Company Quick10K Filing
Alliqua Biomedical
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 6 $18
10-Q 2019-11-14 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
S-1 2019-06-17 Public Filing
10-Q 2019-04-23 Quarter: 2019-03-31
10-K 2019-02-22 Annual: 2018-12-31
10-Q 2018-10-26 Quarter: 2018-09-30
10-Q 2018-08-10 Quarter: 2018-06-30
10-Q 2018-05-14 Quarter: 2018-03-31
10-K 2018-03-02 Annual: 2017-12-31
10-Q 2017-11-09 Quarter: 2017-09-30
10-Q 2017-08-10 Quarter: 2017-06-30
10-Q 2017-05-09 Quarter: 2017-03-31
10-K 2017-03-14 Annual: 2016-12-31
10-Q 2016-11-04 Quarter: 2016-09-30
10-Q 2016-08-09 Quarter: 2016-06-30
10-Q 2016-05-10 Quarter: 2016-03-31
10-K 2016-02-23 Annual: 2015-12-31
10-Q 2015-11-05 Quarter: 2015-09-30
10-Q 2015-08-06 Quarter: 2015-06-30
10-Q 2015-05-14 Quarter: 2015-03-31
10-K 2015-02-24 Annual: 2014-12-31
10-Q 2014-11-05 Quarter: 2014-09-30
10-Q 2014-08-11 Quarter: 2014-06-30
10-Q 2014-05-12 Quarter: 2014-03-31
10-K 2014-03-24 Annual: 2013-12-31
10-Q 2013-11-12 Quarter: 2013-09-30
10-Q 2013-08-14 Quarter: 2013-06-30
10-Q 2013-05-15 Quarter: 2013-03-31
10-Q 2012-11-21 Quarter: 2012-09-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-14 Quarter: 2012-03-31
10-K 2012-03-29 Annual: 2011-12-31
10-Q 2011-11-14 Quarter: 2011-09-30
10-Q 2011-08-15 Quarter: 2011-06-30
10-Q 2011-05-12 Quarter: 2011-03-31
10-K 2011-03-31 Annual: 2010-12-31
10-Q 2010-11-12 Quarter: 2010-09-30
10-Q 2010-08-13 Quarter: 2010-06-30
10-Q 2010-05-05 Quarter: 2010-03-31
10-K 2010-03-31 Annual: 2009-12-31
8-K 2019-12-11 Sale of Shares, Exhibits
8-K 2019-11-12 Earnings, Amendment, Exhibits
8-K 2019-10-02 Regulation FD, Exhibits
8-K 2019-08-14 Earnings, Exhibits
8-K 2019-07-29 Sale of Shares
8-K 2019-07-16 Officers
8-K 2019-06-21 Officers, Regulation FD, Exhibits
8-K 2019-06-11 Leave Agreement
8-K 2019-06-11
8-K 2019-05-29 Accountant, Officers, Exhibits
8-K 2019-05-03 M&A, Off-BS Arrangement, Sale of Shares, Shareholder Rights, Control, Officers, Amend Bylaw, Other Events, Exhibits
8-K 2019-04-11 Enter Agreement, Other Events, Exhibits
8-K 2019-04-05 Officers
8-K 2019-03-13 Officers
8-K 2019-03-08 Shareholder Vote
8-K 2019-01-03 Other Events, Exhibits
8-K 2018-12-13 Other Events, Exhibits
8-K 2018-11-27 Enter Agreement, Other Events, Exhibits
8-K 2018-11-07 Enter Agreement, Other Events, Exhibits
8-K 2018-10-11 Enter Agreement, Control, Other Events, Exhibits
8-K 2018-06-26 Shareholder Vote
8-K 2018-05-07 Leave Agreement, M&A, Other Events, Exhibits
8-K 2018-05-07 Officers, Exhibits
8-K 2018-03-13 Enter Agreement, Off-BS Arrangement, Officers, Exhibits
8-K 2018-02-05 Enter Agreement, Exhibits
8-K 2018-01-05 Enter Agreement, Other Events, Exhibits
8-K 2017-12-31
ALQA 2019-09-30
Part I: Financial Information
Item 1. Financial Statements
Note 1. Organization and Basis of Presentation
Note 2. Summary of Significant Accounting Policies
Note 3. Reverse Merger
Note 4. Property and Equipment, Net
Note 5. Prepaid Expenses and Other Current Assets
Note 6. Accrued Liabilities
Note 7. Term Loans and Convertible Promissory Notes
Note 8. Leases
Note 9. Redeemable Convertible Preferred Stock
Note 10. Warrants
Note 11. Stock Options
Note 12. Commitments and Contingencies
Note 13. Related-Party Transactions
Note 14: Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 2. Mine Safety Disclosures
Item 2. Other Information
Item 6. Exhibits
EX-31 ex_164333.htm
EX-32 ex_164334.htm

Alliqua Biomedical Earnings 2019-09-30

ALQA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
BMRA 22 5 1 5 1 -2 -2 21 25% -9.5 -46%
LLIT 21 6 3 0 0 0 0 21 0%
DRIO 21 12 6 7 2 -20 -20 13 21% -0.7 -161%
AVGR 19 29 19 8 2 -21 -19 5 27% -0.3 -74%
HJLI 19 7 3 0 0 -7 -7 14 70% -2.1 -93%
ALQA 18 3 12 1 -0 -8 -5 17 -1% -3.6 -281%
NVCN 17 12 22 0 0 0 0 8 0%
VLRX 16 53 61 21 13 -52 -48 30 63% -0.6 -99%
DYNT 14 40 19 63 19 -0 -2 14 31% -8.3 -1%
CODX 14 5 1 0 0 -6 -6 10 43% -1.6 -119%

10-Q 1 adyn20190930_10q.htm FORM 10-Q adyn20190930_10q.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]

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

EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

OR

 

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from __________________ to _________________

 

Commission file number: 001-36278

 

Adynxx, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

58-2349413

(State or other jurisdiction of incorporation or

organization)

(IRS Employer Identification No.)

 

100 Pine Street, Suite 500

San Francisco, CA

94111

(Address of principal executive offices)

(Zip Code)

 

(415) 512-7740

(Registrant’s telephone number, including area code)

 

Alliqua BioMedical, Inc.

2150 Cabot Blvd West, Suite B

Langhorne, PA

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

 

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

 

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001 per share

ADYX (OTCQB)

N/A

 

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

 

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

 

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

 

 

 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☒  

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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

 

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

 

As of November 10, 2019 the registrant had 5,807,877 shares of Common Stock, $0.001 par value per share, outstanding.

 

 

 
 

 

ADYNXX, INC. (FORMERLY ALLIQUA BIOMEDICAL, INC.)

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2019

 

TABLE OF CONTENTS

 

 

 

 

 

PAGE
NO.

PART I FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

1

 

 

 

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

1

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)

2

     

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)

3

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)

4

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

 

 

 

 

 

 

Item 2.

 

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

19

         
 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

29

 

 

 

 

 

 

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

30

 

 

 

 

 

 

Item 1A.

 

Risk Factors

30

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

53

         
 

Item 4.

 

Mine Safety Disclosures

53

         
 

Item 5.

 

Other Information

53

         

 

Item 6.

 

Exhibits

54

 

 

 

 

 

 

SIGNATURES

55

 

Where You Can Find More Information

 

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (ir.adynxx.com), SEC filings, webcasts, press releases and conference calls. We use these mediums, including our website, to communicate with our stockholders and the public about our company, our product candidates and other matters. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

 

 

 
 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Adynxx, Inc. (formerly Alliqua Biomedical, Inc.)

Condensed Consolidated Balance Sheets

 

(In thousands, except share and per share data)

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 
   

(unaudited)

         

Assets:

               

Current assets

               

Cash and cash equivalents

  $ 331     $ 1,887  

Restricted cash

    253       55  

Prepaid expenses and other current assets

    1,960       10  

Total current assets

    2,544       1,952  

Property and equipment, net

    5       10  

Right of use asset, net

    687       -  

Other assets

    18       18  

Total assets

  $ 3,254     $ 1,980  
                 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit:

               

Current liabilities

               

Accounts payable

  $ 2,659     $ 491  

Accrued liabilities

    2,173       857  

Current portion of operating lease liability

    224       -  

Convertible promissory notes - related party

    6,348       4,500  

Term loan, net of discount

    2,393       3,812  

Total current liabilities

    13,797       9,660  

Operating lease liability, net of current portion

    519       -  

Warrant liability

    -       140  

Commitments and contingencies (Note 12)

               

Redeemable convertible preferred stock

               

Series A redeemable convertible preferred stock, $0.001 par value; 0 shares authorized, issued and outstanding at September 30, 2019 (unaudited); 2,046,378 shares authorized, 2,034,548 shares issued and outstanding at December 31, 2018

    -       12,814  

Series B redeemable convertible preferred stock, $0.001 par value; 0 shares authorized, issued and outstanding at September 30, 2019 (unaudited); 1,833,387 shares authorized, issued and outstanding at December 31, 2018

    -       15,897  

Stockholders' deficit

               

Preferred stock, $0.001 par value; 1,000,000 shares authorized no shares issued or outstanding

    -       -  

Common stock, $0.001 par value; 95,000,000 shares authorized, 5,807,877 shares issued and outstanding at September 30, 2019 (unaudited) 5,313,200 shares authorized, 701,808 shares issued and outstanding at December 31, 2018

    6       1  

Additional paid-in capital

    35,244       747  

Accumulated deficit

    (46,312 )     (37,279 )

Total stockholders' deficit

    (11,062 )     (36,531 )

Total liabilities, redeemable convertible preferred stock and stockholders' deficit

  $ 3,254     $ 1,980  

 

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

 

1

 
 

 

Adynxx, Inc. (formerly Alliqua Biomedical, Inc.)

Condensed Consolidated Statements of Operations

 

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

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Operating expenses

                               

Research and development

  $ 1,986     $ 524     $ 5,212     $ 1,793  

General and administrative

    1,037       810       3,354       2,102  

Grant reimbursements

    (716 )     -       (1,914 )     -  

Gain on settlement

    (635 )     -       (635 )     -  

Total operating expenses, net

    1,672       1,334       6,017       3,895  

Loss from operations

    (1,672 )     (1,334 )     (6,017 )     (3,895 )

Interest expense, net

    (223 )     (322 )     (2,864 )     (767 )

Other income (expense), net

    -       151       (94 )     211  

Loss from continuing operations

    (1,895 )     (1,505 )     (8,975 )     (4,451 )

Loss from discontinued operations

    -       -       (58 )     -  

Net loss

  $ (1,895 )   $ (1,505 )   $ (9,033 )   $ (4,451 )

Net loss per basic and diluted share:

                               

Loss from continuing operations

  $ (0.33 )   $ (2.14 )   $ (2.56 )   $ (6.34 )

Loss from discontinued operations

    -       -       (0.02 )     -  

Net loss per basic and diluted share

  $ (0.33 )   $ (2.14 )   $ (2.58 )   $ (6.34 )

Weighted-average number of common shares outstanding - basic and diluted

    5,807,877       701,808       3,507,338       701,808  

 

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

 

2

 
 

 

Adynxx, Inc. (formerly Alliqua Biomedical, Inc.)

