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 June 30, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to .
Commission File No. 001-35890
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of | (I.R.S. Employer | ||||
Incorporation or Organization) | Identification No.) | ||||
(Address of Principal Executive Offices) | (Zip Code) | ||||
Registrant’s telephone number, including area code: (415) 798-8589
(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 | Name of each exchange | |||||||||||||||
Symbol(s) | on which registered | ||||||||||||||||
The | |||||||||||||||||
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 ☐
and (2) has been subject to such filing requirements for the past 90 days.
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 | ☐ | ||||||||
| ☒ | 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 Act). Yes ☐ No ☒
The number of shares of Registrant’s Common Stock, $0.001 par value per share, outstanding as of August 10, 2022 was 10,418,856 .
INDEX TO FORM 10-Q
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| Item 5. | ||||||||
| Item 6. | ||||||||
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements (including within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”)) about us and our industry that involve substantial risks and uncertainties. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of our management, as well as assumptions made by, and information currently available to, our management. Forward-looking statements generally include statements that are predictive in nature and depend upon or refer to future events or conditions, and include words such as “may,” “will,” “should,” “would,” “could”, “expect,” “anticipate,” “plan,” “likely,” “believe,” “estimate,” “intend,” and other similar expressions. Statements that are not historical facts are forward-looking statements. Forward-looking statements are based on current beliefs and assumptions that are subject to risks and uncertainties and are not guarantees of future performance. Actual results could differ materially from those contained in any forward-looking statement as a result of various factors, including, without limitation: our strategies, prospects, plans, expectations or objectives for future operations; the progress, scope or timing of the development of our product candidates; the benefits that may be derived from any future products or the commercial or market opportunity with respect to any of our future products; our ability to protect our intellectual property rights; our anticipated operations, financial position, ability to raise capital to fund operations, revenues, costs or expenses; statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. These risks and uncertainties include, but are not limited to, the risks included in this Quarterly Report on Form 10-Q under Part II, Item 1A, “Risk Factors.” Other sections of this Quarterly Report on Form 10-Q, as well as our other disclosures and filings, include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.
Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this document. You should read this document with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.
Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
•our expected future growth and our ability to manage such growth;
•our ability to develop, obtain regulatory approval for and commercialize TPST-1495 and TPST-1120 and our future product candidates;
•the size and growth potential of the markets for our product candidates, and our ability to serve those markets;
•the development, regulatory approval, efficacy and commercialization of competing products;
•our ability to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates;
•our ability to retain regulatory approval for our product candidates or future product candidates in the United States and in any foreign countries in which we make seek to do business;
•our ability to retain and hire our board of directors, senior management, or operational personnel;
•our ability to integrate TempestTx, Inc. and Millendo Therapeutics, Inc. (now the Company) successfully and realize the anticipated benefits of the merger of the two entities, which closed in July 2021;
•our expectation regarding the period during which we will qualify as a smaller reporting company under the federal securities laws;
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•our ability to develop and maintain our corporate infrastructure, including our ability to remediate our existing material weakness and to design and maintain an effective system of internal controls;
•our financial performance and capital requirements; and
•our expectations regarding our ability to obtain, maintain and enforce intellectual property protection for our products and technology, as well as our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights of others.
You should read this Quarterly Report on Form 10-Q as well as the documents that we reference in, and have filed as exhibits to, this report with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Unless the context suggests otherwise, references in this Quarterly Report on Form 10-Q to “Tempest,” “the Company,” “we,” “us,” and “our” refer to Tempest Therapeutics, Inc. and, where appropriate, its subsidiaries.
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PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
TEMPEST THERAPEUTICS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
| June 30, 2022 (Unaudited) | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Insurance recovery of legal settlement | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued legal settlement | |||||||||||
| Accrued expenses | |||||||||||
| Current loan payable | |||||||||||
| Current operating lease liabilities | |||||||||||
| Accrued compensation | |||||||||||
| Interest payable | |||||||||||
| Total current liabilities | |||||||||||
Loan payable (net of discount and issuance costs of $ | |||||||||||
| Operating lease liabilities, less current portion | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 6) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements
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TEMPEST THERAPEUTICS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | $ | $ | $ | $ | |||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
Other (expense) income, net: | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
Interest and other (expense) income, net | |||||||||||||||||||||||
| Total other (expense) income, net | ( | ( | ( | ( | |||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share of common stock, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted-average shares of common stock outstanding, basic and diluted | |||||||||||||||||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements
6
TEMPEST THERAPEUTICS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share amounts)
Three Months Ended June 30, 2022
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||
BALANCE — March 31, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||
Issuance of common stock for cash, net of issuance cost of $ | — | ||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||
Issuance of pre-funded warrants, net of issuance cost of $ | — | — | — | ||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||
| BALANCE — June 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||
Three Months Ended June 30, 2021
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||
BALANCE — March 31, 2021 | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||
| Vesting of early exercised stock options | — | — | |||||||||||||||||||||
| Conversion of preferred stock to common stock | — | ||||||||||||||||||||||
| Issuance of common stock for cash | — | ||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||
| Reverse recapitalization transaction costs | — | — | ( | — | ( | ||||||||||||||||||
| Record pre-merger Millendo stockholders’ equity and elimination of Millendo historical accumulated deficit | — | ||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||
BALANCE — June 30, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
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TEMPEST THERAPEUTICS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share amounts)
Six Months Ended June 30, 2022
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||
BALANCE — December 31, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||
Issuance of common stock for cash, net of issuance cost of $ | — | ||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||
Issuance of pre-funded warrants, net of issuance cost of $ | — | ||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||
BALANCE — June 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||
Six Months Ended June 30, 2021
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||
BALANCE — December 31, 2020 | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||
| Vesting of early exercised stock options | — | — | |||||||||||||||||||||
| Conversion of preferred stock to common stock | — | ||||||||||||||||||||||
| Issuance of common stock for cash | — | ||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||
| Reverse recapitalization transaction costs | — | — | ( | — | ( | ||||||||||||||||||
| Record pre-merger Millendo stockholders’ equity and elimination of Millendo historical accumulated deficit | — | ||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||
BALANCE — June 30, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
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TEMPEST THERAPEUTICS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
For The Six Months Ended June 30, | |||||||||||
2022 | 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation expense | |||||||||||
| Stock-based compensation expense | |||||||||||
Non-cash lease expense | |||||||||||
Non-cash interest and other expense, net | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
Prepaid expenses and other assets | |||||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other liabilities | ( | ||||||||||
| Interest payable | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Cash used in operating activities | ( | ( | |||||||||
| Investing activities: | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Cash used in investing activities | ( | ( | |||||||||
| Financing activities: | |||||||||||
Proceeds from the issuance of common stock, net of issuance costs | |||||||||||
| Proceeds from issuance of pre-funded warrants, net of issuance costs | |||||||||||
| Borrowings on loan payable | |||||||||||
| Payment of loan issuance costs | ( | ||||||||||
| Cash acquired in connection with reverse recapitalization | |||||||||||
| Payment of reverse recapitalization transaction costs | ( | ||||||||||
| Proceeds from option exercises | |||||||||||
| Cash provided by financing activities | |||||||||||
Net increase in cash and cash equivalents | |||||||||||
Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | |||||||||||
Non-cash operating activities: Lease modification | $ | $ | |||||||||
Non-cash investing activities: Property and equipment in accounts payable | $ | $ | |||||||||
Non-cash financing activities: | |||||||||||
| Vesting of early exercise stock options | $ | $ | |||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements
9
TEMPEST THERAPEUTICS, INC.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(Amounts are in thousands, except share and per share data)
1.ORGANIZATION AND DESCRIPTION OF THE BUSINESS
Description of Business—Tempest Therapeutics, Inc. (“Tempest” or the “Company”) is a clinical-stage oncology company advancing small molecules that combine both tumor-targeted and immune-mediated mechanisms with the potential to treat a wide range of tumors. The Company’s two clinical programs are TPST-1120 and TPST-1495, antagonists of PPARα and EP2/EP4, respectively. Both TPST-1120 and TPST-1495 are advancing through Phase 1 clinical trials designed to study both agents as monotherapies and in combination with other approved agents. In collaboration with F. Hoffmann La Roche, TPST-1120 is also advancing through a randomized first line, global, Phase 1b/2 clinical study in combination with the standard-of-care regimen of atezolizumab and bevacizumab in patients with advanced or metastatic hepatocellular carcinoma. Tempest is also developing an orally available inhibitor of TREX-1 designed to activate, selectively, the cGAS/STING pathway, an innate immune response pathway, important for the development of anti-tumor immunity. Tempest is headquartered in South San Francisco, California.
