ITEM 1.
BUSINESS.
COMPANY OVERVIEW
Windtree Therapeutics, Inc. (referred to as “we,” “us,” or the “Company”) is a Delaware corporation, with our principal offices located at 2600 Kelly Road, Suite 100, Warrington, Pennsylvania. We were incorporated as a Delaware corporation in 1992. Our telephone number is 215-488-9300 and our corporate website address is www.windtreetx.com. Our common stock is currently traded on The OTCQB® Venture Market (OTCQB) quotation system operated by The OTC Markets Group Inc., and our symbol is WINT.
We are a biotechnology company focused on developing novel KL4 surfactant therapies for respiratory diseases and other potential applications. Surfactants are produced naturally in the lung and are essential for normal respiratory function and survival. Our proprietary technology platform includes a synthetic, peptide-containing surfactant (KL4 surfactant) that is structurally similar to endogenous pulmonary surfactant, and novel drug delivery technologies being developed to enable noninvasive administration of aerosolized KL4 surfactant. We believe that our proprietary technologies may make it possible to develop a pipeline of surfactant products to address a variety of respiratory diseases for which there are few or no approved therapies. See, "Proprietary Platform - KL4 Surfactant and Aerosol Technologies - KL4 Surfactant Technology.”
As of April 15, 2018, we believe that we will have sufficient cash and cash equivalents to support our development activities and business operations through May 2018. Our ability to advance our AEROSURF development plan is dependent upon our ability to secure additional capital both in the near and long-term through potential strategic transactions and/or private equity offerings.
Initial Focus - AEROSURF for Respiratory Distress Syndrome (RDS) in Premature Infants
Our lead development program is AEROSURF® (lucinactant for inhalation), an investigational combination drug/device product that we are developing to improve the management of respiratory distress syndrome (RDS) in premature infants who may not have fully developed natural lung surfactant and may require surfactant therapy to sustain life. RDS is the most prevalent respiratory disease in the neonatal intensive care unit (NICU). RDS can result in long-term respiratory problems, developmental delays and death. Our independent third-party market research and other third-party data sources (e.g., IMS Health) indicate that 120,000 to 135,000 premature infants in the United States, and a significantly greater number globally, are given respiratory support after birth each year because they have or are at risk for RDS.
Surfactant therapy can be a life-saving treatment for RDS and is the primary therapy to address an underlying surfactant deficiency. Unfortunately, surfactants currently available in the U.S. are animal-derived and must be administered using invasive endotracheal intubation and mechanical ventilation, procedures that may result in serious respiratory conditions and other complications. Intubation is associated with airway trauma and clinical instability that can extend beyond the respiratory system with complications such as increased intracranial pressure and risk for brain injury. Mechanical ventilation can result in ventilator-associated lung injury, bronchopulmonary dysplasia (BPD), chronic lung disease and increased risk of infection.
To avoid the risks associated with intubation and mechanical ventilation, more than half the premature infants in the U.S. and EU are initially treated with noninvasive respiratory support, such as nCPAP. Unfortunately, nCPAP does not address the underlying surfactant deficiency and consequently, many premature infants respond poorly to nCPAP alone (typically within the first 72 hours of life) and may require delayed surfactant therapy with invasive intubation (an outcome referred to as “nCPAP failure”). If surfactant therapy could be administered noninvasively, neonatologists would be able to provide surfactant therapy to premature infants earlier in their course of treatment and without exposing them to the risks associated with intubation and mechanical ventilation.
AEROSURF is designed to deliver aerosolized KL4 surfactant noninvasively and potentially may meaningfully reduce the use of invasive endotracheal intubation and mechanical ventilation. We believe that AEROSURF, if approved, has the potential to address a serious unmet medical need by enabling earlier KL4 surfactant therapy for infants receiving nCPAP alone, reducing the number of premature infants who are subjected to invasive surfactant administration, and potentially providing transformative clinical and pharmacoeconomic benefits. FDA has granted Fast Track designation for our KL4 surfactant (including AEROSURF) to treat RDS.
While we are focused primarily on AEROSURF, we are also assessing potential development pathways to potentially gain marketing approval for lyophilized KL4 surfactant as an intratracheal instillate for the treatment and/or prevention of RDS. Lyophilized KL4 surfactant is the drug component in AEROSURF and may potentially provide benefits related to use, such as longer shelf life, reduced cold-chain requirements and lower viscosity. See, “- Business Strategy and Updates - Other KL4 Surfactant Development Initiatives - Lyophilized KL4 Surfactant.”
Beyond RDS
In the future, we plan potentially to develop a pipeline of KL4 surfactant products to address serious critical care respiratory conditions in children and adults. In that regard, we have received support, and plan to seek additional support, from the National Institutes of Health (NIH) and other government funding sources to explore with recognized educational and research institutions the utility of our KL4 surfactant to address a variety of respiratory conditions.
We believe that our aerosolized KL4 surfactant, alone or in combination with other pharmaceutical compounds, has the potential to be developed to address a range of serious respiratory conditions and may be an effective intervention for such conditions as acute lung injury (ALI), including acute radiation exposure to the lung (acute pneumonitis and delayed lung injury), chemical-induced ALI, and influenza-induced ALI. In addition, although there can be no assurance, we may explore opportunities to apply KL4 surfactant therapies and our aerosol delivery technology to facilitate the delivery of other drugs into the lung and to use KL4 surfactant to treat conditions such as mechanical ventilator-induced lung injury (often referred to as VILI), pneumonia, and diseases involving mucociliary clearance disorders, such as chronic obstructive pulmonary disease (COPD) and cystic fibrosis (CF). There can be no assurance, however, that we will secure the additional capital needed to undertake such explorations, that we will undertake such explorations or that, even if we do, we will be successful.
BUSINESS STRATEGY AND UPDATES
AEROSURF Clinical and Device Development Update
We are focused primarily on the management of RDS in premature infants. In November 2013, we filed an investigational new drug application (IND) with FDA and initiated a phase 2 clinical development program for AEROSURF for the treatment of RDS in premature infants. Our efforts to advance the AEROSURF development program are grounded in our earlier work, including a significant pivotal phase 3 clinical trial, for SURFAXIN®, the liquid instillate dosage form of our KL4 surfactant, which was approved by FDA in 2012. 1 To date, we have completed three AEROSURF phase 2 clinical trials assessing the safety and tolerability of AEROSURF and demonstrating evidence of a beneficial treatment effect when the treatment is delivered as intended in all 3 trials. We have also advanced the development of a proprietary aerosol delivery system (ADS) and manufactured a sufficient number of ADS prototypes to support our nonclinical research and our clinical programs. This work was supported in part by collaborations with Battelle Memorial Institute (Battelle) dating back to 2012. We are currently working with Battelle to complete design verification procedures for a next generation (NextGen) ADS that is expected to replace the prototype device that we have used to date in our phase 2 clinical trials. The following sections summarize our plans for 2018 and our progress over the last three years.
Focus for 2018 - NextGen ADS
In 2018, we plan to focus on a number of initiatives potentially to advance our AEROSURF development program, including a project with Battelle to complete development of the NextGen ADS, which combines the same aerosolization technology used during the phase 2 clinical program, but with improved ergonomics, interface, controls, and dose monitoring in a modular design. Design verification activities are underway. In this process, we have assessed the design of the NextGen ADS and implemented changes potentially to mitigate the risks of device-related treatment interruptions experienced in the prototype device used in the phase 2b clinical trial. See, “- AEROSURF Phase 2b Clinical Trial.” We believe that the NextGen ADS, which is being developed to be easier and faster to use, may support enhanced clinical outcomes by potentially allowing for reduced time to initial administration of our KL4 surfactant and reduced time intervals between doses, if required. See, “- Proprietary Platform - KL4 Surfactant and Aerosol Technologies - Aerosol Technologies - Aerosol Delivery System (ADS).”
Focus for 2018 - AEROSURF Bridge Study
To clinically verify the design and confirm the performance of the NextGen ADS, including with respect to the device-related treatment interruptions experienced in the phase 2b clinical trial, we are planning to conduct a device bridging clinical study with the following objectives: (i) to gain in-clinic experience with the NextGen ADS, (ii) to confirm whether our device development objectives have been met, and (iii) to generate additional higher dose treatment data to augment the higher dose data obtained in the phase 2b clinical trial, which was adversely affected by device-related treatment interruptions. Our plans include a multicenter, randomized, controlled study with masked treatment assignment in approximately 70 premature infants that is designed to assess safety and tolerability of administering aerosolized KL4 surfactant administered to premature infants 26 to 32 week gestational age receiving nCPAP in one dose group (50 minutes) with up to 4 repeat doses (administered with a minimum of 20 minutes between doses) compared to infants receiving nCPAP alone. In addition to assessing safety and tolerability, the key objectives of this trial include assessing nCPAP failure rates at 72 hours and 28 days and the performance of the NextGen ADS. We plan to conduct this trial in 20 to 25 of our higher-performing clinical sites, predominantly in the U.S. This trial will not be powered to establish statistical significance. We anticipate that this trial will start in the fourth quarter of 2018.
1 SURFAXIN, the first synthetic, peptide-containing surfactant based on our KL4 surfactant technology, was approved by FDA in March 2012. SURFAXIN is administered intratracheally using methods similar to currently available surfactants. We ceased SURFAXIN commercial and manufacturing activities in 2015 to focus on AEROSURF clinical development and our other aerosolized KL4 surfactant products.
AEROSURF Phase 2b Clinical Trial
In June 2017, we announced that we had completed enrollment in our AEROSURF phase 2b clinical trial, a multicenter, randomized, controlled study with masked treatment assignment in 221 premature infants that was designed to evaluate aerosolized KL4 surfactant administered to premature infants 26 to 32 week gestational age receiving nCPAP, in two dose groups (25 and 50 minutes) with up to two potential repeat doses, compared to infants receiving nCPAP alone. This trial was conducted in approximately 50 clinical sites in the U.S., Canada, Europe and Latin America.
The key objectives of this trial were to:
●
demonstrate evidence of efficacy: (i) time to nCPAP failure (defined as the need for intubation and delayed surfactant therapy), (ii) incidence of nCPAP failure, and (iii) physiological parameters indicating the effectiveness of lung function;
●
define the dose regimen for the planned phase 3 clinical program; and
●
provide an estimation of the expected efficacy margin of AEROSURF treatment
Based on the planned top-line results, AEROSURF did not meet the primary endpoint of a reduction in nCPAP failure at 72 hours. We believe this result was attributable in large part to an unexpected rate of treatment interruptions, which occurred in about 24% of active enrollments, predominantly in the 50-minute dose group. These interruptions, we believe, were primarily related to specific lots of disposable cartridge filters with a higher tendency to clog. After excluding patients in the 50-minute dose group whose dose was interrupted, nCPAP failure rates were 44% in the control group (n=71) compared to 32% (n=44) in the AEROSURF 50-minute dose group, which is a 12% absolute reduction or a 27% relative reduction in nCPAP failure compared to control. These data suggest a meaningful treatment effect in line with our desired targeted outcome. The overall data suggest that the safety and tolerability profile of AEROSURF was generally comparable to the control group. Reported adverse events and serious adverse events were those that are common and expected among premature infants with RDS and comparable to the control group. As expected, some peridosing events occurred (e.g., changes in oxygen requirements and blood pressure in the time around dosing) more commonly in the AEROSURF groups, however, these were transient in nature and occurred less frequently than seen in intratracheal administration.
In 2017, we also completed a 2a clinical trial assessing three AEROSURF doses in premature infants 26-28 week gestational age (see, “- AEROSURF Phase 2a Clinical Trial (2014 - 2017)”). Data from this trial has enabled (i) the expansion of the phase 2b clinical trial to include 28 week gestational age infants and (ii) inclusion of premature infants 26 weeks gestational age and greater in future clinical trials.
AEROSURF Phase 2a Clinical Trials (2014-2017)
Premature infants 29 to 34 week gestational age
In May 2015, we announced the results of an initial AEROSURF phase 2a open label clinical trial conducted in 48 premature infants 29 to 34 week gestational age who were receiving nCPAP for RDS. This trial was designed to evaluate safety and tolerability of a single exposure of aerosolized KL4 surfactant administered to premature infants with RDS in three escalating inhaled doses (15, 30 and 45 minutes), compared to infants receiving nCPAP alone. A key objective of this trial was to establish proof of concept for our technology through assessments of (i) physiological safety data suggesting that aerosolized KL4 surfactant is being delivered into the lung of premature infants and potentially improving gas exchange, and (ii) the overall performance of the novel ADS in the NICU. Reported adverse events and serious adverse events were those that are common and expected among premature infants with RDS and comparable to the control group. In addition, parameters related to timing and frequency of the need for invasive surfactant therapy suggest that a single dose of AEROSURF may delay the time to invasive surfactant therapy due to nCPAP failure. Based on these encouraging safety and performance results, we expanded this trial to explore higher doses and whether multiple (repeat) doses of AEROSURF may potentially reduce the need for invasive surfactant therapy.
In November 2015, after completing the expansion of the AEROSURF phase 2a clinical trial in an additional 32 premature infants 29 to 34 week gestational age who were receiving nCPAP for RDS, we announced top-line data from our overall phase 2a clinical development program in premature infants 29 to 34 week gestational age, including the previously announced data from the initial phase 2a clinical trial. The expansion trial was designed to evaluate safety and tolerability of administering aerosolized KL4 surfactant in higher (60 and 90 minutes) doses compared to infants receiving nCPAP alone. As before, we also assessed physiological data. The overall data suggested that aerosolized KL4 surfactant delivered to premature infants with RDS generally appeared safe and well tolerated and may be reducing the incidence of nCPAP failure. Reported adverse events and serious adverse events were those that are common and expected among premature infants with RDS and comparable to the control group. Through 72 hours after the start of treatment, AEROSURF treated patients, predominantly receiving a single dose, had lower rates of nCPAP failure compared to control in each of the last three dose groups studied. nCPAP failure rates were 53% in the control group (n=40) compared to 38% (n=8), 14% (n=7, excluding one patient who was inappropriately enrolled) and 38% (n=8) in the 45, 60 and 90 minute AEROSURF dose groups, respectively.
Premature infants 26 to 28 week gestational age
In the third quarter of 2017, we completed the analysis of results from an AEROSURF phase 2a clinical trial in 48 premature infants 26 to 28 week gestational age receiving nCPAP for RDS. This trial was a multicenter, randomized, open-label, controlled study in premature infants 26 to 28 weeks gestational age receiving nCPAP for RDS, and was designed to evaluate the safety and tolerability of aerosolized KL4 surfactant administered in three escalating doses (30, 45, and 60 minute), with a potential repeat dose, compared to infants receiving nCPAP alone. The overall data suggest that the safety and tolerability profile of AEROSURF was generally comparable to the control group. Reported adverse events and serious adverse events were those that are common and expected among premature infants with RDS. Peridosing events occurred in the AEROSURF group but were not measured in the control group that had no aerosol therapy administered. Early nCPAP failures within 6 hours after randomization were less frequently observed in the AEROSURF treated groups compared to control group. The data also suggest that AEROSURF may have an early effect and may be prolonging the time to nCPAP failure compared to control; however, the overall rate of nCPAP failure was comparable at 72 hours between control and treatment groups. At 72 hours, nCPAP failure rates were 63%, 88% and 63% in the 30, 45 and 60 minute AEROSURF dose groups, respectively, compared to 67% in the control group. As was observed in the AEROSURF phase 2b clinical trial, some treatments in this trial were interrupted. These interruptions occurred in one-third of active enrollments, and we believe were primarily related to specific lots of disposable cartridge filters with a higher tendency to clog. Although complicated by small numbers, analysis of data of patients whose dose was not impacted by device-related treatment interruptions (n=16) resulted in nCPAP failure rates of 57%, 100% and 50% in the 30 (n=7), 45 (n=3) and 60 (n=6) minute AEROSURF dose groups, respectively compared to 67% in the control group. The results observed in this trial met the objective of demonstrating an acceptable safety and risk profile to allow inclusion of 26 - 28 week gestational age premature infants in any future studies in the AEROSURF development program.
An important observation emerged from the phase 2a trial in infants 26 to 28 week gestation age. AEROSURF treated patients experienced a significantly lower rate of neonatal bronchopulmonary dysplasia (BPD) or chronic lung disease of the newborn in compared to control. BPD is a costly syndrome that is associated with the prolonged use of respiratory support and oxygen supplementation and is diagnosed when premature infants require respiratory support or supplemental oxygen at 36 weeks post-menstrual age. Babies with BPD suffer from abnormal lung development and typically have a need for respiratory assistance - oftentimes for many months, as well as comprehensive care spanning years. In this trial, BPD rates were 0% (0 of 24) in the AEROSURF treated patients compared to 25% (6 of 24) in the control group.
In addition to assessing safety and tolerability of a drug product candidate, a key goal of any phase 2 clinical trial is to identify the appropriate tolerable dose range for the patient population and potentially the doses that impact relevant outcomes. Throughout the phase 2a trial in younger infants, we observed a potential early effect of AEROSURF on prolonging time to nCPAP failure. When the dose was delivered as intended, it appears that this gestational age group is responding better (less nCPAP failure) to larger delivered doses of AEROSURF similar to the 29-34 week gestational age group and we will be able to proceed with a common dosing approach across the gestational ages under study.
Clinical Summary to Date
Our AEROSURF phase 2 clinical work to date has produced a consistent, positive safety profile. Adverse events and serious adverse events have been those that are common and expected among premature infants with RDS and similar to control. A post-hoc pooled analysis summarizing patients treated with AEROSURF in the phase 2 program who received a dose of AEROSURF for periods of 45 minutes or greater (excluding patients who experienced device-related treatment interruptions) shows a nCPAP failure rate with AEROSURF of 36% compared to a nCPAP failure rate with nCPAP alone of 50%, representing a significant relative reduction of 28% (p=0.038). We also observed a consistent pattern across trials in the U.S. in which the phase 2b clinical trial results in premature infants 28 to 32 week gestational age are similar to the phase 2a clinical trial results in premature infants 29 to 34 week gestational age. In addition, we observed a potential effect on development of BPD in the 26 to 28 week gestational age group, with no cases of BPD observed in the AEROSURF treated infants as compared to 6 of 24 in infants on nCPAP alone. In the 2b clinical trial in 28-32 week gestational age, a population at lower risk for BPD, we saw fewer infants develop BPD also. Moreover, we noted that patients in the phase 2b clinical trial that were treated with AEROSURF but failed nCPAP appeared to experience beneficial effects from AEROSURF compared to nCPAP alone as reflected by reduced mean time on oxygen and fewer days on mechanical ventilation. While these observations are encouraging, there can be no assurance that we will observe similar results in future clinical trials.
The AEROSURF phase 2b clinical trial was supported to date, in part, by a $1.9 million Phase IIb award under a Small Business Innovation Research (SBIR) grant from the National Heart, Lung, and Blood Institute (NHLBI) of the NIH for up to $2.6 million under parent award number R44HL107000. The AEROSURF phase 2a clinical trials in premature infants 29 to 34 week gestational age was supported, in part, by a $1.9 million Phase II award under a SBIR grant from the NHLBI of the NIH for up to $2.5 million under award number 4R44HL107000-02. Previously, $0.6 million was awarded under this grant to support ADS development for use in the AEROSURF phase 2 clinical program. The content of this Annual Report on Form 10-K is solely our responsibility and does not necessarily represent the official views of the NIH.
Other KL4 Surfactant Development Initiatives
Lyophilized KL4Surfactant
While we are focused primarily on AEROSURF, we are also assessing potential development pathways to potentially gain marketing approval for lyophilized KL4 surfactant as an intratracheal instillate for the treatment and/or prevention of RDS. Lyophilized KL4 surfactant is the drug component in AEROSURF and may potentially provide benefits related to use, such as longer shelf life, reduced cold-chain requirements and lower viscosity. We are currently assessing potential development pathways with the goal of defining a development program that is achievable from a cost, timing and resource perspective and that would potentially provide approval for an additional KL4 surfactant product for intratracheal treatment of premature infants with RDS. If we were able to secure such approval, we potentially would be able to provide our KL4 surfactant in both liquid and aerosol dosage forms and strengthen our position in the RDS market. We have initiated discussions with FDA on a potential development program, trial design and regulatory plan for approval.
Nonclinical Initiatives
In April 2016, we completed a multi-year analysis of data collected in a Noninterventional Observational Study (the Observational Study) on the treatment and outcomes of over 2,000 premature infants 26 to 34 week gestational age with RDS. The results of the study have better informed our assessment of the unmet medical need in RDS, the design of our clinical trials, and the RDS market opportunity. Based on this study, we have enhanced some of the operational aspects of the AEROSURF phase 2 program.
In October 2016, we released data from a lung deposition study conducted in non-human primates (NHPs) that demonstrate that the ADS is capable of delivering aerosolized KL4 surfactant throughout all regions of the lung. Results from analysis of images obtained in the study show that aerosolized KL4 surfactant delivered using the ADS via nCPAP was generally uniformly deposited in all regions of the NHPs lungs. We believe that the results of this study serve as validation of the capabilities of our ADS technology and support the potential for further development of the ADS to treat a range of respiratory conditions. See, “- Proprietary Platform - KL4 Surfactant and Aerosol Technologies - Aerosol Technologies.”
Beyond RDS
We believe that our KL4 surfactant technology may potentially support a product pipeline to address a variety of debilitating respiratory conditions and diseases that could represent potentially significant market opportunities. While we remain focused on RDS, we have participated in investigator-initiated research programs and government-funded research and preclinical development initiatives that explore the use of our KL4 surfactant in the treatment of a range of respiratory diseases. We have participated in partially-funded U.S. Government preclinical studies to assess whether aerosolized KL4 surfactant may mitigate the effects of radiation-induced, chemical-induced and/or viral-induced lung injury. Although there can be no assurance, we may in the future support development activities to establish a proof-of-concept and, if successful, thereafter determine whether to seek strategic alliances or collaboration arrangements or pursue other financial alternatives to fund further development and, if approved, commercialization of additional KL4 surfactant indications.
U.S. Government-funded Initiatives
We have pursued and plan to continue pursuing potential U.S. Government-funded research and preclinical development initiatives that provide non-dilutive funding to explore additional opportunities to apply our KL4 surfactant in the treatment of a range of respiratory diseases, including potential medical countermeasures to mitigate acute lung injury (ALI), including acute radiation exposure to the lung (acute pneumonitis and delayed lung injury), chemical-induced ALI, and influenza-induced ALI. In August 2016, we announced a three-year phase II Small Business Innovation Research (SBIR) grant valued at up to $2.6 million from the National Heart, Lung and Blood Institute (NHLBI) to support the AEROSURF phase 2b clinical trial. We were awarded the initial $1 million under this grant in 2016, with up to an additional $1.6 million potentially available in the following two years. In 2017, we received $0.9 million of this award; the remaining funds of $0.7 million are potentially to be made available in mid-2018. In July 2016, we were awarded the third and final $1.0 million funded by the National Institute of Allergy and Infectious Diseases (NIAID) of the NIH under a 2014 $3.0 million phase II SBIR to support continued development of aerosolized KL4 surfactant as a potential medical countermeasure to mitigate acute and chronic/late-phase radiation-induced lung injury. The initial two awards under this grant were received during the third quarter of each of 2014 and 2015, respectively.
Strategic Transactions and Liquidity Update
As of April 15, 2018, we believe that we will have sufficient cash resources available to support our development activities and business operations through May 2018. We believe that our ability to continue as a going concern beyond May 2018, both for the near and longer term, is highly dependent upon our ability to successfully secure additional capital through potential strategic transactions and/or private equity offerings, complete our NextGen ADS device verification activities with Battelle, and execute the planned AEROSURF bridge study to be in a position to initiate an AEROSURF phase 3 clinical program. As a development company, we will require significant additional capital and resources to advance our AEROSURF and other potential KL4 surfactant development programs, support our operations, manufacture our drug product and medical devices, and, if approved, support the commercial introduction of our approved products in markets around the world. To execute our AEROSURF development plan, we have hired and retained professional and scientific personnel and invested heavily in securing the resources and expertise needed to potentially achieve success. To leverage these capabilities, maximize the use of our resources and potentially reduce our dependency on a single product candidate, we seek to enter into strategic alliances, collaboration agreements and other strategic transactions (including without limitation, by merger, acquisition or other corporate transaction). We also seek licensing arrangements for AEROSURF and our other KL4 surfactant products in select geographic markets that could bring strategic partners with local development and commercial expertise to support development of AEROSURF in various markets outside the U.S., and financial resources to support our AEROSURF development program. Such financial resources could take the form of capital investments, upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses.
With the support of our largest stockholder, Lee’s Pharmaceutical Holdings Limited (Lee’s), a company incorporated in the Cayman Islands with limited liability whose common stock is listed on the Hong Kong Stock Exchange and which beneficially owns a majority interest in our common stock, we are currently engaged in active diligence and discussions with a third party for a potential strategic transaction. There can be no assurance, however, that we will be able to reach agreement on terms and within the time frame acceptable to both parties. Moreover, even if we reach agreement and complete a transaction, there can be no assurance that we will have sufficient resources to fund the continued development of AEROSURF or any other product candidates, that our development efforts would be successful, or that we would ever complete such development and obtain regulatory approvals needed to commercialize our product candidates in the world’s markets.
In addition to pursuing potential strategic transactions that could diversify our assets and bring in additional capital, we also seek to raise additional capital through private placement offerings of equity securities. In January and March 2018, we entered into loan agreements with Lee’s for advances of $1.5 million and $1 million, respectively, to support our development activities and operations while we work to complete an equity offering. To secure our obligations under these loans, we granted Lee’s a security interest in substantially all of our assets.
In April 2018, we completed a private placement with an affiliate of Lee’s for the purchase of $2.6 million of our common stock and warrants at a purchase price per share of $4.80. The warrants are exercisable after 6 months and through the seventh anniversary of the issue date at an exercise price of $5.52 per share.
In March 2018, we announced a potential strategic collaboration with Eleison Pharmaceuticals, Inc. (Eleison), a specialty pharmaceutical company developing life-saving therapeutics for cancers, to assess the feasibility of using our proprietary ADS to deliver Eleison’s inhaled lipid cisplatin (ILC) potentially in combination with our KL4 surfactant. There can be no assurance that we will be successful in these efforts or, even if we are successful, that we and Eleison will agree to undertake a full development program.
