2018 0630 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________



Form 10-Q

_____________________



 

 



(Mark One)

 



   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 



OF THE SECURITIES EXCHANGE ACT OF 1934

 



For the Quarterly Period Ended June  30, 2018

or



 

 



   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

 



OF THE SECURITIES EXCHANGE ACT OF 1934

 



Commission File Number: 000-29959

_______________



Pain Therapeutics, Inc.

(Exact name of registrant as specified in its charter)





 

 

 



Delaware

91-1911336

 



(State or other jurisdiction of

(I.R.S.   Employer

 



incorporation or organization)

Identification Number)

 



7801 N. Capital of Texas Highway, Suite 260, Austin, TX 78731

 (512) 501-2444

(Address, including zip code, of registrant's principal executive offices and

telephone number, including area code)



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

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

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



 



Large accelerated filer 

Accelerated filer



Non-accelerated filer 

Smaller reporting company   



 

Emerging growth company 



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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.





 

 

 



 

 

 



Common Stock, $0.001 par value

6,981,207

 



 

Shares Outstanding as of July 24, 2018

 



 



 

1


 





PAIN THERAPEUTICS, INC.



TABLE OF CONTENTS





 

 



 

Page No.

PART I.

FINANCIAL INFORMATION

 



 

 

  Item 1.

Financial Statements

 



 

 



Condensed Balance Sheets – June 30, 2018 and December 31, 2017

3



 

 



Condensed Statements of Operations – Three and Six Months Ended June 30, 2018 and June 30, 2017

4



 

 



Condensed Statements of Comprehensive Loss – Three and Six Months Ended June 30, 2018 and June 30, 2017

5



 

 



Condensed Statements of Cash Flows – Six Months Ended June 30, 2018 and June 30, 2017

6



 

 



Notes to Condensed Financial Statements

7



 

 

  Item 2.

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

13



 

 

  Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21



 

 

  Item 4.

Controls and Procedures

21



 

 

PART II.

OTHER INFORMATION

 



 

 

  Item 1.

Legal Proceedings

21



 

 

  Item 1A

Risk Factors

22



 

 

  Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45



 

 

  Item 3.

Defaults Upon Senior Securities

45



 

 

  Item 4.

Mine Safety Disclosures

45



 

 

  Item 5.

Other Information

45



 

 

  Item 6.

Exhibits

46



 

 

Signatures

47

 



2


 

PART I.  FINANCIAL INFORMATION



Item 1. Financial Statements







 

 

 

 

 



 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

CONDENSED BALANCE SHEETS

(Unaudited, in thousands, except share and per share data)



 

 

 

 

 



June 30,

 

December 31,



2018

 

2017

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

9,608 

 

$

10,479 

Other current assets

 

91 

 

 

184 

Total current assets

 

9,699 

 

 

10,663 

Property and equipment, net

 

122 

 

 

156 

Other assets

 

12 

 

 

12 

Total assets

$

9,833 

 

$

10,831 



 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable

$

962 

 

$

424 

Accrued development expense

 

 —

 

 

399 

Accrued compensation and benefits

 

313 

 

 

309 

Other current liabilities

 

12 

 

 

 —

Total current liabilities

 

1,287 

 

 

1,132 

Noncurrent liabilities

 

 —

 

 

 —

Total liabilities

 

1,287 

 

 

1,132 

Commitments and contingencies

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock, $.001 par value; 10,000,000 shares authorized, none issued and outstanding

 

 —

 

 

 —

Common stock, $.001 par value; 120,000,000 shares authorized; 6,895,509 and 6,595,509 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

 

Additional paid-in capital

 

170,551 

 

 

167,091 

Accumulated deficit

 

(162,012)

 

 

(157,399)

Total stockholders' equity

 

8,546 

 

 

9,699 

Total liabilities and stockholders' equity

$

9,833 

 

$

10,831 



 

 

 

 

 







See accompanying notes to condensed financial statements.

3


 







 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

 

Six months ended



 

June 30,

 

 

June 30,



 

2018

 

2017

 

 

2018

 

2017

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

1,463 

 

$

3,063 

 

 

$

2,532 

 

$

4,452 

General and administrative

 

 

998 

 

 

1,103 

 

 

 

2,097 

 

 

2,478 

Total operating expenses

 

 

2,461 

 

 

4,166 

 

 

 

4,629 

 

 

6,930 

Operating loss

 

 

(2,461)

 

 

(4,166)

 

 

 

(4,629)

 

 

(6,930)

Interest income

 

 

 

 

 

 

 

16 

 

 

27 

Net loss

 

$

(2,452)

 

$

(4,160)

 

 

$

(4,613)

 

$

(6,903)

Net loss per share, basic and diluted

 

$

(0.36)

 

$

(0.64)

 

 

$

(0.68)

 

$

(1.06)

Shares used in computing net loss per share, basic and diluted

 

 

6,838 

 

 

6,537 

 

 

 

6,739 

 

 

6,536 



 

 

 

 

 

 

 

 

 

 

 

 

 











See accompanying notes to condensed financial statements.

4


 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

Six months ended



 

June 30,

 

June 30,



 

2018

 

2017

 

2018

 

2017

Net loss

 

$

(2,452)

 

$

(4,160)

 

$

(4,613)

 

$

(6,903)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on marketable securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Comprehensive loss

 

$

(2,452)

 

$

(4,160)

 

$

(4,613)

 

$

(6,903)



 

 

 

 

 

 

 

 

 

 

 

 











See accompanying notes to condensed financial statements.

5


 







 

 

 

 

 



 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



 

 

 

 

 



Six months ended



June 30,



2018

 

2017

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(4,613)

 

$

(6,903)

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

 

 

 

 

 

Non-cash stock-based compensation

 

1,501 

 

 

1,536 

Depreciation and amortization

 

34 

 

 

34 

Non-cash net interest income

 

 —

 

 

(2)

Changes in operating assets and liabilities:

 

 

 

 

 

Other current assets

 

154 

 

 

344 

Accounts payable

 

538 

 

 

363 

Accrued development expense

 

(399)

 

 

Accrued compensation and benefits

 

 

 

(26)

Other current liabilities

 

12 

 

 

 —

Net cash used in operating activities

 

(2,769)

 

 

(4,649)

Cash flows from investing activities:

 

 

 

 

 

Purchases of marketable securities

 

 —

 

 

(399)

Sales of marketable securities

 

 —

 

 

400 

Maturities of marketable securities

 

 —

 

 

2,100 

Net cash provided by investing activities

 

 —

 

 

2,101 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

1,898 

 

 

 —

Net cash provided by financing activities

 

1,898 

 

 

 —

Net decrease in cash and cash equivalents

 

(871)

 

 

(2,548)

Cash and cash equivalents at beginning of period

 

10,479 

 

 

16,615 

Cash and cash equivalents at end of period

$

9,608 

 

$

14,067 



 

 

 

 

 











See accompanying notes to condensed financial statements.

6


 

PAIN THERAPEUTICS, INC.



