will not be registered with the SEC or listed for trading on any exchange. The CVR Agreement will be effective prior to the closing of the Merger and will continue in effect until the later of the end of the CVR Term and the payment of all amounts payable thereunder, unless and until earlier terminated upon termination of the Merger Agreement.

Change in Control Payments and Severance Awards

On July 24, 2019, the Company entered into amendments to the employment agreements (the “Amendments”) of Dr. Steven Gullans, Chief Executive Officer and President, Dr. Charles Bisgaier, Chief Scientific Officer and Chairman of the board of directors, and Seth Reno, Chief Commercial Officer (the “Executives”) to reduce the cash severance obligation owed to each Executive in connection with the termination of their employment upon the closing of the Merger. Pursuant to the Amendments, if the Merger is completed, each of Dr. Gullans, Dr. Bisgaier and Mr. Reno will receive a lump sum cash payment within thirty days after the effective date of the Merger in an amount equal to $75,000,  $330,000 and $297,536, respectively, subject to a reduction for withholding tax, in lieu of the cash compensation such Executives would otherwise be entitled to receive in connection with a termination following a change in control pursuant to such Executives’ employment agreements.

 

In connection with the Executives agreeing to the Amendments, on July 24, 2019, the Company issued each of Dr. Gullans, Dr. Bisgaier and Mr. Reno a restricted stock award representing 300,000,  100,000 and 100,000 shares, respectively, of common stock. The restricted stock awards were made pursuant to Restricted Stock Grant Notices and Restricted Stock Agreements (the “Award Agreements”). Such Award Agreements provide that such shares shall fully vest immediately prior to the Effective Time, provided that the Executive has executed and delivered to the Company a release and waiver of claims and such release is not subsequently revoked. The Company shall automatically reacquire for no consideration all unvested shares upon the earliest to occur of (i) the Executive’s termination of continuous service (unless such termination results from the completion of the Merger prior to March 31, 2020) or (ii) March 31, 2020 if the Merger has not been completed. The Award Agreements provide that the holders shall have all rights and privileges of a holder of common stock, including for purposes of voting and receiving dividends.

 

Grants were also made to the Company’s non-employee directors (45,000 shares of restricted stock in the aggregate) and employees (62,000 shares of restricted stock in the aggregate) pursuant to Award Agreements on July 24, 2019. The non-employee director Award Agreements do not require the execution and delivery of a release and waiver of claims.

 

On July 23, 2019, the Company’s non-employee directors agreed to waive payment of the cash retainer for the remainder of 2019 otherwise payable to such directors pursuant to the Company’s non-employee director compensation policy.

 

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Notes to Condensed Financial Statements (unaudited), continued

 

4. Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30,

 

December 31,

 

 

 

2019

 

2018

 

Accrued compensation and other payroll liabilities

 

$

92

 

$

137

 

Legal costs

 

 

52

 

 

106

 

Accrued interest

 

 

 —

 

 

43

 

Non-operating transactional costs

 

 

176

 

 

 —

 

Other research and development expenses

 

 

66

 

 

135

 

Other general and administrative expenses

 

 

10

 

 

17

 

Total

 

$

396

 

$

438

 

 

 

5. Debt

 

Term Loan

 

On January 25, 2019, the Company agreed to prepay in full all outstanding indebtedness under the Loan and Security Agreement (the “Original Loan Agreement”) with Silicon Valley Bank (SVB) dated July 24, 2017 (the “Initial Effective Date”), as amended by the First Amendment, dated July 31, 2018 (the “First Amendment” and, the Original Loan Agreement, as amended by the First Amendment, the “Loan Agreement”). Effective January 28, 2019, the Company prepaid in full all outstanding indebtedness under the Term Loan. As of the date of repayment, the Company had approximately $8.9 million in principal and interest outstanding as well as a final payment fee due of $1.0 million. Upon repayment, approximately $0.8 million of unamortized note discounts were recognized as interest expense.