In June 2017, we entered into an exclusive license, development and commercialization agreement (license agreement) with Lee’s Pharmaceutical (HK), Ltd. (Lee’s (HK)), a Hong Kong company and a wholly-owned subsidiary of Lee’s, for the development and commercialization of KL4 surfactant products in China, Hong Kong and other select Asian markets, with a future option potentially to add Japan. The agreement covered our non-aerosol products, SURFAXIN® (which was approved in the U.S. in 2012) and SURFAXIN LS™ (an improved lyophilized formulation of SURFAXIN) as well as AEROSURF. We also granted Lee’s (HK) an exclusive license to manufacture KL4 surfactant in China for use in non-aerosol surfactant products in the licensed territory and a future option to manufacture the device in the licensed territory. Under the License Agreement, Lee’s (HK) paid an upfront license fee in the amount of $1 million, and agreed to pay up to an additional $37.5 million in potential clinical, regulatory and commercial milestone payments. We also will share in any sublicense income that Lee’s (HK) may receive at a rate equal to low double digits, and Lee’s (HK) has agreed to pay all development costs and expenses in and for the licensed territory, including for the planned AEROSURF phase 3 clinical program. In addition, Lee’s (HK) will pay tiered royalties on a country-by-country basis based on a percent of net sales, depending on the product, in the range of high single to low-to-mid double digit percentages. Royalties are payable until the latest of (A) the expiration of the last valid patent claim covering the product in the country of sale, (B) the expiration or revocation of any applicable regulatory exclusivity in the country of sale, and (C) ten (10) years after the first commercial sale in the country of sale; after which the royalties shall be reduced for a period of three years to low-to-mid single digits. In addition, the royalty rates will be reduced if one or more generic products are introduced. The license agreement also contains provisions related to sublicensing, non-competition, manufacturing and technology transfer and termination.
In August 2017, we entered into a Loan Agreement, pursuant to which Lee’s (HK) agreed to lend us up to $3.9 million to support our activities through October 31, 2017, while we and Lee’s worked to complete a $10 million securities purchase agreement (Lee’s SPA) pursuant to which Lee’s acquired a controlling interest in our Company effective on November 1, 2017. In connection with Lee’s SPA, we amended the License Agreement to expand certain of Lee’s (HK) rights, including by immediately adding Japan to the licensed territory, accelerating the right to manufacture the ADS in and for the licensed territory, reducing or eliminating certain of the milestone and royalty payments and adding an affiliate of Lee’s (HK) as a party to the License Agreement. As a result, the additional amounts for potential clinical, regulatory and commercial milestones were reduced to $35.8 million.
In addition, on November 1, 2017, we completed a strategic transaction with affiliates of Deerfield Management Company L.P. (Deerfield) to restructure (Loan Restructuring) our outstanding $25 million long-term loan (Deerfield Loan), $12.5 million of which would have matured in each of February 2018 and February 2019. Under the Loan Restructuring, the notes and the warrants issued in connection with the Deerfield Loan were retired in exchange for $2.5 million in cash, common stock equal to 2% of our outstanding shares, plus potential future AEROSURF regulatory and commercial milestone payments of up to $15 million with the initial payment coming due upon our filing with the FDA a new drug application (NDA) for AEROSURF.
Also in connection with Lee’s SPA, in October 2017, Battelle agreed to waive its right to any Liquidation Preference (as defined in the Designation of Preferences, Rights and Limitations) under the Series A Convertible Preferred Stock, par value $0.001 per share (Preferred Shares) that we issued in February 2017 and we entered into a non-binding memorandum of understanding with Battelle potentially to restructure our payables with them. We are currently working with Battelle to finalize that arrangement.
In February 2017, we completed a private placement offering with selected investors covering 7,049 units at a per unit price of $1,495, resulting in net proceeds to us of approximately $10.5 million. The proceeds included $1.6 million of non-cash consideration representing a reduction in amounts due and accrued as of December 31, 2016 for current development services that otherwise would have become payable in cash in the first and second quarters of 2017. Each unit consisted of: (i) one Preferred Share, which was convertible into 50 shares of common stock at $27.40 per share, and (ii) Series A-1 Warrants to purchase 50 shares of common stock at an exercise price per share equal to $27.40. In addition, from January 1, 2017 through March 23, 2017, we completed registered offerings under our ATM Program, resulting in net proceeds to us of $0.9 million. See, “Item 7 - Management's Discussion and Analysis - Liquidity and Capital Resources - Financings Pursuant to Common Stock Offerings.”
Market Data and Other Information
Our estimates of market size and business opportunities included in this Item 1 - Business and elsewhere in this Annual Report on Form 10-K are based in part on our analysis of data derived from the following sources, among others: third-party market research conducted for us by Deerfield Institute, Defined Health and Compass Consulting with U.S. and European Union (EU) based neonatologists in 2014; Annual Summary of Vital Statistics: 2010, Pediatrics, Martin et. al.; CDC National Vital Statistics, 2013; IMS Midas Data MAT, December 2013; HCUP Hospital Discharge data, 2013; Obstetric and Neonatal Care Practices for Infants 501 to 1500 g From 2000 to 2009; Pediatrics, July 2013, Soll; Hospital Insurance Claim Database, 2009; Management and Outcomes of Very Low Birth Weight, New England Journal of Medicine (NEJM), 2008, Eichenwald, Stark; Cost of hospitalization for preterm and low birth weight infants in the United States, Pediatrics 2007, Russell RB; Market Intelligence Report on Number of ICU Beds in EU5 Countries; The Cystic Fibrosis Foundation website; Vermont Oxford Network Data, 2006; Population Reference Bureau website; CIA website; March of Dimes website; and estimates from other companies with information on surfactant sales in countries where IMS data reporting is often incomplete or non-existent; independent third-party market research provided by a potential strategic partner and by our licensee in the Asia Pacifica region; and Windtree Therapeutics, Inc. Primary Market Research, December 2010 and May 2011; as well as our analysis of the SELECT and STAR trials described below. Although we believe that the information contained in these sources is reliable as of the date of this Annual Report on Form 10-K, we have not independently verified such data and do not guarantee the accuracy or completeness of such information. In addition, our analysis and assumptions take into account estimated patient populations, expected adoption rates of our products, current pricing, and economics and anticipated potential pharmacoeconomic benefits of our products, if approved. We provide estimates and projections to give the reader an understanding of our strategic priorities, but we caution that the reader should not rely on our estimates and projections. These estimates and projections are forward-looking statements, which we intend to be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. For a discussion of forward-looking statements, see, “Forward-Looking Statements” on page ii of this Annual Report on Form 10-K, and “Item 1A
ITEM 1A.
RISK FACTORS.
You should carefully consider the following risks and any of the other information set forth in this Annual Report on Form 10-K and in the documents incorporated herein by reference, before deciding to invest in shares of our common stock. The risks described below are not the only ones that we face. Additional risks that are not presently known to us or that we currently deem immaterial may also impair our business operations. The following risks, among others, could cause our actual results, performance, achievements or industry results to differ materially from those expressed in our forward-looking statements contained herein and presented elsewhere by management from time to time. If any of the following risks actually occurs, our business prospects, financial condition or results of operations could be materially harmed. In such case, the market price of our common stock would likely decline due to the occurrence of any of these risks, and you could lose all or part of your investment.
Risks Related to Capital Resource Requirements
As of April 15, 2018, we currently have sufficient capital to fund our research and development programs, support our business operations and reduce existing obligations on a timely basis to May 2018. If we do not secure additional capital to support our future activities before our existing cash resources are exhausted, we likely will be unable to continue as a going concern.
As of December 31, 2017, we had cash and cash equivalents of $1.8 million and current liabilities of $11.7 million. In November 2017, we successfully retired $25 million of long-term debt under the Deerfield Loan. In January 2018 and March 2018, we received interim loans from LPH, an affiliate of Lee’s, in the amounts of $1.5 million and $1.0 million, respectively. In early April 2018, we completed a $2.6 million private placement offering with LPH II, from which we received net proceeds of approximately $2.5 million. As of April 15, 2018, and before any additional financings, including in connection with potential strategic transactions, we believe that we will have sufficient cash resources available to support our development activities and business operations through May 2018.
We have not yet established an ongoing source of revenue sufficient to cover our operating costs and allow us to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, to fund our research and development programs, support our business operations and pay our existing obligations on a timely basis. We are currently planning to secure the additional capital that we will require in the near-term, through a combination of public or private equity offerings, and strategic transactions, including potential alliances and collaborations focused on various individual markets, as well as potential combinations (including by merger or acquisition) or other corporate transactions. If none of these alternatives is available, or if available, we are unable to raise sufficient capital through such transactions, we likely will not have sufficient cash resources and liquidity to fund our business operations, which could significantly limit our ability to continue as a going concern. If we are unable to raise the required capital, we may be forced to curtail all of our activities and, ultimately, cease operations. Even if we are able to raise sufficient capital, such financings may only be available on unattractive terms, or result in significant dilution of stockholders’ interests and, in such event, the market price of our common stock may decline.
We will require significant additional capital to support our research and development activities and operations, and our ability to raise such capital may be adversely impacted by a number of factors that may represent significant challenges to accessing the capital markets at a time when we would like or require, and at an increased cost of capital. Moreover, any financings could result in substantial dilution to our stockholders, cause our stock price to fall and adversely affect our ability to raise capital.
As of April 15, 2018, and before any additional financings or other strategic transactions, we believe that we will have sufficient cash resources to support our limited development programs and business operations and reduce obligations to May 2018. Since April 2015, we have focused our capital and resources primarily on the AEROSURF clinical development program, our lyophilized KL4 surfactant and design and development of our NextGen ADS for use in our remaining development activities, including our planned phase 3 clinical program. AEROSURF is our only clinical development program. We expect to continue to require significant additional infusions of capital to execute our business strategy until such time as revenues from the commercialization of AEROSURF, if approved, and from potential strategic alliance and collaboration arrangements, and other sources, are sufficient to offset our cash flow requirements. For the next several years, we do not expect to receive revenues from the sale of approved products, and our cash outflows for development programs, operations and debt service are likely to far outpace the rate at which we may generate revenues and other cash inflows from all available sources. See, “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
We plan to seek the additional capital that we require from potential strategic alliances, collaboration arrangements and other similar transactions, and through potential public and private offerings in the equity markets, which could have a dilutive impact on our stockholders. In such event, the issuance, or even potential issuance, of shares could have a negative effect on the market price of our common stock. However, a number of factors, including the timing and outcomes of our clinical activities, our status as a smaller reporting company under the SEC regulations, our loss of eligibility to use the registration statement Form S-3 and our at-the-market equity sales program (ATM Program), our delisting from The Nasdaq Capital Market in May 2017 and subsequent transfer to the OTC Markets Group Inc.’s OTCQB® market, our capital structure, which currently consists of common stock, convertible preferred stock and warrants to purchase common stock, as well as conditions in the global financial markets generally, may present significant challenges to accessing the capital markets at a time when we would like or require, and at an increased cost of capital. We do not have in place arrangements to obtain additional capital. Any financing could be difficult to obtain or only available on unattractive terms and could result in significant dilution of stockholders’ interests. In any such event, the market price of our common stock may decline. In addition, failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our business plan, financial performance and stock price and could delay new product development and clinical trial plans.
If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, curtail or discontinue our research and development programs.
Future sales and issuances of our common stock or rights to purchase our common stock, stock incentive plans and upon the exercise of outstanding securities exercisable for shares of our common stock, including the Series A Convertible Preferred Stock (Preferred Stock) , could result in substantial additional dilution of our stockholders, cause our stock price to fall and adversely affect our ability to raise capital.
We will require additional capital to continue to execute our business plan and advance our research and development efforts. To the extent that we raise additional capital through the issuance of additional equity securities and through the exercise of outstanding warrants, our stockholders may experience substantial dilution. We may sell shares of preferred stock or common stock in one or more transactions at prices that may be at a discount to the then-current market value of our common stock and on such other terms and conditions as we may determine from time to time. Any such transaction could result in substantial dilution of our existing stockholders. If we sell shares of our common stock in more than one transaction, stockholders who purchase our common stock may be materially diluted by subsequent sales. Such sales could also cause a drop in the market price of our common stock. The issuance of shares of our common stock in connection with a public or private financing, in connection with our compensation programs, and upon exercise of outstanding warrants will have a dilutive impact on our other stockholders and the issuance, or even potential issuance, of such shares could have a negative effect on the market price of our common stock.
The exercise of stock options and other securities could also cause our stockholders to experience substantial dilution. Moreover, holders of our stock options and warrants are likely to exercise them, if ever, at a time when we otherwise could obtain a price for the sale of our securities that is higher than the exercise price per security of the options or warrants. Such exercises, or the possibility of such exercises, may impede our efforts to obtain additional financing through the sale of additional securities or make such financing more costly. It may also reduce the price of our common stock.
The rights of the holders of our common stock will be subordinate to our creditors and to the holders of our Preferred Stock in a liquidation. No assurance can be given as to the amount of assets, if any, that would be available for common stockholders in the event of a liquidation.
In liquidation, the rights of equity security holders like our common stockholders are subordinate to holders of our Preferred Stock and debt obligations. As of December 31, 2017, we had cash and cash equivalents of $1.8 million and current liabilities of $11.7 million. In addition, the holders of our Preferred Stock have a preference in liquidation over the holders of our common stock and are entitled to receive up to the greater of three times the amount of their initial investment or the amount to which they would be entitled on an as-converted basis. Accordingly, in the event of liquidation, no assurance can be given as to the amount of remaining assets, if any, available for payment to common stockholders.
The market price of our stock may be adversely affected by market volatility.
The market price of our common stock, like that of many other development stage pharmaceutical or biotechnology companies, has been and is likely to be volatile. In addition to general economic, political and market conditions, the price and trading volume of our stock could fluctuate widely in response to many factors, including:
•
announcements of the results of clinical trials by us or our competitors;
•
significant patient adverse reactions to our products;
•
governmental approvals, delays in expected governmental approvals or withdrawals of any prior governmental approvals or public or regulatory agency concerns regarding the safety or effectiveness of our products;
•
changes in the U.S. or foreign regulatory policy during the period of product development;
•
changes in the U.S. or foreign political environment and the passage of laws, including tax, environmental or other laws, affecting the product development business;
•
developments in patent or other proprietary rights, including any third-party challenges of our intellectual property rights;
•
announcements of technological innovations or new products by us or our competitors;
•
actual or anticipated variations in our operating results due to the level of development expenses and other factors;
•
changes in financial estimates by securities analysts and whether our earnings meet or exceed the estimates;
•
conditions and trends in the pharmaceutical and other industries; including healthcare reform in the U.S. and pricing and reimbursement policies globally;
•
new accounting standards;
•
changes in executive management; and
•
the occurrence of any of the risks described in these “Risk Factors” or elsewhere in this Annual Report on Form 10-K or our other public filings.
Our common stock has been quoted on the OTCQB® market tier operated by The OTC Markets since May 5, 2017. The price of our common stock has been, and we expect it to remain, volatile. The average daily trading volume in our common stock varies significantly and we have experienced extended periods where the trading volume has been low. The instability observed in our daily volume and number of transactions per day may affect the ability of our stockholders to sell their shares in the public market at prevailing prices.
In the past, following periods of volatility in the market price of the securities of companies in our industry, securities class action litigation has often been instituted against companies in our industry. Even if securities class actions that may be filed against us in the future were ultimately determined to be meritless or unsuccessful, they would involve substantial costs and a diversion of management attention and resources, which could negatively affect our business.
Our existing and future debt obligations could impair our liquidity and financial condition, and if we are unable to meet our debt obligations, the lenders could foreclose on our assets.
We currently have loans in the amount of $2.5 million from an affiliate of Lee’s, which we expect to satisfy through Lee’s participation in a future equity financing. To secure our obligations under these loans, we granted to the Lee’s affiliate a security interest in substantially all of our assets. We also have outstanding obligations related to our development activities and ongoing operations of $11.7 million.
Our debt and financial obligations:
•
could impair our liquidity;
•
could make it more difficult for us to satisfy our other obligations;
•
require us to dedicate cash flow to payments on our debt and financial obligations, which would reduce the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements;
•
impose restrictions on our ability to incur other indebtedness, grant liens on our assets, and could impede us from obtaining additional financing in the future for working capital, capital expenditures, acquisitions and general corporate purposes;
•
impose restrictions on us with respect to our ability to license our products in the U.S. and other markets around the world;
•
could adversely affect our ability to enter into strategic transactions, public or private equity offerings, and similar agreements, or require us to obtain the consent to enter into such transactions;
•
make us more vulnerable in the event of a downturn in our business prospects and could limit our flexibility to plan for, or react to, changes in our licensing markets; and
•
could place us at a competitive disadvantage when compared to our competitors.
Should we fail to make pay our obligations or fail to comply with any covenants contained in any related agreements, we could be in default regarding that indebtedness. Since we have pledged substantially all of our assets to secure our obligations to the Lee’s affiliate, a debt default could enable Lee’s to foreclose on the assets securing such debt and could significantly diminish the market value and marketability of our common stock and could result in the acceleration of other payment obligations.
We currently require significant additional capital to support our research and development activities and operations and have sufficient cash resources to pay our vendors, service providers and pay other business expenses. As such, we routinely closely monitor and control our cash resources to assure that investment and spending decisions advance our corporate objectives at any time. While we seek to raise the additional capital that we require, our relationships with important vendors and service providers may be affected. If any of our key vendors and service providers were to cease working with us or subject the delivery of products or services to timing or payment preconditions, our development activities may be adversely affected, which could have a material adverse effect on our business and operations.
During and since completion of our AEROSURF phase 2b clinical trial and announcement of the results, our cash resources have been constrained. To manage our cash, we have controlled and plan to tightly control purchasing and retention of consultants, monitor the release of funds and may defer payment on invoices to conserve cash. As a consequence, our aged accounts payables are expected to increase and our relationships with key vendors and service providers may be affected. Although LPH’s first quarter loans to us and our recent equity offering in April 2018 have provided capital to support our development activities and business operations and pay our vendors and service providers, we still will require significant additional capital. While we seek the additional capital that we require, we are working closely with our vendors and service providers to preserve our key relationships. Failure to retain such key relationships could have a material adverse effect on our development activities and our business and operations.
Risks Related to our Development Activities
Our clinical development program for AEROSURF involves risks and uncertainties that are inherent in the clinical development. Our clinical trials may be delayed, or fail, which will harm our business prospects.
Based on the planned top-line results, our AEROSURF phase 2b clinical trial did not meet the primary endpoint of a reduction in nCPAP failure at 72 hours. We believe this result was attributable in large part to an unexpected rate of treatment interruptions, which occurred in about 24% of active enrollments, predominantly in the 50-minute dose group. These interruptions, we believe, were primarily related to specific lots of disposable cartridge filters with a higher tendency to clog. We are currently preparing to conduct an AEROSURF “bridge” study to: (i) to gain in-clinic experience with the NextGen ADS, (ii) to confirm whether our device development objectives have been met and (iii) to generate additional higher dose treatment data to augment the higher dose data obtained in the phase 2b clinical trial, which was adversely affected by device-related treatment interruptions. We have previously completed three phase 2 clinical trials for AEROSURF. To gain marketing authorization for AEROSURF, we will need to successfully complete our clinical trials, including a future potential pivotal phase 3 clinical development program. Such development programs generally take years to complete and may be delayed by a number of factors. We may not reach agreement with the U.S. Food and Drug Administration (FDA) or a foreign regulator on the extent of our phase 3 program, the
design of any one or more of the clinical trials necessary for approval, or we may be unable to reach agreement on a single design that would permit us to conduct a common pivotal phase 3 clinical development program in the all markets of interest. Conditions imposed by FDA and foreign regulators on our clinical development program could significantly increase the time required to complete, and the costs of conducting, and the risks associated with clinical trials. For example, we may not be able to design a study that is acceptable to both FDA and EMA regulators, which would cause us to limit the scope of our geographical activities or greatly increase our investment. Even if we obtain promising preliminary findings or results in earlier preclinical studies and clinical trials, we may suffer significant delays or setbacks in any stage of our clinical trials. If any of the risks outlined in this risk factor and elsewhere in this Annual Report on Form 10-K, including with respect to regulatory requirements, institutional review board approval, clinical site initiation and supply, patient enrollment, drug manufacture, device development and device performance, lack of compatibility with complementary technologies, or long treatment times required to demonstrate effectiveness, were to delay the results, we might be forced to make changes to our clinical trial plan that we otherwise would not implement, which could adversely affect the results and potentially impair our ability to secure additional capital to fund our continued development program. Even if we complete the clinical trial within our anticipated time, if our results are inconclusive or non-compelling or otherwise insufficient to support a strategic or financing transaction, we potentially could be forced to limit or cease our development activities, which would have a material adverse effect on our business.
The timing and completion of clinical trials to study our product candidates depend on many factors, including the rate at which patients are enrolled. Delays in patient enrollment in clinical trials would likely result in increased costs, program delays, or both. Patient enrollment is a function of many factors, including potentially:
•
the number of clinical sites;
•
the size of the patient population;
•
the perceived risks and benefits of the product candidate;
•
the existence of competing clinical trials;
•
the severity of the disease under investigation;
•
the existence of alternative available products;
•
the eligibility and enrollment criteria for the study;
•
the willingness of patients’ parents or guardians to participate in the clinical trial;
•
the trial complexity and resources required by a clinical study site to participate;
•
availability of clinical supplies and materials;
•
the existence of alternative available products; and
•
geographical and geopolitical considerations.
We have initiated a number of clinical sites outside the U.S. where we use the services of third-party clinical trial consultants and third-party contract research organizations (CROs) to carry out most of our clinical trial related activities and accurately report the results, which may impact our ability to control the timing, conduct, expense and quality of our clinical trials. If our CROs do not successfully carry out their activities or meet expected deadlines, our trials may be delayed. If we fail to adequately manage the design, execution and regulatory aspects of our complex and diverse clinical trials, our studies and any potential regulatory approvals may be delayed, or we may fail to gain approvals for our product candidates.
We have engaged and may in the future engage a third-party clinical supply organization (CSO) to assist us in storing, shipping and tracking the drug product, medical devices and other materials that are required for us to conduct our clinical trial in the U.S. and international sites, including potentially in Canada, the EU, Latin America and Asia Pacific. If our CSO fails to timely perform its obligations under our agreement or if we are unable to manufacture an adequate supply of drug, medical devices and other materials to stock inventories with our CSO and provide for delivery to our clinical sites, we may experience delays in the initiation and enrollment activities of our clinical sites, or limit our ability to complete any ongoing clinical trials, which could delay or otherwise impair our ability to execute our clinical trials on a timely basis, if at all.
Moreover, because AEROSURF is a combination drug-device product, the success of our clinical trial is highly dependent upon our ability to successfully develop and manufacture our ADS and our synthetic lyophilized KL4 surfactant. We are working with our contract manufacturing organizations (CMOs) to be in a position to manufacture sufficient drug supply for our clinical development program when needed. We also are engaged in design verification procedures with Battelle Memorial Institute (Battelle) to complete the collaboration development of our next generation (NextGen) ADS that will replace our prototype ADS used in our phase 2 clinical trials to date and be available for use in our remaining AEROSURF clinical development activities and, if approved, initial commercial activities. We are conducting ongoing assessments of our medical device performance and have incorporated and plan to incorporate performance enhancements into our NextGen ADS as we move forward. If our NextGen ADS should fail to perform as designed, such failures could adversely affect the results of our clinical development program. If we are unsuccessful in our development activities or if for any reason we are unable to obtain active pharmaceutical ingredients (APIs), or manufacture our drug and medical device to our specifications and on commercially reasonable terms, our clinical trials could be delayed or otherwise adversely affected.
If patients are enrolled in our clinical trials, they could suffer adverse medical events or side effects that are known to be associated with surfactant administration or currently unknown to us. It is also possible that we, our AEROSURF Clinical Trial (ACT) Steering Committee, the Independent Safety Review Committee (ISRC), or the FDA could interrupt, delay or halt any one or more of our clinical trials for AEROSURF or any of our product candidates. If our ACT Steering Committee, the ISRC, any regulator or we believe that study participants face unacceptable health risks, any one or more of our clinical trials could be suspended or terminated. In addition, clinical trials may be interrupted, delayed or halted, in whole or in part, for reasons other than health and safety concerns, including, among other things, matters related to the design of the study, drug availability, ACT Steering Committee and/or ISRC recommendation, or business reasons.
In addition, the medical practices and procedures associated with treating RDS can vary between clinicians, medical sites and countries. For instance, we observed differences among clinical sites and on a country by country basis in nCPAP failure rates, in our clinical trials (where nCPAP failure rates have served as control comparators for AEROSURF) and as demonstrated in our Prospective Observational Study. This variability must be accurately estimated when designing and sizing a clinical trial to assure demonstration of efficacy and meeting statistical significance in outcomes. Even when estimated and planned for appropriately, this variability brings additional risk of poor trial outcomes as the trials expand to new centers and countries where we have no prior clinical experience. This risk is inversely related to the size of the trial. Smaller trials may be impacted to a greater degree by variability and have a greater risk of not seeing a true effect when one is actually present. As such, unless an interim analysis is planned in the design, we do not know effects of this or other variability or the results until the trial is fully completed.
The regulatory approval process for our products is expensive and time-consuming and the outcome is uncertain. We may not obtain required regulatory approvals to commercialize our products.
Before we can market our products, we must receive regulatory approvals for each product. The FDA and foreign regulators, such as the European Medicines Agency (EMA), extensively and rigorously regulate the testing, manufacture, distribution, advertising and marketing of drug products. This approval process includes (i) preclinical studies and clinical trials of each drug product candidate and API to establish its safety and effectiveness, and (ii) confirmation by the FDA and foreign regulators that we maintain good laboratory and manufacturing practices during testing and manufacturing. Even if favorable data are generated by clinical trials, the FDA or foreign regulator may not accept, file or approve a new drug application (NDA) or market authorization application (MAA) filed for a drug product on a timely basis or at all. See, “Item 1 - Business - Government Regulation.”
We are currently conducting a phase 2 clinical development program for AEROSURF. No assurance can be given that issues requiring protracted and time-consuming preclinical studies will not arise or that our clinical trials will be concluded successfully. Moreover, success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. As a result, data we obtain from our phase 2 clinical trials may not accurately predict phase 3 trial results, whether due to differences in sample size, study arms, duration, endpoints, features of the ADS used or other factors. We are currently planning to conduct an AEROSURF bridge study to transition in the clinic from the phase 2 ADS to the NextGen ADS, which will be used in our planned phase 3 program. In addition, clinical data are susceptible to varying interpretations that may delay, limit or prevent regulatory approval. There can be no assurance that we will be successful in gaining regulatory approval for AEROSURF.
Clinical trials may indicate that our product candidates lack efficacy, have harmful side effects or raise safety or other concerns that may significantly reduce the likelihood of regulatory approval, result in significant restrictions on use and safety warnings in the approved label, adversely affect placement within the treatment paradigm, or otherwise significantly diminish the commercial potential of the product candidate. Also, positive clinical results may not be replicated in subsequent confirmatory trials. Even if later stage clinical trials are successful, regulatory authorities may question the trial design or sufficiency for approval of the endpoints we select for our clinical trials or add new requirements, such as the completion of additional studies, as conditions for obtaining approval or obtaining an indication. Regulatory authorities may disagree with our view of the data or may fail to approve the processes used to manufacture a product candidate, may find the cGMP compliance status of a facility that manufactures a product candidate unsatisfactory, may fail to approve or delay approval of our product candidates, dosing or delivery methods, companion devices or may otherwise grant marketing approval that is more restricted than anticipated, including indications covering narrow patient populations and the imposition of safety monitoring or educational requirements or risk evaluation and mitigation strategies. The occurrence of any such events may delay our clinical development and regulatory efforts, delay or prevent our obtaining regulatory approval for new product candidates and new indications for existing products, and result in significant additional costs and expenses, require additional time and have an adverse effect on our business, including our financial condition and results of operations, or cause our stock price to decline or experience periods of volatility. Moreover, after taking such events into account, we may make a strategic decision to discontinue development of a product or indication if, for example, we believe commercialization will be difficult relative to other opportunities in our pipeline.