Notes to Condensed Financial Statements

(Unaudited)



Note 1.  General and Liquidity



Pain Therapeutics, Inc. (the “Company”, “Pain Therapeutics” or “we”) develops proprietary drugs that offer significant improvements to patients and healthcare professionals. We generally focus our drug development efforts on disorders of the nervous system. 



In the course of our development activities, we have sustained cumulative operating losses. There are no assurances that additional financing will be available on favorable terms, or at all.



We have prepared the accompanying unaudited condensed financial statements of Pain Therapeutics in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the year 2018.  For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017. 



Liquidity



The Company has incurred significant net losses and negative cash flows since inception, and as a result has an accumulated deficit of $162 million at June 30, 2018. We expect our cash requirements to be significant in the future. As of June 30, 2018, the Company had $9.6 million in cash and cash equivalents, which is available to fund future operations. The amount and timing of our future cash requirements will depend on regulatory and market acceptance of our drug candidates, the resources we devote to researching and developing, formulating, manufacturing, commercializing and supporting our products. We may seek additional future funding through public or private financing within this timeframe, if such funding is available and on terms acceptable to us.



 

Note 2.  Significant Accounting Policies



Use of Estimates



We make estimates and assumptions in preparing our financial statements in conformity with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue earned and expenses incurred during the reporting period. We evaluate our estimates on an ongoing basis, including those estimates related to agreements, research collaborations and investments. Actual results could differ from these estimates and assumptions.



Cash Equivalents, Marketable Securities and Concentration of Credit Risk



We invest in cash equivalents and marketable securities. We consider highly-liquid financial instruments with original maturities of three months or less to be cash equivalents. Our marketable securities include interest-bearing financial instruments, generally consisting of corporate or government securities.



Our investment policy allows for investments in marketable securities with active secondary or resale markets, establishes diversification and credit quality requirements and limits investments by maturity and issuer. We maintain our investments at one financial institution.



A change in prevailing interest rates may cause the fair value of the investment to fluctuate. We do not recognize an impairment charge related to this type of fluctuation because the fluctuation is temporary and eliminated by the

7


 

time an investment matures. We would recognize an impairment charge if and when we determine that a decline in the fair value below the amortized cost of an investment is other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including any adverse changes in the investees’ financial condition, how long the fair value has been below the amortized cost and whether it is more likely than not that we would elect to or be required to sell the marketable security before its anticipated recovery.



We may elect to sell marketable securities before they mature. We hold these investments as “available for sale” and include these investments in our balance sheets as current assets, even though the contractual maturity of a particular investment may be beyond one year.



Fair Value Measurements



We report our cash equivalents and marketable securities at fair value as Level 1, Level 2 or Level 3 using the following inputs:



·

Level 1 includes quoted prices in active markets. We base the fair value of money market funds and U.S. treasury securities on Level 1 inputs.

·

Level 2 includes significant observable inputs, such as quoted prices for identical or similar investments, or other inputs that are observable and can be corroborated by observable market data for similar securities. We use market pricing and other observable market inputs obtained from third-party providers. We use the bid price to establish fair value where a bid price is available. We base the fair value of our marketable securities on Level 2 inputs. We do not have any investments where the fair value is based on Level 2 inputs.

·

Level 3 includes unobservable inputs that are supported by little or no market activity. We do not have any investments where the fair value is based on Level 3 inputs.



We include unrealized gains or losses on our investments as accumulated other comprehensive loss in the stockholders’ equity section of our balance sheets. We include changes in net unrealized gains or losses in our statements of comprehensive income. We would recognize significant realized gains and losses on a specific identification basis as other income in our statements of operations.



Proceeds from Grants



During the first six months of 2018 and 2017, we received $0.8 million and $0.1 million pursuant to a previously disclosed research grant from the National Institutes of Health (“NIH”) and National Institute on Drug Abuse

(“NIDA”) that we recorded as a reduction to our research and development expenses.



Non-cash Stock-based Compensation 



We recognize non-cash expense for the fair value of all stock options and other share-based awards. We use the Black-Scholes option valuation model to calculate the fair value of stock options, using the single-option award approach and straight-line attribution method. For options granted to employees and directors, we recognize the resulting fair value as expense on a straight-line basis over the vesting period of each respective stock option, generally four years. For options granted to non-employees, we remeasure the fair value expense using Black-Scholes each reporting period.



We have granted share-based awards that vest upon achievement of certain performance criteria (“Performance Awards”). We multiply the number of Performance Awards by the fair market value of our common stock on the date of grant to calculate the fair value of each award. We estimate an implicit service period for achieving performance criteria for each award. We recognize the resulting fair value as expense over the implicit service period when we conclude that achieving the performance criteria is probable. We periodically review and update as appropriate our estimates of implicit service periods and conclusions on achieving the performance criteria. Performance Awards vest and common stock is issued upon achievement of the performance criteria.



Net Loss per Share



We compute basic net loss per share on the basis of the weighted-average number of common shares outstanding for the reporting period. We compute diluted net loss per share on the basis of the weighted-average number of

8


 

common shares outstanding plus potential dilutive common shares outstanding using the treasury-stock method. Potential dilutive common shares consist of outstanding stock options.



We include the following in the calculation of basic and diluted net loss per share (in thousands, except per share data):



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

 

Six months ended



 

June 30,

 

 

June 30,



 

2018

 

2017

 

 

2018

 

2017

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,452)

 

$

(4,160)

 

 

$

(4,613)

 

$

(6,903)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing net loss per share, basic and diluted

 

 

6,838 

 

 

6,537 

 

 

 

6,739 

 

 

6,536 

Net loss per share, basic and diluted

 

$

(0.36)

 

$

(0.64)

 

 

$

(0.68)

 

$

(1.06)

Dilutive common shares excluded from net loss per share, diluted

 

 

2,220 

 

 

2,369 

 

 

 

2,190 

 

 

2,402 



 

 

 

 

 

 

 

 

 

 

 

 

 



We excluded options outstanding from the calculation of net loss per share, diluted because the effect of including options outstanding would have been anti-dilutive.



Income Taxes 



We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year.



We have accumulated significant deferred tax assets that reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax assets is dependent upon future earnings. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these deferred tax assets with a valuation allowance.



We may in the future determine that certain deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the period in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our Statement of Operations in that period.



We classify interest recognized pursuant to our deferred tax assets as interest expense, when appropriate. 