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit

 

(In thousands, except share amounts) (Unaudited)

 

   

Series A Redeemable

   

Series B Redeemable

                                         
   

Convertible

   

Convertible

                   

Additional

           

Total

 
   

Preferred Stock

   

Preferred Stock

   

Common Stock

   

Paid-In

   

Accumulated

   

Stockholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Deficit

   

Deficit

 

Balance, December 31, 2018

    2,034,548     $ 12,814       1,833,387     $ 15,897       701,808     $ 1     $ 747     $ (37,279 )   $ (36,531 )

Stock-based compensation expense

    -       -       -       -       -       -       84       -       84  

Net loss

    -       -       -       -       -       -       -       (2,462 )     (2,462 )

Balance, March 31, 2019

    2,034,548     $ 12,814       1,833,387     $ 15,897       701,808     $ 1     $ 831     $ (39,741 )   $ (38,909 )
                                                                         

Conversion of convertible notes and accrued interest into convertible preferred stock

    -       -       367,041       3,203       -       -       -       -       -  

Recognition of beneficial conversion feature upon conversion of convertible notes

    -       -       -       2,101       -       -       -       -       -  

Conversion of convertible preferred stock into common stock

    (2,034,548 )     (12,814 )     (2,200,428 )     (21,201 )     4,234,976       4       34,011       -       34,015  

Issuance of common stock for merger

    -       -       -       -       854,017       1       5,246       -       5,247  

Equity issuance costs paid in stock

    -       -       -       -       17,076       -       -       -       -  

Exchange of warrants

    -       -       -       -       -       -       234               234  

Dividend

    -       -       -       -       -       -       (5,245 )     -       (5,245 )

Spin-off of AquaMed

    -       -       -       -       -       -       (1 )     -       (1 )

Stock-based compensation expense

    -       -       -       -       -       -       84       -       84  

Net loss

    -       -       -       -       -       -       -       (4,676 )     (4,676 )

Balance, June 30, 2019

    -     $ -       -     $ -       5,807,877     $ 6     $ 35,160     $ (44,417 )   $ (9,251 )

Stock-based compensation expense

    -       -       -       -       -       -       84       -       84  

Net loss

    -       -       -       -       -       -       -       (1,895 )     (1,895 )

Balance, September 30, 2019

    -     $ -       -     $ -       5,807,877     $ 6     $ 35,244     $ (46,312 )   $ (11,062 )
                                                                         

Balance, December 31, 2017

    2,034,548     $ 12,814       1,833,387     $ 15,897       701,808     $ 1     $ 438     $ (31,294 )   $ (30,855 )

Stock-based compensation expense

    -       -       -       -       -       -       75       -       75  

Net loss

    -       -       -       -       -       -       -       (1,523 )     (1,523 )

Balance, March 31, 2018

    2,034,548       12,814       1,833,387       15,897       701,808       1       513       (32,817 )     (32,303 )

Stock-based compensation expense

    -       -       -       -       -       -       75       -       75  

Net loss

    -       -       -       -       -       -       -       (1,422 )     (1,422 )

Balance, June 30, 2018

    2,034,548       12,814       1,833,387       15,897       701,808       1       588       (34,239 )     (33,650 )

Stock-based compensation expense

    -       -       -       -       -       -       75       -       75  

Net loss

    -       -       -       -       -       -       -       (1,505 )     (1,505 )

Balance, September 30, 2018

    2,034,548     $ 12,814       1,833,387     $ 15,897       701,808     $ 1     $ 663     $ (35,744 )   $ (35,080 )

 

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

 

3

 
 

 

Adynxx, Inc. (formerly Alliqua Biomedical, Inc.)

Condensed Consolidated Statements of Cash Flows

 

(In thousands) (Unaudited)

 

   

Nine months ended September 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net loss

  $ (9,033 )   $ (4,451 )

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

               

Depreciation expense

    5       6  

Stock-based compensation expense

    252       225  

Changes in fair value of warrant liability

    94       -  

Changes in fair value of derivative liability

    -       (211 )

Accretion of final charge upon maturity of Oxford Term Loan A and B

    187       161  

Amortization of issuance cost and discounts for term loans and convertible notes

    20       258  

Non-cash interest expense on convertible promissory notes

    2,426       62  

Amortization of right-of-use asset

    232       -  

Changes in operating assets and liabilities:

               

Prepaid expenses and other current assets

    (1,948 )     13  

Other assets

    57       -  

Accounts payable

    2,168       (570 )

Accrued liabilities

    1,006       (142 )

Lease liability

    (233 )     -  

Net cash used in operating activities

    (4,767 )     (4,649 )

Cash flows from investing activities:

               

Purchases of property and equipment

    -       (2 )

Net cash used in investing activities

    -       (2 )

Cash flows from financing activities:

               

Payments on term loan

    (1,437 )     (890 )

Proceeds from issuance of convertible promissory notes - related party

    4,846       3,000  

Net cash provided by financing activities

    3,409       2,110  

Net decrease in cash, cash equivalents and restricted cash

    (1,358 )     (2,541 )

Cash, cash equivalents and restricted cash at beginning of period

    1,942       4,356  

Cash, cash equivalents and restricted cash at end of period

  $ 584     $ 1,815  
                 

Other supplemental disclosure:

               

Cash paid for interest

  $ 231     $ 286  

Non-cash investing and financing activities:

               

Right-of-use assets obtained in exchange for operating lease obligations(1)

  $ 227     $ -  

Reclassification of warrant liability to paid in capital

  $ 234     $ -  

Conversion of convertible preferred stock into common stock

  $ 34,015     $ -  
Conversion of convertible notes and accrued interest into convertible preferred stock   $ 3,203     $ -  

 

 

   

September 30,

   

September 30,

 
   

2019

   

2018

 

Reconciliation of cash, cash equivalents and restricted cash:

               

Cash and cash equivalents

  $ 331     $ 1,760  

Restricted cash

    253       55  

Cash, cash equivalents and restricted cash at end of period

  $ 584     $ 1,815  

 


 

(1) Amounts for the nine months ended September 30, 2019 pertains to the transition adjustment for the adoption of ASC 842.

 

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

 

4

 

 

Adynxx, Inc. (formerly Alliqua Biomedical, Inc.)

Notes to Unaudited Condensed Consolidated Financial Statements

  

 

 

Note 1. Organization and Basis of Presentation

 

The Company

 

On May 3, 2019, Adynxx, Inc. (“Adynxx” or the “Company”), formerly known as "Alliqua BioMedical, Inc." (“Alliqua”) completed its reverse merger with what was then known as “Adynxx, Inc.” (“Private Adynxx”), which we refer to as the Merger. This transaction was accounted for as a reverse merger and a recapitalization effected by a share exchange. See ‘Note 3 – Reverse Merger’.

 

The Company is a clinical stage biopharmaceutical company focused on the development of a new class of therapeutics called transcription factor decoys and bringing to market novel, disease-modifying products to address unmet needs in the treatment of pain and inflammation. The Company is primarily engaged in developing initial product technology, recruiting personnel, conducting clinical trials and raising capital.

 

Basis of Presentation

 

These unaudited financial statements represent the condensed consolidated financial statements of Adynxx and, for periods prior to the Merger, the condensed consolidated financial statements of Private Adynxx. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions of the SEC on Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position on a consolidated basis and the consolidated results of operations and cash flows for the interim periods presented. The results of operations for the periods September 30, 2019 and 2018 are not necessarily indicative of expected operating results for the full year. The information presented throughout the document as of and for the periods ended September 30, 2019 and 2018 is unaudited. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and the notes thereto as set forth in the Company’s Form 8-K/A filed with the SEC on June 10, 2019.

 

All share and per share data for all periods presented have been retroactively restated to reflect the exchange ratio used in the Merger of 0.0359 shares of common stock in exchange for each share of Private Adynxx, Inc. common stock outstanding immediately prior to the Merger (which exchange rate reflects a 1-for-6 reverse stock split of the issued and outstanding capital stock of Alliqua BioMedical, Inc. effected on May 3, 2019 immediately prior to the Merger).

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other (expenses) income that are reported in the condensed consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.

 

Liquidity

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As of September 30, 2019, the Company had $331,000 in cash and cash equivalents, had term loans (“Term Loans”), including accrued interest outstanding, of $3.0 million from Oxford Finance, LLC (“Oxford”), and $6.6 million aggregate principal amount of convertible promissory notes (“Notes”), including accrued interest, outstanding. From inception through September 30, 2019, the Company had an accumulated deficit of approximately $46.3 million. The Company expects to incur substantial losses in future periods. The Company is subject to risks common to companies in the clinical stage, including, but not limited to, development of new products, development of markets and distribution channels, dependence on key personnel, and the ability to obtain additional capital as needed to fund its product development plans. The Company has a limited operating history and has yet to generate any revenues from customers. There is no guarantee that profitable operations, if ever achieved, could be sustained on a continuing basis.

 

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The Company plans to finance its operations and capital funding needs through equity and/or debt financing. However, there can be no assurance that additional funding will be available to the Company on acceptable terms on a timely basis, if at all, or that the Company will generate sufficient cash from operations to adequately fund operating needs or ultimately achieve profitability. The conditions above, among others, raise substantial doubt about the ability of the Company to continue as a going concern within one year after the date of the issuance of the financial statements.

 

The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

 

 

Note 2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expenses incurred during the reporting period. Actual results could differ from those estimates and such differences could be material to the Company’s financial position and results of operations.

 

Significant estimates and assumptions include the valuation of equity instruments and equity-linked instruments, including the valuation of the Company’s common stock and the valuation of the Company’s common stock options for purposes of accounting for stock-based compensation, and accruals for clinical trials and the valuation allowances on deferred tax assets.

 

Concentration of Credit Risk and Other Risks and Uncertainties

 

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents. Cash and cash equivalents are deposited in demand and money market accounts with established financial institutions and, at times, such balances with any one financial institution may be in excess of the Federal Deposit Insurance Corporation insured limits. To date, the Company has not experienced any losses on its deposits of cash and cash equivalents.

 

The Company operates in a dynamic and highly competitive industry and believes that changes in any of the following areas could have a material adverse effect on the Company's future financial position, results of operations, or cash flows: ability to obtain future financing; advances and trends in new technologies and industry standards; results of clinical trials; regulatory approval and market acceptance of the Company's products; development of sales channels; certain strategic relationships; litigation or claims against the Company based on intellectual property, patent, product, regulatory, or other factors; and the Company's ability to attract and retain employees necessary to support its growth.

 

The Company’s postoperative pain reduction product candidate, brivoligide, is an oligonucleotide. The Company currently uses Nitto-Denko Avecia, Inc. (“Avecia”) as a single supplier for the brivoligide drug substance. There are currently a limited number of oligonucleotide manufacturers with commercial scale capabilities globally. While the Company intends to develop secondary sources for manufacturing of its drug candidates in the future, there can be no assurance that it will be able to do so on commercially reasonable terms, or at all. Any interruption in the supply of this key material could significantly delay the research and development process or increase the expenses for development and commercialization of the Company’s product candidates. The quality of materials can be critical to the performance of a drug delivery technology. Therefore, the lack of a reliable source that provides a consistent supply of high quality materials would harm the Company. At September 30, 2019, this vendor represented 26% of total accounts payable.

 

At September 30, 2019, three vendors represented 26%, 26% and 23% of total accounts payable, respectively. One of these vendors supported clinical study activities and accounted for 26% of the total accounts payable. The second vendor supported manufacturing activities and accounted for 26% of the total accounts payable. The third vendor supported general and administrative activities associated with the Merger and the next round of equity financing. At December 31, 2018, three vendors represented 52%, 26% and 15% of total accounts payable. Two of these vendors supported general and administrative activities, primarily associated with the Merger and next round of equity financing, which accounted for 67% of the total accounts payable. The remaining vendor supported clinical study activities.

 

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Clinical Trial Accruals

 

The Company’s clinical trial accruals are based on patient enrollment and related costs at clinical investigator sites as well as for the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations (“CROs”) that conduct and manage clinical trials on the Company’s behalf. The Company accrues expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the clinical trial protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, the Company modifies the estimates of accrued expenses accordingly. To date, the Company has had no significant adjustments to accrued clinical trial expenses.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with a maturity of three months or less on the date of acquisition to be cash and cash equivalents.

 

Property and Equipment, Net

 

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using a straight-line method over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the remaining term of the lease.

 

Expenditures for repairs and maintenance are charged to expense as incurred. Upon disposition of an asset, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in the statements of operations.

 

Impairment of Long-Lived Assets

 

The Company's long-lived assets and other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. As of September 30, 2019 and December 31, 2018, the Company had not experienced any impairment losses on its long-lived assets.

 

Restricted Cash

 

At September 30, 2019, the Company had $198,000 restricted from withdrawal and held by a bank in the form of a secured money market account as collateral for Oxford in conjunction with a debt amendment that occurred in January 2019. In addition, as of September 30, 2019 and December 31, 2018, the Company had $55,000 restricted and held by a bank as collateral for a letter of credit provided to the Company’s facility landlord.