For AEROSURF, we may conduct clinical development in the U.S., Canada, the EU, Latin America, and Asia Pacific regions and sell our products in the U.S. and potentially in other major markets. To accomplish this objective, we must obtain and maintain regulatory approvals and comply with regulatory requirements in each jurisdiction. To avoid the significant expense and lengthy time required to complete multiple regional clinical development programs, we expect to meet with relevant regulatory authorities. While we would prefer to design a single, global clinical development program that would satisfy the regulators in all of our target markets, there can be no assurance that our efforts will be successful. If we are unable to reach agreement with the various regulatory authorities, we may not be able to pursue regulatory approval of our products in all of our selected markets.
The FDA and foreign regulatory bodies have substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of product candidates for many reasons, which may include:
•
one or both of the FDA or a foreign regulator may disagree with the design or implementation of one or more clinical trials;
•
one or both of the FDA or a foreign regulator may not deem a product candidate safe and effective for its proposed indication, or may deem a product candidate’s safety or other perceived risks to outweigh its clinical or other benefits;
•
one or both of the FDA or a foreign regulator may not find the data from preclinical studies and clinical trials sufficient to support approval, or the results of clinical trials may not meet the level of statistical or clinical significance required by the FDA or the applicable foreign regulatory body for approval;
•
one or both of the FDA or a foreign regulator may disagree with our interpretation of data from preclinical studies or clinical trials performed by us or third parties;
•
one or both of the FDA or a foreign regulator may not deem the data collected from clinical trials to be sufficient to support the submission of an NDA or other applicable regulatory filing;
•
one or both of the FDA or a foreign regulator may require additional preclinical studies or clinical trials;
•
one or both of the FDA or a foreign regulator may identify deficiencies in the formulation, quality control, labeling or specifications of our current or future product candidates;
•
one or both of the FDA or a foreign regulator may grant approval contingent on the performance of costly additional post-approval clinical trials;
•
one or both of the FDA or a foreign regulator also may approve our current or any future product candidates for a more limited indication or a narrower patient population than we originally requested;
•
one or both of the FDA or a foreign regulator may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates;
•
one or both of the FDA or a foreign regulator may not approve of the manufacturing processes, controls or facilities of third-party manufacturers or testing labs with which we contract; or
•
one or both of the FDA or a foreign regulator may change its approval policies or adopt new regulations in a manner rendering our clinical data or regulatory filings insufficient for approval.
The approval procedures vary among countries in complexity and timing. We may not obtain approvals from regulatory authorities outside the U.S. on a timely basis, if at all, which would preclude us from commercializing products in those markets. Even if we demonstrate the efficacy and safety of a product candidate, a regulator may require us to demonstrate superiority over comparative products before agreeing to grant marketing approval. Also, legislative bodies or regulatory agencies could enact new laws or regulations or change existing laws or regulations at any time, which could affect our ability to obtain or maintain approval of our products or product candidates. For example, the EU has adopted legislation intended to improve operational efficiency and streamline the overall clinical trial authorization process. The new requirements also provide for increased transparency of clinical trial results and submission of quality data relating to the products and product candidates used for such trials. Under the directive, sponsors will be required to submit detailed summaries of the study trial result within one year of termination of the clinical trial. The EMA will make certain clinical trial reports publicly available, which may limit our ability to protect competitively-sensitive information contained in our clinical trial reports. Failure to comply with new laws or regulations could result in significant monetary penalties as well as reputational and other harms. We are unable to predict when and whether any further changes to laws or regulatory policies affecting our business could occur, such as efforts to reform medical device regulation or to implement new requirements for combination products, and whether such changes could have a material adverse effect on our business and results of operations.
In addition, some countries, particularly those in the EU, regulate the pricing of prescription pharmaceuticals. In these countries, pricing discussions with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of their product candidate to other available therapies. Such trials may be time-consuming and expensive, and may not show an advantage in health economics for our products. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, in either the U.S. or the EU, we could be adversely affected.
Failure to complete the timely development of our NextGen ADS intended for future development activities and, if approved, initial commercial activities in a manner that performs as intended in clinical studies, would have a material adverse effect on our efforts to develop AEROSURF as well as our other aerosolized KL4 surfactant products, and our business strategy.
For our phase 2 clinical development activities, we developed a clinic-ready ADS and currently are working with Battelle to further develop a NextGen ADS for use in our remaining AEROSURF development activities and, if approved, initial commercial activities. Our development activities are subject to certain risks and uncertainties, including, without limitation:
•
we may not successfully develop, if at all, and on a timely basis, a NextGen ADS that is acceptable for use in our remaining AEROSURF development activities, with levels of efficiency, consistent performance, reliability and cost appropriate for commercial activities;
•
we will require access to sophisticated engineering capabilities. We have our own medical device engineering staff and we are currently working with Battelle, which is assisting us under a collaboration agreement that is in the final phase of executions. If we are unable to identify design engineers and medical device experts to support our continued development efforts in the future, including, potentially, for commercial use and later versions of the NextGen ADS, it would have a material adverse effect on our business strategy and impair our ability to commercialize or develop AEROSURF or other aerosolized KL4 surfactant products; if we are unable to secure the necessary medical device development expertise to support our development program, this could impair our ability to commercialize or develop AEROSURF or other aerosolized KL4 surfactant products;
•
the ADS may perform to specifications in the bench setting and internal tests, however, at clinical sites with multiple operators of the device, we may experience an unanticipated issue with performance that could have a negative effect on trial outcomes.
The realization of any of the foregoing risks would have a material adverse effect on our business.
Even though some of our product candidates have Fast Track designation, the FDA may not approve them at all or any sooner than other product candidates that do not have Fast Track designation.
The FDA has notified us that three indications of our KL4 surfactant (lucinactant) technology pipeline, treatment of RDS, BPD in premature infants and ARDS in adults, have been granted designation as “Fast Track” products. Fast Track designation does not accelerate clinical trials nor does it mean that the regulatory requirements are less stringent. Instead, Fast Track designation provides opportunities for frequent interactions with FDA review staff, as well as eligibility for priority review, if relevant criteria are met, and rolling review. We believe that other potential products in our KL4 surfactant technology pipeline may also qualify for Fast Track or other designations, including potentially breakthrough therapy, accelerated approval and priority review. These designations and programs are intended to facilitate and expedite development and review of an NDA to address unmet medical needs in the treatment of serious or life-threatening conditions. Our product candidates may cease to qualify for Fast Track designation and our other product candidates may fail to qualify for any such designation or program. Moreover, even if we are successful in gaining a designation that is intended to facilitate or expedite development or review of a product candidate, other factors could result in significant delays in our development activities with respect to our Fast Track products.
We may not be able to obtain or maintain orphan drug exclusivity for our product candidates.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate a drug for relatively small patient populations as Orphan Drugs. Under the Orphan Drug Act, the FDA may designate a product as an Orphan Drug if it is a drug intended to treat a rare disease or condition, which affects a patient population of fewer than 200,000 individuals in the United States.
The FDA has granted Orphan Drug designation for (i) our KL4 surfactant (lucinactant) for the treatment of RDS in premature infants, (ii) our KL4 surfactant for the prevention and treatment of BPD in premature infants, (iii) our KL4 surfactant for the treatment of acute respiratory distress syndrome (ARDS) in adults, and (iv) our KL4 surfactant for the treatment of CF.
If a drug that has Orphan Drug designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the drug is entitled to orphan drug marketing exclusivity for a period of seven years. Orphan Drug marketing exclusivity generally prevents the FDA from approving an NDA to market a drug containing the same active moiety for the same indication for seven years, except in limited circumstances, including if the FDA concludes that the later drug is clinically superior to the approved drug. A drug is clinically superior if it is safer, more effective or makes a major contribution to patient care. Orphan Drug exclusivity may be lost if the FDA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
Risks related to Manufacturing Development and Manufacturing
We currently do not have back-up facilities for our CMOs, our suppliers of APIs or excipients, our third-party analytical testing and other materials. If the parties we depend on for supplying our APIs, materials and excipients as well as analytical testing and manufacturing-related services do not timely supply these products and services, it may delay or impair our ability to execute our development plans for our current and potential pipeline products. Such delays could adversely impact our operations and financial condition.
In most cases, we are dependent upon a single supplier to provide all of our requirements for our APIs, materials and excipients or one or more of our drug product device subcomponents, components and subassemblies, analytical testing and manufacturing-related services. We rely on single CMOs to manufacture drug product that meets appropriate content, quality and stability standards for use in preclinical programs and clinical trials. Our ability to manufacture depends upon receiving adequate supplies and related services, which may be difficult or uneconomical to procure. Supply chain or manufacturing interruptions could negatively impact our operations and financial performance. The supply of any of our manufacturing materials may be interrupted because of supply shortages, poor vendor performance or other events outside our control, which may require us, among other things, to identify alternate vendors, which could involve a lengthy process, and result in increased expenses.
We have supply agreements relating to continued access to APIs with only two of the three providers of drug substances. However, to assure compliance with cGMP requirements, we have entered into Quality Agreements with all of our suppliers of APIs and related materials. We also have quality and service agreements with our third-party laboratories who provide the analytical testing and related services needed to support manufacture of our drug product. If we do not maintain these manufacturing and service relationships that are important to us and are not able to identify replacement suppliers, vendors and laboratories, or develop our own manufacturing capabilities, our ability to obtain regulatory approval for our products could be impaired or delayed and our costs could substantially increase. Even if we are able to find replacement manufacturers, suppliers, vendors and service providers when needed, we may not be able to enter into agreements with them on terms and conditions favorable to us or there could be a substantial delay before such manufacturer, vendor or supplier, or a related new facility is properly qualified and registered with the FDA or other foreign regulatory authorities. The process of changing a supplier could have an adverse impact on our current clinical development programs if supplies of drug substances, materials or excipients on hand are insufficient to satisfy demand. Such delays could have a material adverse effect on our development activities and our business.
We plan to rely on third parties to manufacture our lyophilized KL4 surfactant and manufacture and assemble our medical devices, which exposes us to risks that may affect our ability to maintain supplies of our clinical materials and ADSs and could potentially delay our research and development activities, as well as eventual regulatory approval and commercialization of our drug product candidates.
Our manufacturing strategy for AEROSURF includes manufacturing our lyophilized KL4 surfactant and our ADS using third-party CMOs. Technology transfers of our manufacturing process and our planned future reliance on CMOs exposes us, among other things, to the following risks:
•
we may be unable to identify manufacturers with whom we might establish appropriate arrangements on acceptable terms, if at all, because the number of potential CMOs is limited and, after a product candidate is approved, the FDA must approve any transfer to a different CMO. This approval could require one or more pre-approval inspections as well as a potentially lengthy qualification process. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our approved products after receipt of FDA approval. To qualify and receive regulatory approval for a new manufacturer could take as long as 2 years;
•
we may implement a plan to execute a technology transfer of our manufacturing process to a CMO and, after investing significant time and resources, learn that the CMO we chose is unable to successfully complete the technology transfer and thereafter manufacture our products in accordance with our plan;
•
CMOs might be unable to manufacture our products in the volume and to our specifications to meet our clinical and commercial needs, or we may have difficulty scheduling the production of drug product and devices in a timely manner to meet our timing requirements;
•
CMOs may not perform as agreed, or may not remain in the CMO business for a lengthy time, or may refuse to renew an expiring agreement as expected, or may fail timely to produce a sufficient supply to meet our commercial and/or clinical needs;
•
CMOs are subject to ongoing periodic unannounced inspection by the FDA, international health authorities, registered Notified Body(ies), the Drug Enforcement Administration, and/or corresponding state agencies to ensure strict compliance with cGMP and/or QSR and other government regulations and corresponding international standards. Although we do not have control over the day-to-day operations of any CMO we may use, we are responsible for ensuring compliance with these regulations and standards, and the failure of a CMO to have a compliance status acceptable to the FDA or other regulatory authorities would delay approval of our product candidates;
•
if we desire to make our drug products and/or devices available outside the U.S. for clinical or commercial purposes, our CMOs would become subject to, and may not be able to comply with, corresponding manufacturing and quality system regulations or standards of the various foreign regulators having jurisdiction over our activities abroad. Such failures (such as in-country quality testing) could result in not only a loss of approved supply to that country, but a total loss of a lot (or lots) of materials globally and could restrict our ability to execute our business strategies;
•
if any third-party manufacturer makes improvements in the manufacturing process for our products, we may not have rights to, or may have to share, the intellectual property rights to any such innovation. Such an event could limit our ability to conduct technology transfers to alternate and successor manufacturers. We may be required to pay fees or other costs for access to such improvements; and
•
we may have difficulty implementing changes or modifications to our manufacturing processes that may be required by the FDA or foreign regulator, if, for example, such changes would burden our CMO or otherwise disrupt operations, or our CMO could impose significant financial terms to implement any such change that could adversely affect our business. Failure to achieve such required changes or modifications could delay or prevent our gaining regulatory approval for our product candidates, or prevent us from continuing to market our approved products, which would have a material adverse effect on our business, financial condition and operations.
Each of the foregoing risks and others could delay our development programs and, if approved, commercial manufacturing plans, limit our ability to maintain continuity of supply for our approved products, delay or impair the approval, if any, of our product candidates by the FDA, or result in higher costs or deprive us of potential product revenues.
Manufacturing problems potentially could cause us to experience shortages of APIs, lyophilized KL4 surfactant drug product, medical devices, and materials, or delay our preclinical or clinical development programs, which could have a material adverse effect on our business.
The manufacture of pharmaceutical and medical device products requires significant expertise and compliance with strictly enforced federal, state and foreign regulations. We, our CMOs or our materials and drug substances suppliers may experience manufacturing or quality control and assurance problems that could result in a failure to maintain compliance with cGMP and QSR requirements, or those of foreign regulators or notified bodies, which is necessary to continue manufacturing of our drug products, materials, drug substances, or medical devices. Other problems that may be encountered include:
•
the need to make necessary modifications to maintain a qualified facility;
•
difficulties with production and yields, including manufacturing and completing all required release testing on a timely basis to meet demand;
•
quality control and assurance problems related to, among other things, in-process monitoring and controls, and release and stability testing of our drug product, or materials and drug substances;
•
casualty damage to a facility; and
•
shortages of qualified personnel.
Such a failure could result in product production and shipment delays or an inability to obtain materials or drug substance supplies.
We manufacture our lyophilized KL4 surfactant product candidate, our ADS and aerosol-conducting airway connector using CMOs. If manufacturing or quality control problems should arise at the facilities of a CMO or a manufacturer of our APIs and materials suppliers, such problems may require potentially complex, time-consuming and costly comprehensive investigations to determine the root causes of such problems and may require detailed and time-consuming remediation efforts, which can further delay a return to normal manufacturing and production activities. Any failure by our CMOs or by the manufacturing operations of any of our suppliers to comply with applicable regulatory manufacturing standards, including cGMP or QSR, or other FDA or similar foreign regulatory requirements could adversely affect our ability to manufacture our drug product and medical device candidates, which could have a material adverse effect on our ability to produce our drug and medical device products or obtain approval of our product candidates, and potentially adversely affect our research activities and our business and financial condition. A number of factors could cause interruptions in supply, including:
•
equipment malfunctions or failures;
•
lack of availability of raw materials or subcomponents,
•
technology malfunctions;
•
interruption of material availability;
•
work stoppages or slowdowns;
•
damage to or destruction of the facility;
•
regional power shortages; and
•
product tampering.
In connection with our drug product manufacturing activities, we own certain specialized manufacturing equipment installed at our CMO. However, we do not have fully-redundant systems and equipment to respond promptly in the event of a significant loss at a CMO's manufacturing operations. Under certain conditions, we may be unable to produce our drug product and medical devices at the required volumes or to appropriate standards, if at all. If we are unable to successfully maintain our manufacturing capabilities and at all times comply with cGMP and QSRs, it will adversely affect our development activities and clinical development programs.
For the development and, if approved, commercialization of AEROSURF, we will depend upon third parties to manufacture and assemble our ADS. If we are unable to identify and subsequently retain qualified manufacturers and assemblers, our ability to implement our plans for the further development of AEROSURF and, if approved, commercialization of AEROSURF, will be adversely affected and both AEROSURF and our other aerosolized KL4 surfactant products could be severely impacted.
For AEROSURF, we plan to rely on CMOs to manufacture and assemble the NextGen ADS and all subcomponents to support any preclinical experiments, our ongoing and planned clinical trials and, if approved, commercial activities. The ADS includes a durable device and disposable elements that are either manufactured or cleaned in an environmentally-controlled area. Each ADS is tested for conformance to designated product specifications during assembly must be quality control tested prior to release and monitored for conformance to designated product specifications.
We worked with Battelle to develop a clinic-ready ADS to support our phase 2 clinical development program and currently are collaborating on design verification of our NextGen ADS. Although we have identified a CMO that we expect will be able to produce and assemble the ADS for our future development activities, as with many device development initiatives, there is a risk that, even if we are able to finalize a technology transfer and related agreement, the CMO that we have selected may be unable to consistently manufacture and assemble the subcomponents of our ADS to our specified standards. In addition, the manufacturers and assemblers that we identify may be unable to timely comply with FDA, or other foreign regulatory agency regulatory manufacturing requirements. If we do not successfully identify and enter into agreements with manufacturers and assemblers that have the required expertise to produce our NextGen ADS, it will adversely affect our timeline for the development and, if approved, commercialization of AEROSURF.
Risks Related to our Business and Strategy
We are continually evaluating our business strategy and may modify this strategy in light of developments in our business and other factors.
We continually evaluate our business strategy and plan to modify our strategy as necessary to achieve our objectives. The execution of a clinical development program is complex and involves the cooperation of many individuals and entities, including third parties that we may not be able to control, and requires the coordination of a number of elements, any one of which could involve delays or unforeseen events or circumstances that require adjustment or the development of alternative strategies. If we encounter such events or circumstances, we will change our strategy and plans if we believe that such a change will be in our best interest. There can be no assurance even if we alter our strategy or plans, that we will be successful, or that we will secure regulatory approval for our products and execute any product launches effectively and on time, if at all, in all markets that we may identify. To respond to changing circumstances, we may also expand or alter our research and development activities from time to time, and allocate resources to work on development of different products or may pace, delay or halt the development of potential product programs. As a result of changes in our strategy, we may also change or refocus our existing drug development and manufacturing activities or our plans for commercialization of our products, if approved. These decisions could require changes in our facilities and personnel and restructuring various financial arrangements. There can be no assurances that any product development or other changes that we implement will be successful or that, after implementation of any such changes, that we will not refocus our efforts on new or different objectives.
We have limited resources, which could impair our ability to manage our diverse activities and accomplish our business objectives.
The demands on our management team have grown over time. Our capital resource and budget constraints have put our management under pressure to execute our business strategy with limited resources. Furthermore, as a result of our limited capital resources, our management team has had to dedicate an increasing amount of time towards raising capital, which diverts their attention away from our AEROSURF development program.
Our development program for AEROSURF has progressed to a planned bridge study following our phase 2b clinical trial. Over time, our planned clinical trials are expected to enroll more patients, be conducted in a larger number of sites in the U.S., Canada, EU, Latin America, and Asia Pacific and will require more of our management resources to be successful. In addition to the AEROSURF development program, from time to time, we support studies of other potential KL4 surfactant pipeline products. To assist us with the development and, if approved, commercialization of our products, we have also devoted resources to identifying potential strategic partnerships, collaboration arrangements and similar transactions, in the U.S., EU, Latin America and other potential markets. These activities have and will continue to place additional significant demands on our management and our financial and operational resources, and will require that we continue to develop and improve our financial, operational and other internal controls. From time to time, we will be required to make difficult decisions on how to best allocate our resources.
If we are successful in identifying potential strategic or collaboration partners, we will be required to dedicate management resources and implement controls to establish alliance structures, and potentially add a layer of complexity to our operations. We plan to identify potential strategic alliances and collaboration arrangements that would have the resources and capabilities to not only help develop our products but would also distribute our products either globally or in specific regions or countries. This expansion could further increase the challenges involved in implementing appropriate operational and financial systems, expanding manufacturing and production capacity, expanding infrastructure and capabilities, and providing adequate training and supervision to maintain high quality standards. We believe that the significant challenges associated with these potential activities will require us to recruit, train and integrate skilled management, scientific, medical and operations personnel; establish and effectively manage strategic partnerships and collaboration arrangements to support our development and commercialization activities; and provide for manufacturing, including analytical testing and distribution capabilities, for our products, and clinical capabilities for our products under development. Our inability to grow our business effectively and appropriately or otherwise adapt to these challenges would cause our business, financial condition and results of operations to suffer.
Risks Related to Strategic and Other Transactions
Our plan to use strategic alliances and collaboration arrangements to leverage partner capabilities may not be successful if we are unable to integrate their capabilities with our own or if our partners' capabilities do not meet our expectations. Moreover, if our strategic alliances or collaboration arrangements should require greater focus and attention on our part than we expect, we may be forced to divert our limited resources away from our own development programs, which could have a material adverse effect on our development activities and plans.
As part of our strategy, we intend to continue to evaluate opportunities for strategic alliances and collaboration arrangements, although there can be no assurance that we would be able to consummate any strategic alliances and collaboration arrangements. For these efforts to be successful, we must first identify partners whose capabilities complement and integrate well with ours. Among other things, technologies or know how to which we gain access may prove ineffective or unsafe. Ownership of these technologies or know-how may be disputed. The agreements that grant us access to such technologies may expire and may not be renewable or could be terminated if our partners or we do not meet our respective obligations. In addition, our partners may provide certain services for us, such as product development support or distribution or commercialization services. These agreements may be subject to differing interpretations and we and our partners may not agree on the appropriate interpretation or specific requirements. Among other things, our partners may prove difficult to work with, less effective than we originally expected or unable to satisfy their financial and other commitments to us. Failure of our partners to perform as needed could place us at a competitive disadvantage. Moreover, if we are forced to allocate unplanned resources to bolster our strategic alliances or collaboration arrangement, our limited resources may be diverted from our core activities, which could have a material adverse effect on our development activities and plans.
We may enter into strategic alliances or other collaboration arrangements, which could expose us to risks associated with the transfer of control to third parties and may require that we transfer rights to our products to our partners and collaborators. In addition, if such arrangements potentially provide for the marketing and sale of our products, if approved, including AEROSURF, we will be exposed to additional risks.
To support our AEROSURF development program and potentially the commercial introduction of AEROSURF, we seek to identify potential strategic partners who could provide local development and commercial expertise as well as financial resources (potentially in the form of upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses), although there can be no assurance that we will ultimately secure such an alliance on acceptable terms, if at all.
If we succeed in entering into one or more strategic alliances or other collaboration arrangements, our ability to execute our operating plan will depend upon numerous factors, including the performance of the strategic partners and collaborators with whom we may engage. Under these arrangements, our partners may control key decisions relating to the development and, if approved, commercialization of our products and may require that we transfer to them important rights to our products and/or product candidates. We may not be able to control the timing or resources that our partners devote to our arrangement. In addition, if we or our strategic alliance partners, distributors or collaborators breach or terminate our agreements or otherwise fail to perform their obligations under our distribution or commercialization arrangements to our satisfaction, we may not achieve our goals within the desired time, if at all, and projected sales and our revenues would suffer.
If a strategic partner, distributor or collaborator were to enter into a business combination or other significant transaction, such transaction may adversely affect a partner or collaborator's willingness or ability to perform its obligations, which would adversely affect our business. We also may incur additional expense to terminate such arrangements and to identify and enter into arrangements with replacement partners or collaborators. Moreover, we may have difficulty enforcing our rights in a foreign jurisdiction. Upon termination of any such agreements, we would need to identify other partners or collaborators or develop our own internal capabilities to develop and commercialize our products, which could involve a significant investment and a potentially unacceptable delay. If we, our partners or our collaborators fail to conduct our respective activities in a timely manner, or otherwise breach or terminate the agreements that make up our arrangements, or if a dispute should arise under our agreements or collaboration arrangements, such events could impair our ability to commercialize or develop our products in a competitive and timely manner and would have a material adverse effect on the commercialization of our products.
In entering into any collaboration arrangement, we also will need to consider whether such collaboration could impair our ability to enter into other strategic transactions, including a potential merger or acquisition. We may find it difficult, for example, to identify and enter into commercialization agreements acceptable terms, if at all, in limited territories in the EU, where we have a collaboration with Laboratorios del Dr. Esteve, S.A. (Esteve) in a territory consisting of Andorra, Greece, Italy, Portugal and Spain (the Esteve Territory). If we identify potential collaborators for all or parts of the remainder of the EU, strategic differences could arise, which could result in disputes or otherwise impede the progress of our collaborations. Moreover, if a collaborator or its sublicensees does not meet their obligations, our arrangements may not be successful, and, as a result, we may not receive any revenues.
Risks Related to Healthcare Regulation, Quality and Safety
Issues with product quality could have an adverse effect on our business, subject us to regulatory actions and costly litigation and cause a loss of confidence in our products or us.
Our success depends upon our ability to develop quality products. Our future revenues will depend upon our ability to develop, maintain, and continuously improve our quality management system, including an objective and systematic process for monitoring and the evaluation of key process indicators. Quality and safety issues may occur with respect to any of our products. We are dependent upon third-party suppliers, manufacturers and service providers to support our development and commercialization activities. Third-party suppliers are required to comply with our quality standards. Failure of a third-party supplier to provide compliant raw materials or supplies could result in delays or other quality-related issues. A quality or safety issue could have an adverse effect on patients receiving our drug products and on our business, financial condition and results of operations and may result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals and licenses, restrictions on operations or withdrawal of existing approvals and licenses. An inability to address a quality or safety issue in an effective and timely manner may also cause negative publicity, a loss of customer confidence in our current or future products or us, which may result in the loss of sales and difficulty in commercializing our products.
Adverse safety events or restrictions on use and safety warnings for our products can negatively affect our business, potential future product sales and stock price.
Adverse safety events involving our products under development and our marketed products may have a negative impact on our business. Safety issues with our products could create product liability and could cause additional regulatory scrutiny and requirements for additional labeling, withdrawal of products from the market, and the imposition of fines or criminal penalties. Adverse safety events may also damage physician and patient confidence in our products and our reputation. Any of these could result in liabilities, loss of revenue, material write-offs of inventory, material impairments of intangible assets, goodwill and fixed assets, material restructuring charges and other adverse impacts on our results of operations.