9


 

Note 3.  Cash, Cash Equivalents and Marketable Securities and Assets Measured at Fair Value



Our cash, cash equivalents and marketable securities consisted of the following (in thousands):



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Cash, Cash Equivalents and Marketable Securities



Amortized Cost

 

Unrealized Gains

 

Unrealized Losses

 

Estimated Fair Value

 

Accrued Interest

 

Total Value

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

71 

 

$

 —

 

$

 —

 

$

71 

 

$

 —

 

$

71 

Cash equivalents

 

9,537 

 

 

 —

 

 

 —

 

 

9,537 

 

 

 —

 

 

9,537 

Total cash and cash equivalents

$

9,608 

 

$

 —

 

$

 —

 

$

9,608 

 

$

 —

 

$

9,608 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

9,608 

 

$

 —

 

$

 —

 

$

9,608 

 

$

 —

 

$

9,608 

Marketable securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

9,608 

 

$

 —

 

$

 —

 

$

9,608 

 

$

 —

 

$

9,608 

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matures in one year or less

$

9,608 

 

$

 —

 

$

 —

 

$

9,608 

 

$

 —

 

$

9,608 

Matures one to three years

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

9,608 

 

$

 —

 

$

 —

 

$

9,608 

 

$

 —

 

$

9,608 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

158 

 

$

 —

 

$

 —

 

$

158 

 

$

 —

 

$

158 

Cash equivalents

 

10,321 

 

 

 —

 

 

 —

 

 

10,321 

 

 

 —

 

 

10,321 

Total cash and cash equivalents

$

10,479 

 

$

 —

 

$

 —

 

$

10,479 

 

$

 —

 

$

10,479 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

10,479 

 

$

 —

 

$

 —

 

$

10,479 

 

$

 —

 

$

10,479 

Marketable securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

10,479 

 

$

 —

 

$

 —

 

$

10,479 

 

$

 —

 

$

10,479 

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matures in one year or less

$

10,479 

 

$

 —

 

$

 —

 

$

10,479 

 

$

 —

 

$

10,479 

Matures one to three years

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

10,479 

 

$

 —

 

$

 —

 

$

10,479 

 

$

 —

 

$

10,479 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



We did not realize any material gains or losses on our investments in marketable securities during the six months ended June 30, 2018 and December 31, 2017. To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.



Our assets measured at fair value on a recurring basis are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Level 1

 

Level 2

 

Level 3

 

Total

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

9,608 

 

$

 —

 

$

 —

 

$

9,608 

Commercial paper

 

 —

 

 

 —

 

 

 —

 

 

 —



$

9,608 

 

$

 —

 

$

 —

 

$

9,608 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

10,479 

 

$

 —

 

$

 —

 

$

10,479 

Commercial paper

 

 —

 

 

 —

 

 

 —

 

 

 —



$

10,479 

 

$

 —

 

$

 —

 

$

10,479 



 

 

 

 

 

 

 

 

 

 

 



During the six months ended June 30, 2018, there were no transfers between Level 1, Level 2 or Level 3.



 

 

10


 

Note 4.  Stockholders’ Equity and Stock-Based Compensation Expense



Stockholders’ equity activity in 2018



During the six months ended June 30, 2018, our common stock outstanding and stockholders’ equity

(in thousands) changed as follows:





 

 

 

 



Common Stock

 

Stockholders' equity
(in thousands)

Balance at December 31, 2017

6,595,509 

 

$

9,699 

Non-cash stock-related compensation for:

 

 

 

 

Stock options for employees

 —

 

 

1,469 

Stock options for non-employees

 —

 

 

32 

Issuance of common stock, net of issuance costs

300,000 

 

 

1,959 

Net loss

 —

 

 

(4,613)

Balance at June 30, 2018

6,895,509 

 

$

8,546 



 

 

 

 



At the Market Common Stock Issuance



At the Market Issuance Sales Agreement — On February 8, 2018, we entered into a Capital on Demand™ Sales Agreement, or the ATM Agreement, with JonesTrading. In accordance with the terms of the sales agreement, we are able to offer and sell up to $16.9 million of shares of our common stock, from time to time in one or more public offerings of our common stock, with JonesTrading acting as agent, in transactions pursuant to a shelf registration statement that was declared effective by the SEC on July 31, 2017.



During the six months ended June 30, 2018, we sold a total of 300,000 shares of our common stock under the ATM Agreement, in the open market at an average gross selling price of $6.70 per share for net proceeds of $1.9 million. We expensed approximately $0.1 million of cost for the offering, excluding JonesTrading commissions. During the six months ended June 30, 2018, we charged $0.01 million of these costs against addition paid-in capital. As of July 24, 2018, we had up to $14.7 million of shares of our common stock available for sale under the ATM Agreement.



Stock option and Performance Award activity in 2018



During the six months ended June 30, 2018, stock options and unvested Performance Awards outstanding under our Equity Incentive Plan changed as follows: 





 

 

 

 



 

 

 

 



 

Stock Options

 

Performance Awards

Outstanding as of December 31, 2017

 

2,982,155 

 

152,340 

Options granted

 

15,000 

 

 —

Options exercised

 

 —

 

 —

Options forfeited/canceled

 

(243,257)

 

 —

Outstanding as of June 30, 2018

 

2,753,898 

 

152,340 



 

 

 

 



The weighted average exercise price of options outstanding at June 30, 2018 was $15.44. As outstanding options vest over the current remaining vesting period of  three years, we expect to recognize non-cash expense of $3.6 million. If and when outstanding Performance Awards vest, we would recognize non-cash expense of $2.5 million over the implicit service period.



11


 

Stock-based Compensation Expense in 2018



During the three and six months ended June 30, 2018 and 2017, our non-cash stock-related compensation expenses were as follows (in thousands):



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

 

Six months ended



 

June 30,

 

 

June 30,



 

2018

 

2017

 

 

2018

 

2017

Research and development

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options

 

$

316 

 

$

289 

 

 

$

668 

 

$

601 



 

 

316 

 

 

289 

 

 

 

668 

 

 

601 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options

 

 

382 

 

 

420 

 

 

 

833 

 

 

935 



 

 

382 

 

 

420 

 

 

 

833 

 

 

935 

Total non-cash stock-based compensation expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options

 

 

698 

 

 

709 

 

 

 

1,501 

 

 

1,536 



 

$

698 

 

$

709 

 

 

$

1,501 

 

$

1,536 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



Note 5.  Income Taxes 



On December 22, 2017, legislation commonly known as the Tax Cuts and Jobs Act, or the Tax Act, was signed into law. The Tax Act, among other changes, reduces the U.S. federal corporate tax rate from 35% to 21%, requires taxpayers to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.  On December 31, 2017, the Company did not have any foreign subsidiaries and the international aspects of the Tax Act are not applicable.



In connection with the initial analysis of the impact of the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company's deferred tax balance was primarily offset by application of its valuation allowance.  The Company is still in the process of analyzing the impact to the Company of the Tax Act. Where the Company has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Company has recorded provisional amounts. Where the Company has not yet been able to make reasonable estimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the Tax Act.  For the six months ended June 30, 2018 no adjustments to the remeasurement of the Company’s deferred tax accounts were recognized.



We did not provide for income taxes during the six months ended June 30, 2018, because we have projected a net loss for the full year 2018.



 

Note 6Commitments



We conduct our product research and development programs through a combination of internal and collaborative programs that include, among others, arrangements with universities, contract research organizations and clinical research sites. We have contractual arrangements with these organizations that are cancelable. Our obligations under these contracts are largely based on services performed.