 

Stock-Based Compensation

 

Stock-based compensation is measured at the grant date based on the fair value of the award. The fair value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The Company recognizes forfeitures as they occur.

 

The Company uses the Black-Scholes option-pricing model (the "Black-Scholes model") as the method for determining the estimated fair value of stock options.

 

Expected TermThe expected term represents the period that the Company's stock-based awards are expected to be outstanding and is determined using the simplified method.

 

Expected VolatilityExpected volatility is estimated using comparable public companies’ volatility for similar terms.

 

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Expected DividendThe Black-Scholes model calls for a single expected dividend yield as an input. Other than the dividend paid in connection with the Merger, the Company has never paid dividends and has no plans to pay dividends.

 

Risk-Free Interest RateThe risk-free interest rate used in the Black-Scholes model is based on the U.S. Treasury zero-coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.  

 

Research and Development

 

Research and development expenses consist of personnel costs, including salaries, benefits and stock-based compensation, preclinical studies, clinical studies performed by CROs, materials and supplies, licenses and fees, and overhead allocations consisting of various administrative and facilities related costs. The Company charges research and development costs, including clinical study costs, to expense when incurred.

 

Collaboration Agreement

 

In June 2018, the Company entered into a collaboration agreement with twoXAR, an artificial intelligence-driven drug discovery company, in order to identify potential product candidates for the treatment of endometriosis. In May 2019, the Company made a collaboration initiation payment of $75,000, which was charged to research and development expenses when incurred.

 

In June 2019, Adynxx received an initial set of candidate predictions from twoXAR. The Company has initiated a review of the potential products to determine if any are viable candidates for further research and development.

 

Grant Reimbursements

 

In December 2018, the Company received a Notice of Award from the National Institute on Drug Abuse (“NIDA”), part of the National Institutes of Health (“NIH”), to support the clinical development of its lead product candidate, brivoligide. NIH grants provide funds for certain types of expenditures in connection with research and development activities over a contractually defined period. The maximum funding expected to be available under this grant for qualified expenditures over the two-year period through December 2020 is approximately $5.7 million.

 

On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2018-08, “Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.” Based on this guidance, the Company determined that grant payments received met the definition of a ‘conditional contribution’ (versus an exchange contract) because (i) the Company has limited discretion in the way the funds may be spent, which creates a barrier to entitlement, and (ii) the grant contains provisions that release the awarding agency from the obligation to transfer funds that are not expended at the time the award is terminated. The Company recognizes grant reimbursements as a contra operating expense and reflects this as a component of its loss from operations in the period during which the qualifying expenses are incurred and the related services rendered, provided that the applicable performance obligations have been met.

 

For the three and nine months ended September 30, 2019, the Company incurred qualified expenses and recognized $0.7 million and $1.9 million of grant reimbursements, respectively.

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

 

In evaluating the ability to recover its deferred income tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In the event the Company determines that it would be able to realize its deferred income tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.

 

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The Company recognizes the tax benefit from uncertain tax positions in accordance with GAAP, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company's tax return.

 

Net Loss per Basic and Diluted Share

 

Net loss per basic common share is computed on the basis of the net loss for the period divided by the weighted average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares and of common share equivalents outstanding when dilutive. Common share equivalents include outstanding stock options, warrants and non-vested restricted stock which are included under the treasury share method when dilutive. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be antidilutive.

 

Convertible Preferred Stock Warrants

 

At December 31, 2018, freestanding warrants to acquire shares of convertible preferred stock were classified as liabilities on the accompanying balance sheet. These warrants were subject to remeasurement at fair value at each balance sheet date, and any change in fair value is recognized as a component of other income or expense. In connection with the Merger, the warrants were exchanged into warrants that no longer met the definition of a derivative and thus, the balance was reclassified into equity during the three and nine months ended September 30, 2019.

 

Debt Modifications and Extinguishments

 

When the Company modifies debt, it accounts for the impact of such modification in accordance with Accounting Standards Codification (“ASC”) 470-50, Debt: Modifications and Extinguishments, which requires modification to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications”. A substantial modification of terms shall be accounted for like an extinguishment. Based on the guidance relied upon and the analysis performed, the Company determined that the October 2018 modification of the March 2018 and September 2018 Notes, to add an additional conversion option in the event of a reverse merger, was considered to be a “substantial modification”. As a result, it treated this modification as an ‘extinguishment’ of those debts and recognized $11,000 of net gain from this debt extinguishment in other income in October 2018. All other changes to debt provisions were not considered substantial and were treated as debt modifications, with the exception of the modification in August 2019 which was accounted for as a troubled debt restructuring.

 

Derivative Instruments

 

ASC 815-15, Derivatives and Hedging: Embedded Derivatives, generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirement of ASC 815.

 

At September 30, 2019 and December 31, 2018, the Company maintained outstanding Notes which contained various embedded derivative features. In particular, these Notes contained the following features:

 

1) A share settled redemption in a qualified preferred stock financing; and

 

2) The right to an accelerated cash repayment in the event of a change in control.

 

These embedded features were not considered clearly and closely related to the debt host, therefore, they were bifurcated and accounted for separately from the debt host as a derivative liability. Derivative financial liabilities are initially recorded at fair value, with gains and losses arising from changes in fair value recognized in the statement of operations at each period end while such instruments are outstanding.

 

As of September 30, 2019, and December 31, 2018, the Company determined that there was no fair value associated with the embedded derivatives that remained with the outstanding convertible notes. See ‘Note 7 - Term Loans and Convertible Promissory Notes’ for further discussion of the Notes and the bifurcated derivative liability.

 

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Fair Value of Financial Instruments

 

ASC 820-10, Fair Value Measurement, provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. The standard defines fair value as an exit price, representing the amount that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. The standard also establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

 

Level 2Inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

 

Level 3Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

 

This hierarchy requires the use of observable market data when available and to minimize the use of unobservable inputs when determining fair value.

 

The following table presents the Company’s fair value hierarchy for its warrant liability measured at fair value on a recurring basis at December 31, 2018 (in thousands):

 

   

As of December 31, 2018

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Financial liabilities

                               

Warrant liability

  $ -     $ -     $ 140     $ 140  

Total financial liabilities

  $ -     $ -     $ 140     $ 140  

 

The Level 3 derivative at December 31, 2018 consisted of a warrant liability of Private Adynxx that, at December 31, 2018, was exerciseable into preferred shares that were potentially redeemable. In connection with the Merger, the warrants were exchanged into warrants that no longer met the definition of a derivative and thus, the balance was reclassified into equity in May 2019.

 

The change in fair value of the warrant liability for the three and nine months ended September 30, 2019 and 2018 are as follows (in thousands):

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Fair value, beginning of period

  $ -     $ 42     $ 140     $ 42  

Change in fair value of preferred stock warrants

    -       1       94       1  

Exchange of warrants upon Merger

    -       -       (234 )     -  

Fair value at end of period

  $ -     $ 43     $ -     $ 43  

 

 

The carrying amounts reported in the accompanying balance sheets for cash and cash equivalents, accounts payable and accrued liabilities approximate their fair value due to their short maturities. The fair value of the Company’s term loan is based on the borrowing rate currently available to the Company for borrowings with similar terms and maturity and approximates its carrying value.

 

Derivative liability instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. Level 3 liability instruments consist of the preferred stock warrant liability and derivative liability, for both of which there is no observable market data for the determination of fair value and requires significant management judgment and estimation.

 

While the Company’s Notes contain embedded derivative liabilities, the Company determined that the fair value of these liabilities were zero at September 30, 2019 and December 31, 2018. See ‘Note 7 - Term Loans and Convertible Promissory Notes’ for further discussion on the derivative liability activity.

 

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The change in fair value of the derivative liability relating to the Notes for the three and nine months ended September 30, 2019 and 2018 is summarized below (in thousands): 

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Fair value, beginning of period

  $ -     $ 436     $ -     $ -  

Embedded derivative liability from the issuance of Notes

    -       369       -       864  

Change in value of embedded derivatives

    -       (152 )     -       (211 )

Fair value at end of period

  $ -     $ 653     $ -     $ 653  

 

Discontinued Operations

 

Discontinued operations represent the activities of the AquaMed business that was assumed in connection with the Merger and subsequently spun off during the three months ended June 30, 2019. See ‘Note 3 – Reverse Merger’. There are no ongoing activities or obligations associated with discontinued operations at September 30, 2019.

 

Recently Adopted Accounting Pronouncements

 

Lease Accounting 

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases that extend more than twelve months on the balance sheet. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for financial statements issued for annual and interim periods beginning after December 15, 2018 for public business entities. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company adopted the new standard on January 1, 2019 and used the effective date as its date of initial application. Consequently, the Company has not adjusted prior period amounts.

 

The Company has elected the package of practical expedients permitted in ASC Topic 842. Accordingly, the Company accounted for its existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC Topic 842, (b) whether classification of the operating leases would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs would have met the definition of initial direct costs in ASC Topic 842 at lease commencement.

 

The most significant impact from the adoption of this standard was the recognition of right-of-use (“ROU”), assets and lease obligations on the balance sheet for operating leases. This standard did not have a material impact on the Company’s cash flows from operations and operating results. As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019 (a) a lease liability of approximately $227,000, which represents the present value of the remaining lease payments of approximately $239,000, discounted using the Company’s incremental borrowing rate of 9.41%, and (b) a right-of-use asset of approximately $227,000 which represents the lease liability of $227,000. The ROU asset is being amortized over the remaining term of the lease of twelve months from January 1, 2019.

 

Recent Accounting Pronouncements Not Yet Effective

 

In August 2018, the FASB issued No. ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year, with early adoption permitted. The Company is currently assessing whether these amendments will have a material effect on its financial statements.

 

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Note 3. Reverse Merger

 

Merger

 

On May 3, 2019 the Company completed its reverse merger with Alliqua. Immediately following the Merger, the combined company’s name was changed from “Alliqua BioMedical, Inc.” to “Adynxx, Inc.” Private Adynxx changed its name to “Adynxx Sub, Inc.” and is currently a wholly-owned subsidiary of the Company. The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.

 

Subject to the terms and conditions of the Merger Agreement (a) each outstanding share of capital stock of Private Adynxx, was converted into the right to receive the number of shares of Alliqua’s common stock equal to the exchange ratio formula in the Merger Agreement (“Exchange Ratio”) of 0.0359 shares of common stock (which exchange rate reflects a 1-for-6 reverse stock split of the issued and outstanding capital stock of Alliqua BioMedical, Inc. effected on May 3, 2019 immediately prior to the Merger).and (b) each outstanding Private Adynxx stock option, whether vested or unvested, and warrant that has not previously been exercised, was assumed by the post-Merger company and converted into a stock option or warrant, as the case may be, to purchase shares of the post-Merger Company’s common stock at the Exchange Ratio formula in the Merger Agreement.

 

On May 3, 2019, prior to the closing of the Merger, $3.0 million aggregate principal amount of Notes and $203,000 of cumulative accrued interest on such Notes were converted into 367,041 shares of preferred stock, which were converted into common stock upon completion of the merger.

 

Upon the completion of the Merger, Private Adynxx equity holders held 4,936,784 shares of common stock. Equity issuance costs in connection with the Merger were recorded as an offset to additional paid in capital.

 

As described in “Spin-off” below, at the time of the Merger, Alliqua had in place a plan to spin-off all existing operations. Since Alliqua was deemed to have no operations upon consummation of the Spin-off, Alliqua was not considered to be a business for accounting purposes. Accordingly, no goodwill or intangible assets were recorded as a result of the Merger. Because Private Adynxx is treated as the acquiring company, Private Adynxx’s assets and liabilities are recorded at their pre-combination carrying amounts and the historical operations that are reflected in periods prior to the closing date of the Merger will be those of Private Adynxx. All share and per share amounts have been retroactively restated to give effect to the Exchange Ratio.