Merger with Millendo—On March 29, 2021, TempestTx, Inc. (“Private Tempest”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Millendo Therapeutics, Inc. (“Millendo”).
Concurrent with the execution and delivery of the Merger Agreement, Private Tempest entered into funding agreements with certain investors named therein, pursuant to which the investors agreed to purchase, in the aggregate, $30.0 million of common stock of Private Tempest, convertible into securities of Millendo.
On June 25, 2021, Private Tempest completed the merger with Millendo in accordance with the Merger Agreement. Prior to the effective time of the merger, Millendo effected a 1-for-15 reverse stock split, and right after the merger, Millendo changed its name to Tempest Therapeutics, Inc. Under the terms of the Merger Agreement, immediately prior to the effective time of the merger, each share of Private Tempest’s preferred stock was converted into a share of Private Tempest’s common stock. At closing of the merger, the Company issued an aggregate of approximately 5,365,899 shares of its common stock to Private Tempest stockholders, based on an exchange ratio of 0.0322 shares of the Company’s common stock for each share of Private Tempest common stock outstanding immediately prior to the merger, including those shares of common stock issued upon conversion of the Private Tempest preferred stock, resulting in approximately 6,635,345 shares of the Company’s common stock being issued and outstanding immediately following the effective time of the merger. The Company also assumed all of the outstanding and unexercised stock options and warrants to purchase shares of Private Tempest capital stock. The assumed options continue to be governed by the terms of the 2011 and 2017 Equity Incentive Plans (as discussed more in Note 9) under which the options were originally granted, with such options hence forth representing the right to purchase a number of shares of the Company’s common stock equal to 0.0322 multiplied by the number of shares of Private Tempest common stock previously represented by such options.
The merger was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, Private Tempest was be deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the expectation that, immediately following the merger: (i) Private Tempest stockholders would own a substantial majority of the voting rights; (ii) Private Tempest would designate a substantial majority of the initial members of the board of directors of the combined company; (iii) Private Tempest’s executive management team would become the management of the combined company; and (iv) the combined company would be named Tempest Therapeutics, Inc. Accordingly, for accounting purposes, the merger was treated as the equivalent of Tempest issuing stock to acquire the net assets of Millendo. As a result of the merger, the net assets of Millendo were recorded at their acquisition-date fair value in the financial statements of Private Tempest and the reported operating results prior to the merger will be those of Private Tempest. Historical per share figures of Private Tempest have been retroactively restated based on the exchange ratio of 0.0322 .
Liquidity and Management Plans—The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred operating losses since inception. The Company’s ultimate success depends on the outcome of the ongoing research and development activities. The Company has not yet generated product sales and as a result has experienced operating losses since inception. The Company expects to incur additional losses in the future to conduct research and development and will need to raise additional capital to fully implement management’s business plan. The Company intends to raise such capital through the issuance of additional equity and
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies -- The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 29, 2022. There have been no material changes to the significant accounting policies during the period ended June 30, 2022.
3. MILLENDO MERGER
As described in Note 1, Private Tempest merged with the Company on June 25, 2021. The merger was accounted for as a reverse recapitalization with Private Tempest as the accounting acquirer. The primary pre-combination assets of Millendo were cash, cash equivalents and restricted cash. Under reverse recapitalization accounting, the assets and liabilities of Millendo were recorded at their fair value which approximated book value due to the short-term nature of the instruments. No goodwill or intangible assets were recognized. Consequently, the Condensed Consolidated Financial Statements of Tempest reflect the operations of Millendo for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former stockholders of the legal acquirer and a recapitalization of the equity of the accounting acquirer.
As part of the reverse recapitalization, the Company obtained approximately $17.0 million of cash, cash equivalents and restricted cash. The Company also obtained prepaids and other assets of approximately $1.4 million and assumed payables and accruals of approximately $0.5 million. The Company also acquired the operating lease right-of-use asset of $2.1 million and the related operating lease liability of $2.1 million. All of the development programs and associated collaboration arrangements were terminated prior to the merger and were deemed to have no value at the transaction date and the Company has since wound down the legacy Millendo operations.
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4. FAIR VALUE MEASUREMENTS
The following tables present the Company’s fair value hierarchy for assets measured at fair value on a recurring basis:
June 30, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
5. BALANCE SHEET COMPONENTS
Prepaid expenses and other current assets consist of the following:
| June 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Prepaid expenses | $ | $ | |||||||||
| Prepaid research and development costs | |||||||||||
| Other current assets | |||||||||||
| Total | $ | $ | |||||||||
Property and equipment, net, consists of the following:
| June 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Computer equipment and software | $ | $ | |||||||||
| Furniture and fixtures | |||||||||||
| Lab equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Property and equipment | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Depreciation expense for the three and six months ended June 30, 2022 were $112 and $220 , respectively. Depreciation expense for the three and six months ended June 30, 2021 were $86 and $165 , respectively.
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| June 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Accrued other liabilities | $ | $ | |||||||||
| Accrued clinical trial liabilities | |||||||||||
| Total | $ | $ | |||||||||
6. COMMITMENTS AND CONTINGENCIES
Facilities Lease Agreements—In February 2019, the Company entered into a 5-year office lease agreement for a 9,780 square feet facility in South San Francisco, California (“SSF Lease”). The original lease term expires on February 29, 2024. In June 2022, the lease was amended to terminate early on January 31, 2023. The amendment was not accounted for as a separate contract and the lease liability and the right-of-use asset were remeasured on the lease modification date.
As a result of the merger with Millendo, the Company assumed Millendo’s noncancelable operating leases for office space which have remaining lease terms of approximately 1.8 years. In February 2019 and October 2018, Millendo entered into two noncancellable operating leases for office space in Ann Arbor, Michigan (“Ann Arbor Leases”) of which one that Millendo took possession of in April 2019 and the other that Millendo took possession of in July 2019, respectively. One of its leases in Ann Arbor, Michigan expires in June 2024 and the other expires in March 2024. There were no other leases assumed by the Company as of June 30, 2022.