We have a non-cancelable operating lease for approximately 6,000 square feet of office space in Austin, Texas that expires in December 2020.  Minimum lease payments are as follows (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

2018

 

2019

 

2020

 

Total

Minimum lease payments

 

$

91 

 

$

95 

 

$

99 

 

$

285 



 

 

 

 

 

 

 

 

 

 

 

 



 

12


 

Note 7Recently Issued Accounting Pronouncements



We reviewed recently issued accounting pronouncements and have adopted or plan to adopt those that are applicable to us. We do not expect the adoption of these pronouncements to have a material impact on our financial position, results of operations or cash flows. 



In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  This ASU provides guidance on statement of cash flows presentation for eight specific cash flow issues where diversity in practice exists.  The Company adopted ASU 2016-15 effective January 1, 2018, and this guidance did not have any impact on the Company’s financial statements. 



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases.  For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position.  This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is evaluating the effect that the adoption of this ASU will have on its financial statements.  The Company currently expects that its operating lease commitment will be subject to the new standard and recognized as right-of-use asset and operating lease liability upon adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports relative to such amounts prior to adoption.

 



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations



This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. Operating results are not necessarily indicative of results that may occur in future periods.



This Quarterly Report on Form 10-Q contains certain statements that are considered forward-looking statements within the meaning of the Private Securities Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negatives of these terms or other comparable terminology.



The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to statements about:

·

the timing and topics of our discussions with the U.S. Food and Drug Administration (the  “FDA”) regarding the status of the New Drug Application (the “NDA”) for REMOXY® ER (oxycodone capsules CII), or REMOXY;

·

additional development activities to potentially support obtaining approval of REMOXY by the FDA;

·

the ability of REMOXY to capture a share of the market for extended release opioid drugs;

·

the status of products and potential products that are competitive with REMOXY and the implications of the FDA requirements for approval of such competitive products;

·

our plans to rely on third parties, including Durect Corporation (“Durect”), and Noramco, Inc. (“Noramco”) to supply us with excipients and active pharmaceutical ingredients and to manufacture REMOXY;

·

discussions with potential strategic partners for the development and commercialization of REMOXY;

·

the outcome of research and development activities, including, without limitation, development activities for FENROCK and potential formulation of additional dosage forms of our drug candidates;

13


 

·

the potential benefits of our product candidates such as REMOXY, FENROCK, PTI-125 or PTI-125DX including the potential ability of PTI-125 to prevent or reverse amyloid-related Alzheimer’s damage or PTI-125DX to diagnose Alzheimer’s disease;

·

the utility of protection of our intellectual property;

·

expected future sources of revenue and capital and increasing cash needs;

·

potential competitors or competitive products;

·

market acceptance of our drug candidates and potential drug candidates;

·

expectations regarding trade secrets, technological innovations, licensing agreements and outsourcing of certain business functions;

·

expenses increasing, interest income decreasing or fluctuations in our operating results;

·

operating losses and anticipated operating and capital expenditures;

·

expected uses of capital resources;

·

expectations regarding the issuance of shares of common stock to employees pursuant to equity compensation awards net of employment taxes;

·

anticipated hiring and development of our internal systems and infrastructure;

·

the sufficiency of our current resources to fund our operations over the next 12 months; and

·

assumptions and estimates used for our disclosures regarding stock-based compensation.



Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to:

·

difficulties or delays in potentially obtaining regulatory approval of the NDA for REMOXY, including the potential for requests by the FDA for additional data which may require an extended period of time to obtain and submit;

·

unexpected adverse side effects or inadequate therapeutic efficacy or manufacturing or stability issue of our drug candidates that could slow or prevent product approval (including the risk that current and past results of clinical trials are not indicative of future results of clinical trials) or potential post-approval market acceptance;

·

having or obtaining sufficient resources for the successful development, manufacture and commercialization of REMOXY;

·

the quantity, quality or sufficiency of the data, materials and information transferred to us by Pfizer, Inc.  (“Pfizer”) regarding the REMOXY development program;

·

discussions with potential strategic partners for the development and commercialization of REMOXY;

·

the successful development of other drug candidates, independently as well as pursuant to our other collaboration agreements, and the continuation of such agreements;

·

difficulties or delays in development, testing, clinical trials (including patient enrollment), regulatory authorization or approval, production and commercialization of our drug candidates;

·

the uncertainty of protection of our intellectual property rights or trade secrets;

·

potential infringement of the intellectual property rights of third parties;

·

pursuing in-license and acquisition opportunities;

·

maintenance or third party funding of our collaboration and license agreements;

·

legislation or regulatory actions affecting product pricing, reimbursement or access;

·

significant breakdown or interruption of our information technology and infrastructure;

14


 

·

significant issues that may arise related to outsourcing certain preclinical studies, clinical trials and formation and manufacturing activities;

·

hiring and retaining personnel; and

·

our financial position and our ability to obtain additional financing if necessary.



In addition, such statements are subject to the risks and uncertainties discussed in the "Risk Factors" section and elsewhere in this document. 





Overview



Pain Therapeutics develops proprietary drugs that offer significant improvements to patients and healthcare professionals. We generally focus our drug development efforts on disorders of the nervous system.



Our expertise consists of developing new drug candidates and guiding these drug candidates through various regulatory and development pathways in preparation for their potential commercialization. By necessity, the conduct of drug development is complex, lengthy, expensive and risky. The FDA has not yet established the safety or efficacy of our drug candidates.



The following is a summary of our pipeline of drug assets:



REMOXY ER (extended-release oxycodone capsules CII) – REMOXY, our lead drug candidate, is a proprietary abuse-deterrent, twice-daily, oral oxycodone to treat severe chronic pain. The REMOXY NDA was submitted to the FDA, with priority (six-month) review, in the first quarter of 2018 and was assigned a Prescription Drug User Fee Act (PDUFA) date of August 7, 2018.   The REMOXY NDA is requesting label claims against the injection, inhalation and nasal routes of abuse. The FDA held an Advisory Committee meeting (“Meeting”) on June 26, 2018, to discuss the REMOXY NDA. At the conclusion of the Meeting, members of the Advisory Committee voted 14-to-3 against regulatory approval of REMOXY ER. In addition, during the Meeting, the FDA expressed an opinion that current data for REMOXY ER may not support label claims against the injection and inhalation routes of abuse. At its sole discretion, the FDA may or may not follow the Advisory Committee’s recommendation. We own exclusive rights to develop and commercialize REMOXY worldwide, with a sales royalty obligation to one of our technology partners.



FENROCK (transdermal fentanyl patch CII) – FENROCK     is a proprietary, abuse-deterrent fentanyl skin patch to treat severe pain. This is an early-stage program that is substantially funded by a competitive research grant award from the NIDA, the primary agency of the U.S. government for research on drug abuse. We own exclusive, worldwide rights to FENROCK, with no royalty obligations to any third party.

 

PTI-125 – PTI-125 is a proprietary small molecule drug for the treatment of AD.  In 2018, we completed a first-in-human Phase I study with PTI-125.  This is an early-stage program that is substantially funded by competitive research grant awards from the NIH, the primary agency of the U.S. government for biomedical research.  We own exclusive, worldwide rights to PTI-125, with no royalty obligations to any third party.