 

Private Adynxx was determined to be the accounting acquirer based upon the terms of the Merger Agreement and other factors including: (i) Private Adynxx equity holders owned approximately 86% of the voting interests of the combined company immediately following the closing of the transaction and Alliqua equity holders owned approximately 14%; (ii) directors appointed by Private Adynxx hold a majority of board seats in the combined company; and (iii) Private Adynxx management hold all key positions in the management of the combined company.

 

In connection with a previous modification of its Notes, the Company had computed a contingent beneficial conversion feature (“BCF”) that was contingent upon the occurrence of a reverse merger. In accordance with ASC 470-20-25-6, the contingent BCF is not recognized in earnings until the contingency is resolved. Upon the date of the Merger, the full amount of beneficial conversion feature of $2.1 million was recognized as interest expense in the condensed consolidated statement of operations during the nine months ended September 30, 2019.

 

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Dividend

 

In contemplation of the Merger, Alliqua declared a special cash dividend to the pre-Merger shareholders of Alliqua as of April 22, 2019. The aggregate dividend of $5,245,000 was paid on May 29, 2019.

 

Spin-off

 

On November 27, 2018, Alliqua had entered into an agreement whereby its existing operations would be distributed to existing shareholders as of a record date. With the exception of a corporate lease, substantially all of Alliqua’s assets and liabilities were contributed to a subsidiary, AquaMed Technologies Inc. (“AquaMed”), whose shares were then distributed to the pre-Merger shareholders of Alliqua by way of a pro rata dividend. The dividend distribution occurred on June 21, 2019.

 

Because the historical periods presented prior to the merger are those of Private Adynxx, the results of AquaMed are only reflected in these financial statements from the merger date to the date of the pro rata dividend of AquaMed and are presented as discontinued operations in the condensed consolidated statement of operations.

 

Pro Forma Financial Information

 

As the only significant operations of Alliqua have been discontinued with the spin-off transaction, pro forma financial information for periods prior to the merger is not presented herein as such results are not meaningful.

 

 

 

Note 4. Property and Equipment, Net

 

Property and equipment, net, consist of the following (in thousands):

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Furniture and fixtures

  $ 29     $ 29  

Office equipment

    2       2  

Computer equipment

    18       18  

Laboratory equipment

    2       2  

Total property and equipment

    51       51  

Less accumulated depreciation

    (46 )     (41 )

Property and equipment, net

  $ 5     $ 10  

 

Depreciation expense for the three months ended September 30, 2019 and 2018 was $1,000 and $2,000, respectively, and for the nine months ended September 30, 2019 and 2018 was $5,000 and $6,000 respectively.

 

 

 

Note 5. Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Prepaid clinical trial expenses

  $ 512     $ -  

Equity issuance costs

    740       -  

Prepaid insurance

    471       5  

Other prepaid expenses

    237       5  

Total prepaid and other current assets

  $ 1,960     $ 10  

 

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Note 6. Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Payroll and related expenses

  $ 640     $ 241  

Accrued term loan final payment

    608       421  

Accrued clinical trial expense

    26       -  

Professional fees and other costs

    899       195  

Total accrued liabilities

  $ 2,173     $ 857  

 

 

 

Note 7. Term Loans and Convertible Promissory Notes

 

Term Loans

 

On November 24, 2015, the Company entered into a loan and security agreement (the “Loan Agreement”) with Oxford, pursuant to which the Company received $3.0 million in proceeds from a Term Loan A and $2.0 million in proceeds from a Term Loan B under the Loan Agreement (collectively the “Term Loans”). The Company issued warrants to purchase 11,829 shares of common stock to Oxford in connection with the Term Loans (‘Note 10 Warrants). The Term Loans bear interest at a floating per annum rate equal to (a) 7.06% plus (ii) the greater of (a) the 30 day U.S. Dollar LIBOR rate reported in the Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (b) 0.19%.

 

The Term Loan A was recorded at its initial carrying value of $3.0 million less debt issuance costs of approximately $141,000, and the Term Loan B was recorded at its initial carrying value of $2.0 million, less debt issuance costs of approximately $3,000. The debt issuance costs are being amortized to interest expense over the life of the Term Loans using the effective interest method.

 

At September 30, 2019, $1.4 million was outstanding under Term Loan A and $1.0 million was outstanding under Term Loan B. As of December 31, 2018, $2.3 million was outstanding under Term Loan A and $1.5 million was outstanding under Term Loan B.

 

The following modifications have been made during the nine months ended September 30, 2019:

 

 

In January 2019, the Company and Oxford Finance agreed to amend the Loan Agreement. Oxford agreed to two months of interest-only payments followed by eight months of repayments upon delivery by February 1, 2019 of an executed term sheet for equity financing that would result in aggregate proceeds to the Company of $20.0 million. The Company was also required to place $200,000 in a segregated bank account that is subject to a blocked control agreement in favor of Oxford. Per the blocked control agreement, the account is subject to bank fees, which Oxford has agreed to have deducted from this account on a monthly basis. The funds in the segregated account were to be released upon the earlier of the consummation of a merger by March 31, 2019 or the consummation of an equity financing. The Company recorded the $200,000 as restricted cash. The maturity date of the Term Loans remained unchanged. The amendment fee amounted to $50,000. The amendment was accounted for as a debt modification.

 

 

In May 2019, the Company and Oxford agreed to an amendment to provide consent to the Merger. This consent amended certain provisions of the Term Loans to protect Oxford’s rights under the original Loan Agreement. The consent allowed Alliqua to be named as an additional borrower.

 

 

In June 2019, the Company and Oxford agreed to amend the Loan Agreement. Oxford agreed to two months of interest-only payments and the maturity date of the Term Loans was extended two months. The amendment fee amounted to $20,000. The amendment was accounted for as a debt modification.

 

 

In August 2019, the Company and Oxford agreed to amend the Loan Agreement. Oxford agreed to two months of interest-only payments followed by five months of scheduled repayments upon receipt by the Company of at least $500,000 by September 30, 2019 to fund operations through October 31, 2019. The maturity date of the Term Loans is March 1, 2020. The amendment was accounted for as a troubled debt restructuring.

 

Upon the respective dates of the debt modifications, no gain or loss was recorded, and a new effective interest rate was established based on the carrying value of the debt and the revised cash flows.

  

14

 

 

Interest expense associated with the Term Loans was $100,000 and $173,000 for the three months ended September 30, 2019 and 2018, respectively, and $436,000 and $482,000 for the nine months ended September 30, 2019 and 2018, respectively.

 

As of September 30, 2019, the Company was in compliance with all covenants under the Loan Agreement.

 

Principal payments for the Term Loans due under the loan agreement as of September 30, 2019 are due monthly beginning November 1, 2019 through the Term Loans’ maturity date on March 1, 2020.

 

Convertible Promissory Notes

 

The table below reflects the principal amount of the Notes issued by the Company (in thousands):

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Convertible note payable, due on March 29, 2019 interest at 8.0% p.a.

  $ -     $ 1,500  

Convertible note payable, due on September 27, 2019 interest at 8.0% p.a.

    -       1,500  

Convertible note payable, due on December 21, 2019 interest at 8.0% p.a.

    1,500       1,500  

Convertible note payable, due on March 29, 2020 interest at 8.0% p.a.

    1,500       -  

Convertible note payable, due on April 26, 2020 interest at 8.0% p.a.

    2,000       -  

Convertible note payable, due on May 29, 2020 interest at 8.0% p.a.

    500       -  

Convertible note payable, due on July 1, 2020 interest at 8.0% p.a.

    250       -  

Convertible note payable, due on July 29, 2020 interest at 8.0% p.a.

    350       -  

Convertible note payable, due on August 30, 2020 interest at 8.0% p.a.

    250       -  

Total

  $ 6,350     $ 4,500  

 

Outstanding Notes

 

The Notes outstanding at September 30, 2019 were issued with conversion and repayment rights as described below:

 

 

(a)

in the event that the Company issues and sells equity securities with proceeds to the Company of at least $5 million, on or before the maturity date, and after the closing of a reverse merger, then the outstanding principal amount of this convertible promissory note and any unpaid accrued interest will automatically convert in whole into equity securities of the same class sold in the equity financing at a conversion price equal to the cash price paid per share for equity securities in the financing,

 

 

(b)

if the Company consummates a change of control while the Notes remain outstanding, the Company shall repay the holders in cash in an amount equal to 200% of the outstanding principal amount of the Notes; and

 

 

(c)

in the event the Company consummates an IPO on or before the maturity date, then the outstanding principal amount of the Notes and any unpaid accrued interest will automatically convert into common stock at a conversion price equal to the per share offering price to the public for common stock in the IPO.

 

In July 2019 and August 2019, affiliates of Domain Partners, LLC, a significant shareholder of the Company, purchased from the Company $0.6 million and $0.3 million aggregate principal amount of Notes to fund the Company’s operations. These Notes accrue simple interest on the outstanding principal amount at a rate of 8% per annum and mature in July 2020 and August 2020, respectively.

 

Converted Notes

 

In May 2019, under the terms of the then outstanding Notes, the principal and accrued unpaid interest of two Notes totaling $3.2 million were automatically converted into the Company’s Series B convertible preferred stock. Upon consummation of the Merger, and subject to the terms and conditions of the Merger Agreement each outstanding share of capital stock of Adynxx, was converted into the right to receive the number of shares of the combined Company’s common stock equal to the Exchange Ratio formula in the Merger Agreement. An aggregate of 367,041 post-Merger common shares were issued associated with the conversion of these Notes.

 

15

 

 

In connection with a previous modification, the Company had computed a contingent beneficial conversion feature (“BCF”) that was contingent upon the occurrence of a reverse merger. In accordance with ASC 470-20-25-6, the contingent BCF is not recognized in earnings until the contingency is resolved. Upon the date of the Merger, the full amount of beneficial conversion feature of $2.1 million was recognized as interest expense in the condensed consolidated statement of operations for the nine months ended September 30, 2019.

 

Derivative Liability

 

The Company evaluated its outstanding Notes and determined that certain embedded components relating to conversion and redemption features of those contracts qualified as derivatives, which need to be separately accounted for in accordance with ASC 815. With the consummation of the Merger, several of these clauses no longer apply. However, the redemption provision upon change of control described above is an embedded feature that is required to be bifurcated.

 

As of September 30, 2019, the Company evaluated the fair value of the derivative liability and determined that the bifurcated derivative liability had no value because the Company estimated a zero probability of the embedded feature being triggered. As a result, the Company estimated the fair value of the derivative liability to be $0 at September 30, 2019. Similarly, the embedded derivatives that were in place at December 31, 2018 also had a fair value of $0.

 

 

 

Note 8. Leases

  

The Company leases office facilities under a non-cancelable operating lease agreement expiring on December 31, 2019. The Company also leases a corporate office facility previously utilized by Alliqua through an operating lease agreement, located in Yardley, Pennsylvania that expires in 2023. Effective February 1, 2019, this property has been subleased to The Pinnacle Health Group, Inc. through April 20, 2023 and the Company receives monthly lease payments.

 

Future minimum payments under non-cancellable leases as of September 30, 2019 were as follows (in thousands):

 

Period ending December 31

 

Future Commitments

 

2019 (remaining 3 months)

  $ 116  

2020

    227  

2021

    232  

2022

    236  

2023

    80  

Total future minimum lease payments

    891  

less: imputed interest

    (148 )

Total

  $ 743  

 

Total operating lease expenses for the three and nine months ended September 30, 2019 was $117,000 and $282,000, respectively, and is reflected in general and administrative expenses in the condensed consolidated statements of operations. Rent expense for the three and nine months ended September 30, 2018 was $58,000 and $174,000, respectively.

 

As of September 30, 2019, the Company had no leases that were classified as a financing lease. As of September 30, 2019, the Company did not have additional operating and financing leases that have not yet commenced. 

 

During the three and nine months ended September 30, 2019, the Company recognized $61,000 and $104,000 of sublease income on its condensed consolidated statement of operations, which is recorded as an offset against general and administrative expenses.

 

16

 

 

 

Note 9. Redeemable Convertible Preferred Stock

 

At December 31, 2018, Private Adynxx had 2,034,548 shares of Series A convertible preferred stock issued and outstanding, and 1,833,387 shares of Series B convertible preferred stock issued and outstanding. During 2019, prior to the Merger, an additional 367,041 shares were issued upon conversion of convertible notes described in ‘Note 7 - Term Loans and Convertible Promissory Notes’.