If we enter into strategic alliances or collaboration arrangements, failure of a strategic partner or collaborator to maintain appropriate risk management and adverse event reporting controls exposes us to additional risk.
Regulatory authorities are making greater amounts of stand-alone safety information directly available to the public through periodic safety update reports, patient registries and other reporting requirements. The reporting of adverse safety events involving our products or products similar to ours or any public rumors about such events may give rise to claims against us and may also adversely affect our ability to market our products and conduct our clinical development programs.
Our activities are subject to various and complex laws and regulations, and we are susceptible to a changing regulatory environment. Any failure to comply could adversely affect our business, financial condition and results of operations.
Our products and our operations are regulated by numerous government agencies, both inside and outside the U.S. Our drug product candidates and medical devices must undergo lengthy and rigorous testing and other extensive, costly and time-consuming procedures mandated by the FDA and foreign regulatory authorities. Our facilities and those of our third-party providers must pass inspection and/or be approved or licensed prior to production and remain subject to inspection at any time thereafter. Failure to comply with the requirements of the FDA or other regulatory authorities, including a failed inspection or a failure in our post-marketing reporting, could result in warning or untitled letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of our products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses. Any of these actions could damage our reputation and have a material adverse effect on our sales. In addition, requirements of the FDA and other regulatory authorities may change and implementing any additional compliance requirements may increase our costs, or force us or our third-party providers to suspend production, which could result in a shortage of our approved product or delays in the commercial introduction of our new product candidates, if approved.
The Health Care Reform Law includes provisions, referred to as the federal "Open Payments" law (previously referred to as the "Sunshine Law"), that establish new reporting and disclosure requirements for pharmaceutical and medical device manufacturers. Under the law, pharmaceutical and device manufacturers are required to annually report various types of payments and other transfers of value to physicians and teaching hospitals. Applicable manufacturers are to report data to the U.S. Centers for Medicare and Medicaid Services (CMS) on an annual basis, and the data are made publicly available via a CMS website. Inaccurate or incomplete reports may be subject to enforcement, and it is expected that data will be subject to significant public scrutiny. Like the federal Open Payments law, several states have existing laws that require manufacturers to report transfers of value to select healthcare providers licensed within the state, or even go so far as to prohibit certain marketing related activities. Other states, such as California, Nevada, Massachusetts and Connecticut, require pharmaceutical and/or device companies to implement compliance programs or marketing codes. In others, it is possible that we will be subject to the state's reporting requirements and prohibitions. Compliance activities with respect to these measures could increase our costs and adversely affect business operations.
If AEROSURF is approved for commercial sale, we will be required to comply with not only the requirements of the FDA and potentially international regulators, but will also become subject to various federal, state and international laws regulating the sales, marketing, and distribution of healthcare-related products. These laws govern such activities as our relationships with healthcare providers, the promotion of our products, and pricing of prescription drug products and medical devices. The sales and marketing of products and relationships that pharmaceutical and medical device companies have with healthcare providers are under increasing scrutiny by federal, state and foreign government agencies. The FDA and other federal regulators have increased their enforcement activities with respect to the Anti-Kickback Statute, False Claims Act, off-label promotion of products, and other healthcare related laws, antitrust and other competition laws. The Department of Justice (DOJ) also has increased its focus on the enforcement of the U.S. Foreign Corrupt Practices Act (FCPA), particularly as it relates to the conduct of pharmaceutical companies. Foreign governments have also increased their scrutiny of pharmaceutical companies' sales and marketing activities and relationships with healthcare providers.
Of particular importance, federal and state anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. These laws can be complicated, are subject to frequent change and may be violated unknowingly. In addition, the absence of guidance for some of these laws and the very few court decisions addressing industry practices increase the likelihood that our practices could be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented, for payment to the government (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. In addition, a number of states require that companies implement compliance programs or comply with industry ethics codes, adopt spending limits, and report to state governments any gifts, compensation, and other remuneration provided to physicians. Many pharmaceutical, device, and other health care companies have been investigated and prosecuted for alleged violations of these laws. Sanctions under these laws may include civil monetary penalties, exclusion of a manufacturer's products from reimbursement under government programs (including Medicare and Medicaid), criminal fines, and imprisonment. Companies that have chosen to settle these alleged violations have typically paid multi-million-dollar fines to the government and agreed to abide by corporate integrity agreements, which often include significant and costly burdens. Under the federal False Claims Act and related state laws, private individuals may bring similar actions. In addition, an increasing number of state laws require manufacturers to report to the state certain pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. Given the lack of clarity in laws and their implementation, our reporting actions could be subject to the penalty provisions of the state authorities.
In addition, failure to comply with domestic and international privacy and security laws can result in the imposition of significant civil and criminal penalties. The costs of compliance with these laws, including protecting electronically stored information from cyber-attacks, and potential liability associated with failure to do so could adversely affect our business, financial condition and results of operations. We are subject to various domestic and international privacy and security regulations, including but not limited to the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or collectively, HIPAA. HIPAA mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than HIPAA.
We are continually evaluating our compliance programs, including policies, training and various forms of monitoring, designed to address the outlined above. However, no compliance program can mitigate risk in its entirety. Violations or allegations of violations of these laws may result in large civil and criminal penalties, debarment from participating in government programs, diversion of management time, attention and resources and may otherwise have a material adverse effect on our business, financial condition and results of operations.
The political and healthcare policy environment is becoming more challenging for pharmaceutical companies and medical device manufacturers and may adversely affect our business.
Political, economic and regulatory influences globally are subjecting the healthcare industry to potential fundamental challenges that could substantially affect our business and results of operations. Government and private sector initiatives to limit the growth of healthcare costs, including price regulation, competitive pricing, coverage and payment policies, comparative effectiveness of therapies, technology assessments and managed-care arrangements, are continuing to arise in many countries where we potentially may seek to do business, including the U.S. There is increasing pressure on pricing, reimbursement and demands for value-based data to gain access to patients and healthcare funds globally. This may increase the costs of development, risks of commercialization and overall value of the opportunity.
Given the increasing uncertainty in the healthcare and pharmaceutical industries, capital investment in our industry and our ability to attract capital investment is becoming more challenging. This trend, if continued, may restrict or impair our ability to gain necessary funding for continued development and, if approved, commercialization of our products.
The RDS market and sales of therapies to treat RDS are global (with most occurring outside the U.S.). Political, trade policy, currency and conflicts can arise which may affect our ability to develop and market globally.
Other Risks Affecting our Business
Lee’s Pharmaceutical Holdings Limited has a significant influence on our business operations.
As of April 3, 2018, Lee's, beneficially owns, through its affiliates LPH and LPH II, approximately 60% of our issued and outstanding common stock, including shares issuable upon conversion of our Preferred Stock and shares issuable upon exercise of warrants. Because Lee's is by far our largest shareholder and owns a majority of our outstanding common stock, it has the voting power to approve any matter that requires shareholder approval by written consent without a stockholder meeting. As a result, Lee's has significant influence over our business operations and capital raising activities, and therefore, Lee's could cause corporate actions to be taken even if the interests of Lee's conflict with the interests of our other stockholders. This concentration of voting power could have the effect of deterring or preventing institutional investor interest in the Company or a change in control that might be beneficial to our other stockholders.
If our business development activities are unsuccessful, our business could suffer and our financial performance could be adversely affected.
As part of our long-term growth strategy, we engage in business development activities intended to identify strategic opportunities, including potential strategic alliances, joint development opportunities, acquisitions, technology licensing arrangements and other similar opportunities. Such opportunities may result in substantial investments in our business. Our success in developing products or expanding into new markets from such activities will depend on a number of factors, including our ability to find suitable opportunities for investment, alliance or acquisition; whether we are able to complete an investment, alliance or acquisition on terms that are satisfactory to us; the strength of our underlying technology, products and our ability to execute our business strategies; any intellectual property and litigation related to these products or technology; and our ability to successfully execute the investment, alliance or acquisition into our existing operations, including to fund our share of any in-process research and development projects. If we are unsuccessful in our business development activities, we may be unable to secure needed capital and expertise to support our development programs and our financial condition could be adversely affected.
The financial and operational projections that we may make from time to time are subject to inherent risks.
The projections that our management may provide from time to time (including, but not limited to, those relating to the cost or timing of clinical development programs, product approval, production and supply dates, commercial launch dates, and other financial or operational matters) reflect numerous assumptions developed by management, including assumptions with respect to our specific as well as general business, economic, market and financial conditions and other matters, all of which are difficult to predict and many of which are beyond our control. Accordingly, there is a risk that the assumptions made in preparing the projections, or the projections themselves, will prove inaccurate. There will be differences between actual and projected results, and actual results may be materially different from those contained in the projections. The inclusion of the projections and management’s expectations in (or incorporated by reference in) this Annual Report on Form 10-K should not be regarded as an indication that we or our management or representatives considered or consider the projections to be a reliable prediction of future events, and the projections should not be relied upon as such.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, which will likely result in significant legal and accounting expense and diversion of management resources, and current and potential stockholders may lose confidence in our financial reporting and the market price of our stock will likely decline.
We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our disclosure controls and to disclose any changes in internal controls.
Any failure to maintain internal controls could adversely affect our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. If we do not file our financial statements on a timely basis as required by the SEC, we could face severe consequences. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. We can give no assurance that material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, in the future our controls and procedures may no longer be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements. Responding to inquiries from the SEC, regardless of the outcome, are likely to consume a significant amount of our management resources and cause us to incur significant legal and accounting expense. Further, many companies that have restated their historical financial statements have experienced a decline in stock price and related stockholder lawsuits.
Our corporate compliance program cannot ensure that we are in compliance with all applicable laws and regulations affecting our activities, including in the jurisdictions in which we may sell our products, if approved, and a failure to comply with such regulations or prevail in litigation related to noncompliance could harm our business.
Many of our activities, including the research, development, manufacture, sale and marketing of our products, are subject to extensive laws and regulation, including without limitation, health care "fraud and abuse" laws, such as the federal False Claims Act, the federal Anti-Kickback Statute, and other state and federal laws and regulations. We have developed and implemented a corporate compliance policy and oversight program based upon what we understand to be current industry best practices, but we cannot assure you that this program will protect us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such investigations, actions or lawsuits are instituted against us, and if we are not successful in defending or disposing of them without liability, such investigations, actions or lawsuits could result in the imposition of significant fines or other sanctions and could otherwise have a significant impact on our business.
The increasing use of social media platforms presents new risks and challenges.
Social media is increasingly being used to communicate about milestones and advances in development, market need and opportunity, drug products and related diseases. Social media practices in the biopharmaceutical industry continue to evolve and regulations relating to such use are not always clear or responsive to the changing technological environment. There has been an emerging scrutiny and enforcement of investor relations communication by the FDA as well. This evolution creates uncertainty and risk of noncompliance with regulations applicable to our business. For example, patients may use social media channels to comment on the effectiveness of a product or to report an alleged adverse event. When such disclosures occur, there is a risk that we fail to monitor and comply with applicable adverse event reporting obligations or we may not be able to defend ourselves or the public's legitimate interests in the face of political or market pressures generated by social media due to restrictions on what we may say about our products. There is also a risk of inappropriate disclosure of sensitive information or negative or inaccurate posts or comments about us on any social networking website. If any of these events were to occur or we otherwise fail to comply with applicable regulations, we could incur liability, face overly restrictive regulatory actions or incur other harm to our business.
Failure in our information technology systems could disrupt our operations and cause the loss of confidential information, customers and business opportunities.
In the ordinary course of our business, we and our third-party contractors maintain sensitive data on our and their respective networks, including our intellectual property and proprietary or confidential business information relating to our business and that of our clinical trial participants and business partners. In particular, we rely on contract research organizations and other third parties to store and manage information from our clinical trials, including our AEROSURF phase 2 clinical development program. The secure maintenance of this sensitive information is critical to our business and reputation. Despite the implementation of security measures, our internal computer systems and those of our third-party contractors are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, human error, natural disasters, terrorism, war and telecommunication and electrical failures. In particular, we believe that companies and other entities and individuals have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access to systems and information. These threats can come from a variety of sources, ranging in sophistication from an individual hacker to a state-sponsored attack. Cyber threats may be generic, or they may be custom-crafted against our information systems or those of our third-party contractors. For information stored with our third-party contractors, we rely upon, and the integrity and confidentiality of such information is dependent upon, the risk mitigation efforts such third-party contractors have in place. In the recent past, cyber-attacks have become more prevalent and much harder to detect and defend against. Our and our third-party contractors’ respective network and storage applications may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. It is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. System failures, data breaches and any unauthorized access or disclosure of our information or intellectual property could compromise our intellectual property and expose sensitive business information. System failures or accidents or security breaches could cause interruptions in our operations, and could result in a material disruption of our clinical and commercialization activities and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. A data security breach could also lead to public exposure of personal information of our clinical trial patients and others. Cyber-attacks could cause us to incur significant remediation costs, result in product development delays, disrupt key business operations and divert attention of management and key information technology resources. The loss of clinical trial data could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate public disclosure of confidential or proprietary information, we could incur liability as a result of legal claims or proceedings, under laws that protect the privacy of personal information, regulatory penalties. Furthermore, our product research, development and commercialization efforts could be delayed.
A catastrophic event at our Warrington, Pennsylvania facility or any of the facilities used by our third-party manufacturers would prevent us from producing our drug product candidates and/or medical devices.
All of our facilities are located at our headquarters in Warrington, Pennsylvania. We maintain our analytical testing and device development laboratories in Warrington, Pennsylvania. We depend upon third-party manufacturers and laboratories, to manufacture our lyophilized KL4 surfactant, our AFECTAIR device and our ADS and perform important API and drug product release testing and stability work. We expect initially to manufacture each of these products at a single source facility. If a catastrophic event occurred at our headquarters facility or the facilities of any of our third-party manufacturers and laboratories, such as a fire, flood or tornado, many of those products could not be produced until the manufacturing portion of such facility and the service laboratory was restored and cleared by the FDA. With respect to the analytical laboratory at our headquarters facility, any interruption in release and ongoing stability testing could have an adverse impact on our inventories needed to support our ongoing clinical activities and, if approved, commercial activities. We have obtained insurance to protect against certain business interruption losses. However, there can be no assurance that any such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all.
If we cannot protect our intellectual property, other companies could use our technology in competitive products. Even if we obtain patents to protect our products, those patents may not be sufficiently broad or they may expire and others could then compete with us.
We seek patent protection for our drug and device products and product candidates to prevent others from commercializing equivalent products in substantially less time and at substantially lower expense. The pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Our success will depend in part on our ability, and that of parties from whom we license technology, to successfully obtain patents, defend our patents, protect our trade secrets, and otherwise prevent others from infringing our proprietary rights.
The patent position of companies relying upon biotechnology is highly uncertain and involves complex legal and factual questions for which important legal principles are unresolved. To date, the United States Patent and Trademark Office (USPTO) has not adopted a consistent policy regarding the breadth of claims that is accorded in biotechnology patents or the degree of protection that these types of patents afford. As a result, there are risks that we may not secure proprietary rights to products or processes that appear to be patentable.
The parties who licensed technologies to us and we have filed various U.S. and foreign patent applications with respect to the products and technologies under our development, and the USPTO and foreign patent offices have issued patents with respect to our products and technologies. These patent applications include international applications filed under the Patent Cooperation Treaty. Our pending patent applications, as well as those we may file in the future or those we may license from third parties may not result in the USPTO or foreign patent office issuing patents. In addition, if patent rights covering our products are not sufficiently broad, they may not provide us with sufficient proprietary protection or competitive advantages against competitors with similar products and technologies. Furthermore, even if the USPTO or foreign patent offices were to issue patents to us or our licensors, others may challenge the patents or circumvent the patents, or the patent office or the courts may invalidate the patents. Thus, any patents we own or license from third parties may not provide us any protection against competitors.
The patents that we hold have a limited life. We initially have licensed a series of patents for our KL4 surfactant technology from J&J and its wholly-owned subsidiary Ortho Pharmaceutical Corporation (Ortho Pharmaceutical), which have been important to our strategy of commercializing our KL4 surfactant products. These patents have all expired. However, during the course of our development activities, we have filed, and when possible and appropriate, will file, other patent applications with respect to our products and processes in the U.S. and in foreign countries. Certain of such patents related to lyophilized KL4 surfactant have issued in the U.S., Europe and elsewhere and will expire in March 2033. For our aerosolized KL4 surfactant, we hold worldwide exclusive licenses from Philip Morris USA Inc. (PMUSA) and Philip Morris Products S.A. (PMPSA) to the proprietary aerosol technology for use with pulmonary surfactants alone or in combination with other products for all respiratory diseases. Our exclusive license in the U.S. also extends to other (non-surfactant) drugs to treat certain pediatric and adult respiratory indications in hospitals and other health care institutions. The proprietary aerosol technology patents expire on various dates beginning in May 2016 and ending as late as 2037. We may not be able to develop enhanced or additional products or processes that will be patentable under patent law and, if we do enhance or develop additional products that we believe are patentable, additional patents may not be issued to us.
Our technology platform consists solely of our proprietary KL4 surfactant technology, our proprietary aerosol technology, and our novel aerosol-conducting airway connector.
Our technology platform is based on the scientific rationale of using our KL4 surfactant technology, our proprietary aerosol technology and our novel aerosol-conducting airway connector and related componentry to treat life-threatening respiratory disorders and to serve as the foundation for the development of novel respiratory therapies and products. Our business is dependent upon the successful development and approval of our drug product candidates and our combination drug-device products based on these technologies. Any material problems with our technology platforms could have a material adverse effect on our business.
Intellectual property rights of third parties could limit our ability to develop and market our products.
Our success also depends upon our ability to operate our business without infringing the patents or violating the proprietary rights of others. In certain cases, the USPTO keeps U.S. patent applications confidential while the applications are pending. As a result, we cannot determine in advance what inventions third parties may claim in their pending patent applications. We may need to defend or enforce our patent and license rights or to determine the scope and validity of the proprietary rights of others through legal proceedings, which would be costly, unpredictable and time consuming. Even in proceedings where the outcome is favorable to us, they would likely divert substantial resources, including management time, from our other activities. Moreover, any adverse determination could subject us to significant liability or require us to seek licenses that third parties might not grant to us or might only grant at rates that diminish or deplete the profitability of our products. An adverse determination could also require us to alter our products or processes or cease altogether any product sales or related research and development activities.
If we cannot meet requirements under our license agreements, we could lose the rights to our products.
We depend on licensing agreements with third parties to maintain the intellectual property rights to our products under development. Presently, we have licensed rights from J&J, Ortho Pharmaceutical, PMUSA, PMPSA and The Scripps Institute. These agreements require us to make payments and satisfy performance obligations to maintain our rights under these licensing agreements. By their terms, all of these agreements last either throughout the life of the related patents or for a number of years after the first commercial sale of the relevant product. In addition, we are responsible for the cost of filing and prosecuting certain patent applications and maintaining certain issued patents licensed to us. If we do not meet our obligations under our license agreements in a timely manner, we could lose the rights to our proprietary technology. Finally, we may be required to obtain licenses to patents or other proprietary rights of third parties in connection with the development and use of our products and technologies. Licenses required under any such patents or proprietary rights might not be made available on terms acceptable to us, if at all.
We rely on agreements containing obligations regarding intellectual property, confidentiality and noncompetition provisions that could be breached and may be difficult to enforce.
Although we take what we believe to be reasonable steps to protect our intellectual property, including the use of agreements relating to the non-disclosure of our confidential and proprietary information and trade secrets to third parties, as well as agreements that provide for disclosure and assignment to us of all rights to the ideas, developments, improvements, discoveries and inventions of our employees, consultants, advisors and research collaborators while we employ them, such agreements can be difficult and costly to enforce. We generally seek to enter into these types of agreements with consultants, advisors and research collaborators; however, to the extent that such parties apply or independently develop intellectual property in connection with any of our projects, disputes may arise concerning allocation of the related proprietary rights. Such disputes often involve significant expense and yield unpredictable results.
Moreover, although all employees enter into agreements with us that include non-compete covenants, and our five senior executive officers have agreements that include broader non-competition covenants and provide for severance payments that are contingent upon the applicable employee’s refraining from competition with us, such non-compete provisions can be difficult and costly to monitor and enforce, such that, if any should resign, we may not be successful in enforcing our noncompetition agreements with them.
Despite the protective measures we employ, we still face the risk that:
•
agreements may be breached;
•
agreements may not provide adequate remedies for the applicable type of breach;
•
our trade secrets or proprietary know-how may otherwise become known;
•
our competitors may independently develop similar technology; or
•
our competitors may independently discover our proprietary information and trade secrets.
We depend upon key employees and consultants in a competitive market for skilled personnel. If we or our strategic partners or collaborators are unable to attract and retain key personnel, it could adversely affect our ability to develop and market our products.
We have assembled a team of qualified personnel to advance the AEROSURF development program. We have competed and will continue to compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is significant and attracting and retaining qualified personnel will be critical to our success, and any failure to do so successfully may have a material adverse effect on us.
We are highly dependent upon the members of our executive management team and our directors, as well as our consultants and collaborating scientists. Many of these individuals have been involved with us for many years, have played integral roles in our progress and we believe that they continue to provide value to us. A loss of any of our key personnel may have a material adverse effect on aspects of our business and clinical development and regulatory programs. We have entered into employment agreements with five executive officers, including our President and Chief Executive Officer, our Senior Vice President and Chief Medical Officer, our Senior Vice President and Chief Financial Officer, our Senior Vice President, General Counsel and Corporate Secretary, and our Senior Vice President, Human Resources. The loss of services from any of our executives could significantly adversely affect our ability to develop and market our products and obtain necessary regulatory approvals. Further, we do not maintain key man life insurance.
Our future success also will depend on the continued service of our key professional, scientific and management personnel and our ability to recruit and retain additional personnel. While we attempt to provide competitive compensation packages to attract and retain key personnel at all levels in our organization, many of our competitors have greater resources and more experience than we do, making it difficult for us to compete successfully for key personnel. We may experience intense competition for qualified personnel and the existence of non-competition agreements between prospective employees and their former employers may prevent us from hiring those individuals or subject us to lawsuits brought by their former employers.
Our industry is highly competitive and we have less capital and resources than many of our competitors, which may give them an advantage in developing and marketing products similar to ours or make our products obsolete.
Our industry is highly competitive and subject to rapid technological innovation and evolving industry standards. We compete with numerous existing companies in many ways. We need to successfully introduce new products to achieve our strategic business objectives. The development and acquisition of innovative products and technologies that improve efficacy, safety, patients’ and clinicians’ ease of use and cost-effectiveness involve significant technical and business risks. The success of new product offerings will depend on many factors, including our ability to properly anticipate and satisfy customer needs, adapt to new technologies, obtain regulatory approvals on a timely basis, demonstrate satisfactory clinical results, manufacture products in an economic and timely manner, and differentiate our products from those of our competitors. If we cannot successfully introduce new products, adapt to changing technologies or anticipate changes in our current and potential customers’ requirements, our products may become obsolete and our business could suffer.
We intend to market our products under development for the treatment of diseases for which other technologies and treatments are rapidly developing and, consequently, we expect new companies to enter our industry and that competition in the industry will increase. Many of these companies have substantially greater research and development, manufacturing, marketing, financial, and technology personnel and managerial resources than we have. In addition, many of these competitors, either alone or with their collaborative partners, have significantly greater experience than we do in developing products, preclinical testing and human clinical trials management, obtaining FDA approval and other regulatory approvals, and manufacturing and marketing products. Accordingly, our competitors may succeed in receiving FDA or foreign regulatory approval or commercializing products and obtaining patent protection before us. Our competitors may successfully secure regulatory exclusivities in various markets, which could have the effect of barring us or limiting our ability to market our products in such markets.
For the sale of commercial products, we will compete against companies with greater marketing and manufacturing capabilities that may successfully develop and commercialize products that are more effective or less expensive than our products. In addition, developments by our competitors may render our drug product candidates obsolete or noncompetitive.
We also face, and will continue to face, competition from colleges, universities, governmental agencies and other public and private research organizations. These competitive forces frequently and aggressively seek patent protection and licensing arrangements to collect royalties for technologies that they develop. Some of these technologies may compete directly with the technologies that we are developing. These institutions will also compete with us in recruiting highly qualified scientific personnel. We expect that therapeutic developments in the areas in which we are active may occur at a rapid rate and that competition will intensify as advances in this field are made. As a result, we need to continue to devote substantial resources and efforts to research and development activities.
The failure to prevail in litigation or the costs of litigation, including securities class actions, product liability claims and patent infringement claims, could harm our financial performance and business operations.
We are potentially susceptible to litigation. For example, as a public company, we may be subject to securities claims based on class actions, which generally seek unquantifiable damages and attorneys’ fees and expenses. There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations and financial condition.
Our business activities, including development, manufacture and, if our products are approved, marketing of our drug products and medical devices also exposes us to liability risks. Using our drug product candidates or medical devices, including in clinical trials, may expose us to product liability claims. Even if approved, our products may be subject to claims resulting from unintended effects that result in injury or death. Product liability claims alleging inadequate disclosure and warnings in our package inserts and medical device disclosures also may arise.
Product liability claims may be brought by individuals or by groups seeking to represent a class. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time.
We presently carry general liability, excess liability, products liability and property insurance coverage in amounts that are customary for companies in our industry of comparable size and level of activity. However, our insurance policies contain various deductibles, limitations and exclusions from coverage, and in any event might not fully cover any potential claims. There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost. A successful claim brought against us in excess of available insurance or not covered by indemnification agreements, or any claim that results in significant adverse publicity against us, could have an adverse effect on our business and our reputation.
We may be required to obtain additional product liability insurance coverage, including with locally-authorized insurers licensed in countries where we conduct our clinical trials, before initiating clinical trials; however, such insurance is expensive and may not be available when we need it. In the future, we may not be able to obtain adequate insurance, with acceptable limits and retentions, at an acceptable cost. Any product, general liability or product liability claim, even if such claim is within the limits of our insurance coverage or meritless and/or unsuccessful, could adversely affect the availability or cost of insurance generally and our cash available for other purposes, such as research and development. In addition, such claims could result in:
•
uninsured expenses related to defense or payment of substantial monetary awards to claimants;
•
a decrease in demand for our drug product candidates;
•
damage to our reputation; and
•
an inability to complete clinical trial programs or to commercialize our drug product candidates, if approved.
Moreover, the existence of a product liability claim could affect the market price of our common stock. In addition, as the USPTO keeps U.S. patent applications confidential in certain cases while the applications are pending, we cannot ensure that our products or methods do not infringe upon the patents or other intellectual property rights of third parties. As the biotechnology and pharmaceutical industries expand and more patents are applied for and issued, the risk increases that our patents or patent applications for our KL4 surfactant product candidates or our medical device and combination drug/device products may give rise to a declaration of interference by the USPTO, or to administrative proceedings in foreign patent offices, or that our activities lead to claims of patent infringement by other companies, institutions or individuals. These entities or persons could bring legal proceedings against us seeking to invalidate our patents, obtain substantial damages or enjoin us from conducting research and development activities.