As of June 30, 2022 and December 31, 2021, the balance of the operating lease right-of-use assets were $1,553 and $3,051 , respectively, and the related operating lease liabilities were $1,745 and $3,468 respectively, as shown in the accompanying Condensed Consolidated Balance Sheets.
Rent expense was $345 and $704 for the three and six months ended June 30, 2022, respectively. Rent expense was $161 and $322 for the three and six months ended June 30, 2021, respectively.
As of June 30, 2022, future minimum lease payments under the SSF Lease and Ann Arbor Leases were as follows:
| Year Ending | Total Commitment | ||||
| 2022 (excluding the six months ended June 30, 2022) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| Total minimum lease payments | |||||
| Less: imputed interest | ( | ||||
| Present value of operating lease obligations | |||||
| Less: current portion | ( | ||||
| Noncurrent operating lease obligations | $ | ||||
In January 2022, the Company entered into a new 8 -year office lease agreement for a 20,116 square feet facility in Brisbane, California ("Brisbane Lease"). The lease is scheduled to commence in November 2022. Future minimum lease payments for the Brisbane Lease as of June 30, 2022 are as follows: $290 (2022), $1,748 (2023), $1,809 (2024), $1,872 (2025) and $10,009 (2026 and beyond).
Related to this Brisbane Lease agreement, the Company entered into a letter of credit with a bank to deposit $368 in a separate account that is restricted cash to serve as security rent deposit. This amount is included in other noncurrent assets in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2022.
Guarantees and Indemnifications—In the normal course of business, the Company enters into agreements that contain a variety of representations and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. As of June 30, 2022 and December 31, 2021, the Company does not have any material indemnification claims that were probable or reasonably possible and consequently has not recorded related liabilities.
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Legal Proceedings—Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. As a result of the merger with Millendo, the Company is party to various litigation matters given Millendo’s role as successor to OvaScience, Inc. (“OvaScience”). OvaScience merged with Millendo in 2018. Prior to the merger with Millendo, OvaScience was sued in three matters that are disclosed below.
On November 9, 2016, a purported shareholder derivative action was filed in Massachusetts State court (Cima v. Dipp) against OvaScience and certain former officers and directors of OvaScience and OvaScience alleging breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets for purported actions related to OvaScience’s January 2015 follow-on public offering. No material proceedings have occurred since the case was filed. During a July 6, 2022 scheduling conference, the Court entered a case scheduling order. Defendants’ response to the complaint is due on September 16, 2022.
On March 24, 2017, a purported shareholder class action lawsuit was filed in Massachusetts Federal court (Dahhan v. OvaScience, Inc.) against OvaScience and certain former officers of OvaScience alleging violations of Sections 10(b) and 20(a) of the Exchange Act (the “Dahhan Action”). On March 4, 2022, the parties filed a motion to preliminarily approve a settlement of the action. The settlement amount of $15 million will be funded entirely by insurance. All defendants expressly deny liability. On April 1, 2022, the Court preliminarily approved the settlement. The settlement remains subject to final approval. The amount of $15
On July 27, 2017, a purported shareholder derivative complaint was filed in Massachusetts Federal court (Chiu v. Dipp) against OvaScience and certain former officers and directors of OvaScience alleging breach of fiduciary duties, unjust enrichment and violations of Section 14(a) of the Exchange Act. related to OvaScience’s January 2015 follow-on public offering and other public statements concerning OvaScience’s AUGMENT treatment. Following the Court’s dismissal of an amended complaint, the parties agreed that plaintiffs could file a second amended complaint and that the case would be stayed pending the resolution of the Dahhan Action. In May 2018, the court entered an order staying this case pending the resolution of the Dahhan Action.
With respect to the two OvaScience matters described above (Cima v. Dipp and Chiu v. Dipp), the Company is unable to estimate potential losses, if any. However, the Company believes the matters are without merit, and that in light of applicable insurance, any material exposure to the Company is remote.
7. LOAN PAYABLE
On January 15, 2021, the Company entered into a loan agreement with a lender to borrow a term loan amount of $35,000 to be funded in three tranches. Tranche A of $15,000 was wired to the Company on January 15, 2021. Tranche B of $10,000 expired on March 31, 2022. Tranche C of $10,000 is available at lender’s option. The term loan matures on August 1, 2025 and has an annual floating interest rate of 7.15 % which is an Index Rate plus 7 %. Index Rate is the greater of (i) 30-day US LIBOR or (ii) 0.15 %. Monthly principal payments of $500 will begin on March 1, 2023. Related to this borrowing, the Company recorded loan discounts totaling $898 and paid $95 of debt issuance costs. These amounts would be amortized as additional interest expense over the life of the loan. As of June 30, 2022, the balance of the loan payable (net of debt issuance costs) was $15,301 , of which $2,000 was classified as current and $13,301 was classified as non-current. The carrying value of the loan approximates fair value (Level 2).
For the three and six months ended June 30, 2022, total interest expense was $464 and $797 , respectively. For the three and six months ended June 30, 2021, total interest expense was $276 and $507 , respectively.
8. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Prior to the merger with Millendo on June 25, 2021, Private Tempest had issued and outstanding convertible preferred stock. The authorized, issued and outstanding shares of the convertible preferred stock and liquidation preferences of Private Tempest as of December 31, 2020 and June 24, 2021 were as follows (in thousands, except share and per share amounts):
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| Series | Shares Authorized | Shares Issued and Outstanding | Per Share Liquidation Preference | Aggregate Liquidation Amount | Proceeds Net of Issuance Cost | Net Carrying Value | |||||||||||||||||||||||||||||
| Series A | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Series B | |||||||||||||||||||||||||||||||||||
| Series B-1 | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||||||||||||||||
Common Stock
Upon completion of the merger on June 25, 2021, the Company issued an aggregate of approximately 5,365,899 shares of its common stock to Private Tempest stockholders, based on an exchange ratio of 0.0322 shares of the Company’s common stock for each share of Private Tempest common stock outstanding immediately prior to the merger, including those shares of common stock issued upon conversion of the Private Tempest preferred stock (3,692,912 common shares) and those shares of common stock issued with its pre-merger financing of $30.0 million (1,136,849 common shares).
As of June 30, 2022 and December 31, 2021, the Company was authorized to issue 100,000,000 5,000,000 0.001 10,325,359 and 6,910,324 were issued and outstanding at June 30, 2022 and December 31, 2021, respectively. There were no shares subject to repurchase due to remaining vesting requirements. Common stockholders are entitled to dividends as declared by the Board of Directors, subject to rights of holders of all classes of stock outstanding having priority rights as to dividends. There was no preferred stock issued nor outstanding as of June 30, 2022 and December 31, 2021.
Common stockholders are entitled to dividends as declared by the Board of Directors, subject to rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date. The holders of each share of common stock are entitled to one vote. Except for effecting or validating certain specific actions intended to protect the preferred stockholders, the holders of common stock vote together with preferred stockholders and have the right to elect one member of the Company’s Board of Directors.
ATM Program
On July 23, 2021, the Company entered into a sales agreement with Jefferies LLC, pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $100,000,000 of its common stock through Jefferies LLC (the "ATM Program").