 

Upon the consummation of the Merger, all outstanding shares of Series A and Series B convertible preferred stock were cancelled and exchanged for shares of the Company’s common stock. Following the Merger, Private Adynxx survived as a wholly-owned subsidiary of new Adynxx, Inc. and adopted a new certificate of incorporation with no shares of preferred stock authorized or outstanding. The Company has 1,000,000 shares of preferred stock authorized under its certificate of incorporation, as amended.

 

 

 

Note 10. Warrants

 

Private Adynxx had issued warrants that were previously classified as a liability as they were exercisable for preferred shares that were potentially redeemable. The fair value of the warrant liability was re-measured at each balance sheet date up through the date of the Merger with the change as other income recorded in the statements of operations.

 

On May 3, 2019, in connection with the closing of the Merger, each outstanding Adynxx warrant that had not previously been exercised was converted into a stock warrant to purchase shares of the Company’s common stock at the Exchange Ratio and, as a result, outstanding warrants were converted into warrants to purchase an aggregate of 11,829 shares of the Company’s common stock at an exercise price of $6.34 per share. As such warrants qualify for equity classification, the Company reclassified the balance of $234,000 from warrant liability to additional paid in capital. These warrants are exercisable at any time and expire in 2025 and 2026.

 

Additionally, upon the closing of the Merger on May 3, 2019, the Company assumed outstanding Alliqua warrants to purchase an aggregate of 38,945 shares of common stock at exercise prices ranging from $26.40 to $28.20 per share. These warrants are exercisable at any time and expire in 2022.

 

 

 

Note 11. Stock Options

 

On May 3, 2019, in connection with the closing of the Merger, each outstanding Private Adynxx stock option, whether vested or unvested, was converted into a stock option to purchase shares of the Company’s common stock at the Exchange Ratio and, as a result, the Company issued options to purchase an aggregate of 690,058 shares of the Company’s common stock at exercise prices ranging from $1.11 to $3.06 per share.

 

Additionally, at the date of the Merger, Alliqua had outstanding employee options to purchase an aggregate of 57,822 shares of the post-Merger Company’s common stock at exercise prices ranging from $21.00 to $656.40 per share to former Alliqua option holders that were assumed as part of the merger. All Alliqua employees were terminated in connection with the Merger; however, such options have provisions that extend the expiration date beyond the employees’ termination date.

 

A summary of the Company’s stock option activity during the nine months ended September 30, 2019 is as follows (in thousands, except exercise prices):

 

                   

Weighted

         
           

Weighted

   

Average

         
           

Average

   

Remaining

         
   

Number of

   

Exercise

   

Life

   

Intrinsic

 
   

Options

   

Price

   

In Years

   

Value

 

Outstanding, December 31, 2018

    690     $ 2.76                  

Alliqua options assumed in Merger

    58       289.76                  

Exercised

    -       -                  

Expired

    (17 )     93.48                  

Outstanding, September 30, 2019

    731     $ 23.38       6.1     $ 33  
                                 

Exercisable, September 30, 2019

    550     $ 30.07       5.8     $ 33  

 

17

 

 

A summary of the Company’s stock options as of September 30, 2019 is as follows (in thousands, except exercise prices):

 

       

Options Outstanding

   

Options Exercisable

 
       

Weighted

           

Weighted

   

Weighted

         

Range of

 

Average

   

Outstanding

   

Average

   

Average

   

Exercisable

 

Exercise

 

Exercise

   

Number of

   

Exercise

   

Remaining Life

   

Number of

 

Price

 

Price

   

Options

   

Price

   

In Years

   

Options

 
                                             

$1.11

- $1.38   $ 1.11       73     $ 1.11       2.2       73  

$1.39

- $3.05   $ 1.39       37     $ 1.39       2.9       37  

$3.06

- $196.79   $ 3.06       580     $ 3.06       7.2       399  

$196.80

- $656.40   $ 370.21       41     $ 370.21       0.7       41  
        $ 23.38       731     $ 30.07       5.8       550  

 

The Company did not grant any stock options to employees during the three and nine months ended September 30, 2019. Stock-based compensation expense recorded in research and development and general and administrative expenses was $68,000 and $75,000 for the three months ended September 30, 2019 and 2018, respectively, and $204,000 and $225,000 for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, unrecognized stock-based compensation expense related to employees totaled approximately $327,000, which is expected to be recognized over approximately 1.3 years.

 

Stock-based compensation expense recorded in exchange for services related to non-employee options was $16,000 and $0 for the three months ended September 30, 2019 and 2018, respectively, and $48,000 and $0 for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was no unrecognized stock-based compensation expense related to unvested non-employees stock options.

 

 

 

Note 12. Commitments and Contingencies

 

Gain on Settlement

 

During August 2019, the Company entered into an agreement to resolve a vendor dispute. The vendor agreed to pay the Company $635,000 (the “Settlement Amount”) over a three-month period ending October 31, 2019, which is reflected as a gain on settlement in the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2019. As of September 30, 2019, the Company has received $443,000 of the Settlement Amount, with the remaining amount reflected as prepaid expenses and other current assets on the accompanying condensed consolidated balance sheet.

 

 

 

Note 13. Related-Party Transactions

 

At September 30, 2019, the Company had $6.4 million aggregate principal amount of outstanding convertible notes issued to a significant shareholder. ‘Note 7 - Term Loans and Convertible Promissory Notes’. Interest expense associated with related party notes was $122,000 and $31,000 for the three months ended September 30, 2019 and 2018, respectively, and $325,000 and $62,000 for the nine months ended September 30, 2019 and 2018, respectively.

 

In connection with the Merger, Alliqua’s existing CEO resigned from the company and received severance pay of $1,091,000. As such amounts were accrued by Alliqua prior to the Merger, this severance payment had no impact to our condensed consolidated statement of operations for the three and nine months ended September 30, 2019.

 

 

 

Note 14: Subsequent Events

 

In November 2019, the Company and Oxford agreed to amend the Loan Agreement. Oxford agreed to one month of interest-only payments followed by four months of scheduled repayments. The maturity date of the Term Loans is March 1, 2020. The amendment fee amounted to $30,000.

 

18

 
 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, the audited consolidated financial statements and related notes thereto as of and for the years ended December 31, 2018 and 2017 which are contained in our Form 8-K/A filed with the SEC on June 10, 2019 and our other public filings.

 

On May 3, 2019, Private Adynxx completed a reverse merger, or the Merger, with Alliqua BioMedical, Inc., or Alliqua, and we survived as a wholly-owned subsidiary of Alliqua. Following the consummation of the Merger, Adynxx changed its name to Adynxx Sub, Inc., and Alliqua BioMedical, Inc. changed its name to Adynxx, Inc. For financial reporting purposes, Alliqua was deemed to be the acquired entity in the Merger. The following management’s discussion and analysis relates to the results of operations of Adynxx, Inc. for periods subsequent to the Merger and Adynxx, the private company, for periods prior to the Merger.

 

Forward-Looking Statements

 

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management; and accounting estimates and the impact of new or recently issued accounting pronouncements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “should,” “could,” “predicts,” “potential,” “continue,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Quarterly Report on Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations as described from time to time in our SEC reports, including those risks outlined under the section titled “Item 2A. Risk Factors” found elsewhere in this report. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

 

Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the Securities and Exchange Commission. Any forward-looking statements in this report should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others. 

 

Overview

 

We are a clinical stage biopharmaceutical company focused on the development of a new class of therapeutics called transcription factor decoys and bringing to market novel, disease-modifying products for the treatment of pain and inflammation. Transcription factor decoys are short strands of DNA that specifically bind to and block the activity of their target transcription factors. Transcription factors are proteins that specifically bind to the regulatory regions of one or more target genes and regulate the expression of those genes. Since our founding in 2007, we have leveraged our AYX platform of proprietary transcription factor decoys to identify and develop novel product candidates designed to modify the course of pain. We believe that our transcription factor decoy technology can transform the treatment of pain, and going forward has the potential to be applied to additional disease states. We plan to continue advancing our AYX platform programs while simultaneously developing new transcription factor decoy candidates, collaborating with twoXAR, our artificial intelligence-driven drug discovery partner, and evaluating in-licensing opportunities in order to expand our pipeline and leverage our business development, clinical development and regulatory expertise.

 

19

 

 

We have no products approved for commercial sale and have not generated any revenue from product sales. From inception to September 30, 2019, we have raised net cash proceeds of approximately $63 million, primarily through the sale of equity securities, receipts of proceeds from a strategic collaboration, government grants, issuance of Notes, and gross proceeds from the Oxford term loans.

 

In December 2018, we received a grant from the National Institute on Drug Abuse, or NIDA, part of the National Institutes of Health, or NIH, the NIH grant, to support the clinical development of our lead product candidate, brivoligide. NIH grants provide funds for certain types of expenditures in connection with research and development activities over a contractually defined period. The maximum funding to be available under this grant for qualified expenditures over the next two years is expected to be approximately $5.7 million. We started drawing from this NIH grant in February 2019 and recognized $1.9 million and $0 as grant reimbursement contra-expense in our operating expenses for the nine months ended September 30, 2019 and 2018, respectively. We intend to continue to evaluate pursuing additional government grant opportunities on a case-by-case basis. In September 2019, we received a Notice of Award from the National Institute on Neurological Disease and Stroke, or NINDS, part of the NIH, for up to approximately $0.6 million to be paid over 12 months to support our planned preclinical studies of AYX2. The funds will become available after approval from the Office of Laboratory Animal Welfare, or OLAW, of the planned preclinical studies for AYX2, and we have not yet drawn from this NIH grant. We have incurred operating losses in each year since inception, with the exception of 2014, when we received a $20.0 million option payment as part of a strategic collaboration, which was subsequently terminated in 2014. Our net losses were $1.9 million and $1.5 million for the three months ended September 30, 2019 and 2018, respectively, and $9.0 million and $4.5 million, for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of $46.3 million. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations.

 

We expect to incur significant expenses and increasing operating losses for at least the next several years as we initiate and continue the clinical development of, and seek regulatory approval for, our product candidates and add personnel necessary to operate as a public company with an advanced clinical pipeline of products. In addition, operating as a publicly traded company involves the hiring of additional financial and other personnel, upgrading our financial information systems and incurring costs associated with operating as a public company. We expect that our operating losses will fluctuate significantly from quarter to quarter and year to year due to timing of clinical development programs and efforts to achieve regulatory approval of any of our product candidates.

 

Our current capital resources are insufficient to fund our planned operations for a 12-month period, and therefore, raise substantial doubt about our ability to continue as a going concern. We will continue to require substantial additional capital to continue our clinical development and potential commercialization activities. Accordingly, we will need to raise substantial additional capital to continue to fund our operations. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on our financial condition and our ability to develop our product candidates.

 

Basis of Presentation

 

Research and Development Expenses

 

Research and development expenses represent costs incurred to conduct research and development, such as the development of our product candidates. We recognize all research and development costs as they are incurred. Research and development expenses consist primarily of the following: 

 

 

expenses incurred under agreements with consultants and clinical trial sites that conduct research and development activities on our behalf;

 

 

laboratory and vendor expenses related to the execution of clinical trials;

 

 

contract manufacturing expenses, primarily for the production of clinical supplies; and

 

20

 

 

 

internal costs that are associated with activities performed by our research and development organization. These costs are not separately allocated by product candidate as we typically use our employee resources across various research and development activities. Unallocated internal research and development costs consist primarily of:

 

 

o

personnel costs, which include salaries, benefits and stock-based compensation expense; and

 

 

o

regulatory expense related to development activities.