Provisions of our Amended and Restated Certificate of Incorporation, as amended (Certificate of Incorporation), our Amended and Restated By-Laws (By-Laws) and Delaware law could deter a change of our management and thereby discourage or delay offers to acquire us.
Provisions of our Certificate of Incorporation, our By-Laws and Delaware law may make it more difficult for someone to acquire control of us or for our stockholders to remove existing management, and might discourage a third-party from offering to acquire us, even if a change in control or in management would be beneficial to our stockholders. For example, our Certificate of Incorporation allows us to issue shares of preferred stock without any vote or further action by our stockholders. Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. As a result, our Board of Directors could issue large blocks of preferred stock or authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, before the redemption of our common stock. Such provisions may make it costlier for a potential acquirer to engage in a business combination transaction with us. Provisions that have the effect of discouraging, delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock. Moreover, our obligations to the holders of preferred stock could limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. These preferential rights could also result in divergent interests between the holders of shares of preferred stock and holders of our common stock.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2.
PROPERTIES.
We maintain our principal executive offices at 2600 Kelly Road, Suite 100, Warrington, Pennsylvania 18976-3622, which consist of 21,189 square feet of space that we lease. In February 2018, as part of our effort to reduce cash outflows and conserve cash resources, we agreed to surrender 9,317 square feet to the landlord, reducing the size of our premises from 30,506 square feet to 21,189 square feet, and lowered our proportionate share of the building expense. Our base rent was adjusted effective January 1, 2019, as provided in the lease amendment; and our security deposit was reduced from $225,000 to $140,000, releasing $85,000 cash from a bank deposit account securing a letter of credit that we provided to the landlord as security. In addition, we agreed to cancel a right of first offer set forth in the lease and the landlord agreed to undertake at its expense the work required to separately demise the surrendered space.
At our leased premises, we maintain our corporate headquarters and operations, consisting of administration, research and drug and device development, clinical operations, regulatory affairs, and quality, as well as our analytical and technical support laboratory, which conducts release testing of all active pharmaceutical ingredients (APIs) as well as supportive research for our lyophilized and aerosolized KL4 surfactant. We also maintain a controlled medical device development laboratory that is used by our engineering team to conduct development activities for AEROSURF and our aerosol delivery technologies. We believe our current facilities are adequate for our needs in 2018.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS.
We are not aware of any pending or threatened legal actions to which we are a party or of which our property is the subject that would, if determined adversely to us, have a material adverse effect on our business and operations.
We have from time to time been involved in disputes and proceedings arising in the ordinary course of business. In addition, as a public company, we are also potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations or financial condition.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is quoted on the OTCQB market operated by the OTC Market Group under the symbol “WINT.” As of April 6, 2018, we had 80 holders of record of shares of our common stock, and there were 3,769,088 shares of our common stock issued and outstanding.
The following table sets forth the quarterly sales price ranges of our common stock for the periods indicated, as reported by Nasdaq through May 4, 2017 and as reported on the OTCQB from May 5, 2017 through December 31, 2017 (adjusted for the 1-for-20 reverse stock split that was effective December 22, 2017).
We have not paid dividends on our common stock and do not expect to declare and pay dividends on our common stock in the foreseeable future.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing activities, includes forward-looking statements that involve risks and uncertainties. You should review the “Forward Looking Statements” and “Risk Factors” sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis or elsewhere in the Annual Report on Form 10-K.
Management’s discussion and analysis of financial condition and results of operations (MD&A) is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. This item should be read in connection with our Consolidated Financial Statements for the year ending December 31, 2017 and notes thereto (Notes) included in this Annual Report on Form 10-K. See, “Item 8 - Financial Statements and Supplementary Data.”
Our discussion is organized as follows:
●
Company Overview and Business Strategy: this section provides a general description of our company and business plans.
●
Critical Accounting Policies: this section contains a discussion of the accounting policies that we believe are important to our financial condition and results of operations and that require the exercise of judgment and use of estimates on the part of management in their application. In addition, all of our significant accounting policies, including the critical accounting policies and estimates, are discussed in Note 4 to the accompanying consolidated financial statements.
●
Results of Operations: this section provides an analysis of our results of operations presented in the accompanying consolidated statements of operations, including comparisons of the results for the years ended December 31, 2017 and 2016.
●
Liquidity and Capital Resources: this section provides a discussion of our capital resources, future capital requirements, cash flows, potential sources of financing our activities, historical financing transactions, outstanding debt arrangements and commitments.
OVERVIEW
Windtree Therapeutics, Inc. (referred to as “we,” “us,” or the “Company”) is a biotechnology company focused on developing novel KL4 surfactant therapies for respiratory diseases and other potential applications. Surfactants are produced naturally in the lung and are essential for normal respiratory function and survival. Our proprietary technology platform includes a synthetic, peptide-containing surfactant (KL4 surfactant) that is structurally similar to endogenous pulmonary surfactant, and novel drug delivery technologies, including our proprietary aerosol delivery system (ADS), being developed to enable noninvasive administration of aerosolized KL4 surfactant at consistent and reproducible volumes suitable to deliver therapeutic dosages in a reasonable period of time. We are currently working with Battelle Memorial Institute (Battelle) to complete design verification procedures for a next generation (NextGen) ADS potentially for use in our remaining AEROSURF® development activities and, if approved, initial commercial activities. We believe that our proprietary technologies may make it possible to develop a pipeline of surfactant products to address a variety of respiratory diseases for which there are few or no approved therapies.
Our lead development program is AEROSURF (lucinactant for inhalation), an investigational combination drug/device product that we are developing to improve the management of respiratory distress syndrome (RDS) in premature infants who may not have fully developed natural lung surfactant and may require surfactant therapy to sustain life. The currently-available surfactants in the United States (U.S.) are administered using invasive endotracheal intubation and mechanical ventilation, each of which may result in serious respiratory conditions and other complications. To avoid these risks, many premature infants are initially treated with noninvasive respiratory support such as nasal continuous positive airway pressure (nCPAP). Unfortunately, nCPAP does not address the underlying surfactant deficiency and consequently, many premature infants respond poorly to nCPAP alone (typically within the first 72 hours of life) and may require delayed surfactant therapy with invasive intubation (an outcome referred to as “nCPAP failure”). If surfactant therapy could be administered noninvasively, neonatologists would be able to provide surfactant therapy to premature infants earlier in their course of treatment and without exposing them to the risks associated with intubation and mechanical ventilation.
AEROSURF is designed to administer aerosolized KL4 surfactant noninvasively and potentially meaningfully reduce the use of invasive endotracheal intubation and mechanical ventilation. We believe that AEROSURF, if approved, will allow for earlier treatment of premature infants who currently receive delayed surfactant therapy, decrease the morbidities and complications currently associated with surfactant administration, and reduce the number of premature infants who are subjected to invasive intubation and delayed surfactant therapy following nCPAP failure. We also believe that AEROSURF has the potential to address a serious unmet medical need and potentially provide transformative clinical and pharmacoeconomic benefits. Consistent with our belief, FDA has granted Fast Track designation for our KL4 surfactant (including AEROSURF) to treat RDS.
While we are focused primarily on AEROSURF, we are also assessing potential development pathways to potentially gain marketing approval for lyophilized KL4 surfactant as an intratracheal instillate for the treatment and/or prevention of RDS. Lyophilized KL4 surfactant may potentially provide benefits related to use, such as longer shelf life, reduced cold-chain requirements and lower viscosity. We have engaged with the FDA to discuss a potential development plan, trial design and regulatory plan for approval. If we can define an acceptable development program that is achievable from a cost, timing and resource perspective, we might seek approval to treat premature infants who, because they are unable to breathe on their own, cannot benefit from AEROSURF.
We also believe that our KL4 surfactant technology may potentially support a product pipeline to address a broad range of serious respiratory conditions in children and adults. We have received support, and plan to seek additional support, from the National Institutes of Health (“NIH”) and other government funding sources to explore the utility of our KL4 surfactant to address a variety of such respiratory conditions as acute lung injury (ALI), including acute radiation exposure to the lung (acute pneumonitis and delayed lung injury), chemical-induced ALI, and influenza-induced ALI; as well as chronic rhinosinusitis, complications of certain major surgeries, mechanical ventilator-induced lung injury (often referred to as VILI), pneumonia, and diseases involving mucociliary clearance disorders, such as chronic obstructive pulmonary disease (COPD) and cystic fibrosis (CF). Although there can be no assurance, we may in the future support development activities to establish a proof-of-concept and, if successful, thereafter determine whether to seek strategic alliances or collaboration arrangements or pursue other financial alternatives to fund further development and, if approved, commercialization of additional KL4 surfactant indications.
We have limited resources and no operating revenues and believe that our ability to continue as a going concern in the longer term is highly dependent upon our ability to successfully complete development of our NextGen ADS, execute the planned AEROSURF bridge study to be in a position to initiate an AEROSURF phase 3 clinical program, and attract interested investors, strategic partners and collaborators. Because our AEROSURF phase 2b program did not meet its primary endpoint, due, we believe, to a higher-than-anticipated rate of treatment interruptions experienced with the phase 2 prototype device, we adjusted our AEROSURF development plan to add a clinical study. During this period, we have found it difficult to attract investors that are willing to provide the additional capital that we require and, as such, we have depended upon the support or our majority stockholder and licensee in the Asia Pacific markets while we seek to advance our AEROSURF development program and identify potential strategic transactions that potentially may attract the interest of other investors.
To leverage our capabilities, maximize the use of our resources and potentially reduce our dependency on a single product candidate, we seek to enter into strategic alliances, collaboration agreements and other strategic transactions (including without limitation, by merger, acquisition or other corporate transaction) that could potentially provide access to additional pipeline products under development that we believe could diversify our portfolio and improve our ability to attract the significant capital that we will require. We also seek licensing arrangements for AEROSURF and our other KL4 surfactant products in select geographic markets that could bring strategic partners with local development and commercial expertise to support development of AEROSURF in various markets outside the U.S., and financial resources to support our AEROSURF development program. Such financial resources could take the form of capital investments, upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses.
The reader is referred to, and encouraged to read in its entirety “Item 1 - Business - Company Overview” and “- Business Strategy,” in this Annual Report on Form 10-K, which contains a discussion of our Business and Business Strategy, as well as information concerning our proprietary technologies and our current and planned KL4 pipeline programs.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, and information available from other outside sources, as appropriate. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting policies and practices are both important to the portrayal of a company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from such estimates due to changes in economic factors or other conditions that are outside the control of management. A summary of our significant accounting policies is described in Note 4 of the Consolidated Financial Statements contained in this Annual Report on Form 10-K. Of those policies, we believe that the following accounting policy is critical to aid our stockholders in fully understanding and evaluating our reported financial results.
Accrued Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses are related to expenses incurred with respect to contract research organization (CROs), contract manufacturing organizations (CMOs,) clinical trial sites, and other vendors supporting our research and development and manufacturing activities.
We base our expenses related to CROs, CMOs and clinical trial sites on our estimates of services received and efforts expended under quotations and contracts with those vendors that conduct research and development and manufacturing activities on our behalf. The financial terms of these agreements are negotiated, vary from contract to contract and may result in uneven payment flows. At times, payments made to our vendors may exceed the level of services provided and result in a prepayment of the applicable research and development or manufacturing expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. There have been no material changes in estimates for the periods presented.
RESULTS OF OPERATIONS
Net Loss and Operating Loss
The operating loss for the years ended December 31, 2017 and 2016 was $22.5 million and $38.0 million, respectively. The decrease in operating loss from 2016 to 2017 was due to a $16.0 million decrease in operating expenses, partially offset by a $0.6 million decrease in revenue.
The net loss for the years ended December 31, 2017 and 2016 was $18.4 million and $39.5 million, respectively. Included in the net loss is (i) a gain on debt restructuring of $5.8 million in 2017; (ii) interest expense of $1.9 million and $2.5 million for 2017 and 2016, respectively; (iii) for 2017 and 2016, a severance charge of $0.2 and $1.6 million, respectively; (iv) for 2016, $0.4 million in proceeds from the sale of Commonwealth of Pennsylvania research and development tax credits and (v) the change in fair value of certain common stock warrants classified as derivative liabilities, resulting in non-cash income of $0.2 million for 2016.
The net loss attributable to common stockholders for the years ended December 31, 2017and 2016 was $24.8 million (or $24.14 basic net loss per common share) and $39.5 million (or $94.84 basic net loss per common share), respectively. Included in the net loss attributable to common stockholders for 2017 is a $6.4 million non-cash deemed dividend on preferred stock (see, “Note 4 - Accounting Policies and Recent Accounting Pronouncements”).
Grant Revenue
We recognized grant revenue of $1.4 million and $2.0 million for the years ended December 31, 2017 and 2016, respectively.
Grant revenue for 2017 includes $1.1 million of funds received and expended under a Phase II Small Business Innovation Research Grant (SBIR) from the National Heart, Lung, and Blood Institute (NHLBI) of the NIH to support the AEROSURF phase 2b clinical trial (AEROSURF Grant), and $0.3 million of funds under a Phase II SBIR grant from the National Institute of Allergy and Infectious Diseases (NIAID) to support continued development of our aerosolized KL4 surfactant as a potential medical countermeasure to mitigate acute and chronic/late-phase radiation-induced lung injury (Radiation Grant).
Grant revenue for 2016 includes $0.9 million of funds received and expended under the AEROSURF Grant, $1.0 million under the Radiation Grant, and $0.1 million under a fixed-price contract to support development of our aerosolized KL4 surfactant to mitigate influenza-related lung injury (Influenza Grant).
As of December 31, 2017, all funding under the AEROSURF Grant, the Radiation Grant, and the Influenza Grant has been received and $0.1 million related to the Radiation Grant is currently recorded as deferred revenue and will be recognized as grant revenue when the funds are expended.
Research and Development Expenses
Our research and development expenses are charged to operations as incurred and we account for such costs by category rather than by project. As many of our research and development activities form the foundation for the development of our KL4 surfactant and drug delivery technologies, they are expected to benefit more than a single project. For that reason, we cannot reasonably estimate the costs of our research and development activities on a project-by-project basis. We believe that tracking our expenses by category is a more accurate method of accounting for these activities. Our research and development costs consist primarily of expenses associated with (a) product development and manufacturing, (b) medical and regulatory operations, and (c) direct preclinical and clinical development programs. We also account for research and development and report by major expense category as follows: (i) salaries and benefits, (ii) contracted services, (iii) raw materials, aerosol devices and supplies, (iv) rents and utilities, (v) depreciation, (vi) contract manufacturing, (vii) travel, (viii) stock-based compensation and (ix) other.
Research and development expenses by category for the years ended December 31, 2017 and 2016 are as follows:
Research and development expenses include non-cash charges associated with stock-based compensation and depreciation of $1.0 million and $0.8 million for 2017 and 2016, respectively.
For a description of the clinical development programs included in research and development expenses, see, “Item 1 - Business - Surfactant Therapy.”
Product Development and Manufacturing
Product development and manufacturing includes (i) manufacturing operations, both in-house and with CMOs, validation activities, quality assurance and analytical chemistry capabilities that support the manufacture of our KL4 surfactant used in research and development activities, and our medical devices, including our ADS, (ii) design and development activities related to our ADS for use in our AEROSURF clinical development program; and (iii) pharmaceutical and manufacturing development activities, including development of a lyophilized dosage form of our KL4 surfactant. These costs include employee expenses, facility-related costs, depreciation, costs of drug substances (including raw materials), supplies, quality control and assurance activities, analytical services, and expert consultants and outside services to support pharmaceutical and device development activities.
Product development and manufacturing expenses decreased $3.6 million from 2016 to 2017, due to (i) our efforts in the second quarter of 2016 to initiate cash conservation and other cost reduction measures, (ii) a $1.7 million decrease in costs related to development activities under our collaboration agreement with Battelle, (iii) a $0.3 million decrease in costs associated with the technology transfer of our lyophilized surfactant manufacturing process to a new facility at our CMO, and (iv) the July 2017 workforce reduction.
Clinical, Medical and Regulatory Operations
Clinical, medical and regulatory operations include (i) medical, scientific, preclinical and clinical, regulatory, data management and biostatistics activities in support of our research and development programs; and (ii) medical affairs activities to provide scientific and medical education support for our KL4 surfactant and aerosol delivery systems under development. These costs include personnel, expert consultants, outside services to support regulatory and data management, symposiums at key medical meetings, facilities-related costs, and other costs for the management of clinical trials.
Clinical, medical and regulatory operations expenses decreased $1.5 million from 2016 to 2017 due to (i) our efforts in the second quarter of 2016 to initiate cash conservation and other cost reduction measures, and (ii) the July 2017 workforce reduction.
Direct Preclinical and Clinical Development Programs
Direct preclinical and clinical development programs include: (i) development activities, toxicology studies and other preclinical studies; and (ii) activities associated with conducting clinical trials, including patient enrollment costs, clinical site costs, clinical device and drug supply, and related external costs, such as consultant fees and expenses.
Direct preclinical and clinical development programs expenses decreased $9.2 million from 2016 to 2017 due to a decrease in AEROSURF phase 2 clinical development program costs following the completion of enrollment in the phase 2a and phase 2b clinical trials during the second quarter of 2017.
Research and Development Expense by Major Expense Category
We also account for our research and development expense by major expense category as shown in the following table:
Contracted services include third-party costs of preclinical studies, clinical trial activities, certain components of our manufacturing operations, quality control and analytical stability and release testing of our drug product, consulting services, aerosol device design and engineering services, etc. The decrease from 2016 to 2017 is due to the completion of enrollment in the AEROSURF clinical trials in the second quarter of 2017 and to the investment in 2016 in clinic-ready ADSs for use in the AEROSURF clinical trials.
The decrease in salaries and benefits of $1.9 million from 2016 to 2017 is due to our continuing efforts, beginning in the second quarter of 2016, to conserve cash resources and implement other cost reduction initiatives.
Royalties represent minimum royalties due under our licensing agreements with Philip Morris USA Inc. and Philip Morris Products S.A. for our ADS technology.
Contract manufacturing represents costs related to the technology transfer of our lyophilized KL4 surfactant manufacturing processes to a CMO and manufacture of a sufficient supply of lyophilized KL4 surfactant to support our AEROSURF clinical development program. The decrease from 2016 to 2017 is related to adjustments that we made to the ongoing technology transfer of our lyophilized KL4 surfactant manufacturing process to a new facility at our CMO to conserve our cash resources and better align the manufacture of our clinical drug supply with our expected revised clinical time line.
Raw materials, aerosol devices and supplies consist of purchases of our active pharmaceutical ingredients (APIs) for the manufacture of KL4 surfactant, purchases of aerosol device components and supplies to support our manufacturing and analytical testing and development laboratories operations. Raw materials, aerosol devices and supplies purchases decreased $3.2 million from 2016 to 2017 due to a $2.4 million investment during 2016 in aerosol devices for use in our then-ongoing AEROSURF phase 2 clinical trials and a decrease of $0.7 million in clinical trial supply costs.
The category “Other” consists primarily of ongoing research and development costs such as insurance, taxes, education and training and software licenses.
Research and Development Projects
A substantial portion of our cumulative losses to date relate to investments in our research and development projects, for which we incurred $49.0 million in expenses for the two-year period ended December 31, 2017. Due to the significant risks and uncertainties inherent in the clinical development and regulatory approval processes, the nature, timing and costs of the efforts necessary to complete individual projects in development are not reasonably estimable. With every phase of a development project, there are unknowns that may significantly affect cost projections and timelines. In view of the number and nature of these factors, many of which are outside our control, the success, timing of completion and ultimate cost of development of any of our product candidates are highly uncertain and cannot be estimated with any degree of certainty. In addition to the risks and uncertainties affecting our research and development projects discussed in this MD&A (see, “Item 1A - Risk Factors”), other risks could arise that we may not foresee that could affect our ability to estimate projections and timelines.
Our research and development activities have been focused over the past few years primarily on AEROSURF for the treatment of RDS in premature infants, and have involved the following projects (i) manufacturing development for our lyophilized KL4 surfactant, initially for use in our AEROSURF clinical development program and, if AEROSURF is approved, commercial activities; (ii) the development and manufacture of a clinic-ready ADS to support our AEROSURF phase 2 clinical development program, and further development of our NextGen ADS under our collaboration agreement with Battelle to support our remaining AEROSURF development activities, including our planned bridge study and phase 3 clinical program and, if approved, initial commercial activities; and (iii) AEROSURF clinical development program activities, which to date have included three phase 2 clinical trials. We are currently engaged in design verification of our NextGen ADS and preparing for initial preparatory work for the planned AEROSURF bridge study; however, as of April 15, 2018, we have sufficient cash resources available to support our development activities and business operations through May 2018 and our ability to move these activities forward will depend on our ability to successfully secure the necessary capital to fund our research and development programs, support our business operations and pay our existing obligations on a timely basis. Accordingly, we are unable to project the timing of completion of these activities and the overall anticipated expense we may incur.
Our key activities for AEROSURF, including the potential timing and anticipated milestones, are discussed in “Item 1 - Business - Business Strategy.” In addition to our efforts to advance the AEROSURF clinical and device development programs, we believe that our aerosolized KL4 surfactant, alone or in combination with other pharmaceutical compounds, has the potential to be developed to address a range of serious respiratory conditions and may be an effective intervention for such conditions as acute lung injury (ALI), including acute radiation exposure to the lung (acute pneumonitis and delayed lung injury), chemical-induced ALI, and influenza-induced ALI. In addition, although there can be no assurance, we may explore opportunities to apply KL4 surfactant therapies to treat conditions such as mechanical ventilator-induced lung injury (often referred to as VILI), pneumonia, and diseases involving mucociliary clearance disorders, such as chronic obstructive pulmonary disease (COPD) and cystic fibrosis (CF). There can be no assurance, however, that we will secure the additional capital needed to undertake such explorations, that we will undertake such explorations or that, even if we do, we will be successful. In addition, we recently announced that we are exploring a potential collaboration with Eleison Pharmaceuticals, Inc. (Eleison) to assess the feasibility of using our proprietary ADS to deliver Eleison’s inhaled lipid cisplatin (ILC) potentially in combination with our KL4 surfactant. There can be no assurance that we will be successful in these efforts or, even if we are successful, that we and Eleison will agree to undertake a full development program.
Ultimately, if we do not successfully develop and gain marketing approval for our drug product candidates, in the U.S. or elsewhere, we will not be able to commercialize, or generate any revenues from the sale of our products and the value of our company and our financial condition and results of operations will be substantially harmed.
General and Administrative Expenses
General and administrative expenses consist of the costs of executive management, business development, intellectual property, finance and accounting, legal, human resources, information technology, facility and other administrative costs.
General and administrative expenses include non-cash charges associated with stock-based compensation and depreciation of $0.7 million and $0.8 million for the years ended December 31, 2017 and 2016, respectively.
General and administrative expenses decreased $1.7 million from 2016 to 2017 due to a severance charge of $1.2 million (including $0.2 million in stock-based compensation expense) in 2016 related to the February 2016 termination of the Employment Agreement between ourselves and our then-President and Chief Executive Officer (Former CEO) and due to our efforts beginning in the second quarter of 2016 to conserve cash resources and implement other cost reduction initiatives.
We plan to continue investments in protecting our existing intellectual property, and in pursuing potential additional intellectual property rights, including patents, trademarks, and trade secrets, and regulatory exclusivity designations, such as potential orphan drug, new drug product exclusivities, Fast Track, breakthrough therapy, accelerated approval and priority review. See, “Item 1 - Business - Licensing, Patents and Other Proprietary Rights and Regulatory Designations.”
Change in Fair Value of Common Stock Warrant Liability
We account for common stock warrants in accordance with applicable accounting guidance provided in ASC Topic 815, Derivatives and Hedging - Contracts in Entity’s Own Equity (ASC Topic 815), either as derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement. Derivative warrant liabilities are valued at the date of initial issuance and as of each subsequent balance sheet date using an appropriate valuation pricing model depending on the terms of the applicable warrant agreement. Changes in the fair value of the warrants are reflected in the consolidated statement of operations as “Change in fair value of common stock warrant liability.”
The five-year warrants that we issued in the February 2011 public offering (2011 Warrants) contained anti-dilutive provisions that adjusted the exercise price if we issued any common stock, securities convertible into common stock, or other securities (subject to certain exceptions) at a value below the then-existing exercise price of the 2011 Warrants. As such, they were classified as derivative liabilities and reported, at each balance sheet date, at estimated fair value determined using a trinomial pricing model.
Changes in our common stock warrant liability are primarily related to changes in our common stock share price during the periods. For 2016, the change in fair value of the common stock warrant liability represents the write-off of the remaining liability upon expiration of the underlying warrants in February 2016.
Other Income / (Expense)
In November 2017 we restructured and retired a secured loan with affiliates of Deerfield Management, L.P. (Deerfield Loan). This transaction was accounted for as an extinguishment of debt in accordance with ASC 470, Debt-Modifications and Extinguishments, and as a result, we recognized a $5.8 million non-cash gain on debt restructuring (see, “- Liquidity and Capital Resources - Long-term Debt”).
Interest expense primarily consists of interest expense associated with the Deerfield Loan (see, “- Liquidity and Capital Resources - Long-term Debt”).
Other income in 2016 primarily consists of proceeds from the sale of Commonwealth of Pennsylvania research and development tax credits.
The following amounts comprise the Deerfield Loan interest expense for the periods presented:
Amortization of prepaid interest expense represents non-cash amortization of $5 million of Series A Units and Series B units that Deerfield purchased in our July 2015 public offering and accepted in satisfaction of $5 million of future interest payments calculated at an interest rate of 8.75% under the Deerfield Loan. Cash interest expense represents interest at an annual rate of 8.25% payable on a quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2017, we had cash and cash equivalents of $1.8 million and current liabilities of $11.7 million.
In January 2018 and March 2018, we received interim loans from our parent company, LPH Investments Limited (LPH), an affiliate of Lee’s Pharmaceutical Holdings Limited, a company incorporated in the Cayman Islands with limited liability and majority holder of our common stock (Lee’s), in the amounts of $1.5 million and $1.0 million, respectively, to support our AEROSURF development activities and sustain our operations while we continued our diligence efforts to identify one or more potential strategic or equity transactions. To secure our obligations under these loans, we granted LPH a security interest in substantially all of our assets. (See, “- Private Placement Offering”)
In early April 2018, we completed a $2.6 million private placement offering with LPH II Investments Limited (LPH II), a wholly-owned subsidiary of Lee’s, from which we received net proceeds of approximately $2.5 million (see, “- Private Placement Offering”). As of April 15, 2018, and before any additional financings, including in connection with potential strategic transactions, we believe that we will have sufficient cash resources available to support our development activities and business operations through May 2018.