The obligations, liabilities, covenants, and terms that are expressly specified in the Loan Agreement and any other related loan and collateral security documents issued by the Company to SVB in connection with the transaction evidenced by the Loan Agreement as surviving termination shall continue to survive notwithstanding the payment, including without limitation, the Company’s indemnity obligations and the Company’s obligation to pay to SVB a success fee of 3.5% of the funded principal amount of the Term Loan in the event any of the following occur on or before 5:00 PM, Eastern time, on July 24, 2024: (a) the Company receives FDA approval for any new drug application for gemcabene, (b) a sale or other transfer of all or substantially all of the assets of the Company occurs, (c) a merger or consolidation of the Company with or into another person or entity occurs where the holders of the Company’s outstanding voting equity securities immediately prior to such merger or consolidation hold less than a majority of the issued and outstanding voting equity securities of the successor immediately following such transaction or (d) any sale by the holders of the Company’s outstanding voting equity securities where such holders do not continue to hold at least a majority of the Company’s issued and outstanding voting equity securities immediately following the consummation of such transaction. The Merger, upon completion, will trigger a success fee of $350,000 (See Note 3 – Merger Agreement). The Warrant to purchase 36,000 shares (subject to adjustment) of the Company’s common stock dated as of July 31, 2018 between the Company and SVB remains outstanding and exercisable in accordance with its terms.

The Company was required to reserve $15,000 in cash related to a SVB commercial credit card arrangement in February 2019 upon the prepayment of the Term Loan. The cash reserve is reflected as restricted cash in the accompanying condensed balance sheets.

 

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6. Commitments and Contingencies

 

Pfizer License Agreement

 

In April 2011, the Company and Pfizer Inc. (Pfizer) entered into an exclusive license agreement for the clinical product candidate gemcabene, which was subsequently amended and restated in August 2018 (as so amended, the Pfizer Agreement). In exchange for this worldwide exclusive license to certain patent rights and a non-exclusive royalty bearing right and license to certain related data to make, use, develop, commercialize, import and otherwise exploit the clinical product candidate gemcabene, the Company agreed to certain milestone and royalty payments on future sales (See Note 7 — License Agreements). As of September 30, 2019, there was sufficient uncertainty with regard to both the outcome of the clinical trials and the ability to obtain sufficient funding to support any of the cash milestone payments under the Pfizer Agreement, and as such, no liabilities were recorded related to the Pfizer Agreement.

 

Other Agreements

 

In May 2016, the Company entered into a non-cancellable lease agreement for its headquarters location, commencing in the third quarter of 2016. The initial term of the agreement was 3 years with an initial monthly base rent of approximately $8,400 and increasing to approximately $8,900 during the last year of the lease term. The total rent expense under this operating classified lease was $17,000 and $26,000 during the three month periods ended September 30, 2019 and 2018, respectively, and $69,000 and $78,000 during the nine month periods ended September 30, 2019 and 2018, respectively. The lease expired in August 2019, and no office space is currently being leased as of September 30, 2019.

Supplemental cash flow information related to the operating lease was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Nine months ended

 

 

 

September 30, 2019

 

September 30, 2018

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liability:

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

71

 

$

78

 

 

 

 

 

 

 

 

 

Right-of -use assets obtained in exchange for lease obligations:

 

 

 

 

 

 

 

Operating leases

 

$

70

 

$

 —

 

 

Supplemental balance sheet information related to the operating lease was as follows (in thousands, except weighted average data):

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

September 30, 2019

 

December 31, 2018

 

 

 

 

 

 

 

Right-of-use assets

 

$

 —

 

$

68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease liability

 

$

 —

 

$

70

 

 

 

 

 

 

 

Weighted average remaining lease term

 

 

  —

 

 

0.7 years

Weighted average discount rate

 

 

 —

 

 

5.5%

 

 

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Other Commitments and Contingencies

 

In the ordinary course of business, from time to time, the Company may be subject to a broad range of claims and legal proceedings that relate to contractual allegations, patent infringement, employment-related matters and other claims. The Company establishes accruals for matters which it believes that losses are probable and can be reasonably estimated. Although it is not possible to predict with certainty the outcome of these matters, the Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on its results of operations or financial position.