 

​     The largest component of our operating expenses has historically been the investment in research and development activities. However, we do not allocate internal research and development costs, such as salaries, benefits, stock-based compensation expense and indirect costs to product candidates on a program-specific basis. The following table shows our research and development expenses by program (in thousands):

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 
                 

Direct research and development expenses by program:

               

AYX Platform

  $ 1,517     $ 120  

ADYX-005 TKA

    1,184       -  

ADYX-006 Mastectomy

    1,161       -  

twoXar Platform

    75       -  

ADYX-004 TKA

    2       92  

Internal research and development expenses

    1,273       1,581  
    $ 5,212     $ 1,793  

 

We expect research and development expenses will increase in the future as we advance our product candidates into and through clinical trials and pursue regulatory approvals, which will require a significant investment in regulatory support and contract manufacturing. In addition, we continue to evaluate opportunities to acquire or in-license other product candidates and technologies, which may result in higher research and development expenses due to license fees and/or milestone payments.

 

In December 2018, we received a NIH grant to support the clinical development of our lead product candidate, brivoligide. The grant is expected to provide approximately $2.8 million in funding in 2019 that will support research and development activities for the ADYX-006 Mastectomy study. We record qualified expenses reimbursable under the NIH grant as grant reimbursements, a contra operating expense.

 

The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in timely developing and achieving regulatory approval for our product candidates. The probability of success of our product candidates may be affected by numerous factors, including clinical data, competition, intellectual property rights, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

 

General and Administrative Expenses

 

Our general and administrative expenses consisted of personnel-related costs, professional fees for legal, consulting, audit and tax services, overhead expenses, such as rent, equipment depreciation, insurance and utilities, and other general operating expenses not otherwise included in research and development expenses.

 

We expect to incur additional expenses associated with operating as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission, or SEC, and standards applicable to companies listed on the over-the-counter market with securities registered under the Exchange Act, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our administrative headcount to support the growth of our business and operate as a public company.

 

21

 

 

Grant Reimbursements

 

We account for reimbursements of qualified grant related research and development expenses in accordance with the guidance provided by the Financial Accounting Standards Board, or FASB, in the Accounting Standards Update (ASU) 2018-08, “Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made,” or ASU 2018-08, which it adopted in January 2019. Based on this guidance, we determined that reimbursements of qualified expenses per the terms of the grant, met the definition of a ‘conditional contribution’ (versus an exchange contract) because (i) we have limited discretion in the way the funds may be spent, which creates a barrier to entitlement, and (ii) the grant contains provisions that release the awarding agency from the obligation to transfer funds that are not expended at the time the award is terminated.

 

We recognize the grant reimbursements as a contra operating expense in the period in which the related costs are incurred and the related services are rendered, provided that the applicable performance obligations under the government grants have been met.

 

Interest Income (Expense), Net

 

Interest income (expense), net, consists primarily of cash interest expense on the Oxford term loans, or Term Loans, and non-cash interest expense and amortization of debt issuance and debt discount costs related to the Term Loans and the debt discounts on the issuance of Notes, as well as the recognition of $2.1 million of a contingent beneficial conversion feature that was recognized upon the date of the Merger. Debt discount is accreted to interest expense over the debt borrowing term.

 

Other Income

 

Other income consists primarily of gains and losses resulting from the revaluation of our preferred stock warrant liabilities and convertible debt derivative liabilities, both of which are revalued at the end of each reporting period and any change in fair value recorded as a component of other income or expense.

 

We had preferred stock warrants related to Term Loans as well as convertible debt derivatives relating to the issuance of Notes. Both the warrants and Notes derivatives were recorded as a liability, with an offsetting amount recorded as debt discount. The preferred stock warrants were converted into warrants to purchase shares of common stock upon the closing of the Merger. We recorded adjustments to the fair value of the convertible debt derivative liability, as applicable, for the duration that they were outstanding.

 

Income Taxes

 

We recognize deferred income taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. We periodically evaluate the positive and negative evidence bearing upon realizability of our deferred tax assets. Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our future results, we maintained a full valuation allowance on the net deferred tax assets at September 30, 2019 and December 31, 2018. We intend to maintain a full valuation allowance on the federal and state deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

 

Summary of Significant Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. [Refer to Note 1, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q for a description of the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements.

 

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Results of Operations

 

Comparison of the Three Months Ended September 30, 2019 and 2018 (in thousands)

 

   

Three months ended September 30,

         
   

2019

   

2018

   

Dollar change

 
                         

Operating expenses

                       

Research and development

  $ 1,986     $ 524     $ 1,462  

General and administrative

    1,037       810       227  

Grant reimbursements

    (716 )     -       (716 )

Gain on settlement

    (635 )     -       (635 )

Total operating expenses, net

    1,672       1,334       338  

Loss from operations

    (1,672 )     (1,334 )     (338 )

Interest expense, net

    (223 )     (322 )     99  

Other income (expense), net

    -       151       (151 )

Loss from continuing operations

    (1,895 )     (1,505 )     (390 )

Loss from discontinued operations

    -       -       -  

Net loss

  $ (1,895 )   $ (1,505 )   $ (390 )

 

Research and Development

 

Research and development expenses increased by $1.5 million to $2.0 million for the three months ended September 30, 2019, from $0.5 million for the three months ended September 30, 2018. The increase was primarily due to $1.0 million in connection with start-up activities related to our planned Phase 2 ADYX-005 TKA and the Phase 2 ADYX-006 mastectomy clinical trials and $0.6 million related to the initiation of drug supply manufacturing with Avecia, partially offset by a $0.1 million reduction in salaries and benefits from the resignation of an employee and other minor cost changes.

 

General and Administrative

 

General and administrative expenses increased by $0.2 million to $1.0 million for the three months ended September 30, 2019, from $0.8 million for the three months ended September 30, 2018. This increase was due to $0.2 million in other general and administrative costs, including insurance, associated with us being a public company.

 

Grant Reimbursements

 

Beginning in February 2019, we started to receive payments from a NIH grant to support the clinical development of our lead product candidate, brivoligide. In the three months ended September 30, 2019, we recorded $0.7 million of grant reimbursements relating to qualified expenses incurred under the terms of the NIH grant.

 

Gain on Settlement

 

During August 2019, we entered into an agreement to resolve a vendor dispute. The vendor agreed to pay us $0.6 million which is reflected as a gain on settlement in the accompanying condensed consolidated statement of operations.

 

Interest Expense

 

Interest expense decreased by $0.1 million to 0.2 million for the three months ended September 30, 2019, from $0.3 million for the three months ended September 30, 2018. This decrease was primarily due to extinguishment of debt discount upon modification of debt terms.

 

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Comparison of the Nine Months Ended September 30, 2019 and 2018 (in thousands)

 

   

Nine months ended September 30,

         
   

2019

   

2018

   

Dollar change

 
                         

Operating expenses

                       

Research and development

  $ 5,212     $ 1,793     $ 3,419  

General and administrative

    3,354       2,102       1,252  

Grant reimbursements

    (1,914 )     -       (1,914 )

Gain on settlement

    (635 )     -       (635 )

Total operating expenses, net

    6,017       3,895       2,122  

Loss from operations

    (6,017 )     (3,895 )     (2,122 )

Interest expense, net

    (2,864 )     (767 )     (2,097 )

Other income (expense), net

    (94 )     211       (305 )

Loss from continuing operations

    (8,975 )     (4,451 )     (4,524 )

Loss from discontinued operations

    (58 )     -       (58 )

Net loss

  $ (9,033 )   $ (4,451 )   $ (4,582 )

 

Research and Development

 

Research and development expenses increased by $3.4 million to $5.2 million for the nine months ended September 30, 2019, from $1.8 million for the nine months ended September 30, 2018. The increase was primarily due to  $2.2 million in connection with start-up activities related to the Phase 2 ADYX-005 TKA and the Phase 2 ADYX-006 Mastectomy clinical trials and $1.4 million related to the initiation of drug supply manufacturing with Avecia, partially offset by a $0.2 million in salaries and benefits associated with the resignation of one employee.

 

General and Administrative

 

General and administrative expenses increased by $1.3 million to $3.4 million for the nine months ended September 30, 2019, from $2.1 million for the nine months ended September 30, 2018. This increase was primarily due to an increase of $0.9 million in legal and professional service costs incurred in connection with the Merger and preparation to be a public company, and an increase of $0.4 million in other general and administrative costs, including insurance, associated with us being a public company.

 

Grant Reimbursements

 

Beginning in February 2019, we started to receive payments from a NIH grant to support the clinical development of our lead product candidate, brivoligide. In the nine months ended September 30, 2019, we recorded $1.9 million of grant reimbursements relating to qualified expenses incurred under the terms of the NIH grant.

 

Gain on Settlement

 

During August 2019, we entered into an agreement to resolve a vendor dispute. The vendor agreed to pay us $0.6 million which is reflected as a gain on settlement in the accompanying condensed consolidated statement of operations.

 

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Interest Expense, Net

 

Interest expense, net, increased by $2.1 million to $2.9 million during the nine months ended September 30, 2019, from $0.8 million during the nine months ended September 30, 2018. The increase was primarily attributable to the recognition of $2.1 million associated with the beneficial conversion feature recognized upon the modification and conversion of two Notes.

 

Loss from Discontinued Operations

 

Loss on discontinued operations relates to the AquaMed business that was incurred from the date of the Merger to its spin-off that occurred on June 21, 2019.

 

Liquidity and Capital Resources

 

We expect that our research and development and general and administrative expenses will increase, and, as a result, we anticipate that we will continue to incur increasing losses in the foreseeable future. As stated above, we also expect that our current capital resources will be insufficient to fund our planned operations for a 12-month period. Therefore, we will need to raise additional capital to fund our operations, which may be through the issuance of additional equity, and potentially through the incurrence of additional debt. In addition, we may be required to raise additional capital in the future to service our indebtedness, including outstanding indebtedness that will become due and payable during fiscal year 2019, and make necessary capital expenditures. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts and our ability to refinance outstanding indebtedness before the applicable maturity date. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on our financial condition and our ability to develop our product candidates. In addition, if we default under the loan and security agreement, or the Loan Agreement, with Oxford, Oxford will have the ability to exercise its rights as collateral agent to take possession and dispose of the collateral securing the indebtedness under the Loan Agreement, which collateral includes all of our property including our intellectual property.

 

Beginning in February 2019, we started to receive payments from a NIH grant to support the clinical development of our lead product candidate, brivoligide. While these payments will offset certain qualifying expenses incurred on this research and development program, it will not be adequate to cover other expenses expected to be incurred for research, development, general and administrative expenses.

 

We have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate any revenue from product sales unless and until we obtain regulatory approval for and commercialize any of our product candidates. At the same time, we expect our expenses to increase in connection with our ongoing development and manufacturing activities, particularly as we continue the research, development, manufacture and clinical trials of, and seek regulatory approval for, our product candidates. Subject to obtaining regulatory approvals of any of our product candidates, we anticipate that we will need substantial additional funding in connection with our continuing operations. Further, we expect to continue to incur additional costs associated with operating as a public company following the Merger.

 

Until we can generate a sufficient amount of product revenue to finance our cash requirements, we expect to finance our future cash needs primarily through the issuance of additional equity and potentially through borrowings, receipt of proceeds from government grants, and strategic alliances with partner companies. To the extent that we raise additional capital through the issuance of additional equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.

 

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Cash Flows

 

The following table shows a summary of our cash flows for each of the periods shown below (in thousands):

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 
                 

Net cash used in operating activities

  $ (4,767 )   $ (4,649 )

Net cash used in investing activities

    -       (2 )

Net cash provided by financing activities

    3,409       2,110  

Net decrease in cash and cash equivalents

    (1,358 )     (2,541 )

Cash, cash equivalents and restricted cash at beginning of period

    1,942       4,356  

Cash, cash equivalents and restricted cash at end of period

  $ 584     $ 1,815  

 

Cash Flows from Operating Activities

 

Cash used in operating activities for the nine months ended September 30, 2019 was $4.8 million, consisting of a net loss of  $9.0 million, which was offset by non-cash charges of  $3.2 million primarily for non-cash interest expense on Notes, stock-based compensation expense, accretion of the charge due upon maturity of debt, and amortization of right of use assets, and a net increase in cash resulting from changes in operating assets and liabilities of $1.0 million. The change in our net operating assets and liabilities included cash generated from an increase in accounts payable of $2.2 million and an increase of  $1.0 million for accrued liabilities, both of which were due primarily to an increase in legal, accounting and other professional fees and expenses incurred in connection with the Merger and preparation to be a public company, which was offset by cash used due to an increase in prepaid expense of $1.9 million primarily related to clinical trial activity and $0.2 million of lease liability payments.