PTI-125DX – PTI-125 is a proprietary, blood-based diagnostic/biomarker to detect AD.  This is an early-stage program that is substantially funded by competitive research grant awards from the NIH. We own exclusive, worldwide rights to PTI-125DX, with no royalty obligations to any third party.



REMOXY ER -  a drug candidate for severe chronic pain



Our lead drug candidate is called REMOXY ER (extended-release).  REMOXY is a proprietary, abuse-deterrent, twice-daily, capsule formulation of oral oxycodone, a strong opioid drug.  REMOXY is intended to meet the needs of healthcare professionals who appropriately prescribe extended-release oxycodone and who seek to minimize the risks of drug diversion, abuse or accidental patient misuse.  In particular, REMOXY’s thick, sticky, high viscosity gel formulation may deter unapproved routes of drug administration, such as injection, snorting or smoking.



15


 

The proposed indication for REMOXY is for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate.



We resubmitted the REMOXY NDA in the first quarter of 2018 with priority (six-month) review. The REMOXY NDA was subsequently accepted by the FDA and was assigned a PDUFA date of August 7, 2018.



The REMOXY NDA is requesting label claims for abuse deterrence against three routes of abuse: injection, inhalation and nasal. The FDA held an Advisory Committee meeting (“Meeting”) on June 26, 2018, to discuss the REMOXY NDA. At the conclusion of the Meeting, members of the Advisory Committee voted 14-to-3 against regulatory approval of REMOXY ER. In addition, during the Meeting, the FDA expressed an opinion that current data for REMOXY ER may not support label claims against the injection and inhalation routes of abuse. At its sole discretion, the FDA may or may not follow the Advisory Committee’s recommendation.



We own exclusive, worldwide rights to REMOXY.



Opioid drugs, such as oxycodone, are an important treatment option for patients with severe chronic pain. However, misuse, abuse and diversion of these prescription drugs remains a serious, persistent problem.  For over a decade, we have pioneered technology, tools and techniques that enable the development of Abuse-Deterrent Formulations (ADFs). ADFs are intended to make opioid drugs difficult to abuse yet provide steady pain relief when used appropriately by patients. ADFs are intended to help in the fight against prescription drug abuse.



In March 2016, we resubmitted to the FDA an  NDA for REMOXY.   In September 2016, we received a Complete Response Letter (‘CRL”) from the FDA for the REMOXY NDA. The CRL informed us that REMOXY could not be approved in its present form and specified additional actions and data needed for drug approval. The CRL substantially focused on the need to conduct a clinical abuse-deterrent study via the nasal route of administration, and additional in vitro (non-clinical) studies to further characterize the abuse-deterrent properties of REMOXY.  The 2016 CRL made no mention of clinical safety, drug efficacy, manufacturing, stability, bioequivalence or any other issues from a prior CRL.



In February 2017, we met with the FDA regarding REMOXY.  During this meeting, we reached a  written agreement with the FDA on a roadmap to resubmit the NDA for REMOXY.  Final minutes of our FDA meeting confirmed two key requirements needed for the resubmission of the REMOXY NDA:

·

To support a potential drug label claim against abuse by injection: Repeat an injectability/syringeability study using thin films of drug, smaller volumes of solvents, additional mixed solvents and alternative extraction methods and syringe filter.

·

To support a potential drug label claim against abuse by snorting: Conduct an intranasal abuse potential study in human volunteers.



During 2017, we conducted these mandated studies with REMOXY.  We believe positive results from these studies support label claims against abuse by injection and abuse by snorting.  In November 2017, we concluded a pre-NDA meeting with the FDA.  The purpose of this pre-NDA meeting was to agree on submission requirements for the REMOXY NDA under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act.   During the pre-NDA meeting, we received comments and clarification from the FDA on the acceptability of the data to be included in the REMOXY NDA resubmission, including a recent intranasal study.  All questions were addressed and summarized in official minutes of the meeting issued by the FDA.  There are no discrepancies or requests for clarifications following receipt of final meeting minutes. As a result, we resubmitted the REMOXY NDA in the first quarter of 2018 with Priority (six-month) review. The REMOXY NDA was subsequently accepted by the FDA and was assigned a PDUFA date of August 7, 2018. 



We have yet to generate any revenues from product sales. We have an accumulated deficit of $162 million at June 30, 2018. These losses have resulted principally from costs incurred in connection with research and development activities, salaries and other personnel-related costs and general corporate expenses. Research and development activities include costs of preclinical and clinical trials as well as clinical supplies associated with our drug candidates. Salaries and other personnel-related costs include non-cash stock-based compensation associated with options and other equity awards granted to employees and non-employees. Our operating results may fluctuate substantially from

16


 

period to period as a result of the timing of preclinical activities, enrollment rates of clinical trials for our drug candidates and our need for clinical supplies.



We expect to continue to use significant cash resources in our operations for the next several years. Our cash requirements for operating activities and capital expenditures may increase substantially in the future as we:



·

conduct preclinical and clinical trials for our drug candidates;

·

seek regulatory approvals for our drug candidates;

·

develop, formulate, manufacture and commercialize our drug candidates;

·

implement additional internal systems and develop new infrastructure;

·

acquire or in-license additional products or technologies, or expand the use of our technology;

·

maintain, defend and expand the scope of our intellectual property; and

·

hire additional personnel.



Product revenue will depend on our ability to receive regulatory approvals for, and successfully market, our drug candidates. If our development efforts result in regulatory approval and successful commercialization of our drug candidates, we will generate revenue from direct sales of our drugs and/or, if we license our drugs to future collaborators, from the receipt of license fees and royalties from sales of licensed products. We conduct our research and development programs through a combination of internal and collaborative programs. We rely on arrangements with universities, our collaborators, contract research organizations and clinical research sites for a significant portion of our product development efforts.



We focus substantially all of our research and development efforts in the area of neurology. The following table summarizes expenses by category for research and development efforts (in thousands):



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

 

Six months ended



 

June 30,

 

 

June 30,



 

2018

 

2017

 

 

2018

 

2017

Compensation

 

$

753 

 

$

714 

 

 

$

1,591 

 

$

1,441 

Contractor fees and supplies

 

 

548 

 

 

2,166 

 

 

 

620 

 

 

2,622 

Other common costs

 

 

162 

 

 

183 

 

 

 

321 

 

 

389 



 

$

1,463 

 

$

3,063 

 

 

$

2,532 

 

$

4,452 



 

 

 

 

 

 

 

 

 

 

 

 

 



Contractor fees and supplies generally include expenses for preclinical studies and clinical trials and costs for formulation and manufacturing activities. Other common costs include the allocation of common costs such as facilities. During the three and six months ended June 30, 2018, we received $0.4 million and $0.8 million pursuant to a previously disclosed research grant from the National Institutes of Health (“NIH”) and National Institute on Drug Abuse (NIDA”) that we recorded as a reduction to our research and development expenses.