7. License Agreements

 

Pfizer

 

The Company is party to the Pfizer Agreement, as amended on August 2, 2018, for a worldwide exclusive license to certain patent rights and a non-exclusive royalty bearing right and license to certain related data to make, use, develop, commercialize, import and otherwise exploit the clinical product candidate gemcabene. Pfizer retains the right to make, use and import gemcabene solely for internal research purposes.

 

In partial exchange for the rights granted by Pfizer, the Company agreed to issue shares of its common stock to Pfizer representing 15% of the Company’s fully diluted capital at the close of its first arms‑length Series A financing, which occurred on March 31, 2015.

 

The Company agreed to make milestone payments totaling up to $37 million upon the achievement of certain milestones, including the first new drug application (or its foreign equivalent) in any country, regulatory approval in each of the United States, Europe and Japan, the first anniversary of the first regulatory approval in any country, and upon achieving certain aggregate sales levels of gemcabene. Future milestone payments under the Pfizer Agreement, if any, are not expected to begin for at least several years and extend over a number of subsequent years.

 

The Company also agreed to pay Pfizer tiered royalties on a country‑by‑country basis based upon the annual amount of net sales, as specified in the Pfizer Agreement, until the later of: (a) five (5) years after the first commercial sale in such country; (b) the expiration of all regulatory or data exclusivity for gemcabene in such country; and (c) the expiration or abandonment of the last valid claim of the licensed patents, including any patent term extensions or supplemental protection certificates in such country (collectively, the Royalty Term). Under the Pfizer Agreement, the Company is obligated to use commercially reasonable efforts to develop and commercialize gemcabene.

 

On March 31, 2015, upon the closing of the Series A preferred stock financing, the Company issued 675,250 shares of its common stock, at a fair market value of $0.9 million, to Pfizer in connection with the first equity payment, pursuant to which Pfizer became the owner of more than 5% of the Company’s capital stock. The transaction was recorded as acquired in‑process research and development expenses based on the fair value of the common shares issued since no processes or activities that would constitute a “business” were acquired and none of the rights and underlying assets acquired had alternative future uses or reached a stage of technological feasibility. None of the other milestone or royalty payments were triggered as of September 30, 2019.

 

The Pfizer Agreement will expire upon expiration of the last Royalty Term. On expiration (but not earlier termination), the Company will have a perpetual, exclusive, fully paid-up, royalty-free license under the licensed patent rights and related data to make, use, develop, commercialize, import and otherwise exploit the clinical product candidate gemcabene. Either party may terminate the Pfizer Agreement for the other party’s material breach following a cure period or immediately upon certain insolvency events relating to the other party. Pfizer may immediately terminate the Pfizer Agreement in the event that (i) the Company or any of its affiliates or sublicenses contests or challenges, or supports or assists any third party to contest or challenge, Pfizer’s ownership of or rights in, or the validity, enforceability or scope of any of the patents licensed under the Pfizer Agreement or (ii) the Company or any of its affiliates or sublicensees fails to achieve the first commercial sale in at least one country by April 16, 2024. Furthermore, upon termination of the Pfizer Agreement by Pfizer for any of the foregoing reasons, the Company grants Pfizer a non-

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Notes to Condensed Financial Statements (unaudited), continued

 

exclusive, fully paid-up, royalty free, worldwide, transferrable, perpetual and irrevocable license to use any intellectual property rights arising from the development or commercialization of gemcabene by the Company and any trademarks identifying gemcabene and agrees to transfer regulatory filings and approvals to Pfizer or permit Pfizer to cross-reference and rely on such regulatory filings and approvals for gemcabene. The Company may terminate the License Agreement for convenience upon 90 days’ written notice and payment of an early termination fee.