 

Cash used in operating activities for the nine months ended September 30, 2018 was $4.7 million, consisting of a net loss of  $4.5 million, which was offset by noncash charges of  $0.5 million primarily for stock-based compensation expense, accretion of the charge due upon maturity of debt and amortization of debt discount and debt financing costs. In addition, $0.7 million of cash was consumed resulting from changes in operating assets and liabilities. The change in our net operating assets and liabilities was due primarily to a decrease in accounts payable of  $0.6 million related to the completion of the ADYX-004 clinical trial initiated in 2017 and a decrease of  $0.1 million due to the reduction of accrued liabilities relating to the ADYX-004 clinical trial.

 

Cash Flows from Investing Activities

 

Cash used in investing activities for all periods presented was nominal.

 

Cash Flows from Financing Activities

 

During the nine months ended September 30, 2019, net cash provided by financing activities was $3.4 million, consisting of $4.8 million proceeds from the issuance of Notes, offset by $1.4 million used to repay principal of the Term Loans.

 

During the nine months ended September 30, 2018, net cash used in financing activities was $2.1 million consisting of $3.0 million proceeds from the issuance of Notes, offset by $0.9 million used to repay principal under the Term Loans.

 

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Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations as of September 30, 2019 (in thousands):

 

   

Total

   

Less than

1 Year

   

1 - 3 Years

   

3-5 Years

   

More Than

5 Years

 

Term loan principal and interest (1)

  $ 3,104     $ 3,104     $ -     $ -     $ -  

Convertible promissory notes and interest (2)

    6,859       6,859       -       -       -  

Operating lease commitments (3)

    891       287       465       139       -  
    $ 10,854     $ 10,250     $ 465     $ 139     $ -  

 

(1) Reflects principal, interest payments through maturity and final balloon payment due to Oxford under the Loan Agreement. The interest rate under the Loan Agreement is floating and future interest payments are estimated based upon the September 2019 interest rate.

 

(2) Reflects principal and accrued interest under outstanding convertible promissory notes through maturity. The notes automatically convert into shares of common stock upon the closing of a qualified equity financing.

 

(3) We lease our office space under a non-cancellable long-term operating lease. Reflects cash payments due under the remaining term of the operating lease, and amounts are not adjusted for imputed interest related to the lease liability.

 

Convertible Notes

 

In May 2019, upon the closing of the Merger, $3.0 million principal amount of Notes, plus $203,000 of cumulative accrued but unpaid interest, were converted into 367,041 shares of preferred stock, which were converted into shares of common stock upon completion of the Merger.

 

As of September 30, 2019, $6.4 million aggregate principal amount remained outstanding under outstanding Notes.

 

Term Loans

 

In November 2015, we entered into the Loan Agreement with Oxford pursuant to which Oxford agreed to lend us up to $10.0 million principal amount issuable in three tranches, or the Term Loans, of which $5.0 million had been drawn as of September 30, 2019. The Term Loans will mature on November 1, 2019. The Loan Agreement has been amended several times. We have the option to prepay all, but not less than all, of the borrowed amounts, provided that we will be obligated to pay a prepayment fee. The Term Loans bear interest at a floating per annum rate equal to (i) 7.06% plus (ii) the greater of  (a) the 30-day U.S. Dollar LIBOR rate reported in the Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (b) 0.19%. We will be required to make a final payment of 4.25% of the funded amount, payable on the earlier of  (i) the maturity date or (ii) the prepayment of the Term Loans. Our obligations under the Loan Agreement are secured by a perfected first-priority lien on all of our assets including our intellectual property. In connection with the Merger, Alliqua was named as an additional borrower under the Loan Agreement. As of September 30, 2019, we were in compliance with all covenants under the Loan Agreement.

 

In January 2019, we and Oxford amended the Loan Agreement to provide for two months of interest-only payments followed by eight months of repayments. We also placed $200,000 in a segregated bank account that is subject to a blocked control agreement in favor of Oxford. Per the blocked control agreement, the account is subject to bank fees, which Oxford has agreed to have deducted from this account on a monthly basis. The funds in the segregated account will be released upon the closing of this offering. The amendment fee was $50,000. The amendment was accounted for as a debt modification.

 

In May 2019, we and Oxford agreed to an additional amendment to provide consent to the Merger. This consent amended certain provisions of the term loan to protect Oxford’s rights under the original Term Loan agreement. The consent allowed Alliqua to be named as an additional borrower.

 

In June 2019, we and Oxford agreed to amend the Loan Agreement. Oxford agreed to two months of interest-only payments and the maturity date of the Term Loans was extended two months. The amendment fee was $20,000. The amendment was accounted for as a debt modification.

 

27

 

 

In August 2019, we and Oxford agreed to amend the Loan Agreement. Oxford agreed to two months of interest-only payments followed by five months of repayments upon receipt by us of at least $500,000 by September 30, 2019 to fund operations through October 31, 2019. The maturity date of the Term Loans is March 1, 2020. The amendment was accounted for as a troubled debt restructuring.

 

In connection with the Loan Agreement, we issued warrants to purchase our preferred stock to Oxford. Upon the closing of the Merger, these warrants were converted into warrants to purchase 11,829 shares of our common stock at an exercise price of $6.34 per share. The warrants are immediately exercisable and expire ten years from the issuance date.

 

Other Contracts

 

We enter into contracts in the normal course of business with various third parties for preclinical research studies, clinical trials, testing and other general and administrative services. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

 

Recently Adopted Accounting Pronouncements

 

Lease Accounting

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases that extend more than twelve months on the balance sheet. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for financial statements issued for annual and interim periods beginning after December 15, 2018 for public business entities. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. We have elected the package of practical expedients permitted in ASC Topic 842. Accordingly, we accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC Topic 842, (b) whether classification of the operating leases would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2015) would have met the definition of initial direct costs in ASC Topic 842 at lease commencement.

 

As a result of the adoption of the new lease accounting guidance, we recognized on January 1, 2019 (a) a lease liability of approximately $227,000, which represents the present value of the remaining lease payments of approximately $239,000, discounted using our incremental borrowing rate of 9.41%, and (b) a right-of-use asset of approximately $227,000 which represents the lease liability of  $227,000. The most significant impact was the recognition of right-of-use, or ROU, assets and lease obligations on the balance sheet for operating leases. This standard did not have a material impact on our operating results or cash flows from operations.

 

28

 

 

Recent Accounting Pronouncements Not Yet Effective

 

In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. This ASU is effective for fiscal years beginning after December 15, 2019 including interim periods within that fiscal year, with early adoption permitted. We are currently assessing whether these amendments will have a material effect on our financial statements.

 

Off-Balance Sheet Arrangements

 

During the nine months ended September 30, 2019 and the year ended December 31, 2018, we did not have any off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This item has been omitted as we qualify as a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

 Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Controller, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures were designed to provide 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 September 30, 2019, our Chief Executive Officer and Controller concluded that our disclosure controls and procedures are not effective at a level that provides reasonable assurance.

 

Remediation Efforts on Previously Identified Material Weakness

 

During the audit of our financial statements for the year ended December 31, 2018 and in connection with the preparation of interim financial statements for the first three quarters of 2019, a material weakness was identified in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls. The material weakness that was identified related to our inability to prepare accurate financial statements, resulting from a lack of adequate accounting personnel to timely and appropriately account for and disclose the impact of complex, non-routine transactions in accordance with GAAP, including the recording of convertible note and related disclosures, and as a result of the previously disclosed restatement of our consolidated statements of operations for the three and six months ended June 30, 2019 and 2018.

 

We are implementing measures designed to improve our disclosure controls and procedures and internal control over financial reporting to address the underlying causes of this material weakness, including hiring key accounting personnel and third-party consultants. Our remediation efforts are ongoing. However, our efforts to remediate this material weakness may not be effective or prevent any future material weakness or significant deficiency in our internal control over financial reporting. If our efforts are not successful, or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence and cause the market price of our common stock to decline.

 

29

 

 

Changes in Internal Control over Financial Reporting

 

We are currently in the process of adding additional controls over financial reporting, including the engagement of third-party consultants to assist with our financial reporting process. We are also currently evaluating the impacts of such control changes to our overall system of internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

 

 

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not presently party to any material legal proceedings. From time to time we may be involved in claims arising in connection with our business. Based on information currently available, we believe that the amount, or range, of reasonably possible losses in connection with any pending actions against us in excess of established reserves, in the aggregate, not to be material to our consolidated financial condition or cash flows. However, losses may be material to our operating results for any particular future period, depending on the level of income for such period.

 

ITEM 1A. RISK FACTORS

 

RISK FACTORS

 

Our business involves significant risks, some of which are described below. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition and future prospects. In such event, the market price of our common stock could decline 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. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this Quarterly Report.

 

Risks Related to Our Financial Condition and Capital Requirements

 

We have incurred losses since our inception, have a limited operating history on which to assess our business, and anticipate that we will continue to incur significant losses for the foreseeable future.

 

We are a clinical development-stage biopharmaceutical company with a limited operating history. On May 3, 2019, we completed the Merger with Alliqua BioMedical, Inc., and we survived as a wholly-owned subsidiary of Alliqua. Following the consummation of the Merger, Adynxx changed its name to Adynxx Sub, Inc., and Alliqua BioMedical, Inc. changed its name to Adynxx, Inc. Adynxx was deemed to be the accounting acquirer in the Merger and the historical financial statements of Private Adynxx are deemed to be the historical financial statements of the combined company. We have incurred net losses for the past several years, including net losses of $9.0 million, $6.0 million and $11.6 million for the nine months ended September 30, 2019 and the years ended December 31, 2018 and 2017, respectively. As of September 30, 2019, we had an accumulated deficit of $46.3 million.

 

As of September 30, 2019, we had $14.3 million in current and long-term liabilities. Our management concluded that there is substantial doubt about our ability to continue as a going concern. The audit report to our financial statements for the year ended December 31, 2018, also includes an explanatory paragraph related to our ability to continue as a going concern. The doubts concerning our ability to continue as a going concern may impact our ability to obtain financing on reasonable terms or at all. As of September 30, 2019, we had cash and cash equivalents of $0.3 million.

 

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We have devoted substantially all of our financial resources to identifying and developing our product candidates, including conducting clinical trials and providing general and administrative support for our operations. To date, we have financed our operations primarily through the sale of equity securities, payments associated with strategic collaborations, secured loan agreements and convertible notes. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through equity or debt financings, strategic collaborations, or grants. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We expect losses to increase as we continue Phase 2 development of our lead program brivoligide in two models of postoperative pain and potentially advance additional product candidates through investigational new drug, or IND, enabling activities and into clinical development. While we have not yet commenced pivotal clinical trials for any product candidate and it may be several years, if ever, before we complete pivotal clinical trials and have a product candidate approved for commercialization, we expect to invest significant funds into these clinical candidates to determine the potential to advance these compounds to regulatory approval.

 

If we obtain regulatory approval to market a product candidate, our future revenue will depend upon the size of any markets in which our product candidates may receive approval, and our ability to achieve sufficient market acceptance, hospital formulary access, pricing, reimbursement from third-party payors, and adequate market share for our product candidates in those markets. Even if we obtain adequate market share for our product candidates, because the potential markets in which our product candidates may ultimately receive regulatory approval could be very small, we may never become profitable despite obtaining such market share and acceptance of our products.