Our technology has been applied across certain of our drug candidates. Data, know-how, personnel, clinical results, research results and other matters related to the research and development of any one of our drug candidates also relate to, and further the development of, our other drug candidates. As a result, costs allocated to a specific drug candidate may not necessarily reflect the actual costs surrounding research and development of that drug candidate due to cross application of the foregoing.



Estimating the dates of completion of clinical development, and the costs to complete development, of our drug candidates would be highly speculative, subjective and potentially misleading. Pharmaceutical products take a significant amount of time to research, develop and commercialize. The clinical trial portion of the development of a new drug alone usually spans several years. We expect to reassess our future research and development plans based on our review of data we receive from our current research and development activities. The cost and pace of our future research and development activities are linked and subject to change.





17


 

Critical Accounting Policies



The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and interest income in our financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those estimates related to agreements, research collaborations and investments. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following items in our financial statements require significant estimates and judgments:



·

Stock-based compensationWe recognize non-cash expense for the fair value of all stock options and other share-based awards. We use the Black-Scholes option valuation model to calculate the fair value of stock options, using the single-option award approach and straight-line attribution method. For options granted to employees and directors, we recognize the resulting fair value as expense on a straight-line basis over the vesting period of each respective stock option, generally four years. For options granted to non-employees, we remeasure the fair value expense using Black-Scholes each reporting period.



We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. We multiply the number of Performance Awards by the fair market value of our common stock on the date of grant to calculate the fair value of each award. We estimate an implicit service period for achieving performance criteria for each award. We recognize the resulting fair value as expense over the implicit service period when we conclude that achieving the performance criteria is probable. We periodically review and update as appropriate our estimates of implicit service periods and conclusions on achieving the performance criteria. Performance Awards vest and common stock is issued upon achievement of the performance criteria.



·

Income Taxes.  We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year. We have accumulated significant deferred tax assets that reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any. We are uncertain as to the timing and amount of any future earnings. Accordingly, we offset these deferred tax assets with a valuation allowance. We may in the future determine that our deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the quarter in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our statement of operations in that period. We classify interest recognized in connection with our tax positions as interest expense, when appropriate.





Results of Operations –  Three and six months ended June 30, 2018 and 2017 



Research and Development Expense



Research and development expense consists primarily of costs of drug development work associated with our drug candidates, including:



·

preclinical testing,

·

clinical trials,

·

clinical supplies and related formulation and design costs, and

·

compensation and other personnel-related expenses.



Research and development expenses were $1.4 million and $3.1 million during the three months ended June 30, 2018 and 2017, respectively. The decrease was due primarily to  a decrease in REMOXY related expenses in 2018 and the receipt of grant funding from the NIH, recorded as a reduction in research and development expenses.



18


 

Research and development expenses were $2.5 million and $4.5 million during the six months ended June 30, 2018 and 2017, respectively. The decrease was due primarily to a decrease in REMOXY related expenses in 2018.



Research and development expenses included non-cash stock-related compensation expenses of $0.3 million in both three months ended June 30, 2018 and 2017, respectively. Non-cash-stock-related compensation expenses were $0.7 million and $0.6 million during the six months ended June 30, 2018 and 2017, respectively.



We expect research and development expenses to fluctuate over the next several years as we continue our development efforts. We believe our development efforts may result in our drug candidates progressing through various stages of clinical trials. Our research and development expenses may fluctuate from period to period due to the timing and scope of our development activities and the results of clinical trials and preclinical studies. We also expect non-cash equity-related expenses to increase in the future.



General and Administrative Expense



General and administrative expenses consist of personnel costs, allocated expenses and other expenses for outside professional services, including legal, human resources, audit and accounting services. Personnel costs consist of salaries, bonus, benefits and stock-based compensation. We incur expenses associated with operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and Nasdaq Stock Market LLC (“Nasdaq”), additional insurance expenses, additional audit expenses, investor relations activities, Sarbanes-Oxley compliance expenses and other administrative expenses and professional services.



General and administrative expenses were $1.0 million and $1.1 million during the three months ended June 30, 2018 and 2017, respectively. The decrease was due primarily to a decrease non-cash compensation related expenses and reduction in outside professional fees.



General and administrative expenses were $2.1 million and $2.5 million during the six months ended June 30, 2018 and 2017, respectively. The decrease was due primarily to a decrease in cash and non-cash compensation related expenses and reduction in outside professional fees.



General and administrative expenses included non-cash stock-related compensation expenses of $0.4 million in both three months ended June 30, 2018 and 2017. Non-cash-stock-related compensation expenses were $0.8 million and $0.9 million during the six months ended June 30, 2018 and 2017, respectively.



We expect our general and administrative expenses during the remainder of 2018 to remain approximately the same as compared to 2017 activities.



Interest Income



Interest income was  $9,000 and $6,000 during the three months ended June 30, 2018 and 2017, respectively. Interest income was $16,000 and $27,000  during the six months ended June 30, 2018 and 2017.  The decrease was due primarily to a lower cash balance and lower prevailing interest rate on our investments.





Liquidity and Capital Resources



Since inception, we have financed our operations primarily through public and private stock offerings, payments received under collaboration agreements and interest earned on our investments. We intend to continue to use our capital resources to fund research and development activities, capital expenditures, working capital requirements and other general corporate purposes. As of June 30, 2018, cash and cash equivalents were  $9.6 million.



On February 8, 2018, we entered into Capital on Demand Sales Agreement with JonesTrading. In accordance with the terms of the sales agreement, we are able to offer and sell up to $16.9 million of shares of our common stock, from time to time in one or more public offerings of our common stock, with JonesTrading acting as agent, in transactions pursuant to a shelf registration statement that was declared effective by the SEC on July 31, 2017. We sold 300,000 shares of our common stock in the open market for net proceeds of $1.9 million through June 30, 2018,

19


 

in the Capital on Demand program. As of July 24, 2018, we had up to $14.7 million of shares of our common stock available for sale under the Capital on Demand Sales Agreement.



Net cash used in operating activities was $2.8 million and  $4.7 million for the six months ended June 30, 2018 and 2017, respectively. The decrease  was primarily due to a reduction in R&D expenses and the timing changes in other balance sheet accounts.



Net cash provided by investing activities during the six months ended June 30, 2017 was  $2.1 million. All marketable securities were sold in Q1 2017 and were not re-invested during Q2 2018 resulting in all amounts held in cash and cash equivalents.



Net cash provided by financing activities during the  six months ended June 30, 2018 was $1.9 million. Cash provided in 2018 was primarily related to sale common stock, net of issuance costs in Capital on Demand transactions.



Realization of our other deferred tax assets is dependent on future earnings, if any. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these net deferred tax assets with a valuation allowance.