Pre-Funded Warrants
9. STOCK-BASED COMPENSATION
Equity Plans
In 2011, Private Tempest adopted the 2011 Equity Incentive Plan (the “2011 Plan), and in 2017, Private Tempest adopted the 2017 Equity Incentive Plan (the “2017 Plan”), and together with the 2011 Plan, “the Tempest Equity Plans”. Upon adoption of the 2017 Plan, the 2011 Plan was terminated.
The Board of Millendo adopted the 2019 Equity Incentive Plan (the “2019 Plan”) on April 29, 2019, subject to approval by the Company’s stockholders, and became effective with such stockholder approval on June 11, 2019. As a result of the
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merger, the Tempest Equity Plans were assumed by the Company. The number of shares of the Company's common stock reserved for issuance under the 2019 Plan will automatically increase on January 1st of each year, for a period of 10 years, from January 1, 2020 continuing through January 1, 2029, by 4 % of the total number of shares of the Company's common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Board of Directors. On January 1, 2022, the common stock reserved for issuance was increased by 276,412 shares.
On June 17, 2022, the Company’s stockholders approved the Amended and Restated 2019 Equity Incentive Plan (the “A&R 2019 Plan”), which amends and restates the 2019 Plan and will be a successor to, and replacement of, the 2019 Plan. The A&R 2019 Plan had been adopted by the Company’s Board of Directors and one of the material changes was to increase the number of shares available for issuance by 1,132,252 . The A&R 2019 Plan still includes the annual evergreen provision of automatically increasing on January 1st of each year the number of option shares available for issuance by 4 % of the total number of shares of the Company's common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Board of Directors.
Both the 2017 Plan and the A&R 2019 Plan allow the Company to grant stock awards to employees, directors and consultants of the Company, including incentive stock options (“ISOs”), nonqualified stock options (“NSOs”), stock appreciation rights, restricted stock awards, restricted stock unit awards and other stock awards. The Company measures employee and non-employee stock-based awards at grant date fair value and records compensation expense on a straight-line basis over the vesting period of the award.
As of June 30, 2022, a total of 942,590 shares are available for future grant under the 2017 Plan and A&R 2019 Plan.
Employee Stock Ownership Plan
The Board of Millendo adopted the 2019 Employee Stock Purchase Plan (the “2019 ESPP”) on April 29, 2019, subject to approval by the Company’s stockholders, and became effective with such stockholder approval on June 11, 2019. On June 17, 2022, the Company’s stockholders approved the Amended and Restated 2019 Employee Stock Purchase Plan (the “A&R 2019 ESPP”), which amends and restates the 2019 ESPP. The A&R 2019 ESPP had been adopted by the Board of Directors and includes the following material changes:
•Increase in the number of shares available for issuance under the A&R 2019 ESPP by 107,596 shares; and
•Modification of the calculation of the number of shares of our common stock added automatically on January 1 of each year beginning on January 1, 2023, and continuing through (and including) January 1, 2029, to be equal to the lesser of (i) 1.5 % of the total number of shares of Common Stock outstanding on December 31st of the preceding calendar year or (ii) 500,000 shares of Common Stock.
The A&R 2019 ESPP enables employees to purchase shares of the Company’s common stock through offerings of rights to purchase the Company’s common stock to all eligible employees. As of June 30, 2022, 143,217 shares of common stock remained available for future issuance under the A&R 2019 ESPP.
Stock Options
Options to purchase the Company’s common stock may be granted at a price not less than the fair market value in the case of both NSOs and ISOs, except for an options holder who owns more than 10% of the voting power of all classes of stock of the Company, in which case the exercise price shall be no less than 110 % of the fair market value per share on the grant date. Stock options granted under the Plans generally vest over four years and expire no later than ten (10 ) years from the date of grant. Vested options can be exercised at any time.
Prior to the merger, the grant date fair market value of the shares of common stock underlying stock options has historically been determined by the Company’s Board of Directors. Up until the merger, there had been no public market for the Company’s common stock, and therefore the Board of Directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair market value, which included valuations performed by an independent third-party, important developments in the Company’s operations, sales of convertible preferred stock, actual operating results, financial performance, the conditions in the life sciences industry, the economy in general, the stock price performance and volatility of comparable public companies, and the lack of liquidity of the Company’s common stock.
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| Total Options Outstanding | Weighted-Average Exercise Price | ||||||||||
| Balance—December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Exercised | — | ||||||||||
| Cancelled and forfeited | ( | ||||||||||
| Balance—June 30, 2022 | |||||||||||
| Balance—December 31, 2020 | $ | ||||||||||
| Assumed in reverse recapitalization | |||||||||||
| Granted | |||||||||||
| Exercised | ( | ||||||||||
| Cancelled and forfeited | ( | ||||||||||
| Balance—June 30, 2021 | |||||||||||
The following table summarizes information about stock options outstanding at June 30, 2022:
| Shares | Weighted Average Remaining Contractual Life (In Years) | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||||||||||||
| Options outstanding | $ | $ | |||||||||||||||||||||
| Vested and expected to vest | $ | $ | |||||||||||||||||||||
| Exercisable | $ | $ | |||||||||||||||||||||
During the six months ended June 30, 2022 and 2021, the Company granted employees and non-employees stock options to purchase 893,527 and 186,482 shares of common stock with a weighted-average grant date fair value of $2.81 and $12.70 per share, respectively. As of June 30, 2022 and 2021, total unrecognized compensation costs related to unvested employee stock options were $4,919 and $3,072 , respectively. These costs are expected to be recognized over a weighted-average period of approximately 3.1 years and 1.6 years, respectively.
The Company estimated the fair value of stock options using the Black-Scholes option pricing valuation model. The fair value of employee stock options is being amortized on the straight-line basis over the requisite service period of the awards. The fair value of stock options was estimated using the following assumptions for the six months ended June 30, 2022 and 2021:
| 2022 | 2021 | ||||||||||
| Expected term (in years) | |||||||||||
| Expected volatility | |||||||||||
| Risk-free interest rate | |||||||||||
| Dividends | |||||||||||
Expected Term—The expected term of options granted represents the period of time that the options are expected to be outstanding. Due to the lack of historical exercise history, the expected term of the Company’s employee stock options has been determined utilizing the simplified method for awards that qualify as plain-vanilla options.
Expected Volatility—The expected stock price volatility assumption was determined by examining the historical volatilities for industry peers.
Risk-Free Interest Rate—The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options.
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Dividends—The Company has not paid any cash dividends on common stock since inception and does not anticipate paying any dividends in the foreseeable future. Consequently, an expected dividend yield of zero was used.
Stock-Based Compensation Expense
The following table summarizes the components of stock-based compensation expense recognized in the Company’s Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2022:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Research and development | $ | $ | $ | $ | |||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
10. RETIREMENT PLAN
11. NET LOSS PER SHARE
The following table sets forth the computation of the Company’s basis in diluted net loss per share for the three and six months ended June 30, 2022 and 2021 (in thousands, except share and per share amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Numerator: | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average common shares outstanding | |||||||||||||||||||||||
| Less: Weighted-average unvested restricted shares and shares subject to repurchase | ( | ( | |||||||||||||||||||||
| Weighted-average shares used in computing basic and diluted net loss per share | |||||||||||||||||||||||
| Net loss per share attributable to common stockholders—basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
As of June 30, 2022 and 2021, the Company’s potentially dilutive securities included outstanding convertible preferred stock, stock options, unvested restricted stock and stock warrants, which have been excluded from the computation of diluted net loss per share attributable to common stockholders as the effect would be anti-dilutive. Based on the amounts outstanding as of June 30, 2022 and 2021, the Company excluded the following potential common shares from the computation of diluted net loss per share attributable to common stockholders because including them would have had an anti-dilutive effect:
| As of June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Options to purchase common stock | |||||||||||
| Common stock warrants | |||||||||||
| Total | |||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited Interim Financial Statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this report contains forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, intentions, and beliefs, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors,” under Part II, Item 1A of this report and those discussed in our other disclosures and filings.