 

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future and our expenses will increase substantially if and as we:

 

 

continue the clinical development of our product candidates;

 

advance our programs into larger, more expensive clinical trials;

 

initiate additional nonclinical, clinical, or other studies for our product candidates;

 

identify and develop potential commercial opportunities, such as reduction in postoperative pain for patients scoring ≥16 on the Pain Catastrophizing Scale, or PCS, for the brivoligide product candidate;

 

seek regulatory and marketing approvals and reimbursement for our product candidates;

 

continue manufacturing our product candidates and plan for scale-up of outsourced manufacturing capabilities as we commence additional clinical trials for our product candidates;

 

establish a sales, marketing, and distribution infrastructure to commercialize any products for which we may obtain marketing approval;

 

seek to identify, assess, acquire, and/or develop other product candidates;

 

make milestone, royalty or other payments under third party license agreements;

 

seek to maintain, protect, and expand our intellectual property portfolio;

 

seek to attract and retain skilled personnel;

 

create additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts; and

 

experience any delays or encounter issues with the development and potential for regulatory approval of our clinical candidates such as safety issues, clinical trial accrual delays, longer follow-up for planned studies, additional major studies, or supportive studies necessary to support marketing approval.

 

Further, the net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance.

 

We have never generated any revenue from product sales and may never be profitable.

 

We have no products approved for commercialization and have never generated any revenue from product sales. Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic collaboration partners, to successfully complete the development of, and obtain the regulatory and marketing approvals necessary to commercialize one or more of our product candidates. We do not anticipate generating revenue from product sales for the foreseeable future. Our ability to generate future revenue from product sales depends heavily on our success in many areas, including but not limited to:

 

 

completing research and development of our product candidates;

 

obtaining regulatory and marketing approvals for our product candidates;

 

manufacturing product candidates and establishing and maintaining supply and manufacturing relationships with third parties that meet regulatory requirements and our supply needs in sufficient quantities to meet market demand for our product candidates, if approved;

 

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marketing, launching and commercializing product candidates for which we obtain regulatory and marketing approval, either directly or with a collaborator or distributor;

 

gaining market acceptance of our product candidates as treatment options;

 

addressing any competing products;

 

protecting and enforcing our intellectual property rights, including patents, trade secrets, and know-how;

 

negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter;

 

obtaining reimbursement or pricing for our product candidates that supports profitability; and

 

attracting, hiring, and retaining qualified personnel.

 

Even if one or more of the product candidates that we develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product candidate. We will have to develop or acquire commercial-scale manufacturing capabilities in order to continue development and potential commercialization of our product candidates. Additionally, if we are not able to generate revenue from the sale of any approved products, we may never become profitable.

 

Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial indebtedness.

 

As of September 30, 2019, our total current and long-term liabilities balance was $14.3 million, of which $2.4 million was secured indebtedness, collateral for which includes, but is not limited to, our intellectual property rights. Our ability to make scheduled payments of the principal, to pay interest on, to refinance the secured loan agreement with Oxford, or the Loan Agreement, or Notes or to make cash payments in connection with any conversion of the Notes depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control and ability to raise additional capital. We may not be able to raise sufficient capital or generate cash flow from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives if they are available to us based on the terms of the instruments and agreements governing the indebtedness, such as restructuring indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. If we default under the Loan Agreement, Oxford will have the ability to exercise its rights as collateral agent to take possession and dispose of the collateral securing the indebtedness under the Loan Agreement, which collateral includes all of our property, including our intellectual property. Our business, financial condition and results of operations could be substantially harmed as a result of any such foreclosure.

 

Despite our current indebtedness levels, we may still incur substantially more indebtedness or take other actions which would intensify the risks discussed above.

 

Despite our current indebtedness levels, and the restrictions we are under based on the terms of the Loan Agreement from incurring additional senior indebtedness, we may be able to incur substantial additional indebtedness in the future, subject to any restrictions contained in our then-existing debt instruments, some of which may be secured indebtedness, however the terms of such indebtedness may not be commercially attractive, if available.

 

We face risks related to government funded awards. If NIDA/NIH or NINDS/NIH were to eliminate, reduce or delay funding from these awards, this would have a significant negative impact on the brivoligide program.

 

We are substantially dependent upon awards from NIDA/NIH and NINDS/NIH for the costs related to the planned brivoligide Phase 2 and Phase 3 mastectomy model studies and the development of AYX2, respectively. If NIDA/NIH or NINDS/NIH were to eliminate, reduce or delay the funding for either or both of these awards or disallow some of our incurred costs, we would have to obtain additional funding for continued development or regulatory registration for brivoligide and AYX2 or significantly delay, reduce or stop the development effort. In contracting with NIDA/NIH and NINDS/NIH, we are subject to various U.S. government contract requirements which may limit reimbursement or if we are found to be in violation could result in contract termination. If the U.S. government terminates our award for its convenience, or if we default by failing to perform in accordance with the award schedule and terms, significant negative impact on our cash flows and operations could result.

 

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights.

 

To the extent that we raise additional capital through the sale of equity, debt or other securities convertible into equity, your ownership interest will be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available at all, would likely involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, making additional product acquisitions, or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates or future revenue streams or grant licenses on terms that are not favorable to us. We cannot assure you that we will be able to obtain additional funding if and when necessary to fund our entire portfolio of product candidates to meet our projected plans. If we are unable to obtain funding on a timely basis, we may be required to delay or discontinue one or more of our development programs or the commercialization of any product candidates or be unable to expand our operations or otherwise capitalize on potential business opportunities, which could materially affect our business, financial condition, and results of operations.

 

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Risks Related to the Development of Our Product Candidates

 

We are heavily dependent on the success of our lead product candidate, brivoligide, which is in the early stages of clinical development, and our other product candidates, which are in pre-clinical development. We cannot give any assurance that we will generate data sufficient to receive regulatory approval, which will be required before any of our product candidates can be commercialized.

 

To date, we have invested substantially all of our efforts and financial resources to identify and develop our portfolio of product candidates. Our future success is dependent on our ability to successfully further develop, obtain regulatory approval for, and commercialize one or more product candidates. We currently generate no revenue from sales of any drugs, and we may never be able to develop or commercialize a product candidate.

 

Our product candidate brivoligide, which is currently in Phase 2 of clinical development, is being developed for the reduction of postoperative pain in patients scoring ≥16 on the PCS. We have not prospectively demonstrated a statistically significant clinical benefit in this patient population for the primary endpoint in any clinical trial and may not be able to do so. Furthermore, the U.S. Food and Drug Administration, or the FDA, has not previously granted an indication for the reduction of postoperative pain in patients scoring ≥16 on the PCS. Additionally, in order to obtain an indication for the reduction of postoperative pain without restriction by type of surgical procedure, we intend to study brivoligide in pivotal trials in one orthopedic and one soft-tissue model of postoperative pain. We have studied brivoligide to date in total knee arthroplasty, or TKA, an orthopedic model of postoperative pain, and intend to study brivoligide in mastectomy with immediate tissue expander or implant placement, or mastectomy, as a soft-tissue model of postoperative pain. Failure to demonstrate efficacy in both an orthopedic and soft-tissue model of postoperative pain may limit the likelihood of FDA approval for brivoligide for postoperative pain, may limit approval to a subset of surgical procedures, and may limit the addressable patient population and related commercial opportunity. Further, we may not be able to replicate or develop additional data to satisfy regulatory requirements for approval. Our other product candidate, AYX2, has not yet been evaluated in clinical trials and may fail to show the desired safety and efficacy during clinical development. There can be no assurance that the data that we develop for our product candidates in their planned indications will be sufficient to obtain regulatory approval.

 

Our current product candidates are for the treatment of pain. The evaluation of pain therapeutics often relies upon patient-reported outcomes of pain, such as the Numerical Rating Scale, or NRS, as clinical trial endpoints. While these endpoints are well-validated and accepted by the FDA and comparable foreign authorities for evaluation of efficacy of product candidates for the treatment of pain, there may be increased variability associated with these patient-reported outcomes as compared to objective measures used in evaluation of efficacy for product candidates treating other disease states. If these patient-reported endpoints are associated with increased variability in future studies, the data generated may not be sufficient to obtain regulatory approval.

 

In addition, none of our product candidates have advanced into a pivotal study for their proposed indications and it may be years before such studies are initiated and completed, if at all. We are not permitted to market or promote any of our product candidates before they receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates. We cannot be certain that any of our product candidates will be successful in clinical trials or receive regulatory approval. Further, our product candidates may not receive regulatory approval even if they are successful in clinical trials. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations.

 

Our research and development is focused on discovering and developing novel drugs based on transcription factor decoys, and the approach we are taking to discover and develop drugs is not proven and may never lead to marketable products.

 

The discovery and development of drugs based on transcription factor decoys is an emerging field, and the scientific discoveries that form the basis for our efforts to discover and develop product candidates are relatively new. The scientific evidence to support the feasibility of developing differentiated product candidates based on these discoveries is both preliminary and limited, and has not led to products which have obtained regulatory approval by the FDA or comparable foreign authorities. Therefore, we do not know if our approach will be successful. Failure by any transcription factor decoy, including those currently being developed by us, would adversely impact this platform technology.

 

In addition, our product candidates are all based on a single platform technology. If we were required to discontinue development of brivoligide because the related trials are unsuccessful or do not demonstrate sufficiently positive results to continue development of brivoligide, development of our other product candidates may be harmed. Moreover, if we decide to leverage any success with brivoligide to develop our other product candidates reliant on our platform technology, we may not be successful in such efforts. In any such event, our business will be adversely impacted.

 

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Our research and development is focused on discovering and developing non-opioid therapies to treat pain. We are not developing our product candidates to address opioid dependence, and any potential impact these therapies may have on opioid usage is speculative and may never be supported by clinical data.

 

Our product candidates are being developed for the treatment of pain. There can be no assurance that any of these product candidates will have any impact on potential opioid usage in patients who use our product candidates, if approved. There remains significant uncertainty regarding the assessment of opioid-sparing outcomes in clinical trials of product candidates addressing pain as well as the clinical relevance of any such results. Further, there is no clear guidance from regulators on the design or endpoints of clinical trials intended to evaluate pain and related opioid usage and what clinical data, if any, would be necessary to support potential claims of reduced opioid usage or opioid-sparing effects. As a result of this uncertainty, we cannot assess, and can provide no assurance of, the potential impact, if any, that our product candidates may have on opioid usage for pain or as analgesic therapy. In addition, we have not evaluated, and do not intend to evaluate, the potential effect of our product candidates on opioid dependence.

 

We have yet to present the current clinical data to the relevant regulatory authorities to give an opinion on the clinical development pathway for brivoligide.

 

We plan to present the clinical and non-clinical data sets for brivoligide to the FDA and relevant foreign regulatory authorities after completion of the planned Phase 2 studies at an End of Phase 2 meeting or receipt of scientific advice from the European Medicines Agency, or EMA, as applicable. Until the results of these meetings are known and documented, there can no assurance as to what requirements may be imposed for filing a New Drug Application, or NDA, or Marketing Approval in the EMA for brivoligide. We are currently relying on opinions from experts and regulatory precedents to design our development program. It is possible that the official position of the applicable regulatory authorities will be substantially different from the advice we have received. Any such difference could increase both the time and cost required to obtain the necessary regulatory approvals for brivoligide, which may in turn limit or prohibit its further development, resulting in a material harm to our business, financial condition, results of operations and prospects.

 

Even if we successfully complete the necessary preclinical studies and clinical trials, we cannot predict when, or if, we will obtain regulatory approval to commercialize a product candidate and the regulatory approval may be for a more narrow indication than we seek.

 

The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable, typically takes many years following the commencement of clinical trials, and depends upon numerous factors. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions, which may cause delays in the approval or the decision not to approve an application. We have not obtained regulatory approval for any product candidate, and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.

 

Applications for our product candidates could fail to receive regulatory approval for many reasons, including but not limited to the following:

 

 

the FDA or comparable foreign regulatory authorities may disagree with the design, size or implementation of our clinical trials;

 

the FDA or comparable foreign regulatory authorities may disagree with the use of and definition of one orthopedic and one soft-tissue surgical model of postoperative pain as appropriate for approval for general postoperative pain;

 

the FDA does not currently have published guidance on the requirements for a general postoperative pain indication and may publish guidance that is not in alignment with our current clinical development plans, which may cause us to alter development plans, thereby increasing the costs and time required to complete clinical development of brivoligide;

 

the FDA or comparable foreign regulatory authorities may disagree with the use of the PCS as a tool for patient selection for treatment with brivoligide;