We expect to continue to incur significant losses and require significant additional capital to advance our AEROSURF clinical development program, support our operations and satisfy existing obligations beyond May 2018, and we do not have sufficient cash and cash equivalents for at least the next year following the date that the financial statements are issued. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.
To alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, management plans to raise additional capital through one or more of the following: (i) strategic transactions, including potential alliances and collaborations focused on markets outside the U.S., as well as potential combinations (including by merger or acquisition) or other corporate transactions; we are currently engaged in active diligence and discussions with a third party for a potential strategic transaction, although there can be no assurance that we will be able to secure such agreement on acceptable terms, if at all; and (ii) through private placements of our equity securities. If none of these alternatives is available, or if available, we are unable to raise sufficient capital through such transactions, we will not have sufficient cash resources and liquidity to fund our business operations for at least the next year following the date that the financial statements are issued. Accordingly, management has concluded that substantial doubt exists with respect to our ability to continue as a going concern through one year after the issuance of the accompanying financial statements.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business, and do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
We believe that our ability to fund our activities in the longer term will be highly dependent upon whether we are able to timely advance our AEROSURF development program, including our planned bridge study and phase 3 clinical program and NextGen ADS development activities, in accordance with our plans and achieve results that are sufficiently positive to attract investor interest and/or support a strategic transaction (including by merger, acquisition of assets or license arrangement that could diversify our product portfolio). Our AEROSURF development program activities are subject to significant risks and uncertainties, such that there can be no assurance that we will be successful in completing our clinical trials in accordance with our plans, or at all. If our AEROSURF development program activities should be delayed for any reason, we may be forced to implement cost-saving measures that may potentially have a negative impact on our activities and potentially the results of our clinical program. Even if we complete our AEROSURF development program activities as planned, if the results are inconclusive, or present an unacceptable benefit/risk profile due to suboptimal efficacy and/or poor safety profile, we may be unable to secure the additional capital that we will require to continue our development activities and operations, which could have a material adverse effect on our business. If we cannot raise sufficient capital, we may be forced to limit or cease our development activities and consider other means of creating value for our stockholders, if available. If we are unable to raise the required capital, we may be forced to curtail all of our activities and, ultimately, cease operations. Even if we are able to raise sufficient capital, such financings may only be available on unattractive terms, or result in significant dilution of stockholders’ interests and, in such event, the market price of our common stock may decline.
As we seek to secure the needed capital through equity financings and other similar transactions, we will be subject to regulatory and other restrictions, including the following: we are no longer eligible to use a registration statement on Form S-3 to register our securities and will have to use a long-form Form S-1, the preparation of which would be more time-consuming and costly; we no longer have access to an at-the-market equity sales program (ATM Program); our capital structure, which includes common stock, convertible preferred stock, and warrants to purchase common stock, may make it difficult to attract new investors; our controlling stockholder may not approve a strategic transaction recommended by our Board, or agree to increase the number of shares of common stock authorized under our Certificate of Incorporation, which could impair our ability in the future to conduct equity financings or enter into certain strategic transactions; and our efforts may be adversely affected by potentially unfavorable credit and financial markets. Under these circumstances, we cannot be certain that we will be able to raise a sufficient amount when needed, if at all, on favorable terms or otherwise.
In addition, in May 2016, we received a deficiency notice from The Nasdaq Stock Market (Nasdaq) that we were no longer in compliance with the minimum stockholders’ equity listing requirement. After securing extensions through May 15, 2017, we were unable to regain compliance with the listing requirement and consequently, our common stock was delisted from Nasdaq effective May 5, 2017. Since May 5, 2017, our common stock has been quoted on the OTC Markets Group Inc.’s OTCQB Market (OTCQB), and has experienced, over time, lower trading volumes and reduced analyst interest. In addition, effective December 22, 2017, we implemented a share combination (1-for-20 reverse split) that had the effect of reducing the number of shares outstanding and further lowering our trading volumes. These conditions may make it more difficult to raise capital when needed. Our stockholders may find it more difficult to trade our securities on the OTCQB, and the value and liquidity of our common stock may be adversely affected, which could have a material adverse effect on our ability to raise the additional capital that we require. Moreover, even if we are successful in raising the required capital, any equity financings could result in substantial equity dilution of stockholders' interests
In addition, we have from time to time collaborated with research organizations and universities to assess the potential utility of our KL4 surfactant in studies funded in part through non-dilutive grants issued by U.S. Government-sponsored drug development programs, including grants in support of initiatives related to our AEROSURF clinical development program. We announced in 2016 that we had been awarded a Phase II Small Business Innovation Research Grant (SBIR) grant valued at up to $2.6 million from the National Heart, Lung, and Blood Institute (NHLBI) of the National Institutes of Health (NIH) to support the AEROSURF phase 2b clinical trial in premature infants 28 to 32 week gestational age. In 2016, we received and expended $0.9 million and in 2017, we received and expended $1.1 million of this award. We have also received grants that support medical and biodefense-related initiatives under programs that encourage private sector development of medical countermeasures against chemical, biological, radiological and nuclear terrorism threat agents, and pandemic influenza, and provide a mechanism for federal acquisition of such countermeasures. In June 2016, we announced the results of a study funded by the NIH that KL4 surfactant could potentially be an effective medical countermeasure to mitigate acute and chronic/late-phase radiation-induced lung injury (pneumonopathy) due to exposure from a nuclear accident or act of terrorism. In addition, in February 2017 we announced the results of a study funded by the NIH that KL4 surfactant could be a potential medical intervention to reduce morbidity and mortality associated with both seasonal and pandemic influenza pneumonia. Although there can be no assurance, we expect to pursue potential additional funding opportunities as they arise and expect that we may qualify for similar programs in the future.
As of December 31, 2017, there were 120 million shares of common stock and 5 million shares of preferred stock authorized under our Certificate of Incorporation, and approximately 114.1 million shares of common stock and 5.0 million shares of preferred stock available for issuance and not otherwise reserved.
Cash Flows
As of December 31, 2017 and 2016, we had cash and cash equivalents of $1.8 million and $5.6 million, respectively. Net cash outflows for 2017 consisted of $21.0 million used for ongoing operating activities, offset by cash inflows for 2017 of $17.3 million for financing activities.
Operating Activities
Net cash used in operating activities was $21.0 million and $33.6 million for the years ended December 31, 2017 and 2016, respectively. Net cash used in operating activities is a result of our net losses for the period, adjusted for non-cash items and changes in working capital.
Investing Activities
Net cash used in investing activities was $24,000 and $0.3 million for the years ended December 31, 2017 and 2016, respectively, and represents capital expenditures, partially offset by proceeds from sale of property and equipment in 2016.
Financing Activities
Net cash provided by financing activities was $17.3 million and $0.7 million for the years ended December 31, 2017 and 2016, respectively, summarized as follows:
The following sections provide a more detailed discussion of our cash flows from available financing facilities and activities.
Financings Pursuant to Common Stock Offerings
Historically, we have funded, and expect that we will continue to fund, our business operations through various sources, including financings in the form of equity offerings. Since May 2017, we are no longer eligible to use a universal shelf registration statement on Form S-3. Accordingly, until we are again eligible to use the registration statement on Form S-3, we plan to conduct future equity offerings through private placement transactions
Private Placement Offerings
On February 15, 2017, we completed a private placement offering of 7,049 Series A Convertible Preferred Stock units for net proceeds of approximately $10.5 million, including $1.6 million of non-cash consideration in the form of a reduction in amounts due and accrued as of December 31, 2016 for current development services that otherwise would have become payable in cash in the first and second quarters of 2017. Each unit consists of (i) one share of Series A Convertible Preferred Stock; and (ii) 50 Series A-1 Warrants to purchase one share of Common Stock at an exercise price equal to $27.40.
Effective October 27, 2017, we entered into a Securities Purchase Agreement (SPA) with LPH Investments Limited, a company incorporated in the Cayman Islands with limited liability (LPH). LPH an affiliate of Lee’s. Under the SPA, LPH invested $10.0 million in the Company for 2,311,604 shares of our common stock, at a price of $4.326 per share, which represented a 15% premium over the average of the daily volume-weighted average price per share (VWAP) over the 10-day trading period ending on and including the date of the SPA. Following the transaction, Lee's beneficially owned 73% of our issued and outstanding shares of common stock. The investment included cancellation of $3.9 million in outstanding loans that the Company borrowed from Lee’s Pharmaceutical (HK) Ltd., a Hong Kong company organized and existing under the laws of Hong Kong (Lee's (HK)) under that certain Loan Agreement, effective August 14, 2017, between ourselves and Lee's (HK).
In April 2018, we completed a private placement with LPH II Investments Limited (LPH II), a wholly-owned subsidiary of Lee’s, for the purchase of $2.6 million of our common stock and warrants at a purchase price per share of $4.80. In connection with this offering, we issued 541,667 shares of common stock and warrants to purchase 135,417 shares of common stock at an exercise price of $5.52 per share. The warrants are exercisable after 6 months and through the seventh anniversary of the issue date.
At-the-Market Program (ATM Program)
Stifel ATM Program
In 2013, we entered into an At-the-Market Equity Sales Agreement (ATM Agreement) with Stifel, under which Stifel, as our exclusive agent, agreed to sell on our behalf up to a maximum of $25 million of shares of our common stock (ATM Program). We agreed to pay Stifel a commission equal to 3.0% of the gross sales price of any shares sold pursuant to the ATM Agreement. In February 2016, we extended the term of the ATM Agreement until February 11, 2019. However, effective with our transition to the OTCQB® Market (OTCQB) tier in early May 2017, the ATM Program was no longer available to us.
During 2017, we completed registered offerings of our common stock under the ATM Program of 42,357 shares, resulting in aggregate gross and net proceeds to us of approximately $1.1 million and $1.0 million, respectively.
During 2016, we completed offerings of our common stock under our ATM Program of 18,013 shares, resulting in aggregate gross and net proceeds to us of approximately $0.7 million.
Loan Payable
In January 2018 and March 2018, we entered into loan agreements with LPH, an affiliate of Lee’s, for loan proceeds of $1.5 million and $1.0 million, respectively, to support our AEROSURF development activities and sustain its operations while we seek to identify and advance one or more potential strategic initiatives (“Funding Event”). To secure our obligations under these loans, we granted LPH a security interest in substantially all of our assets. The loans will accrue interest at a rate of 6% per annum and mature upon the earlier of the closing date of the Funding Event or December 31, 2018. The parties expect that, upon the closing of the Funding Event, the outstanding principal balance of the Loan will be applied in full satisfaction of a like amount of cash consideration payable by LPH for its participation in such Funding Event, and the Loan will be discharged in full thereby.
Long-term Debt
Long-term debt as of December 31, 2016 consists solely of amounts due under a $25 million loan (Deerfield Loan) with affiliates of Deerfield Management Company, L.P. (Deerfield) for the periods presented:
Under the terms of the Deerfield Loan, Deerfield made two advances, the first upon execution of the agreement in February 2013 in the amount of $10 million, and the second upon the first commercial sale of SURFAXIN in December 2013 in the amount of $20 million. The outstanding principal accrued interest at a rate of 8.75%, payable quarterly in cash.
Upon execution of the Deerfield Loan, we issued to Deerfield warrants to purchase approximately 10,000 shares of our common stock at an exercise price of $786.80 per share. Upon receipt of the second advance in December 2013, we issued to Deerfield warrants to purchase an additional 15,000 shares of our common stock at an exercise price of $786.80 per share. The warrants expired on the sixth anniversary of the Deerfield Loan agreement, or February 13, 2019.
In July 2015, we entered into two amendments to the Deerfield Loan agreement resulting in (i) prepayment of $5.0 million of principal, (ii) elimination of the principal installment originally due in February 2017, (iii) each of the principal payments due in February 2018 and February 2019 was increased to $12.5 million, (iv) Deerfield purchased and accepted $5 million Series A and Series B units offered in our July 2015 public offering in satisfaction of $5 million of future interest payments due under the Deerfield Loan, and (v) after the full allocation of the $5 million interest prepayment, any remaining interest due on the principal amount of the Deerfield Loan accrued at a rate of 8.25% per annum.
On November 1, 2017, we and Deerfield entered into an Exchange and Termination Agreement pursuant to which (i) the promissory notes evidencing the aggregate principal amount of $25 million then owed under the Deerfield Loan, and (ii) warrants to purchase up to 25,000 shares of our common stock at an exercise price of $786.80 per share held by Deerfield were cancelled in consideration for (i) a cash payment in the aggregate amount of $2.5 million, (ii) an aggregate of 71,111 shares of common stock and (iii) the right to receive certain milestone payments based on achievement of specified development and commercial milestones related to our AEROSURF development program, which, if achieved, could potentially total up to $15 million.
Contemporaneously with the execution of the Exchange and Termination Agreement, we and Deerfield entered into a registration rights agreement pursuant to which we agreed to provide certain registration rights with respect to the shares of common stock issued to Deerfield under the Exchange and Termination Agreement. We issued the shares of common stock to Deerfield pursuant to Rule 506(b) of Regulation D under, and Section 4(a)(2) of, the Securities Act of 1933.
The November 2017 restructuring and retirement of the Deerfield Loan was accounted for as an extinguishment of debt in accordance with ASC Topic 470, Debt - Modifications and Extinguishments, and, as a result, we recognized a $5.8 million non-cash gain on debt restructuring consisting of the difference between the $25 million carrying amount of the extinguished Deerfield Loan and the consideration to Deerfield under the Exchange and Termination Agreement, which includes $15 million in contingent milestone payments, $2.5 million in cash, a $1.4 million write-off of prepaid interest, and $0.3 million in fair value of common stock issued to Deerfield. We established a $15 million long-term liability for the contingent milestone payments potentially due to Deerfield under the Exchange and Termination Agreement.
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements at December 31, 2017 or 2016, or during the periods then ended.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See, Index to Consolidated Financial Statements on Page attached hereto.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures
Our management, including our President and Chief Executive Officer (principal executive officer) and our Senior Vice President and Chief Financial Officer (principal financial officer), do not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud. 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 simple error or mistake. Controls can also 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 is based in part on 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 deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, to allow for timely decisions regarding required disclosures, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated 2013 Framework. Based on our assessment, our management believes that our internal control over financial reporting is effective based on those criteria, as of December 31, 2017.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
(c) Changes in internal controls
There were no changes in our internal control over financial reporting identified in connection with the evaluation described above that occurred during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION.
Not applicable.
PART III
Except as set forth below, the information required by Items 10 through 14 of Part III is incorporated herein by reference to our definitive proxy or information statement or an amendment to this annual report on Form 10-K, in any case, to be filed with the Securities and Exchange Commission on or before April 30, 2018 (within 120 days after the end of our 2017 fiscal year).
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
We have adopted a Code of Business Conduct and Ethics that applies to our officers, including our principal executive, financial and accounting officers, and our directors and employees. We have posted the Code of Business Conduct and Ethics on our Internet website at “http://www.windtreetx.com” under the “Company” tab in the Corporate Governance section. We intend to make all required disclosures on our website concerning any amendments to, or waivers from, our Code of Business Conduct and Ethics with respect to our executive officers and directors. Our website and the information contained therein or connected thereto are not incorporated into this Annual Report on Form 10-K.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The consolidated financial statements required to be filed in this Annual Report on Form 10-K are listed on the Index to Consolidated Financial Statements on page hereof.
Exhibits are listed on the Index to Exhibits at the end of this Annual Report on Form 10-K. The exhibits required to be filed pursuant to Item 601 of Regulation S-K, which are listed on the Index in response to this Item, are incorporated herein by reference.
ITEM 16.
FORM 10-K SUMMARY.
Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16. The Company has elected not to include such summary information.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Name & Title
Date
/s/ Craig Fraser
Craig Fraser
Director, President, and Chief Executive Officer
April 17, 2018
(Principal Executive)
/s/ John Tattory
John Tattory
Senior Vice President and Chief Financial Officer
April 17, 2018
(Principal Financial and Accounting Officer)
/s/ John R. Leone
John R. Leone
Director (Chairman of the Board)
April 17, 2018
/s/ Joseph M. Mahady
Joseph M. Mahady
Director
April 17, 2018
/s/ Bruce A. Peacock
Bruce A. Peacock
Director
April 17, 2018
/s/ Marvin E. Rosenthale
Marvin E. Rosenthale, Ph.D.
Director
April 17, 2018
INDEX TO EXHIBITS
The following exhibits are included with this Annual Report on Form 10-K.
Exhibit No.
Description
Method of Filing
3.1
Amended and Restated Certificate of Incorporation of Windtree Therapeutics, Inc. (Windtree) filed on February 15, 2018
Filed herewith
3.2
Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of Windtree, dated February 15, 2017
Incorporated by reference to Exhibit 3.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on February 15, 2017
3.3
Amended and Restated By-Laws of Windtree, as amended effective April 19, 2016
Incorporated by reference to Exhibit 3.2 to Windtree’s Current Report on Form 8-K, as filed with the SEC on April 18, 2016
4.1
Form of Warrant to Purchase Common Stock dated October 10, 2014, by and between Windtree and Battelle Memorial Institute
Incorporated by reference to Exhibit 4.11 to Windtree’s Quarterly Report on Form 10-Q, as filed with the SEC on November 7, 2014
4.2
Form of Series A Warrant dated July 22, 2015
Incorporated by reference to Exhibit 4.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on July 17, 2015
4.3
Form of Series B Warrant dated July 22, 2015
Incorporated by reference to Exhibit 4.3 to Windtree’s Current Report on Form 8-K, as filed with the SEC on July 17, 2015
4.4
Form of Series A-1 Warrant dated February 13, 2017
Incorporated by reference to Exhibit 4.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on February 15, 2017
4.5
Form of Series C Warrant dated April 4, 2018
Incorporated by reference to Exhibit 4.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on April 4, 2018
10.1+
Sublicense Agreement, dated as of October 28, 1996, between Johnson & Johnson, Ortho Pharmaceutical Corporation and Acute Therapeutics, Inc.
Incorporated by reference to Exhibit 10.6 to Windtree’s Registration Statement on Form SB-2/A, as filed with the SEC on April 18, 1997 (Commission File Number 333-19375)
10.2+
Amended and Restated License Agreement by and between Windtree and Philip Morris USA Inc., d/b/a/ Chrysalis Technologies, dated March 28, 2008
Incorporated by reference to Exhibit 10.4 to Windtree’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, as filed with the SEC on May 9, 2008
10.3+
License Agreement by and between Windtree and Philip Morris Products S.A., dated March 28, 2008
Incorporated by reference to Exhibit 10.5 to Windtree’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, as filed with the SEC on May 9, 2008
10.4+
Amended and Restated Sublicense and Collaboration Agreement made as of December 3, 2004, between Windtree and Laboratorios del Dr. Esteve, S.A.
Incorporated by reference to Exhibit 10.28 to Windtree’s Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 16, 2005
10.5+
Amended and Restated Supply Agreement, dated as of December 3, 2004, by and between Windtree and Laboratorios del Dr. Esteve, S.A.
Incorporated by reference to Exhibit 10.29 to Windtree’s Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 16, 2005
10.6+
License, Development and Commercialization Agreement dated as of June 12, 2017, by and between Windtree and Lee’s Pharmaceutical (HK) Ltd.
Incorporated by reference to Exhibit 10.1 to Windtree’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, as filed with the SEC on August 21, 2017
10.7+
Amendment No. 1 dated as of August 14, 2017 to the License Development and Commercialization Agreement by and between the Company and Lee’s Pharmaceutical (HK) Ltd. dated as of June 12, 2017
Incorporated by reference to Exhibit 10.1 to Windtree’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, as filed with the SEC on November 14, 2017
10.8*
Windtree’s 2007 Long-Term Incentive Plan
Incorporated by reference to Exhibit 1.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on June 28, 2007
10.9*
Form of 2007 Long-Term Incentive Plan Stock Option Agreement
Incorporated by reference to Exhibit 10.3 to Windtree’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, as filed with the SEC on August 9, 2007
10.10*
Windtree’s 2011 Long-Term Incentive Plan, as amended
Filed herewith
10.11*
Form of Employee Option Agreement under Windtree’s 2011 Long-Term Incentive Plan
Incorporated by reference to Exhibit 10.2 to Windtree’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 15, 2012
10.12*
Form of Non-Employee Director Option Agreement under Windtree’s 2011 Long-Term Incentive Plan
Incorporated by reference to Exhibit 10.3 to Windtree’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 15, 2012
10.13*
Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under Windtree’s 2011 Long-Term Incentive Plan
Incorporated by reference to Exhibit 10.11 to Windtree’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 16, 2015
10.14*
Form of Restricted Stock Unit Award Agreement for Employees under Windtree’s 2011 Long-Term Incentive Plan
Filed herewith
10.15*
Employment Agreement dated as of February 1, 2016, by and between Windtree and Craig Fraser
Incorporated by reference to Exhibit 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on February 3, 2016
10.16*
Inducement Stock Option Award Agreement dated February 1, 2016, between Windtree and Craig Fraser under Windtree’s 2011 Long-Term Incentive Plan
Incorporated by reference to Exhibit 10.3 to Windtree’s Current Report on Form 8-K, as filed with the SEC on February 3, 2016
10.17*
Amendment dated as of March 13, 2018, to Employment Agreement dated as of February 1, 2016, by and between Windtree and Craig Fraser
Incorporated by reference to Exhibit 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on March 16, 2018
10.18*
Employment Agreement dated as of December 19, 2014, by and between Windtree and Steven G. Simonson, M.D.
Incorporated by reference to Exhibit 10.4 to Windtree’s Quarterly Report on Form 10-Q, as filed with the SEC on May 11, 2015
10.19*
Amendment dated December 29, 2014 to Employment Agreement dated as of December 19, 2014, effective as of April 1, 2015, by and between Windtree and Steven G. Simonson, M.D.
Incorporated by reference to Exhibit 10.5 to Windtree’s Quarterly Report on Form 10-Q, as filed with the SEC on May 11, 2015
10.20*
Amendment dated as of March 13, 2018, to Employment Agreement dated as of December 19, 2014 by and between Windtree and Steven G. Simonson, M.D.
Incorporated by reference to Exhibit 10.3 to Windtree’s Current Report on Form 8-K, as filed with the SEC on March 16, 2018
10.21*
Employment Agreement dated as of March 21, 2014, by and between Windtree and John A. Tattory
Incorporated by reference to Exhibit 10.1 to Windtree’s Quarterly Report on Form 10-Q, as filed with the SEC on May 12, 2014
10.22*
Amendment dated December 29, 2014 to Employment Agreement dated as of March 21, 2014, effective as of April 1, 2015, by and between Windtree and John A. Tattory
Incorporated by reference to Exhibit 10.19 to Windtree’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 16, 2015
10.23*
Amendment dated March 13, 2018, to Employment Agreement dated as of March 21, 2014 by and between John A. Tattory
Incorporated by reference to Exhibit 10.2 to Windtree’s Current Report on Form 8-K, as filed with the SEC on March 16, 2018
10.24*
Form of Indemnification Agreement between Windtree and its named executive officers and directors.
Incorporated by reference to Exhibit 10.4 to Windtree’s Current Report on Form 8-K, as filed with the SEC on February 3, 2016
10.25
Lease Agreement dated May 26, 2004, and First Amendment to Lease Agreement, dated April 2, 2007, by and between TR Stone Manor Corp. and Windtree
Incorporated by reference to Exhibits 10.1 and 10.2 to Windtree’s Current Report on Form 8-K, as filed with the SEC on April 6, 2007
10.26
Second Amendment to Lease Agreement, dated January 3, 2013 by and between TR Stone Manor Corp. and Windtree
Incorporated by reference to Exhibits 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on January 8, 2013
10.27
Fourth Amendment to Lease Agreement, dated April 29, 2016, by and between PH Stone Manor LP and Windtree
Incorporated by reference to Exhibits 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on May 31, 2016
10.28
Fifth Amendment to Lease Agreement, dated February 23, 2018, by and between PH Stone Manor LP and Windtree
Incorporated by reference to Exhibit 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on March 1, 2018
10.29+
Master Services Agreement dated October 24, 2013 between Windtree and DSM Pharmaceuticals, Inc. (now known as Patheon Manufacturing Services LLC)
Incorporated by reference to Exhibit 10.3 to Windtree’s Quarterly Report on Form 10-Q, as filed with the SEC on November 12, 2013
10.30+
Supply Agreement dated as of December 22, 2010 between by and between Corden Pharma (formerly Genzyme Pharmaceuticals LLC, now known as Corden Pharma) and Windtree
Incorporated by reference to Exhibit 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on December 29, 2010
10.31+
Collaboration Agreement made as of October 10, 2014, by and between Windtree and Battelle Memorial Institute
Incorporated by reference to Exhibit 10.1 to Windtree’s Quarterly Report on Form 10-Q, as filed with the SEC on November 7, 2014
10.32
Second Amendment dated March 31, 2016 to Collaboration Agreement dated as of October 14, 2014 between Windtree and Battelle Memorial Institute
Incorporated by reference to Exhibit 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on April 5, 2016
10.33
Security Purchase Agreement dated as of February 13, 2017 between Windtree and selected investors
Incorporated by reference to Exhibit 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on February 15, 2017
10.34
Registration Rights Agreement dated as of February 13, 2017 between Windtree and selected investors
Incorporated by reference to Exhibit 10.2 to Windtree’s Current Report on Form 8-K, as filed with the SEC on February 15, 2017
10.35
Exchange and Termination Agreement dated as of October 27, 2017, between Windtree and Deerfield
Incorporated by reference to Exhibit 10.2 to Windtree’s Current Report on Form 8-K, as filed with the SEC on November 1, 2017
10.36
Registration Rights Agreement dated as of October 27, 2017, between Windtree and Deerfield
Incorporated by reference to Exhibit 99.2 to Windtree’s Current Report on Form 8-K, as filed with the SEC on November 1, 2017
10.37
Registration Rights Agreement dated as of October 27, 2017, between Windtree and LPH Investments Limited
Incorporated by reference to Exhibit 99.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on November 1, 2017
10.38
Loan Agreement dated as of January 10, 2018, between Windtree and LPH Investments Ltd.
Incorporated by reference to Exhibit 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on January 12, 2018
10.39
Loan Agreement dated as of March 1, 2018, between Windtree and LPH Investments Ltd.
Incorporated by reference to Exhibit 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on March 5, 2018
10.40
Security Agreement dated as of March 1, 2018, between Windtree and LPH Investments Ltd.