Overview
We are a clinical-stage oncology company focused on leveraging a deep scientific understanding of cancer biology and medicinal chemistry to develop and advance novel, orally available therapies for the treatment of solid tumors. Our philosophy is to build a company based upon not only creative science and thoughtful management, but also upon the efficient translation of those ideas into therapies that will improve patient’s lives. To this end, we currently are advancing three programs, TPST-1495, TPST-1120 and a third program targeting the three prime repair exonuclease ("TREX-1"). TPST-1495 is a dual antagonist of the EP2 and EP4 prostaglandin E2 receptors, and, to our knowledge, is the only such dual antagonist in clinical development. TPST-1495 is currently in a Phase 1 trial in solid tumors. Our second clinical program, TPST-1120, is a selective antagonist of peroxisome proliferator-activated receptor alpha (" PPARα"), and is also in a Phase 1 trial in solid tumors. Similar to TPST-1495, we believe TPST-1120 is the only PPARα antagonist in clinical development. We also have a third program in preclinical studies that could be the first to target TREX-1, a cellular enzyme that regulates the innate immune response in tumors.
We have no products approved for commercial sale and have not generated any revenue from product sales. From inception to June 30, 2022, we have raised $164.4 million, through sales of common stock, convertible preferred stock and issuance of debt.
We have never been profitable and has incurred operating losses in each period since inception. Our net losses were $17.7 million and $12.4 million for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, we had an accumulated deficit of $117.7 million. Substantially all of the operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations.
We expect to incur significant expenses and increasing operating losses for at least the next several years as we initiate and continue the clinical development of, and seek regulatory approval for, our product candidates and add personnel necessary to advance our pipeline of clinical-stage product candidates. In addition, operating as a publicly traded company will involve the hiring of additional financial and other personnel, upgrading our financial information and other systems, and incurring substantial costs associated with operating as a public company. We expect our operating losses will fluctuate significantly from quarter to quarter and year to year due to timing of clinical development programs and efforts to achieve regulatory approval.
As of June 30, 2022, we had cash and cash equivalents of $51.6 million. Our ability to fund continued development will require additional capital, and we intend to raise such capital through the issuance of additional debt or equity including in connection with potential merger opportunities, or through business development activities. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish these plans and secure sources of financing and ultimately attain profitable operations. If we are unable to obtain adequate capital, we could be forced to cease operations.
Recent Developments
PIPE Financing
In April 2022, we completed a private investment in public equity (“PIPE”) financing from the sale of 3,149,912 shares of our common stock at a price per share of $2.36 and, in lieu of shares of common stock, pre-funded warrants to purchase up to 3,206,020 shares of our common stock at a price per pre-funded warrant of $2.359 to EcoR1 Capital, LLC and Versant Venture Capital (the “PIPE Investors”). Net proceeds from the PIPE financings totaled approximately $14.5 million, after deducting offering expenses. The pre-funded warrants provide that the holder will not have the right to exercise any portion of its warrants if such holder, together with its affiliates, would beneficially own in excess of 9.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise (the “Beneficial Ownership
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Limitation”); provided, however, that the holder may increase or decrease the Beneficial Ownership Limitation by giving 61 days’ notice, but not to any percentage in excess of 19.99%. We entered into a registration rights agreement (the “Registration Rights Agreement”) with the PIPE Investors pursuant to which we filed a registration statement with the SEC registering the resale of the 3,149,912 shares common stock and the 3,206,020 shares of common stock underlying the pre-funded warrants issued in the PIPE financing.
Components of Results of Operations
Research and Development Expense
Research and development expenses represent costs incurred to conduct research and development, such as the development of our product candidates.
We recognize all research and development costs as they are incurred. Research and development expenses consist primarily of the following:
•Salaries, benefits and stock-based compensation;
•licensing costs;
•allocated occupancy;
•materials and supplies;
•contracted research and manufacturing;
•consulting arrangements; and
•other expenses incurred to advance our research and development activities.
The largest component of our operating expenses has historically been the investment in research and development activities. We expect research and development expenses will increase in the future as we advance our product candidates into and through clinical trials and pursues regulatory approvals, which will require a significant investment in costs of clinical trials, regulatory support and contract manufacturing and inventory build-up. In addition, we continue to evaluate opportunities to acquire or in-license other product candidates and technologies, which may result in higher research and development expenses due to license fee and/or milestone payments, as well as added clinical development costs.
The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in timely developing and achieving regulatory approval for our product candidates. The probability of success of our product candidates may be affected by numerous factors, including clinical data, competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
General and Administrative Expenses
General and administrative expenses consist of employee-related expenses, including salaries, benefits, travel and non-cash stock-based compensation, for our personnel in executive, finance and accounting, and other administrative functions, as well as fees paid for legal, accounting and tax services, consulting fees and facilities costs not otherwise included in research and development expense. Legal costs include general corporate legal fees and patent costs. We expect to incur additional expenses as a result of becoming a public company following completion of the merger, including expenses related to compliance with the rules and regulations of the SEC and Nasdaq, additional insurance, investor relations and other administrative expenses and professional services.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of interest expense, interest income, and various income or expense items of a non-recurring nature.
Results of Operations
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Comparison of the three months ended June 30, 2022 and 2021
The following table summarizes our operating results for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Expenses: | |||||||||||
| Research and development | $ | 5,651 | $ | 4,229 | |||||||
| General and administrative | 3,123 | 2,556 | |||||||||
| Total expenses | 8,774 | 6,785 | |||||||||
| Operating loss | (8,774) | (6,785) | |||||||||
| Interest expense | (464) | (276) | |||||||||
| Interest and other (expense) income, net | 70 | 3 | |||||||||
| Provision for income taxes | — | — | |||||||||
| Net loss | $ | (9,168) | $ | (7,058) | |||||||
Research and development
Our research and development expenses for the three months ended June 30, 2022 and 2021 were primarily incurred in connection with our most advanced product candidates, TPST-1120 and TPST-1495. We have not historically tracked research and development expense by program other than direct external expenses in conducting clinical trials for TPST-1120 and TPST-1495. We typically have various early-stage research and drug discovery projects, as well as various potential product candidates undergoing clinical trials. Our internal resources, employees and infrastructure are not directly tied to any one research and drug discovery project and our resources are typically deployed across multiple projects. As such, we do not maintain information regarding these costs incurred for these early-stage research and drug discovery programs on a project specific basis.