We have a non-cancelable operating lease for approximately 6,000 square feet of office space in Austin, Texas that expires in December 2020.  Minimum lease payments are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

2018

 

2019

 

2020

 

Total

Minimum lease payments

 

$

91 

 

$

95 

 

$

99 

 

$

285 



 

 

 

 

 

 

 

 

 

 

 

 



We have license agreements that require us to make milestone payments upon the successful achievement of milestones, including clinical milestones. Our license agreements also require us to pay certain royalties to our licensors if we succeed in fully commercializing products under these license agreements. All of these potential future payments are cancelable as of June 30, 2018. Our formulation agreement with Durect obligates us to make certain milestone payments upon achieving clinical milestones and regulatory milestones and pay royalties on related drug sales.



Our employees have Performance Awards that vest upon certain conditions. If these Performance Awards vest, we may issue the employees shares of our common stock net of statutory employment taxes. This net issuance would result in fewer shares of common stock issued and uses our cash to pay these taxes on behalf of employees.  The use of cash could be higher or lower, depending on the fair value of our common stock on the date the Performance Awards vest.



We have an accumulated deficit of $162 million at June 30, 2018. We expect our cash requirements to be significant in the future. The amount and timing of our future cash requirements will depend on regulatory and market acceptance of our drug candidates, the resources we devote to researching and developing, formulating, manufacturing, commercializing and supporting our products and other corporate needs. We believe that our current resources should be sufficient to fund our operations for at least the next 12 months. We may seek additional future funding through public or private financing within this timeframe, if such funding is available and on terms acceptable to us. 





Off-balance Sheet Arrangements



As of June 30, 2018, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.



 

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk



The primary objective of our cash investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the interest rate later rises, we expect the fair value of our investment will decline. A hypothetical 50 basis point increase in interest rates would not affect the fair value of securities at June 30, 2018. To minimize  risk, we intend to maintain our portfolio of cash equivalents and marketable securities in a variety of securities, including commercial paper, government and non-government debt securities and/or money market funds that invest in such securities. We are not aware of holdings of derivative financial or commodity instruments.



As of June 30, 2018, our investments consisted of money market accounts with variable market rates of interest.  We believe our credit risk is immaterial. We measure our cash equivalents and marketable securities at fair value on a recurring basis and have significant observable inputs where there are identical or comparable assets in the market to use in establishing our fair value measurements. We use significant observable inputs that include but are not limited to benchmark yields, reported trades, broker/dealer quotes and issuer spreads. We consider these inputs to be Level 2 inputs. Generally, the types of instruments we invest in are not traded on a market such as the Nasdaq Global Market, which we would consider to be Level 1 inputs. We do not have any investments that would require inputs considered to be Level 3. We use the bid price to establish fair value where a bid price is available.



 

Item 4. Controls and Procedures



Evaluation of disclosure controls and procedures.  Our management evaluated, with the participation of our Chief Executive Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer (as Principal Executive Officer and Principal Financial Officer) has concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (the “SEC”) rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.



Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2018, our Chief Executive Officer (as Principal Executive Officer and Principal Financial Officer) concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.



Changes in internal control over financial reporting.   There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified during the six months ended June 30, 2018 that has material affected, or is reasonable likely to materially affect, our internal control over financial reporting. 



 

PART II – OTHER INFORMATION



Item 1.  Legal Proceedings



None.



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Item 1A.    Risk Factors



Investing in our common stock involves a high degree of risk.



You should carefully consider the risks described below, as well as all other information, including our financial statements, the notes thereto and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” If any of the following risks occur, our business, financial condition, operating results, prospects and ability to accomplish our strategic objectives could be materially harmed. As a result, the trading price of our common stock could quickly decline by a material amount, and you could lose all or part of your investment.



Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and the market price of our common stock.



Clinical and Regulatory Risks



Our success depends in large part on receiving FDA approval for our lead product, REMOXY. 



To date, we have invested substantial resources in the development of our lead product, REMOXY.  Despite these investments, the REMOXY NDA received CRLs from the FDA in 2008, 2011 and 2016 indicating our drug was not yet ready for approval.  Collectively, these CRLs have resulted in long delays to product revenue; sudden, severe and prolonged drops in our stock price; loss of our initial competitive advantages in the market for abuse-deterrent opioid drugs; and dwindling cash balances.  Accordingly, we cannot assure you that we will be able to receive FDA approval for REMOXY, or successfully commercialize this drug candidate. If we cannot do so, or are significantly delayed in doing so, our business will be materially harmed, and we may not be able to survive as a business.



A recent FDA Advisory Committee meeting voted substantially against the regulatory approval of REMOXY.



The FDA held an Advisory Committee meeting (“Meeting”) on June 26, 2018, to discuss the REMOXY NDA.  At the conclusion of the Meeting, members of the Committee voted 14-to-3 against regulatory approval of REMOXY.  In addition, during the Meeting, the FDA expressed an opinion that current data for REMOXY may not support label claims against the injection and inhalation routes of abuse.  At its sole discretion, the FDA may or may not follow the Advisory Committee’s recommendation.  Accordingly, we cannot assure you that REMOXY will receive FDA approval for REMOXY, or, if REMOXY is approved, that the product will receive a favorable label claims on abuse deterrence.



The FDA may not approve product labeling for REMOXY that would permit us to market and promote this drug in the United States by describing their abuse-deterrent features. 



There can be no assurance that REMOXY will receive final FDA-approved product labeling that adequately describes its abuse deterrent features. We have invested substantial time and money conducting abuse deterrence studies to ensure that REMOXY complies with the FDA’s guidance regarding opioid abuse deterrence. If the FDA does not approve product labeling containing abuse deterrence claims for REMOXY, we will not be able to promote REMOXY based on its abuse deterrent features and may not be able to differentiate our drug from other opioid products containing the same active pharmaceutical ingredients.  This would make REMOXY less competitive, or even un-competitive, in the market. Furthermore, the FDA’s April 2015 final guidance on abuse deterrent opioids expects sponsors to compare their formulations against approved abuse deterrent versions of the same opioid based on the relevant categories of testing. If the FDA decides that REMOXY is less resistant to manipulation than an approved product, our lead drug candidate may not be approved or may lack product labeling containing abuse deterrence claims



Even if REMOXY is approved for marketing with certain abuse-deterrence claims, the April 2015 final FDA guidance on abuse-deterrent opioids is not binding law and may be superseded or modified at any time. Also, if the FDA determines that our post-marketing data do not demonstrate that REMOXY’s abuse-deterrent properties do in fact result in reduction of abuse, or demonstrate a shift to routes of abuse that present a greater risk, the FDA may find that product labeling revisions are needed, and potentially may require the removal of any abuse-deterrence claims.



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If we fail to obtain the necessary regulatory approvals, or if such approvals are limited, we and our collaborators will not be allowed to commercialize our drug candidates, and we will not generate product revenues.