Incorporated by reference to Exhibit 10.2 to Windtree’s Current Report on Form 8-K, as filed with the SEC on March 5, 2018
10.41
Securities Purchase Agreement dated as of March 30, 2018, between Windtree and LPH II Investments Limited
Incorporated by reference to Exhibit 10.1 to Windtree’s Current Report on Form 8-K, as filed with the SEC on April 4, 2018
10.42
Registration Rights Agreement dated as of March 30, 2018, between Windtree and LPH II Investments Limited
Incorporated by reference to Exhibit 10.2 to Windtree’s Current Report on Form 8-K, as filed with the SEC on April 4, 2018
21.1
Subsidiaries of Windtree
Filed herewith
23.1
Consent of Ernst & Young LLP, independent registered public accounting firm
Filed herewith
31.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
Filed herewith
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
101.1
The following consolidated financial statements from the Windtree Therapeutics, Inc. Annual Report on Form 10-K for the year ended December 31, 2017, formatted in Extensive Business Reporting Language (“XBRL”): (i) Balance Sheets as of December 31, 2017 and December 31, 2016, (ii) Statements of Operations for the years ended December 31, 2017 and December 31, 2016, (iii) Statements of Changes in Equity for the years ended December 31, 2017 and December 31, 2016, (iv) Statements of Cash Flows for the years ended December 31, 2017 and December 31, 2016, and (v) Notes to consolidated financial statements
101.INS
Instance Document
Filed herewith
101.SCH
XBRL Taxonomy Extension Schema Document
Filed herewith
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Filed herewith
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
+Confidential treatment requested as to certain portions of these exhibits. Such portions have been redacted and filed separately with the Commission.
*A management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report pursuant to Item 15(b) of Form 10-K.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Contents
Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016
Consolidated Statements of Operations for the years ended December 31, 2017 and 2016
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016
Notes to consolidated financial statements
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Windtree Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Windtree Therapeutics, Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2017, and the related notes collectively referred to as the consolidated financial statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has incurred recurring losses from operations, expects to continue to incur losses and requires significant additional capital to advance its clinical development program, support operations and satisfy existing obligations, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst and Young LLP
We have served as the Company’s auditor since 2000.
Philadelphia, Pennsylvania
April 17, 2018
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share and per share data)
See notes to consolidated financial statements
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(in thousands, except per share data)
See notes to consolidated financial statements
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(in thousands)
See notes to consolidated financial statements
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
See notes to consolidated financial statements
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Note 1 -
The Company and Description of Business
Windtree Therapeutics, Inc. (referred to as “we,” “us,” or the “Company”) is a biotechnology company focused on developing novel KL4 surfactant therapies for respiratory diseases and other potential applications. Surfactants are produced naturally in the lung and are essential for normal respiratory function and survival. Our proprietary technology platform includes a synthetic, peptide-containing surfactant (KL4 surfactant) that is structurally similar to endogenous pulmonary surfactant, and novel drug delivery technologies, including our proprietary aerosol delivery system (ADS), being developed to enable noninvasive administration of aerosolized KL4 surfactant at consistent and reproducible volumes suitable to deliver therapeutic dosages in a reasonable period of time. We are currently working with Battelle Memorial Institute (Battelle) to complete design verification procedures for a next generation (NextGen) ADS potentially for use in our remaining AEROSURF development activities and, if approved, initial commercial activities. We believe that our proprietary technologies may make it possible to develop a pipeline of surfactant products to address a variety of respiratory diseases for which there are few or no approved therapies.
Our lead development program is AEROSURF® (lucinactant for inhalation), an investigational combination drug/device product that we are developing to improve the management of respiratory distress syndrome (RDS) in premature infants who may not have fully developed natural lung surfactant and may require surfactant therapy to sustain life. The currently-available surfactants in the United States (U.S.) are administered using invasive endotracheal intubation and mechanical ventilation, each of which may result in serious respiratory conditions and other complications. To avoid these risks, many premature infants are initially treated with noninvasive respiratory support such as nasal continuous positive airway pressure (nCPAP). Unfortunately, nCPAP does not address the underlying surfactant deficiency and consequently, many premature infants respond poorly to nCPAP alone (typically within the first 72 hours of life) and may require delayed surfactant therapy with invasive intubation (an outcome referred to as “nCPAP failure”). If surfactant therapy could be administered noninvasively, neonatologists would be able to provide surfactant therapy to premature infants earlier in their course of treatment and without exposing them to the risks associated with intubation and mechanical ventilation.
AEROSURF is designed to administer aerosolized KL4 surfactant noninvasively and potentially meaningfully reduce the use of invasive endotracheal intubation and mechanical ventilation. We believe that AEROSURF, if approved, will allow for earlier treatment of premature infants who currently receive delayed surfactant therapy, decrease the morbidities and complications currently associated with surfactant administration, and reduce the number of premature infants who are subjected to invasive intubation and delayed surfactant therapy following nCPAP failure. We also believe that AEROSURF has the potential to address a serious unmet medical need and potentially provide transformative clinical and pharmacoeconomic benefits. Consistent with our belief, FDA has granted Fast Track designation for our KL4 surfactant (including AEROSURF) to treat RDS.
While we are focused primarily on AEROSURF, we are also assessing potential development pathways to potentially gain marketing approval for lyophilized KL4 surfactant as an intratracheal instillate for the treatment and/or prevention of RDS. Lyophilized KL4 surfactant may potentially provide benefits related to use, including longer shelf life, reduced cold-chain requirements and lower viscosity. We have engaged with the FDA to discuss a potential development plan, trial design and regulatory plan for approval. If we can define an acceptable development program that is achievable from a cost, timing and resource perspective, we might seek approval to treat premature infants who, because they are unable to breathe on their own, cannot benefit from AEROSURF.
We also believe that our KL4 surfactant technology may potentially support a product pipeline to address a broad range of serious respiratory conditions in children and adults. We have received support, and plan to seek additional support, from the National Institutes of Health (“NIH”) and other government funding sources to explore the utility of our KL4 surfactant to address a variety of such respiratory conditions as acute lung injury (ALI), including acute radiation exposure to the lung (acute pneumonitis and delayed lung injury), chemical-induced ALI, and influenza-induced ALI; as well as chronic rhinosinusitis, complications of certain major surgeries, mechanical ventilator-induced lung injury (often referred to as VILI), pneumonia, and diseases involving mucociliary clearance disorders, such as chronic obstructive pulmonary disease (COPD) and cystic fibrosis (CF). Although there can be no assurance, we may in the future support development activities to establish a proof-of-concept and, if successful, thereafter determine whether to seek strategic alliances or collaboration arrangements or pursue other financial alternatives to fund further development and, if approved, commercialization of additional KL4 surfactant indications.
The reader is referred to, and encouraged to read in its entirety “Item 1 - Business - Company Overview” and “- Business Strategy,” in this Annual Report on Form 10-K, which contains a discussion of our Business and Business Strategy, as well as information concerning our proprietary technologies and our current and planned KL4 pipeline programs.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Note 2 -
Basis of Presentation
The accompanying consolidated financial statements reflect a 1-for-20 reverse split of our common stock that was approved by our Board of Directors and controlling stockholder and made effective on December 22, 2017. All share and per share information data herein that relates to our common stock prior to the effective date has been retroactively restated to reflect the reverse stock split.
Note 3 -
Liquidity Risks and Management’s Plans
As of December 31, 2017, we had cash and cash equivalents of $1.8 million and current liabilities of $11.7 million.
In January 2018 and March 2018, we received interim loans from our parent company, LPH Investments Limited (LPH), an affiliate of Lee’s Pharmaceutical Holdings Ltd (Lee’s), a company incorporated in the Cayman Islands with limited liability whose common stock is listed on the Hong Kong Stock Exchange and which beneficially owns a majority interest in our common stock, in the amounts of $1.5 million and $1.0 million, respectively, to support our AEROSURF development activities and sustain our operations while we continued our diligence efforts to identify one or more potential strategic or equity transactions. To secure our obligations under these loans, we granted Lee’s a security interest in substantially all of our assets (see, “- Note 17 - Subsequent Events.”)
In early April 2018, we completed a $2.6 million private placement offering with LPH II Investments Limited (LPH II), a wholly-owned subsidiary of Lee’s, from which we received net proceeds of approximately $2.5 million (see, “- Note 17 - Subsequent Events”). As of April 15, 2018, before any additional financings, including in connection with potential strategic transactions, we believe that we will have sufficient cash resources available to support our development activities and business operations through May 2018.
We expect to continue to incur significant losses and require significant additional capital to advance our AEROSURF clinical development program, support our operations and satisfy existing obligations beyond May 2018, and we do not have sufficient cash and cash equivalents for at least the next year following the date that the financial statements are issued. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.
To alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, management plans to raise additional capital through one or more of the following: (i) strategic transactions, including potential alliances and collaborations focused on markets outside the U.S., as well as potential combinations (including by merger or acquisition) or other corporate transactions; we are currently engaged in active diligence and discussions with a third party for a potential strategic transaction, and (ii) through private placements of our equity securities, although there can be no assurance that we will be able to secure such transaction or complete a private placement on acceptable terms, if at all. If none of these alternatives is available, or if available, we are unable to raise sufficient capital through such transactions, we will not have sufficient cash resources and liquidity to fund our business operations for at least the next year following the date that the financial statements are issued. Accordingly, management has concluded that substantial doubt exists with respect to our ability to continue as a going concern through one year after the issuance of the accompanying financial statements.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business, and do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
As of December 31, 2017, there were 120 million shares of common stock and 5 million shares of preferred stock authorized under our Certificate of Incorporation, and approximately 114.1 million shares of common stock and 5.0 million shares of preferred stock available for issuance and not otherwise reserved.
Note 4 -
Accounting Policies and Recent Accounting Pronouncements
The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U. S.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Consolidation
The consolidated financial statements include all accounts of Windtree Therapeutics, Inc. and its inactive subsidiary, Discovery Laboratories, Inc. (formerly known as Acute Therapeutics, Inc.). All intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the U. S., requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents are held in U.S. banks and consist of liquid investments and money market funds with a maturity from date of purchase of 90 days or less that are readily convertible into cash.
Fair value of financial instruments
Our financial instruments consist principally of cash and cash equivalents and restricted cash. The fair values of our cash equivalents are based on quoted market prices. The carrying amount of cash equivalents is equal to their respective fair values at December 31, 2017 and 2016, respectively. Other financial instruments, including accounts payable and accrued expenses, are carried at cost, which we believe approximates fair value.
Property and equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets (generally three to ten years). Leasehold improvements are amortized over the shorter of the estimated useful lives or the remaining term of the lease. Repairs and maintenance costs are charged to expense as incurred.
Restricted cash
Restricted cash consists of a certificate of deposit held by our bank as collateral for a letter of credit in the same notional amount held by our landlord to secure our obligations under our Lease Agreement dated May 26, 2004 for our headquarters location in Warrington, Pennsylvania (see, " - Note 12 - Commitments," for further discussion on our leases).
Long-lived assets
Our long-lived assets, primarily consisting of equipment, are reviewed for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable, or its estimated useful life has changed significantly. When the undiscounted cash flows of an asset are less than its carrying value, an impairment is recorded and the asset is written down to estimated value. No impairment was recorded during the years ended December 31, 2017 and 2016 as management believes there are no circumstances that indicate the carrying amount of the assets will not be recoverable.
Collaborative arrangements
We account for collaborative arrangements in accordance with applicable accounting guidance provided in ASC Topic 808, Collaborative Arrangements. See, “- Note 11 - Collaboration, Licensing and Research Funding Agreements - Collaboration Agreement - Battelle Memorial Institute,” for a description of our accounting for the Battelle collaboration Agreement.
Restructured debt liability - contingent milestone payment
In conjunction with the November 2017 restructuring and retirement of long-term debt (see, " - Note 8 - Long-term Debt/Restructured debt liability,"), we have established a $15 million long-term liability for contingent milestone payments potentially due under the Exchange and Termination Agreement dated as of October 27, 2017 (Exchange and Termination Agreement), between ourselves and affiliates of Deerfield Management Company L.P. (Deerfield). The liability has been recorded at full value of the contingent milestones and will continue to be carried at full value until the milestones are achieved and paid or milestones are not achieved and the liability is written off as a gain on debt restructuring.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Deferred revenue
Deferred revenue represents amounts collected but not yet earned and includes $1.0 million received in July 2017 for an upfront license fee in connection with the License Agreement with Lee’s. The License Agreement constitutes a multiple-element arrangement and revenue will be recognized as deliverables are completed and all revenue recognition criteria have been met.
Revenue recognition
Grant revenue
We recognize grant revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.
License revenue
We recognize license revenue under the License Agreement with Lee's in accordance with ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, which provides guidance for separating and allocating consideration in a multiple-element arrangement. Deliverables under the arrangement are separate units of accounting if the delivered item has value to the customer on a standalone basis and if the arrangement includes a general right of return relative to the delivery, or performance of the undelivered item is considered probable and substantially within the company’s control. The consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units of accounting based on their relative selling prices. We exercise significant judgement in determining whether a deliverable is a separate unit of accounting.
In determining the separate units of accounting, we evaluate whether the components have standalone value to the collaborator based on consideration of the relevant facts and circumstances for each arrangement. Whenever we determine that an element is delivered over a period of time, revenue is recognized using either a proportional performance model, if a pattern of performance can be determined, or a straight-line model over the period of performance, which is typically the research and development term.
Research and development
We account for research and development expense by the following categories: (a) product development and manufacturing, (b) medical and regulatory operations, and (c) direct preclinical and clinical development programs. Research and development expense includes personnel, facilities, manufacturing and quality operations, pharmaceutical and device development, research, clinical, regulatory, other preclinical and clinical activities and medical affairs. Research and development costs are charged to operations as incurred in accordance with Accounting Standards Codification (ASC) Topic 730, Research and Development.
Stock-based compensation
Stock-based compensation is accounted for under the fair value recognition provisions of ASC Topic 718, Stock Compensation (ASC Topic 718). See, “- Note 10 - Stock Options and Stock-based Employee Compensation," for a detailed description of our recognition of stock-based compensation expense. The fair value of stock option grants is recognized evenly over the vesting period of the options or over the period between the grant date and the time the option becomes non-forfeitable by the employee, whichever is shorter.
Warrant accounting
We account for common stock warrants in accordance with applicable accounting guidance provided in ASC Topic 815, Derivatives and Hedging - Contracts in Entity’s Own Equity (ASC Topic 815), as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement.
Income taxes
We account for income taxes in accordance with ASC Topic 740, Accounting for Income Taxes, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
We use a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Because we have never realized a profit, management has fully reserved the net deferred tax asset since realization is not assured.
Beneficial Conversion Feature
The issuance of our Preferred Shares in the first quarter of 2017 (see, “- Note 9 - Stockholders’ Equity”) resulted in a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor (or in the money) at inception due to the conversion option having an effective conversion price that is less than the fair value of the underlying stock at the commitment date. We recognized the beneficial conversion feature by allocating the relative fair value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the Preferred Shares. As the Preferred Shares are immediately convertible by the holders, the discount allocated to the beneficial conversion feature was immediately accreted and recognized as a $3.6 million one-time, non-cash deemed dividend to the preferred shareholders during the first quarter of 2017.
An additional discount to the Preferred Shares of $4.5 million was created due to the allocation of proceeds to the Warrants which were issued with the Preferred Shares. This discount is amortized proportionately as the Preferred Shares are converted. For the year ended December 31, 2017, we recognized a non-cash deemed dividend to the preferred shareholders of $2.8 million related to the Preferred Shares converted during the period.
Net loss per common share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive securities outstanding for the period. For the years ended December 31, 2017 and 2016, the number of shares of common stock potentially issuable upon the conversion of preferred stock or the exercise of certain stock options and warrants was 1.0 million and 0.5 million shares, respectively. As of December 31, 2017 and 2016, all potentially dilutive securities were anti-dilutive and therefore have been excluded from the computation of diluted net loss per share.
In accordance with ASC Topic 260, Earnings per Share, when calculating diluted net loss per common share, a gain associated with the decrease in the fair value of warrants classified as derivative liabilities results in an adjustment to the net loss; and the dilutive impact of the assumed exercise of these warrants results in an adjustment to the weighted average common shares outstanding. We utilize the treasury stock method to calculate the dilutive impact of the assumed exercise of warrants classified as derivative liabilities. For the year ended December 31, 2016, the effect of the adjustments for warrants classified as derivative liabilities was anti-dilutive. In February 2016, the warrants underlying the derivative liability expired.
We do not have any components of other comprehensive income (loss).
Concentration of Suppliers
We currently obtain the active pharmaceutical ingredients (APIs) of our KL4 surfactant drug products from single-source suppliers. In addition, we rely on a number of third-party institutions and laboratories that perform various studies as well as quality control release and stability testing and other activities related to our KL4 surfactant development and manufacturing activities. At the present time, several of these laboratories are single-source providers. The loss of one or more of our single-source suppliers or testing laboratories could have a material adverse effect upon our operations.
Business segments
We currently operate in one business segment, which is the research and development of products focused on surfactant therapies for respiratory disorders and diseases, and the manufacture and commercial sales of approved products. We are managed and operated as one business. A single management team that reports to the Chief Executive Officer comprehensively manages the entire business. We do not operate separate lines of business with respect to our product candidates.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. Substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or are available to be issued). We adopted ASU 2014-15 effective December 31, 2016. Management has concluded that substantial doubt exists with respect to our ability to continue as a going concern through one year after the issuance of these financial statements (see, “- Note 3 - Liquidity Risks and Management's Plans”).
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update addresses the income tax effects of stock-based payments and eliminates the windfall pool concept, as all of the tax effects related to stock-based payments will now be recorded at settlement (or expiration) through the income statement. The new guidance also permits entities to make an accounting policy election for the impact of forfeitures on the recognition of expense for stock-based payment awards. Forfeitures can be estimated or recognized when they occur. We adopted ASU 2016-09 during the three months ended March 31, 2017 and will continue to recognize stock compensation expense with estimated forfeitures. The adoption did not have a material impact on our 2017 financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. We adopted ASU 2016-18 on March 31, 2017 on a retrospective basis. As a result, beginning-of-period cash, cash equivalents and restricted cash in the statement of cash flows increased by $0.2 million for each of the years ended December 30, 2017 and 2016.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the annual period ending December 31, 2018 and interim periods within that annual period. An entity can elect to apply the guidance under one of the following two methods: (i) retrospectively to each prior reporting period presented, referred to as the full retrospective method or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings, referred to as the modified retrospective method. We have not yet completed our final review of the impact of this guidance including the new disclosure requirements, as we are continuing to evaluate the impact of adoption and the implementation approach to be used. We plan to adopt the new standard effective January 1, 2018 using the modified retrospective method. We continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact its current conclusions.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 482). This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting standards. The ASU is effective for the annual period ending December 31, 2019 and interim periods thereafter. Early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are currently evaluating the effect of ASU 2016-02 and believe it may have a material impact on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The ASU is effective prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. We are currently evaluating the effect that ASU 2017-09 may have on our consolidated financial statements and related disclosures, but we do not expect it to have a material impact on our financial statements.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Note 5 -
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
●
Level 1 - Quoted prices in active markets for identical assets and liabilities.
●
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
●
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are categorized in the table below as of December 31, 2017 and 2016:
The following table summarizes changes in the fair value of common stock warrant liability measured on a recurring basis using Level 3 inputs. For 2016, the change in fair value of common stock warrant liability represents the write-off of the remaining liability upon expiration of the underlying 2011 warrants in February 2016.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Note 6 -
Property and Equipment
Property and equipment comprises the following:
Depreciation expense on property and equipment for the years ended December 31, 2017 and 2016 was $0.2 million and $0.3 million, respectively.
Note 7 -
Collaboration Payable and Accrued Expenses
Collaboration payable represents amounts due to Battelle under a collaboration agreement related to the development of a new version of our ADS (see, Note 11 - Collaboration, Licensing and Research Funding Agreements). As of December 31, 2017 and 2016, collaboration payable was $3.6 million and $4.0 million, respectively, including accrued interest.
Accrued expenses comprise the following:
Note 8 -
Long-term Debt / Restructured Debt Liability
As of December 31, 2016, long-term debt consists solely of amounts due under a loan (Deerfield Loan) with Deerfield for the periods presented:
Under the terms of the Deerfield Loan, Deerfield made two advances, the first upon execution of the agreement in February 2013 in the amount of $10 million, and the second upon the first commercial sale of SURFAXIN® in December 2013 in the amount of $20 million. The outstanding principal accrued interest at a rate of 8.75%, payable quarterly in cash.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Upon execution of the Deerfield Loan, we issued to Deerfield warrants to purchase approximately 10,000 shares of our common stock at an exercise price of $786.80 per share. Upon receipt of the second advance in December 2013, we issued to Deerfield warrants to purchase an additional 15,000 shares of our common stock at an exercise price of $786.80 per share. The warrants had a six-year term through the sixth anniversary of the Deerfield Loan agreement, or February 13, 2019.
In July 2015, we entered into two amendments to the Deerfield Loan agreement resulting in (i) prepayment of $5.0 million of principal, (ii) elimination of the principal installment originally due in February 2017, (iii) each of the principal payments due in February 2018 and February 2019 was increased to $12.5 million, (iv) Deerfield purchased and accepted $5 million Series A and Series B units offered in our July 2015 public offering in satisfaction of $5 million of future interest payments due under the Deerfield Loan, and (v) after the full allocation of the $5 million interest prepayment, any remaining interest due on the principal amount of the Deerfield Loan accrued at a rate of 8.25% per annum.
On November 1, 2017, we and Deerfield entered into an Exchange and Termination Agreement pursuant to which (i) the promissory notes evidencing the aggregate principal amount of $25 million then owed under the Deerfield Loan, and (ii) warrants to purchase up to 25,000 shares of our common stock at an exercise price of $786.80 per share held by Deerfield were cancelled in consideration for (i) a cash payment in the aggregate amount of $2.5 million, (ii) an aggregate of 71,111 shares of common stock and (iii) the right to receive certain milestone payments based on achievement of specified development and commercial milestones related to our AEROSURF® development program, which, if achieved, could potentially total up to $15 million.
Contemporaneously with the execution of the Exchange and Termination Agreement, we and Deerfield entered into a registration rights agreement pursuant to which we agreed to provide certain registration rights with respect to the shares of common stock issued to Deerfield under the Exchange and Termination Agreement. We issued the shares of common stock to Deerfield pursuant to Rule 506(b) of Regulation D under, and Section 4(a)(2) of, the Securities Act of 1933.
The November 2017 restructuring and retirement of the Deerfield Loan was accounted for as an extinguishment of debt in accordance with ASC Topic 470, Debt - Modifications and Extinguishments, and, as a result, we incurred a $5.8 million non-cash gain on debt restructuring consisting of the difference between the $25 million carrying amount of the extinguished Deerfield Loan and the consideration to Deerfield under the Exchange and Termination Agreement, which includes $15 million in contingent milestone payments, $2.5 million in cash, a $1.4 million write-off of prepaid interest, and $0.3 million in fair value of common stock issued to Deerfield. We established a $15 million long-term liability for the contingent milestone payments potentially due to Deerfield under the Exchange and Termination Agreement (see, “-Note 4 - Accounting Policies and Recent Accounting Pronouncements - Restructured debt liability - contingent milestone payment”).
The following amounts comprise the Deerfield Loan interest expense for the periods presented:
Amortization of prepaid interest expense represents non-cash amortization of $5 million of Series A Units and Series B units that Deerfield purchased in our July 2015 public offering and accepted in satisfaction of $5 million of future interest payments calculated at an interest rate of 8.75% under the Deerfield Loan. Cash interest expense represents interest at an annual rate of 8.25% payable on a quarterly basis.
Note 9 -
Stockholders’ Equity
Private Placement Offerings
February 2017 Private Placement
On February 15, 2017, we completed a private placement offering of 7,049 Series A Convertible Preferred Stock units at a price per unit of $1,495, for an aggregate purchase price of approximately $10.5 million, including $1.6 million of non-cash consideration representing a reduction in amounts due and accrued as of December 31, 2016 for current development services that otherwise would have become payable in cash in the first and second quarters of 2017. Each unit consists of: (i) one share of Series A Convertible Preferred Stock, par value $0.001 per share (Preferred Shares); and (ii) Series A-1 Warrants ("Warrants") to purchase 50 shares of common stock at an exercise price equal to $27.40 per share. Each Preferred Share may be converted at the holder's option at any time into 50 shares of common stock. The Warrants may be exercised through February 15, 2024. The Preferred Shares and the Warrants may not be converted or exercised to the extent that the holder would, following such exercise or conversion, beneficially own more than 9.99% (or other lesser percent as designated by each holder) of our outstanding shares of common stock. In the event of a liquidation, including without limitation, the sale of substantially all of our assets and certain mergers and other corporate transactions (as defined in the Certificate of Designation of Preferences, Rights and Limitations relating to the Preferred Shares), the holder of Preferred Shares will have a liquidation preference that could result in the holder receiving a return of its initial investment before any payments are made to holders of common stock, and then participating with other equity holders until it has received in the aggregate up to three times its original investment. In addition to the offering, the securities purchase agreement also provides that, until February 13, 2018, the investors are entitled to participate in subsequent bona fide capital raising transactions that we may conduct.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
To facilitate consummation of the Share Purchase Agreement in October 2017 (see - Share Purchase Agreement), Battelle, holder of an aggregate of 1,095 shares of our Series A Convertible Preferred Stock, par value $0.001 per share, executed a waiver wherein Battelle waived its right to the liquidation preference with respect to their Preferred Shares. We considered the relevant accounting guidance and concluded that the waiver did not remove a substantive term or otherwise fundamentally change the Preferred Shares. As a result, the Preferred Shares were modified rather than extinguished, and Battelle did not receive incremental fair value in the modification. There was, therefore, no incremental expense to be recognized related to the waiver. In addition, we and Battelle entered into a non-binding memorandum of understanding outlining the key terms for a potential restructuring of the amounts due to Battelle under development and collaboration agreements between ourselves and Battelle.
As of December 31, 2017, 4,348 Preferred Shares have been converted into 217,400 shares of common stock and 2,701 Preferred Shares remain outstanding.
Share Purchase Agreement
Effective October 27, 2017, we entered into a Share Purchase Agreement (SPA) with LPH Investments Limited (LPH), a company incorporated in the Cayman Islands with limited liability and an affiliate of Lee’s. Under the SPA, LPH invested $10 million (the Investment) in our Company and acquired 2,311,604 shares of our common stock (the Shares), at a price of $4.326 per share, which represented a 15% premium over the average of the daily volume-weighted average price per share (VWAP) over the 10-day trading period ending on and including the date of the SPA. Following the transactions described in the SPA, LPH beneficially owned 73% of our issued and outstanding shares of common stock. The Investment included cancellation of $3.9 million in outstanding loans that we borrowed from Lee’s (HK) under the Loan Agreement, effective August 14, 2017, between ourselves and Lee's (HK). Pursuant to the SPA, we granted LPH the right to appoint up to two individuals to serve on our Board of Directors, and LPH may designate such individuals on or prior to the 30th day following the closing of the transactions contemplated by the SPA (the Closing). In addition, the SPA also amended the executive employment agreement of each of our President and Chief Executive Officer (Craig Fraser), Senior Vice President and Chief Financial Officer (John A. Tattory) and Senior Vice President and Chief Medical Officer (Steven G. Simonson, M.D.), such that the executives agreed to waive the guaranteed Annual Bonuses (as defined in each executive's employment agreement) that otherwise would have been payable to the executives during the 24-month period following the change of control to Lee’s. Also under the SPA, each executive was awarded restricted stock units under our 2011 Long-Term Incentive Plan, as amended, having a value when issued equal to the combined total value of the 2017 and 2018 Target Bonus Amounts (as defined in each executive's employment agreement) and initially vesting in two equal installments on March 15, 2018 and March 15, 2019. Under the terms of the SPA, we also granted to LPH a preemptive right to purchase in future offerings of equity securities up to that number of shares of our equity securities needed to maintain LPH's percentage of beneficial ownership of our outstanding voting stock immediately prior to each such offering, subject to certain limitations and exclusions.