Research and development expense increased by $1.5 million to $5.7 million for the three months ended June 30, 2022, compared to the prior year period. The following table summarizes our research and development expenses for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Research and development outside services | $ | 3,686 | $ | 2,850 | |||||||
| Compensation expense | 1,010 | 679 | |||||||||
| Stock-based compensation expense | 125 | 44 | |||||||||
| Consulting and professional services | 374 | 425 | |||||||||
| Other expenses | 456 | 231 | |||||||||
| Total research and development expense | $ | 5,651 | $ | 4,229 | |||||||
The increase in research and development expense of $1.5 million for the three months ended June 30, 2022, compared to the prior year period, was primarily attributable to expanded research and development efforts incurred from contract research organizations and third-party vendors, as well as compensation expenses due to an increase in employee headcount.
General and administrative
General and administrative expenses increased by $0.5 million to $3.1 million for the three months ended June 30, 2022, compared to the prior year period. The increase was primarily due to an increase of $0.3 million in insurance expense, as a result of operating as a publicly traded company.
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Other (expense) income, net
For the three months ended June 30, 2022 and 2021, other (expense) income, net consisted of total interest expense of $464 thousand and $276 thousand, respectively, related to the Oxford Loan, and interest income of $70 thousand and $3 thousand, respectively.
Comparison of the six months ended June 30, 2022 and 2021
The following table summarizes our operating results for the six months ended June 30, 2022 and 2021:
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Expenses: | |||||||||||
| Research and development | $ | 10,760 | $ | 7,821 | |||||||
| General and administrative | 6,175 | 4,091 | |||||||||
| Total expenses | 16,935 | 11,912 | |||||||||
| Operating loss | (16,935) | (11,912) | |||||||||
| Interest expense | (797) | (507) | |||||||||
| Interest and other (expense) income, net | 73 | 6 | |||||||||
| Provision for income taxes | — | — | |||||||||
| Net loss | $ | (17,659) | $ | (12,413) | |||||||
Research and development
Our research and development expenses for the six months ended June 30, 2022 and 2021 were primarily incurred in connection with our most advanced product candidates, TPST-1120 and TPST-1495. We have not historically tracked research and development expense by program other than direct external expenses in conducting clinical trials for TPST-1120 and TPST-1495. We typically have various early-stage research and drug discovery projects, as well as various potential product candidates undergoing clinical trials. Our internal resources, employees and infrastructure are not directly tied to any one research and drug discovery project and our resources are typically deployed across multiple projects. As such, we do not maintain information regarding these costs incurred for these early-stage research and drug discovery programs on a project specific basis.
Research and development expense increased by $3.0 million to $10.8 million for the six months ended June 30, 2022. The following table summarizes our research and development expenses for the six months ended June 30, 2022 and 2021:
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Research and development outside services | $ | 6,900 | $ | 4,963 | |||||||
| Compensation expense | 2,023 | 1,400 | |||||||||
| Stock-based compensation expense | 227 | 122 | |||||||||
| Consulting and professional services | 669 | 891 | |||||||||
| Other expenses | 941 | 445 | |||||||||
| Total research and development expense | $ | 10,760 | $ | 7,821 | |||||||
The increase in research and development expense of $3.0 million for the six months ended June 30, 2022, compared to the prior year period, was primarily attributable to expanded research and development efforts incurred from contract research organizations and third-party vendors, as well as compensation expenses due to an increase in employee headcount.
General and administrative
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General and administrative expenses increased by $2.1 million to $6.2 million for the six months ended June 30, 2022, compared to the prior year period. The increase was primarily due to an increase of $1.2 million in professional and consulting fees and an increase of $0.6 million in insurance expense, as a result of operating as a publicly traded company.
Other (expense) income, net
For the six months ended June 30, 2022 and 2021, other (expense) income, net consisted of total interest expense of $797 thousand and $507 thousand, respectively, related to the Oxford Loan, and interest income of $73 thousand and $6 thousand, respectively.
Liquidity and Capital Resources
Sources of Liquidity
Since inception through June 30, 2022, our operations have been financed primarily by net cash proceeds from the sale of common stock, pre-funded warrants to purchase common stock, convertible preferred stock and issuance of debt. As of June 30, 2022, we had $51.6 million in cash and cash equivalents and an accumulated deficit of $117.7 million. We expect that our research and development and general and administrative expenses will increase, and, as a result, we anticipate that we will continue to incur increasing losses in the foreseeable future.
We believe our cash and cash equivalents as of June 30, 2022 will fund our ongoing working capital, investing, and financing requirements for at least the next 12 months.
On January 15, 2021, we entered into a loan and security agreement with Oxford to borrow a term loan amount of $35.0 million to be funded in three tranches. Tranche A of $15.0 million was funded on January 15, 2021. Tranche B of $10.0 million expired on March 31, 2022. Tranche C of $10,000 is available at lender’s option. The term loan matures on August 1, 2025 and has an annual floating interest rate of 7.15% which is an index rate plus 7%. The index rate is the greater of (i) 30-day US LIBOR or (ii) 0.15%. As of June 30, 2022, the balance of the loan payable (net of debt issuance costs) was $15,301, of which $2,000 was classified as current and $13,301 was classified as non-current.
On July 23, 2021, we entered into a sales agreement with Jefferies LLC, pursuant to which we may sell, from time to time, up to an aggregate sales price of $100.0 million of our common stock through the Agent in a series of one or more ATM equity offerings (the “ATM Program”).
In April 2022, the Company completed a PIPE financing, which included the issuance of pre-funded warrants to purchase up to 3,206,020 shares of its common stock at a price per pre-funded warrant of $2.359 to the PIPE Investors. Net proceeds from the PIPE financings totaled approximately $14.5 million, after deducting offering expenses.
Cash Flows
The following table summarizes our cash flows for the six months ended June 30, 2022 and 2021:
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Cash used in operating activities | $ | (15,521) | $ | (6,183) | |||||||
| Cash used in investing activities | (98) | (84) | |||||||||
| Cash provided by financing activities | 15,779 | 55,905 | |||||||||
| Net increase in cash and cash equivalents | $ | 160 | $ | 49,638 | |||||||
Cash flows from operating activities
Cash used in operating activities for the six months ended June 30, 2022 was $15.5 million, consisting of a net loss of $17.7 million, add back of non-cash adjustments for depreciation, stock-based compensation, non-cash operating lease expense and other non-cash items totaling $1.8 million, plus changes in operating assets and liabilities of $0.4 million.
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Cash used in operating activities for the six months ended June 30, 2021 was $6.2 million consisting of a net loss of $12.4 million, add back of non-cash adjustments for depreciation, stock-based compensation, non-cash operating lease expense and other non-cash items totaling $1.2 million, plus changes in operating assets and liabilities of $5.0 million.
Cash flows from investing activities
Cash used in investing activities for the six months ended June 30, 2022 and 2021 was related to purchases of property and equipment, primarily related to office, laboratory and computer equipment.
Cash flows from financing activities
Cash provided by financing activities for the six months ended June 30, 2022 was $15.8 million, primarily related to proceeds from the issuance of common stock of $1.3 million from the ATM program, and issuance of common stock of $7.2 million and pre-funded warrants of $7.3 million related to the PIPE financing.
Cash provided by financing activities for the six months period ended June 30, 2021 was $55.9 million consisting of (i) proceeds from Oxford Loan of $14.9 million (net of issuance costs), (ii) issuance of common stock of $30.0 million concurrent with closing of the merger with Millendo and (iii) cash brought over by Millendo as a result of the merger, offset by payment of reverse recapitalization costs of $6.1 million.