 

Beijing SL License and Collaboration Agreement

 

On July 23, 2019, the Company entered into a License and Collaboration Agreement (the “Beijing SL Agreement”) with Beijing SL Pharmaceutical Co., Ltd. (“Beijing SL”), pursuant to which the Company granted Beijing SL an exclusive royalty-bearing license to research, develop, manufacture and commercialize pharmaceutical products comprising, as an active ingredient, gemcabene in mainland China, Hong Kong, Macau and Taiwan (each, a “region,” and collectively, the “Territory”). The terms of the agreement include non-refundable upfront fees, payments based upon achievement of milestones and royalties on net product sales. Under the Beijing SL Agreement, the Company has both fixed and variable consideration. Non-refundable upfront fees are considered fixed, while milestone payments are identified as variable consideration. As of September 30, 2019, no revenue under the Beijing SL Agreement has been recognized as the performance obligation related to the non-refundable upfront fees was not satisfied.  For additional detail on the Company’s accounting policy regarding revenue recognition, refer to Note 2 – Summary of Accounting Policies.

 

Under the terms of the Beijing SL Agreement, Beijing SL will be responsible, at its expense, for developing and commercializing products containing gemcabene (each, a “Licensed Product”) in the Territory, with certain assistance from the Company. To the extent mutually agreed to in writing, the Company and Beijing SL will collaborate on the Phase 3 clinical trial for homozygous familial hypercholesterolemia or other clinical trials with the Company as the sponsor designed to enroll patients both inside and outside the Territory (a “Global Study”), but Beijing SL will be responsible, at its expense, for the conduct of any Global Study to the extent solely in the Territory, subject to the Company’s final decision making authority, and the Company will be responsible, at its expense, for the conduct of any Global Study to the extent solely outside of the Territory. Under a territory development plan, the parties shall develop Licensed Products with respect to the Territory. Beijing SL will be responsible for development activities, including non-clinical and clinical studies directed at obtaining regulatory approval of the Licensed Product in the Territory. Beijing SL has agreed to use commercially reasonable efforts to commercialize the Licensed Products for each indication that receives regulatory approval in the Territory and shall prepare and present a commercialization plan that shall be subject to approval by the joint steering committee.

 

Pursuant to the Beijing SL Agreement, Beijing SL will make a non-refundable upfront gross payment of $2.5 million to the Company within 45 days of the effective date of the Beijing SL Agreement; the upfront payment was received in October 2019. Additionally, with respect to each Licensed Product, the Company will be eligible to receive (i) payments for specified developmental and regulatory milestones (including submission of a new drug application to China’s National Medical Product Administration, dosing of the first patient in a phase 3 clinical trial in mainland China and regulatory approval for the first and each additional indication of a Licensed Product in the Territory) totaling up to $6 million in the aggregate and (ii) payments for specified global net sales milestones of up to $20 million in the aggregate multiplied by the ratio of the net sales of a Licensed Product sold by Beijing SL in the Territory divided by the global net sales of a Licensed Product, which net sales milestone payments are payable once, upon the first achievement of such milestone.

 

Beijing SL will also be obligated to pay the Company tiered royalties ranging from the mid-teens to twenty percent on the net sales of all Licensed Products in the Territory until the latest of (a) the date on which any applicable regulatory exclusivity with respect to such Licensed Product expires in such region, (b) the expiration or abandonment of the last valid patent claim or joint patent claim covering such Licensed Product in each region and (c) the fifth anniversary of the first commercial sale of such Licensed Product in such region (the “Royalty Term”). Future milestone payments under the Beijing SL Agreement, if any, are not expected to begin for at least one year and will extend over a number of subsequent years. The Company cannot determine the date on which Beijing SL’s potential royalty payment obligations to the Company would expire because Beijing SL has not yet developed any Licensed Products under the Beijing SL

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Notes to Condensed Financial Statements (unaudited), continued

 

Agreement and therefore the Company cannot at this time identify the date of the first commercial sale or the periods of any regulatory exclusivity or patent claims with respect to any Licensed Product.

 

On a Licensed Product-by-Licensed Pro