Satisfaction of all regulatory requirements for commercialization of a drug candidate typically takes many years, is dependent upon the type, complexity and novelty of the drug candidate, and requires the expenditure of substantial resources for research and development. In December 2008, we received from the FDA a CRL for the REMOXY NDA. In this CRL, the FDA indicated that additional non-clinical data was required to support the approval of REMOXY. However, the FDA did not request or recommend additional clinical efficacy studies prior to approval. In March 2009, King Pharmaceuticals (“King”) assumed sole responsibility for the regulatory approval of REMOXY. In December 2010, King resubmitted the NDA for REMOXY. In June 2011, we and Pfizer announced that King received a CRL from the FDA in response to King’s resubmission of the REMOXY NDA. The FDA’s CRL raised concerns related to, among other matters, the Chemistry, Manufacturing, and Controls section of the NDA for REMOXY. Certain drug lots showed inconsistent release performance during in vitro testing. Pfizer completed work designed to address the June 2011 CRL. On April 21, 2015, we announced that we resumed responsibility for REMOXY under the terms of a letter agreement with Pfizer. The letter agreement was entered into within the scope of the previously disclosed provisions of the Collaboration Agreement between us and Pfizer relating to the return of REMOXY.



We believe Pfizer has now transferred to us its data, materials, capital equipment and other assets related to REMOXY. Pfizer and the FDA had discussed and agreed to a regulatory plan to refile the NDA for REMOXY. The FDA had agreed that we may follow this plan for the NDA for REMOXY.



In March 2016, we resubmitted to the FDA the NDA for REMOXY. In April 2016, the FDA determined that the NDA for REMOXY was sufficiently complete to permit a substantive review. On May 19, 2016, we announced that the FDA planned to hold an Advisory Committee meeting to review the NDA for REMOXY. On July 1, 2016, we announced that the FDA had determined that an Advisory Committee meeting for REMOXY was unnecessary and would not be held.



In September 2016, we received a  CRL from the FDA on the resubmission of NDA for REMOXY. The CRL informed us that the NDA for REMOXY could not be approved in its present form and specifies additional actions and data that are needed for drug approval. The CRL focuses on the abuse-deterrent properties of REMOXY and proposed drug labeling.



On February 13, 2017, we met with the FDA regarding REMOXY. During this meeting, we reached agreement with the FDA on a roadmap to resubmit the NDA for REMOXY.  Final minutes of our FDA meeting confirmed two key requirements needed for the resubmission of the REMOXY NDA: a) to conduct a clinical abuse potential study via the intranasal route of abuse; and b) to conduct a non-clinical abuse potential study using household solvents.



During 2017, we conducted these mandated studies with REMOXY.  In November 2017, we concluded a regulatory meeting with the FDA.  The purpose of this pre-NDA meeting was to agree on submission requirements for the REMOXY NDA under 505(b)(2) of the Federal Food, Drug, and Cosmetic Act.   We received comments and clarification from the FDA on the acceptability of the data to be included in the REMOXY NDA resubmission, including a recent intranasal study.  All questions were addressed and summarized in official minutes of the meeting issued by the FDA.  There are no discrepancies or requests for clarifications following receipt of final meeting minutes.  As a result, we resubmitted the REMOXY NDA in the first quarter of 2018 with Priority (six-month) review. The REMOXY NDA was subsequently accepted by the FDA and was assigned a PDUFA date of August 7, 2018.



There can be no assurance that the FDA will approve an NDA for REMOXY or that the FDA will not require submission of additional clinical or non-clinical data. Obtaining data from such studies (even if completed) that is insufficient to support approval of REMOXY or any adverse decisions by the FDA (including any decision by the FDA to require additional clinical or non-clinical data) may significantly delay or prevent the potential approval of REMOXY.



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Our research and clinical approaches may not lead to drugs that the FDA considers safe for humans and effective for indicated uses we are studying. The FDA may require additional studies, in which case we or our collaborators would have to expend additional time and resources and would likely delay the date of potentially receiving regulatory approval. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals would:

·

delay commercialization of, and product revenues from, our drug candidates; and

·

diminish the competitive advantages that we may have otherwise enjoyed, which would have an adverse effect on our operating results and financial condition.



Even if we or our collaborators comply with all FDA regulatory requirements, our drug candidates may never obtain regulatory approval. If we or our collaborators fail to obtain regulatory approval for any of our drug candidates we will have fewer commercial products, if any, and corresponding lower product revenues, if any. Even if our drug candidates receive regulatory approval, such approval may involve limitations on the indications and conditions of use or marketing claims for our products. Further, later discovery of previously unknown problems or adverse events could result in additional regulatory restrictions, including withdrawal of products. The FDA may also require us or our collaborators to commit to perform lengthy Phase IV post-approval clinical efficacy or safety studies. Our expending additional resources on such trials would have an adverse effect on our operating results and financial condition.



In jurisdictions outside the United States, we must receive marketing authorizations from the appropriate regulatory authorities before commercializing our drugs. Regulatory approval processes outside the United States generally include all of the aforementioned requirements and risks associated with FDA approval.



If we are unable to design, conduct and complete preclinical and clinical trials successfully, our drug candidates will not be able to receive regulatory approval.



In order to obtain FDA approval for any of our drug candidates, we must submit to the FDA an NDA that demonstrates with substantive evidence that the drug candidate is both safe and effective in humans for its intended use. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials.



Preclinical studies may not provide results we believe are sufficient to support the filing of an IND. Success in early preclinical studies does not ensure success in later preclinical or clinical studies. The FDA may disagree with the design of our preclinical studies or our interpretations of data from preclinical studies. The FDA may not accept an IND for our product candidate and may require additional preclinical studies to support the filing of an IND.



Success in preclinical studies and early clinical trials does not ensure that later clinical trials will be successful. Results from Phase I clinical programs may not support moving a drug candidate to Phase II or Phase III clinical trials. Phase III clinical trials may not demonstrate the safety or efficacy of our drug candidates. Results of later clinical trials may not replicate the results of prior clinical trials and preclinical studies. Even if the results of Phase III clinical trials are positive, we or our collaborators may have to commit substantial time and additional resources to conducting further preclinical studies and clinical trials before obtaining FDA approval for any of our drug candidates.



Clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous requirements. The clinical trial process also consumes a significant amount of time. Furthermore, if patients in clinical trials suffer drug-related adverse reactions during the course of such clinical trials, or if we, our collaborators or the FDA believe that participating patients are being exposed to unacceptable health risks, such clinical trials will have to be suspended or terminated. Failure can occur at any stage of the clinical trials, and we or our collaborators could encounter problems that cause abandonment or repetition of clinical trials.



Clinical trials with REMOXY and our potential future clinical trials for other drug candidates for treatment of pain measure clinical symptoms, such as pain and physical dependence, that are not biologically measurable. The success in these clinical trials depends on reaching statistically significant changes in patients’ symptoms based on clinician-rated scales. Due in part to a lack of consensus on standardized processes for assessing clinical outcomes, these scores may or may not be reliable, useful or acceptable to regulatory agencies.

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In addition, completion of clinical trials can be delayed by numerous factors, including:

·

delays in identifying and agreeing on acceptable terms with prospective clinical trial sites;

·

slower than expected rates of patient recruitment and enrollment;

·

unanticipated patient dropout rates;

·

increases in time required to complete monitoring of patients during or after participation in a clinical trial; and

·

unexpected need for additional patient-related data.



Any of these delays could significantly impact th