Material Cash Requirements
We expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates. In addition, subject to obtaining regulatory approval for our product candidates, we anticipate that we will need substantial additional funding in connection with our continuing operations.
Our material cash requirements as of June 30, 2022 primarily relate to the maturities of the principal obligations under our long term debt, operating leases for office space, trade payables, and accrued expenses. As of June 30, 2022, we have $22.4 million payable within 12 months.
Until we can generate a sufficient amount of product revenue to finance our cash requirements, we expect to finance our future cash needs primarily through the issuance of additional equity, borrowings and strategic alliances with partner companies. To the extent that we raise additional capital through the issuance of additional equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourself.
Recent Accounting Pronouncements
See Note 2 to our Condensed Consolidated Financial Statements for a description of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements.
Smaller Reporting Company Status
We are a smaller reporting company as defined in the Securities Exchange Act of 1934, as amended. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by nonaffiliates is less than $250.0 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.
Item 3. Controls and Procedures
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Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (principal executive officer) and Vice-President, Strategy and Finance (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, as of June 30, 2022. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our Chief Executive Officer and Vice-President, Strategy and Finance concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level because of the material weaknesses in internal control over financial reporting set forth below; provided, however, that we have made improvements with respect to addressing such material weaknesses and will continue to execute on an existing plan to remedy them.
Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d (f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
In preparing the financial statements as of and for the year ended December 31, 2020, our management identified material weaknesses in its internal control over financial reporting. The material weaknesses identified were as follows:
(i) There was a material weakness in our internal control environment over financial reporting as a result of insufficient resources with appropriate knowledge and expertise to design, implement, document and operate effective internal controls over financial reporting.
(ii) There was a material weakness in our internal control activities due to a failure in design and implementation of controls to review clinical trial expenses, including the evaluation of the terms of clinical trial contracts. Specifically, Tempest failed to properly review and evaluate progress of expense incurred in clinical trial contracts which resulted in the inaccurate actual of our clinical trial expenses.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
Our management, under the supervision of our Chief Executive Officer, has undertaken a plan to remediate the material weaknesses identified above, including adjustment to the methodology used to reflect clinical trial expenses in our financial statements and leveraging additional accounting resources. The additional efforts summarized below are intended to finalize the remediation. Significant progress has been made towards implementing these initiatives and our management expects to complete these efforts in the third quarter of 2022.
(i) We have hired additional accounting personnel with appropriate experience, certification, education and training to help design, implement, document and operate effective internal controls over financial reporting; and
(ii) We will finalize our internal control design, and implement management review controls to review clinical trial expenses and the completeness of our reserves based on the status of clinical development and the progress of expense incurred.
Our management cannot assure you that the material weaknesses identified will be remediated on the timelines currently anticipated by us, or at all, or that there will not be additional material weaknesses or significant deficiencies in the future.
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Notwithstanding the existence of the material weaknesses as described above, we believe that the Consolidated Financial Statements in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in conformity with GAAP.
Changes in Internal Control over Financial Reporting
Other than remediation measures associated with the material weaknesses discussed above, there were no changes in internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our Vice-President, Strategy and Finance, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information pertaining to legal proceedings is provided in Note 6 to the Condensed Consolidated Financial Statements contained in this report and is incorporated by reference herein.
Item 1A. Risk Factors
Our business involves significant risks, some of which are described below. You should carefully consider the risks described below, together with all of the other information contained in this Quarterly Report on Form 10-Q, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the related notes. Any of these events could cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made or may make from time to time. Such risks may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy.
Summary of Selected Risks Associated with Our Business
Our business is subject to numerous risks and uncertainties, including those discussed at length in the section titled "Risk Factors." Below is a summary of some of the risks and uncertainties as of the date of the filing of this Quarterly Report on Form 10-Q, any one of which could materially adversely affect our business, financial condition, operating results, and prospects. You should read this summary together with the more detailed description of each risk factor contained below.
•We have a history of operating losses, and we may not achieve or sustain profitability. We anticipate that we will continue to incur losses for the foreseeable future. If we fail to obtain additional funding to conduct our planned research and development efforts, we could be forced to delay, reduce or eliminate our product development programs or commercial development efforts.
•We expect that we will need to raise additional funding to finance our operations. This additional financing may not be available on acceptable terms or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.
•We have identified material weaknesses in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could harm our business and negatively impact the value of our common stock.
•Public health threats could have an adverse effect on our clinical trials and financial results.
•We expect to expand our development and regulatory capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
•If we are unable to develop, obtain regulatory approval for and commercialize TPST-1495 and TPST-1120 and its future product candidates, or if we experience significant delays in doing so, our business will be materially harmed.
•Success in preclinical studies and earlier clinical trials for our product candidates may not be indicative of the results that may be obtained in later clinical trials, which may delay or prevent obtaining regulatory approval.
•We may not be successful in our efforts to expand our pipeline of product candidates and develop marketable products.
•The commercial success of our product candidates, including TPST-1495 and TPST-1120, will depend upon their degree of market acceptance by providers, patients, patient advocacy groups, third-party payors and the general medical community.
•We may rely on third parties to manufacture our clinical product supplies, and we may have to rely on third parties to produce and process our product candidates, if approved.
•We face significant competition in an environment of rapid technological change, and it is possible that our competitors may achieve regulatory approval before us or develop therapies that are more advanced or effective than ours, which may harm our business, financial condition and ability to successfully market or commercialize TPST-1495, TPST-1120, and our other product candidates.
•If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate any revenues.
•We may not be successful in finding strategic collaborators for continuing development of certain of our future product candidates or successfully commercializing or competing in the market for certain indications.
•The U.S. Food and Drug Administration (“FDA”) regulatory approval process is lengthy and time-consuming, and we may experience significant delays in the clinical development and regulatory approval of our product candidates.
•Our success depends in part on our ability to obtain, maintain and protect our intellectual property. It is difficult and costly to protect our proprietary rights and technology, and we may not be able to ensure their protection.
•Our owned and in-licensed patents and patent applications may not provide sufficient protection of our product candidates or result in any competitive advantage.
•The trading price of the shares of our common stock has been and is likely to continue to be volatile, and purchasers of our common stock could incur substantial losses.
•Our executive officers, directors and principal stockholders have the ability to control or significantly influence all matters submitted to our stockholders for approval.
•If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.
Risks Related to Our Financial Position and Capital Needs
We have a history of operating losses, and we may not achieve or sustain profitability. We anticipate that we will continue to incur losses for the foreseeable future. If we fail to obtain additional funding to conduct our planned research and development efforts, we could be forced to delay, reduce or eliminate our product development programs or commercial development efforts.
We are a clinical-stage biotechnology company with a limited operating history. Biotechnology product development is a highly speculative undertaking and involves a substantial degree of risk. Our operations to date have been limited primarily to organizing and staffing, business planning, raising capital, acquiring and developing product and technology rights, manufacturing, and conducting research and development activities for our product candidates. We have never generated any revenue from product sales and we have not obtained regulatory approvals for any of our product candidates.
We incurred net losses of $17.7 million for the six months ended June 30, 2022. As of June 30, 2022, we had an accumulated deficit of $117.7 million. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and operating losses over the next several years and for the foreseeable future as we continue to conduct research and development, clinical testing, regulatory compliance activities, manufacturing activities, and, if any of our product candidates is approved, sales and marketing activities. Our prior losses, combined with our expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
We expect that we will need to raise additional funding to finance our operations. This additional financing may not be available on acceptable terms or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.