Contemporaneously with the execution of the SPA, we and LPH entered into a registration rights agreement pursuant to which we agreed to provide certain registration rights with respect to the Shares under the SPA, which rights are limited to registration of up to 25% of the Shares during the initial 18-month period following the closing of the SPA. We issued the Shares to LPH pursuant to Rule 506(b) of Regulation D and Regulation S under, and Section 4(a)( 2) of, the Securities Act of 1933.
At-the-Market Program (ATM Program)
Stifel ATM Program
On February 11, 2013, we entered into an At-the-Market Equity Sales Agreement (ATM Agreement) with Stifel, under which Stifel, as our exclusive agent, at our discretion and at such times that we may determine from time to time, may sell over a three-year period up to a maximum of $25 million of shares of our common stock (ATM Program). On February 11, 2016, we amended the ATM Agreement to extend the term three years until February 11, 2019. We are not required to sell any shares at any time during the term of the ATM Program.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
If we issue a sale notice to Stifel, we may designate the minimum price per share at which shares may be sold and the maximum number of shares that Stifel is directed to sell during any selling period. We agreed to pay Stifel a commission equal to 3.0% of the gross sales price of any shares sold pursuant to the ATM Agreement. With the exception of expenses related to the shares, Stifel will be responsible for all of its own costs and expenses incurred in connection with the offering.
During 2017, we completed registered offerings of our common stock under the ATM Program of 42,357 shares, resulting in aggregate gross and net proceeds to us of approximately $1.1 million and $1.0 million, respectively.
During 2016, we completed offerings of our common stock under our ATM Program of 18,013 shares, resulting in aggregate gross and net proceeds to us of approximately $0.7 million.
Effective with our transition to the OTCQB® Market (OTCQB) tier in early May 2017, the ATM Program was no longer available to us.
401(k) Plan Employer Match
We have a voluntary 401(k) savings plan (401(k) Plan) covering eligible employees that allows for periodic discretionary company matches equal to a percentage of each participant’s contributions (up to the maximum deduction allowed, including “catch up” amounts). During 2017 and 2016 we provided for the company match by issuing shares of common stock that are registered pursuant to a registration statement on Form S-8 filed with the U.S. Securities and Exchange Commission (SEC). For the years ended December 31, 2017 and 2016, the match resulted in the issuance of 7,561 and 8,437 shares of common stock, respectively. Expense associated with the 401(k) match for the years ended December 31, 2017 and 2016 was $0.1 million and $0.3 million, respectively.
Common Shares Reserved for Future Issuance
Common shares reserved for potential future issuance upon exercise of warrants
The chart below summarizes shares of our common stock reserved for future issuance upon the exercise of warrants:
(1)
See, “- Note 11 - Collaboration, Licensing and Research Funding Agreements" for further details on the Battelle collaboration agreement
Common shares reserved for potential future issuance upon exercise of stock options or granting of additional equity incentive awards
At the 2017 Annual Meeting of Stockholders, our stockholders approved an increase in the number of shares available for issuance under our Amended and Restated 2011 Long-Term Incentive Plan (the “2011 Plan”) by 37,500. On October 25, 2017 the Board of Directors approved an increase to the number of shares available for issuance under the Plan by 1.75 million, which increase was approved by an action of the majority stockholder by written consent without a meeting of stockholders dated as of November 13, 2017.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
As of December 31, 2017 and 2016, we had 1.6 million and 0.1 million shares, respectively, available for potential future issuance under the 2011 Plan.
Common shares reserved for potential future issuance under our 401(k) Plan
As of December 31, 2017 and 2016, we had 807 and 8,368 common shares, respectively, reserved for potential future issuance under the 401(k) Plan.
Note 10 -
Stock Options and Stock-based Employee Compensation
Long-Term Incentive Plans
We have the 2011 Plan that provides for the grant of long-term equity and cash incentive compensation awards and replaced a 2007 Long-Term Incentive Plan (the 2007 Plan). Awards outstanding under the 2007 and an earlier 1998 Plan (expired) will continue to be governed by the terms of the plans and award agreements under which they were granted.
There are 1.9 million shares of our common stock authorized under the 2011 Plan, of which 1.6 million shares remain available for issuance. Additionally, any shares returnable to the 2007 Plan as a result of cancellations, expirations and forfeitures will be returned to, and become available for issuance under, the 2011 Plan. Shares returnable to the 1998 Plan as a result of cancellations, expirations and forfeitures will not become available for issuance under the 1998 Plan or the 2011 Plan. Awards under the Plan may include stock options, stock appreciation rights (SARs), restricted stock awards (RSAs), restricted stock units, other performance and stock-based awards, and dividend equivalents.
An administrative committee (the Committee - currently the Compensation Committee of the Board of Directors) or Committee delegates may determine the types, the number of shares covered by, and the terms and conditions of, such awards. Eligible participants may include any of our employees, directors, advisors or consultants.
Stock options and restricted stock units (RSUs) outstanding and available for future issuance are as follows:
No SARs, RSAs, other performance and stock-based awards, or dividend equivalents have been granted under the 2011 Plan. Although individual grants may vary, option awards generally are exercisable upon vesting, vest in a series of three successive, equal installments beginning with the first anniversary of the grant date, and have a 10-year term. Non-Plan stock options outstanding are in connection with the hiring of our Chief Executive Officer, Mr. Fraser, on February 1, 2016. Mr. Fraser was awarded an inducement grant in accordance with Nasdaq Listing Rule 5635(c)(4) and this inducement grant is exercisable upon vesting, vests in a series of three successive, equal installments beginning with the first anniversary of the grant date, and has a 10-year term.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
A summary of activity under our long-term incentive plans is presented below:
Based upon application of the Black-Scholes option-pricing formula described below, the weighted-average grant-date fair value of options granted during the years ended December 31, 2017 and 2016 was $17.44 and $27.80, respectively. The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2017 and 2016 was $4.33 and $36.80, respectively. The total intrinsic value of options outstanding, vested, and exercisable as of December 31, 2017 are each $0.
Stock-Based Compensation
We recognized stock-based compensation expense in accordance with ASC Topic 718 of $1.6 million for each of the years ended December 31, 2017 and 2016.
Stock-based compensation expense was classified as follows:
Under the 2011 Plan, outstanding awards fully vest upon a change in control. Concurrent with the execution of the share purchase agreement with LPH (see, Note 9 - Stockholders’ Equity - Private Placement Offerings) and the resulting change in control, all outstanding awards under the 2011 Plan, except for those held by certain executive officers, fully vested and resulted in a $0.4 million charge to stock based compensation expense in 2017.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula that uses assumptions noted in the following table. Expected volatilities are based upon the historical volatility of our common stock and other factors. We also use historical data and other factors to estimate option exercises, employee terminations and forfeiture rates. The risk-free interest rates are based upon the U.S. Treasury yield curve in effect at the time of the grant.
The total fair value of the underlying shares of the options vested during 2017 and 2016 equals $3.1 million and $1.9 million, respectively. As of December 31, 2017, there was $0.9 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2011 Plan. That cost is expected to be recognized over a weighted-average vesting period of 1.9 years.
Note 11 -
Collaboration, Licensing and Research Funding Agreements
Collaboration Agreement
Battelle Memorial Institute
In October 2014, we entered into a collaboration agreement with Battelle providing for the development of a new version (NextGen) of our ADS potentially for use in our remaining AEROSURF development activities and, if approved, initial commercial activities. Under our agreement, we and Battelle are executing a development plan to design, develop, and complete the testing, verification, and documentation of the NextGen ADS, with a sharing of development costs. These costs are recognized in research and development expense as incurred and were $1.2 million and $2.9 million for the years ended December 31, 2017 and 2016, respectively.
In connection with the collaboration agreement, we issued to Battelle two warrants to purchase shares of our common stock, each having an exercise price of $1,400 per share and a term of 10 years, subject to earlier termination under certain circumstances, including (i) a warrant to purchase up to 3,571 shares of our common stock, exercisable upon successful completion by Battelle of the three stage project plan (Initial Warrant), and (ii) a warrant to purchase up to 1786 shares of our common stock (Additional Warrant), exercisable if and only if Battelle successfully completed the project plan no later than a specified Milestone Date ( November 15, 2016). The Additional Warrant was cancelled as of November 15, 2016 as the project plan had not been completed by that date. The Battelle Warrants were issued pursuant to an exemption from registration contained in Regulation D, Rule 506. The Battelle Warrants are accounted for as equity instruments under the applicable accounting guidance of ASC Topic 815.
If Battelle successfully completes their activities under the agreement, we have agreed to pay Battelle royalties equal to a low single digit percentage of the worldwide net sales and license royalties on sales of AEROSURF for the treatment of RDS in premature infants, up to an aggregate limit of $25 million.
On October 27, 2017, we entered into a nonbinding memorandum of understanding with Battelle (Battelle MOU) outlining potential terms to restructure certain accounts payable related to our device development activities with Battelle and accordingly, we have written off approximately $0.6 million of previously accrued interest on collaboration invoices. Among other things, the MOU provides that in connection with the restructuring, the aggregate limit of potential royalties will be increased from $25 million to $35 million.
Licensing and Research Funding Agreements
Lee’s Pharmaceutical (HK) Ltd.
In June 2017, we entered into a License, Development and Commercialization Agreement (“License Agreement”) with Lee’s Pharmaceutical (HK) Ltd., a company organized under the laws of Hong Kong (“Lee’s”). Under the License Agreement, we granted to Lee’s an exclusive license with a right to sublicense, (i) to develop and commercialize our KL4 surfactant products, including SURFAXIN®, which was approved by the U.S. Food and Drug Administration (“FDA”) in 2012 for the prevention of respiratory distress syndrome (“RDS”) in premature infants, SURFAXIN LS™, the lyophilized dosage form of SURFAXIN; and AEROSURF®, an investigative combination drug/device product that is designed to deliver aerosolized KL4 surfactant noninvasively, and (ii) to register and manufacture SURFAXIN and SURFAXIN LS for use in the Licensed Territory, which includes the People’s Republic of China (“PRC”), Hong Kong, Thailand, Taiwan and 12 other countries (the “Licensed Territory”). In addition, we granted Lee’s options to potentially add Japan to the Licensed Territory and to manufacture our ADS in the Licensed Territory, in each case subject to conditions set forth in the License Agreement.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Under the License Agreement, Lee’s made an upfront payment to us of $1 million. We also may receive up to $37.5 million in potential clinical, regulatory and commercial milestone payments and will share in any sublicense income Lee’s may receive at a rate equal to low double digits. In addition, Lee’s will be responsible for all costs and expenses in and for the Licensed Territory related to development activities, including a planned AEROSURF phase 3 clinical trial, regulatory activities, and commercialization activities.
In August 2017, we entered into a Loan Agreement, pursuant to which Lee’s (HK) agreed to lend us up to $3.9 million to support our activities through October 31, 2017, while we and Lee’s worked to complete a $10 million securities purchase agreement (Lee’s SPA) pursuant to which Lee’s acquired a controlling interest in our Company effective on November 1, 2017. In connection with Lee’s SPA, we amended the License Agreement to expand certain of Lee’s (HK) rights, including by immediately adding Japan to the licensed territory, accelerating the right to manufacture the ADS in and for the licensed territory, reducing or eliminating certain of the milestone and royalty payments and adding an affiliate of Lee’s (HK) as a party to the License Agreement. As a result, the additional amounts for potential clinical, regulatory and commercial milestone were reduced to $35.8 million.
We will be eligible to receive tiered royalties based on a percent of Net Sales, depending on the product, in the range of high single to low-to-mid double digit percentages. Royalties are payable on a country-by-country basis until the latest of (A) the expiration of the last valid patent claim covering the product in the country of sale, (B) the expiration or revocation of any applicable regulatory exclusivity in the country of sale, and (C) ten (10) years after the first commercial sale in the country of sale. Thereafter, in consideration of licensed rights other than patent rights, royalties shall continue for the commercial life of each product and, for the initial three years, shall be in the range of low-to-mid single digits. In addition, in the event that one or more generic products are introduced, the royalty rates will be reduced, subject to certain minimums if we are subject to continuing obligations at the time to pay royalties under our in-license agreements.
Under the License Agreement, Lee’s will be responsible for all activities related to development, regulatory approval and commercialization of KL4 surfactant and combination drug/device products in the Licensed Territory. Lee’s will hold the product licenses for all non-aerosolized products in the Licensed Territory and will seek regulatory approval initially for SURFAXIN and SURFAXIN LS for RDS. We will hold the product license in the Licensed Territory (except where prohibited by law) for all aerosolized products and will designate Lee’s its exclusive agent and representative to develop and register AEROSURF and other aerosolized products in our name and on our behalf. Lee’s also has agreed that, except as provided in the License Agreement, for a period of ten (10) years beginning with the later of the first commercial sale of the first aerosolized product and the first commercial sale of the first non-aerosolized product in the PRC, it will not develop, register, manufacture, or commercialize any product for the prevention and/or treatment of RDS in premature infants or other diseases and conditions in humans, in either case that administers, utilizes or contains pulmonary surfactant without our prior written consent.
Lee’s may sublicense certain activities under the License Agreement to an affiliate of Lee’s, but may not grant sublicenses to unaffiliated third parties without our prior consent. A sublicensee and a subcontractor may not be a competitor that we identify to Lee’s. Sublicenses under the License Agreement do not include the right to further sublicense. In addition, we and Lee’s have entered into a technology transfer agreement under which we will transfer to Lee’s the manufacturing processes for SURFAXIN and SURFAXIN LS; and we and Lee’s plan to negotiate (i) a manufacturing agreement providing for the manufacture of SURFAXIN and SURFAXIN LS by Lee’s and giving us access to such products outside the Licensed Territory; (ii) a manufacturing and supply agreement providing for the manufacture and supply of AEROSURF drug and medical device components by us to Lee’s; and (iii) such other agreements and amendments as may be necessary for the parties to perform their obligations under the License Agreement.
The term of the License Agreement commenced on the effective date of the License Agreement and will continue on a country-by-country basis for the commercial life of the products. Either party may terminate the License Agreement in the event of bankruptcy or a material breach of the License Agreement by the other party that remains uncured for a period of sixty (60) days. In addition, either party may terminate the License Agreement in its entirety or with respect to any individual product or country if a regulatory authority terminates, suspends or discontinues development of a product and such termination, suspension or discontinuance persists for a period in excess of eighteen (18) months. Upon termination of the License Agreement in its entirety or with respect to a particular product or country, generally all related rights and licenses granted to Lee’s will terminate, all rights under our technology will revert to us, and Lee’s will cease all use of our technology.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Philip Morris USA Inc. and Philip Morris Products S.A.
Under license agreements with Philip Morris USA Inc. (PMUSA) and Philip Morris Products S.A. (PMPSA), we hold exclusive worldwide licenses to the ADS technology for use with pulmonary surfactants (alone or in combination with any other pharmaceutical compound(s)) for all respiratory diseases and conditions (the foregoing uses in each territory, the Exclusive Field), and an exclusive license in the U.S. for use with certain non-surfactant drugs to treat a wide range of pediatric and adult respiratory indications in hospitals and other health care institutions. We generally are obligated to pay royalties at a rate equal to a low single digit percent of sales of products sold in the Exclusive Field (as defined in the license agreements) in the territories, including sales of aerosol devices that are not based on the capillary aerosolization technology (unless we exercise our right to terminate the license with respect to a specific indication). We also agreed to pay minimum royalties quarterly beginning in 2014, but are entitled to a reduction of future royalties in an amount equal to the excess of any minimum royalty paid over royalties actually earned in prior periods. For 2016, we paid the minimum royalty of $250,000 to PMUSA and paid $62,500 to PMPSA with the remaining $187,500 deferred until July 2017. For 2017, we paid the minimum royalty of $300,000 to PMUSA and paid $487,500 to PMPSA, which included the minimum royalty of $300,000 as well as the $187,500 in deferred 2016 payments.
Johnson & Johnson and Ortho Pharmaceutical Corporation
We, Johnson & Johnson (J&J) and its wholly-owned subsidiary, Ortho Pharmaceutical Corporation, are parties to a license agreement granting to us an exclusive worldwide license to the J&J proprietary KL4 surfactant technology. Under the license agreement, we are obligated to pay fees of up to $2.5 million in the aggregate upon our achievement of certain milestones, primarily upon receipt of marketing regulatory approvals for certain designated products. We have paid $950,000 to date for milestones that have been achieved including a $500,000 milestone payment in 2012 that became due as a result of the FDA’s approval of SURFAXIN. In addition, we are required to make royalty payments at different rates, depending upon type of revenue and country, in amounts in the range of a high single digit percent of net sales (as defined in the license agreement) of licensed products sold by us or sublicensees, or, if greater, a percentage of royalty income from sublicensees in the low double digits.
Laboratorios del Dr. Esteve, S.A.
We have a strategic alliance with Laboratorios del Dr. Esteve, S.A. (Esteve) for the development, marketing and sales of a broad portfolio of potential KL4 surfactant products in Andorra, Greece, Italy, Portugal, and Spain. Antonio Esteve, Ph.D., a principal of Esteve, served as a member of our Board of Directors from May 2002 until January 2013. Esteve will pay us a transfer price on sales of our KL4 surfactant products. We will be responsible for the manufacture and supply of all of the covered products and Esteve will be responsible for all sales and marketing in the territory. Esteve is obligated to make stipulated cash payments to us upon our achievement of certain milestones, primarily upon receipt of marketing regulatory approvals for the covered products. In addition, Esteve has agreed to contribute to phase 3 clinical trials for the covered products by conducting and funding development performed in the territory. As part of a 2004 restructuring in which Esteve returned certain rights to us in certain territories (Former Esteve Territories), we agreed to pay Esteve 10% of any cash up front and milestone fees (up to a maximum aggregate of $20 million) that we receive in connection with any strategic collaborations for the development and/or commercialization of certain of our KL4 surfactant products in the Former Esteve Territories.
Note 12 -
Commitments
Operating Leases
Our operating leases consist primarily of a facility lease for our operations in Pennsylvania.
We maintain our corporate headquarters and operations in Warrington, Pennsylvania. The facility serves as the main operating facility for drug and device development, regulatory, analytical technical services, research and development, and administration. In April 2016, the lease was amended to (i) reduce the leased space from 39,594 square feet to 30,506 square feet and (ii) extend the term an additional four years through February 2022. The total aggregate base rental payments remaining under the extended portion of the lease as of December 31, 2017 were approximately $3.9 million.
In February 2018, the lease was amended to (i) reduce the leased space from 30,506 square feet to 21,189 square feet and (ii) reduce the security deposit under the lease in the form of a letter of credit from $225,000 to $140,000. The total aggregate base rental payments remaining under the lease as of the date of the amendment were approximately $2.5 million.
Rent expense under these leases was $0.7 million and $0.8 million for the years ended December 31, 2017 and 2016, respectively.
Severance
Effective February 1, 2016, we terminated the Employment Agreement between ourselves and our then-President and Chief Executive Officer (Former CEO). During the first quarter of 2016, we incurred a severance charge of $1.2 million in general and administrative expense under the terms of the Former CEO’s employment agreement, including $0.2 million related to stock option expense for certain options that continued to vest through August 1, 2017. Of the $1.0 million in severance not related to stock-based compensation, $0.9 million was paid as of December 31, 2017.
During the second quarter of 2016, we incurred a severance charge of $0.4 million related to a May 2016 workforce reduction that was a component of a broader effort to initiate cash conservation and other cost reduction measures.
On July 13, 2017, we implemented a reduction in workforce by 20 employees, representing approximately 42% of our total workforce, from 48 to 28 employees. The reduction was across all functions of the Company and affected employees were eligible for certain severance and other benefits resulting in a severance charge of $0.2 million in the third quarter of 2017.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Note 13 -
Litigation
We are not aware of any pending or threatened legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
We have from time to time been involved in disputes and proceedings arising in the ordinary course of business, including in connection with the conduct of our clinical trials. In addition, as a public company, we are also potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations and financial condition.
Note 14 -
Income Taxes
Since our inception, we have never recorded a provision or benefit for Federal and state income taxes.
The reconciliation of the income tax benefit computed at the Federal statutory rates to our recorded tax benefit for the years ended December 31, 2017 and 2016 is as follows:
On December 22, 2017, the U.S. government enacted the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act), which significantly revises U.S. tax law by, among other provisions, lowering the U.S. federal statutory income tax rate to 21%, imposing a mandatory one-time transition tax on previously deferred foreign earnings, and eliminating or reducing certain income tax deductions. As a result of the reduction in the U.S. corporate income tax rate, we revalued our ending net deferred tax assets as of December 31, 2017 which resulted in a provisional benefit of $71.2 million. However, this adjustment was offset by a related change in the valuation allowance. The 2017 Tax Act also imposed a tax for a one-time deemed repatriation of post-1986 unremitted foreign E&P through the year ended December 31, 2017. We did not record any provisional tax expense related to the deemed repatriation as we do not have any undistributed foreign earnings.
ASC 740, Income Taxes requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the 2017 Tax Act’s provisions, the SEC issued SAB 118, which allows companies to record the tax effects of the 2017 Tax Act on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment. The 2017 Tax Act did not have a material impact on our financial statements since our deferred temporary differences are fully offset by a valuation allowance and we do not have any off shore earnings from which to record the mandatory transition tax. However, given the significant complexity of the 2017 Tax Act, anticipated guidance from the U.S. Treasury about implementing the 2017 Tax Act, and the potential for additional guidance from the SEC or the FASB related to the 2017 Tax Act, these estimates may be adjusted during the measurement period. The provisional amounts disclosed in this footnote were based on the present interpretations of the 2017 Tax Act and current available information, including assumptions and expectations about future events, such as our projected financial performance, and are subject to further refinement as additional information becomes available (including our actual full fiscal 2018 results of operations, as well as potential new or interpretative guidance issued by the FASB or the Internal Revenue Service and other tax agencies) and further analyses are completed. We continue to analyze the changes in certain income tax deductions and gather additional data to compute the full impacts on our deferred and current tax assets and liabilities.
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities, at December 31, 2017 and 2016, are as follows:
We are in a net deferred tax asset position at December 31, 2017 and 2016 before the consideration of a valuation allowance. Because we have never realized a profit, management has fully reserved the net deferred tax asset since realization is not assured. It is our policy to classify interest and penalties recognized on uncertain tax positions as a component of income tax expense. There was neither interest nor penalties accrued as of December 31, 2017 or 2016, nor were any incurred in 2017 or 2016.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
At December 31, 2017 and 2016, we had available carryforward net operating losses for Federal tax purposes of $590.0 million and $581.4 million, respectively, and a research and development tax credit carryforward of $16.8 million and $15.7 million, respectively. The Federal net operating loss and research and development tax credit carryforwards will continue to expire through 2037.
At December 31, 2017, we had available carryforward Federal and state net operating losses of $5.2 million and $0.4 million, respectively, related to stock-based compensation, the tax effect of which will result in a credit to equity as opposed to income tax expense, to the extent these losses are utilized in the future.
At December 31, 2017 and 2016, we had available carryforward losses of approximately $567.7 million and $570.3 million, respectively, for state tax purposes. Of the $567.7 million state tax carryforward losses, $553.6 million is associated with the state of Pennsylvania, with the remainder associated with the other 6 states within which we have established tax nexus.
Utilization of net operating loss (NOL) and research and development (R&D) credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. There also could be additional ownership changes in the future, which may result in additional limitations in the utilization of the carryforward NOLs and credits.
A full valuation allowance has been provided against our deferred tax assets and, if a future assessment requires an adjustment, an adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations if an adjustment were required.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Note 15 -
Selected Quarterly Financial Data (Unaudited)
The following tables contain unaudited statement of operations information for each quarter of 2017 and 2016. The operating results for any quarter are not necessarily indicative of results for any future period.
(1)
Net loss per common share - basic and diluted and weighted average number of common shares outstanding for the quarters ended June 30, 2017 and September 30, 2017 have been corrected for immaterial calculation errors related to the conversion of preferred stock to common stock during those periods (see, " - Note 9 - Stockholders’ Equity - Private Placement Offerings - February 2017 Private Placement," for further discussion of our preferred stock). The loss per share for the three and six months ended June 30, 2017 was reduced by $0.80. The loss per share for the three and nine months ended September 30, 2017 was reduced by $3.40.
WINDTREE THERAPEUTICS, INC. AND SUBSIDIARY
Note 16 -
Subsequent Events
We evaluated all events or transactions that occurred after December 31, 2017 through the date we issued these financial statements. During this period, we noted a subsequent event as described below:
In January 2018 and March 2018, we entered into loan agreements with LPH Investments Limited (LPH), an affiliate of Lee’s, for loan proceeds of $1.5 million and $1.0 million, respectively, to support our AEROSURF development activities and sustain its operations while the parties seek to identify and advance one or more potential strategic initiatives (“Funding Event”). To secure our obligations under these loans, we granted Lee’s a security interest in substantially all of our assets. The loans will accrue interest at a rate of 6% per annum and mature upon the earlier of the closing date of the Funding Event or December 31, 2018. The parties expect that, upon the closing of the Funding Event, the outstanding principal balance of the Loan will be applied in full satisfaction of a like amount of cash consideration payable by LPH for its participation in such Funding Event, and the Loan will be discharged in full thereby.
In April 2018, we completed a private placement with LPH II for the purchase of $2.6 million of our common stock and warrants at a purchase price per share of $4.80. In connection with this offering, we issued 541,667 shares of common stock and warrants to purchase 135,417 shares of common stock at an exercise price of $5.52 per share. The warrants are exercisable after 6 months and through the seventh anniversary of the issue date. In addition, under a Registration Rights Agreement, we agreed to file within 90 days from March 30, 2018, an initial resale registration statement with the SEC to register for subsequent resale the shares and the warrant shares. We are required to seek registration of 25% of the shares and warrant shares on such initial resale registration statement. From time to time, following the 180th day from March 30, 2018, LPH II or a majority of the holders of the Shares and Warrant Shares may require us to file additional registration statement(s) to register the resale of the balance of the Shares and Warrant Shares, subject to certain limitations.