We will require substantial future capital in order to complete planned and future preclinical and clinical development for our product candidates and potentially commercialize these product candidates. We expect our spending levels to increase in connection with our preclinical studies and clinical trials of our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant expenses related to commercial launch, product sales, medical affairs, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated
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with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations before any commercial revenue may occur.
Additional capital might not be available when we need it and our actual cash requirements might be greater than anticipated. If we require additional capital at a time when investment in our industry or in the marketplace in general is limited, we might not be able to raise funding on favorable terms, if at all. If we are not able to obtain financing when needed or on terms favorable to us, we may need to delay, reduce or eliminate certain research and development programs or other operations, sell some or all of our assets or merge with another entity.
Our operations have consumed significant amounts of cash since inception. Our future capital requirements will depend on many factors, including:
•the costs associated with the scope, progress and results of discovery, preclinical development, laboratory testing and clinical trials for our product candidates;
•the costs associated with the manufacturing of our product candidates;
•the costs related to the extent to which we enter into partnerships or other arrangements with third parties to further develop our product candidates;
•the costs and fees associated with the discovery, acquisition or in-license of product candidates or technologies;
•our ability to establish collaborations on favorable terms, if at all;
•the costs of future commercialization activities, if any, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
•revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval; and
•the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims.
Our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of product candidates that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives, which may not be available to us on acceptable terms, or at all.
Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
Our operations to date have been limited to organizing and staffing, business planning, raising capital, acquiring our technology, identifying potential product candidates, undertaking research and preclinical studies of our product candidates, manufacturing, and establishing licensing arrangements. We have not yet demonstrated the ability to complete clinical trials of our product candidates, obtain marketing approvals, manufacture a commercial scale product or conduct sales and marketing activities necessary for successful commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.
In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a licensing and research focus to a company that is also capable of supporting clinical development and commercial activities. We may not be successful in such a transition.
We have identified material weaknesses in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could harm our business and negatively impact the value of our common stock.
In connection with the preparation and audit of our financial statements as of and for the year ended December 31, 2020, a material weakness was identified in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, we identified the following material weaknesses in our internal control over financial reporting:
•We did not have sufficient resources with appropriate knowledge and expertise to design, implement, document and operate effective internal controls over financial reporting.
•We did not design and implement controls surrounding review of clinical trial expenses, including the evaluation of the terms of our clinical trial contracts. Specifically, we failed to properly review and evaluate the progress of expenses incurred in our clinical trial contracts that resulted in the inaccurate accrual of clinical trial expenses.
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These material weaknesses resulted in adjustments to our financial statements for the year ended December 31, 2020. Additionally, these material weaknesses could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our annual or interim financial statements that would not be prevented or detected.
We are actively recruiting additional accounting personnel with appropriate experience, certification, education and training as a component of our plans to remediate the material weaknesses. We also plan to design and implement controls related to review of clinical trial expenses to properly evaluate progress of expense incurred in clinical trial contracts. To the extent that we are not able to hire and retain such individuals, or are unable to successfully design and implement such controls, the material weaknesses identified may not be remediated and management may be required to record additional adjustments to our financial statements in the future.
Our ability to utilize our net operating loss carryforwards and tax credit carryforwards may be subject to limitations.
Our ability to use our federal and state net operating losses (“NOLs”) to offset potential future taxable income and related income taxes that would otherwise be due is dependent upon our generation of future taxable income, and we cannot predict with certainty when, or whether, we will generate sufficient taxable income to use all of our NOLs.
Under Section 382 and Section 383 of the Code and corresponding provisions of state law, if a corporation undergoes an “ownership change,” its ability to use its pre-change NOL carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income or taxes may be limited. A Section 382 “ownership change” is generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three-year period. We may have experienced ownership changes in the past, including as a result of the merger with Millendo, and may experience ownership changes in the future due to subsequent shifts in our stock ownership (some of which are outside of our control). Furthermore, the merger constituted an ownership change (within the meaning of Section 382 of the Code) of Millendo which may have eliminated or otherwise substantially limited our ability to use Millendo’s federal and state NOLs to offset our future taxable income. Consequently, even if we achieve profitability, we may not be able to utilize a material portion of Private Tempest’s, Millendo’s or our combined NOL carryforwards and other tax attributes, which could have a material adverse effect on cash flow and results of operations. Similar provisions of state tax law may also apply to limit our ability to use of accumulated state tax attributes. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.
Risks Related to Our Business and Strategy
Public health threats could have an adverse effect on our clinical trials and financial results
We face various risks related to epidemics, pandemics, and other outbreaks, including the ongoing COVID-19 pandemic, including newly discovered strains of the virus, which could adversely affect our ongoing or planned business operations. In particular, the ongoing COVID-19 pandemic has resulted in quarantines, restrictions on travel and other business and economic disruptions. We cannot presently predict the scope and severity of any future business shutdowns or disruptions, but if we or any of the third parties with whom we engage, including the partners and other third parties with whom we conduct business, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and adversely impacted.
COVID-19 could continue to disrupt production and cause delays in the supply and delivery of products used in our operations, may affect our operations, including the conduct of clinical studies, or the ability of regulatory bodies to grant approvals or supervise our candidates and products, may further divert the attention and efforts of the medical community to coping with the COVID-19 and disrupt the marketplace in which we operate and may have a material adverse effects on our operations. COVID-19 may also affect our employees and employees and operations at suppliers that may result in delays or disruptions in supply. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of COVID-19’s global economic impact, including any recession that has occurred or may occur in the future and the uncertainty of the timing of the broader economic recovery to pre-pandemic levels.
We expect to expand our development and regulatory capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of product candidate development, growing our capability to conduct clinical trials, and, if approved, through commercialization of our product candidates. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional
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qualified personnel, or contract with third parties to provide these capabilities. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
We must attract and retain highly skilled employees to succeed.
To succeed, we must recruit, retain, manage and motivate qualified clinical, scientific, technical and management personnel, and we face significant competition for experienced personnel. If we do not succeed in attracting and retaining qualified personnel, particularly at the management level, it could adversely affect our ability to execute our business plan, harm our results of operations and increase our capabilities to successfully commercialize our product candidates. In particular, we believe that our future success is highly dependent upon the contributions of our senior management, particularly our Chief Executive Officer, Stephen Brady, our President, Thomas Dubensky and our Chief Medical Officer, Sam Whiting. The loss of services of Messrs. Brady, Dubensky or Whiting, or any of our other senior management, could delay or prevent the successful development of our product pipeline, completion of our planned clinical trials or the commercialization of our product candidates, if approved. The competition for qualified personnel in the biotechnology field is intense and as a result, we may be unable to continue to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel.
Many of the other biotechnology companies that we compete against for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what we have to offer. If we are unable to continue to attract and retain high-quality personnel, the rate and success at which we can discover and develop product candidates and our business will be limited.
Future acquisitions or strategic alliances could disrupt our business and harm our financial condition and results of operations.
We may acquire additional businesses or drugs form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any new drugs resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will achieve the expected synergies to justify the transaction. The risks we face in connection with acquisitions, include: