0001104659-20-124372.txt : 20201112 0001104659-20-124372.hdr.sgml : 20201112 20201112160133 ACCESSION NUMBER: 0001104659-20-124372 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 55 CONFORMED PERIOD OF REPORT: 20200930 FILED AS OF DATE: 20201112 DATE AS OF CHANGE: 20201112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATABASIS PHARMACEUTICALS INC CENTRAL INDEX KEY: 0001454789 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37467 FILM NUMBER: 201306492 BUSINESS ADDRESS: STREET 1: 100 HIGH STREET STREET 2: 28TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 617-349-1971 MAIL ADDRESS: STREET 1: 100 HIGH STREET STREET 2: 28TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 10-Q 1 tm2029578-1_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

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: 001-37467

Catabasis Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	26-3687168
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)
100 High Street Floor 28
Boston, Massachusetts	02110
(Address of Principal Executive Offices)	(Zip Code)

(617) 349-1971

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which

registered

Common Stock, $0.001 par value per share

CATB

The Nasdaq Stock Market LLC

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

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 x No o

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	o	Accelerated filer	o

Non-accelerated filer	x	Smaller reporting company	x

		Emerging growth company	x

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 accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

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

As of October 30, 2020, there were 20,084,337 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION		2
Item 1.	Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheet as of September 30, 2020 and December 31, 2019	2
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019	3
	Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2020 and 2019	4
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22

PART II. OTHER INFORMATION		23
Item 1A.	Risk Factors	23
Item 6.	Exhibits	57

SIGNATURES		58

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements include, among other things, statements about:

	·	our expectations regarding our ability to stop development activities related to edasalonexent and wind down material costs related thereto;

	·	our expectations regarding our plans to explore and evaluate strategic options;

	·	our intellectual property position and strategy;

our estimates regarding expenses, capital requirements and needs for additional financing;

our expectations regarding possible litigation and investigations; and

the impact of government laws and regulations.

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 we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Catabasis Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

	September 30,			December 31,
	2020			2019
Assets
Current assets:
Cash and cash equivalents	$	52,856		$	9,899
Short-term investments		-			26,345
Prepaid expenses and other current assets		2,656			2,714
Total current assets		55,512			38,958
Right-of-use asset		1,178			2,349
Other assets		160			473
Total assets	$	56,850		$	41,780
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,408		$	1,197
Accrued expenses		4,924			2,610
Current portion of operating lease liabilities		648			1,225
Total current liabilities		6,980			5,032
Long-term portion of operating lease liabilities		559			1,028
Total liabilities		7,539			6,060
Commitments (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value per share, 5,000,000 shares authorized and no shares issued and outstanding		-			-
Common stock, $0.001 par value per share, 150,000,000 shares authorized; 20,077,337 and 12,433,600 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		20			12
Additional paid-in capital		301,210			259,305
Accumulated other comprehensive loss		-			-
Accumulated deficit		(251,919	)		(223,597	)
Total stockholders’ equity		49,311			35,720
Total liabilities and stockholders’ equity	$	56,850		$	41,780

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

Catabasis Pharmaceuticals, 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,
	2020			2019			2020			2019
Operating expenses:
Research and development	$	7,806		$	4,697		$	19,845		$	14,054
General and administrative		3,057			1,985			8,612			6,287
Total operating expenses		10,863			6,682			28,457			20,341
Loss from operations		(10,863	)		(6,682	)		(28,457	)		(20,341	)
Other income (expense):
Interest and investment income		4			214			231			697
Other expense, net		(3	)		(46	)		(96	)		(39	)
Total other income, net		1			168			135			658
Net loss	$	(10,862	)	$	(6,514	)	$	(28,322	)	$	(19,683	)
Net loss per share - basic and diluted	$	(0.56	)	$	(0.56	)	$	(1.59	)	$	(1.80	)
Weighted-average common shares outstanding used in net loss per share - basic and diluted		19,424,866			11,624,232			17,769,738			10,945,765

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

Catabasis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Net loss	$	(10,862	)	$	(6,514	)	$	(28,322	)	$	(19,683	)
Other comprehensive income:
(Loss) gain on short-term investments		(1	)		(1	)		-			4
Total other comprehensive income:		(1	)		(1	)		-			4
Comprehensive loss	$	(10,863	)	$	(6,515	)	$	(28,322	)	$	(19,679	)

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

Catabasis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except shares)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Common stock, shares
Balance, beginning of period		18,823,601			11,553,937			12,433,600			7,141,996
Issuance of common stock in at-the-market offerings		1,253,736			161,349			2,353,737			564,590
Issuance of common stock and warrants in public offerings		-			-			5,290,000			4,000,000
Issuance of common stock upon exercise of common stock warrants		-			-			-			8,700
Balance, end of period		20,077,337			11,715,286			20,077,337			11,715,286
Common stock, par value
Balance, beginning of period	$	19		$	12		$	12		$	7
Issuance of common stock in at-the-market offerings		1			-			3			1
Issuance of common stock and warrants in public offerings		-			-			5			4
Balance, end of period	$	20		$	12		$	20		$	12
Additional paid-in capital
Balance, beginning of period	$	291,897		$	253,821		$	259,305		$	232,243
Issuance of common stock in at-the-market offerings		8,938			1,049			16,267			3,223
Issuance of common stock and warrants in public offerings		-			-			24,554			18,501
Issuance of common stock upon exercise of common stock warrants		-			-			-			54
Stock-based compensation expense		375			378			1,084			1,227
Balance, end of period	$	301,210		$	255,248		$	301,210		$	255,248
Accumulated deficit
Balance, beginning of period	$	(241,057	)	$	(210,473	)	$	(223,597	)	$	(197,304	)
Net loss		(10,862	)		(6,514	)		(28,322	)		(19,683	)
Balance, end of period	$	(251,919	)	$	(216,987	)	$	(251,919	)	$	(216,987	)
Accumulated other comprehensive loss
Balance, beginning of period	$	1		$	1		$	-		$	(4	)
Realized (loss) gain on short-term investments		(1	)		(1	)		-			4
Balance, end of period	$	-		$	-		$	-		$	-
Total stockholders' equity	$	49,311		$	38,273		$	49,311		$	38,273

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

Catabasis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2020			2019
Operating activities
Net loss	$	(28,322	)	$	(19,683	)
Reconciliation of net loss to net cash used in operating activities:
Non-cash items		1,127			1,277
Changes in assets and liabilities:
Prepaid expenses and other current assets		36			(671	)
Other assets		85			(25	)
Right-of-use asset- operating		125			(36	)
Accounts payable		211			682
Accrued expenses		2,314			(287	)
Other liabilities		-			(56	)
Net cash used in operating activities		(24,424	)		(18,799	)
Investing activities
Purchases of short-term investments		(42,777	)		(123,355	)
Sales and maturities of short-term investments		69,110			122,777
Purchases of property and equipment		(23	)		-
Net cash provided by (used in) investing activities		26,310			(578	)
Financing activities
Proceeds from public offerings, net of issuance costs		24,559			18,505
Proceeds from at-the-market offering, net of issuance costs		16,270			3,289
Proceeds from exercise of common stock warrants		-			54
Net cash provided by financing activities		40,829			21,848
Net increase in cash, cash equivalents and restricted cash		42,715			2,471
Cash, cash equivalents and restricted cash, beginning of period		10,376			15,407
Cash, cash equivalents and restricted cash, end of period	$	53,091		$	17,878
Non-cash financing activities:
At-the-market offering issuance costs included in current liabilities	$	-		$	65

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

Catabasis Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Organization and Operations

The Company

Catabasis Pharmaceuticals, Inc (the “Company”) is a biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics. On October 26, 2020, the Company announced that the Phase 3 PolarisDMD trial of the Company’s lead product candidate, edasalonexent, for the treatment of Duchenne muscular dystrophy (DMD) did not meet the primary and secondary endpoints of the trial. Based on these results, the Company announced that it was stopping activities related to the development of edasalonexent, including the Company’s ongoing open-label extension trial, and that it plans to work with external advisors to explore and evaluate strategic options. The Company was incorporated in the State of Delaware on June 26, 2008.

Liquidity

The Company has entered into various sales agreements with Cowen and Company LLC (“Cowen”), pursuant to which the Company could issue and sell shares of common stock, par value of $0.001 per share, under at-the-market offering programs (the “ATM Programs”). The Company pays Cowen 3% of the gross proceeds from any common stock sold through these sales agreements. As of September 30, 2020, the Company has $27.9 million remaining available under its current sales agreement.

During the nine months ended September 30, 2020, the Company sold an aggregate of 2,353,737 shares of common stock pursuant to the ATM Program at an average price of $7.13 per share, for gross proceeds of $16.8 million and net proceeds of $16.3 million after deducting sales commissions and offering expenses.

On January 30, 2020, the Company entered into an underwriting agreement with Oppenheimer & Co. Inc. relating to an underwritten public offering (the “January 2020 Financing”) of 5,290,000 shares of common stock at a price to the public of $5.00 per share, including 690,000 shares issued upon the exercise in full by Oppenheimer & Co. Inc. of its overallotment option. This resulted in gross proceeds of $26.5 million, and net proceeds of $24.6 million.

As of September 30, 2020, the Company had an accumulated deficit of $251.9 million. The Company has been primarily involved with research and development activities and has incurred operating losses and negative cash flows from operations since its inception.

The Company is subject to a number of risks, including, but not limited to, the ability to successfully execute on its exploration and evaluation of strategic options, the successful discovery and development of any future drug candidates that the Company may pursue, raising additional capital, development by potential competitors of new technological innovations, protection of proprietary technology, regulatory approval and market acceptance of any products the Company may develop, and the COVID-19 pandemic. The Company anticipates that it will continue to incur significant operating losses as it explores and evaluates strategic options.

As of September 30, 2020, the Company had available cash and cash equivalents of $52.9 million. Based on the Company’s current operating plan, the Company believes it has sufficient cash and cash equivalents to fund operations for at least twelve months following the issuance of these condensed consolidated financial statements.

The Company has not generated any product revenues and has financed its operations primarily through public offerings and private placements of its equity securities. There can be no assurance that the Company will be able to obtain additional debt, equity or other financing or generate product revenue or revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company's business, results of operations, and financial condition.

Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying financial statements and the related disclosures are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Additionally, certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted from this report. Accordingly, these condensed financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2019 and notes thereto included in the 2019 Annual Report on Form 10-K.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company’s management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments, including those adjustments that are of a normal and recurring nature, which are necessary to fairly present the Company’s results for the interim periods presented. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020, or for any future period.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Catabasis Securities Corporation. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

The Company utilizes certain estimates to record expenses relating to research and development contracts. These contract estimates, which are primarily related to the length of service of each contract and the amount of service provided as of each measurement date, are determined by the Company based on input from internal project management, as well as from the Company’s service providers.

Stock-Based Compensation

During the three and nine months ended September 30, 2020 and 2019, the Company recorded stock-based compensation expense, which was allocated as follows in the condensed consolidated statements of operations (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Research and development	$	154	$	162	$	491	$	462
General and administrative		221		216		593		765
Total	$	375	$	378	$	1,084	$	1,227

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the Company’s dilutive net loss per share calculation, stock options and warrants to purchase common stock were considered to be common stock equivalents but were excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive; therefore, basic and diluted net loss per share were the same for all periods presented.

The following common stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect:

	Three and Nine Months Ended September 30,
	2020		2019
Stock options		1,336,262		843,183
Common stock warrants		6,193,749		6,193,749
		7,530,011		7,036,932

Cash, Cash Equivalents and Restricted Cash

The reconciliation of cash, cash equivalents and restricted cash reported within the applicable balance sheet that sum to the total of the same such amount shown in the statement of cash flows is as follows:

	September 30,
	2020		2019
Cash and cash equivalents	$	52,856	$	17,765
Restricted cash (1)		235		113
Total	$	53,091	$	17,878

(1) Included in prepaid expenses and other current assets and other assets.

Recent Accounting Pronouncements - Adopted

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820). This standard includes amendments regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and disclosure requirements of measurement uncertainty. This amendment was effective for annual reporting periods beginning after December 15, 2019. Adoption of the standard did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements - Not Yet Adopted

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). This standard requires a financial asset to be presented at amortized cost basis at the net amount expected to be collected. It also requires that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. In November 2019, the FASB issued an amendment making this ASU effective for annual reporting periods beginning after December 15, 2022 for smaller reporting companies., early adoption is permitted. The Company is currently evaluating the impact that this standard will have on its consolidated financial statements.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the 2019 Annual Report on Form 10-K, and there were no significant changes to such policies in the three and nine months ended September 30, 2020 that had a material impact on the Company’s results of operations or financial position.

Financial Instruments

The tables below present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 and indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the Company to develop its own assumptions for the asset or liability. There were no transfers between fair value measurement levels during the nine months ended September 30, 2020 or 2019.

The Company’s investment portfolio may include fixed income securities that do not always trade on a daily basis. As a result, the pricing services used by the Company apply other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations. The Company validates the prices provided by its third party pricing services by obtaining market values from other pricing sources and analyzing pricing data in certain instances. The Company has from time to time invested in certain reverse repurchase agreements which are collateralized by deposits in the form of U.S. Government Securities and Obligations for an amount no less than 102% of their value. The Company has not recorded an asset or liability for the collateral as the Company was not permitted to sell or re-pledge the collateral. The collateral had at least the prevailing credit rating of U.S. Government Treasuries and Agencies. The Company utilized a third party custodian to manage the exchange of funds and ensure that collateral received is maintained at 102% of the value of the reverse repurchase agreements on a daily basis.

Below is a summary of assets measured at fair value on a recurring basis (in thousands):

	As of September 30, 2020
	Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash and cash equivalents:
Money market funds	$	46,995	$	-	$	-	$	46,995
Total assets	$	46,995	$	-	$	-	$	46,995

	As of December 31, 2019
	Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash and cash equivalents:
Money market funds	$	5,432	$	-	$	-	$	5,432
Corporate debt securities		-		1,937		-		1,937
Short-term investments:
Commercial paper		-		1,993		-		1,993
Corporate debt securities		-		3,352		-		3,352
Reverse repurchase agreements		-		21,000		-		21,000
Total assets	$	5,432	$	28,282	$	-	$	33,714

At September 30, 2020, and December 31, 2019, cash equivalents approximated their fair value due to their short-term nature.

Short-Term Investments

The Company did not hold any short-term investments at September 30, 2020. The following table summarizes the short-term investments held at December 31, 2019 (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2019
Commercial paper	$	1,993	$	-	$	-	$	1,993
Corporate debt securities		3,352		-		-		3,352
Reverse repurchase agreements		21,000		-		-		21,000
Total	$	26,345	$	-	$	-	$	26,345

The contractual maturities of all short-term investments held at December 31, 2019 were one year or less. There were four short-term investments in an unrealized loss position at December 31, 2019, none of which had been in an unrealized loss position for more than 12 months. The aggregate fair value of these investments was approximately $3.4 million. The Company did not hold any investments with other-than-temporary impairments at December 31, 2019.

Gross realized gains and losses on the sales of short-term investments are included in other income, net. Unrealized holding gains or losses for the period that have been included in accumulated other comprehensive income, as well as gains and losses reclassified out of accumulated other comprehensive income into other income, net were not material to the Company’s condensed consolidated results of operations. The cost of investments sold or the amount reclassified out of the accumulated other comprehensive income into other income, net is based on the specific identification method for purposes of recording realized gains and losses. All proceeds in the three and nine-month periods ended September 30, 2020 and 2019 related to maturities of underlying investments. The gains on proceeds from maturities of short-term investments were not material to the Company’s condensed consolidated results of operations for the three and nine months ended September 30, 2020 and 2019.

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	September 30,		December 31,
	2020		2019
Accrued contracted research costs	$	2,456	$	737
Accrued compensation		1,483		1,365
Accrued professional fees		555		370
Accrued other		430		138
Total	$	4,924	$	2,610

Commitments

Future minimum payments required under the Company’s non-cancelable operating lease as of September 30, 2020 are summarized as follows (in thousands):

Period Ending December 31,	Amount
2020	$	182
2021		740
2022		438
Total minimum lease payments	$	1,360

Rent expense was $0.2 million and $0.1 million for the three months ended September 30, 2020 and 2019, respectively. Rent expense was $0.7 million and $0.2 million for the nine months ended September 30, 2020 and 2019, respectively. Lease payments were $0.2 million and $0.4 million for the three months ended September 30, 2020 and 2019, respectively. Lease payments were $1.3 million and $1.1 million for the nine months ended September 30, 2020 and 2019, respectively.

Stockholders’ Equity

Preferred Stock

As of September 30, 2020, the Company had 5,000,000 shares of preferred stock authorized for issuance, $0.001 par value per share, none of which are issued or outstanding. Preferred stock may be issued from time to time in one or more series, each series to have such terms as stated or expressed in the resolutions providing for the issue of such series adopted by the board of directors of the Company. Preferred stock which may be redeemed, purchased or acquired by the Company may be reissued except as otherwise provided by law.

Common Stock Warrants

The following table presents information about warrants to purchase Common Stock issued and outstanding at September 30, 2020:

Year Issued	Warrants Outstanding		Exercise Price		Date of Expiration
2014		1,227	$	122.12		8/26/2021
2015		1,227	$	122.12		3/30/2022
2018		4,199,995	$	12.00		6/21/2023
2019		1,991,300	$	6.25		2/7/2024
Total		6,193,749
Weighted average exercise price			$	10.19
Weighted average life in years						2.93

Common Stock Reserved for Future Issuance

The Company has reserved for future issuance the following shares of common stock:

	September 30,		December 31,
	2020		2019
Warrants for the purchase of common stock		6,193,749		6,193,749
Options outstanding to purchase common stock		1,336,262		785,832
Options available for future issuance to purchase common stock		1,974,563		525,484
Shares reserved for the employee stock purchase plan		148,951		112,481
Total		9,653,525		7,617,546

Stock Incentive Plans

A summary of the Company’s stock option activity and related information follows:

	Shares			Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2019		785,832		$	16.48		8.13	$	470
Granted		583,500		$	5.55
Cancelled or forfeited		(32,589	)	$	26.59
Expired		(481	)	$	32.10
Outstanding at September 30, 2020		1,336,262		$	11.46		8.31	$	964
Vested and exercisable at September 30, 2020		482,969		$	21.82		6.89	$	227

There were no options exercised in the three or nine months ended September 30, 2020 and 2019. The total grant date fair value of options vested for the three months ended September 30, 2020 and 2019 was $0.3 million and $0.5 million, respectively. The total grant date fair value of options vested for the nine months ended September 30, 2020 and 2019 was $1.0 million and $1.3 million, respectively. The weighted-average grant date fair value of options granted to employees and non-employees for the three months ended September 30, 2020 and 2019 was $4.85 and $4.10, respectively. The weighted-average grant date fair value of options granted to employees and non-employees for the nine months ended September 30, 2020 and 2019 was $3.72 and $3.25, respectively.

At September 30, 2020, the total unrecognized compensation expense related to unvested stock option awards was $2.8 million. The Company expects to recognize that cost over a weighted-average period of approximately 2.7 years.

10.

Subsequent Events

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates and to identify matters that require additional disclosure. Subsequent events have been evaluated as required.

On October 26, 2020, the Company announced that the Phase 3 PolarisDMD trial of the Company’s lead product candidate, edasalonexent, for the treatment of DMD did not meet the primary and secondary endpoints of the trial. Based on these results, the Company announced that it was stopping activities related to the development of edasalonexent, including the Company’s ongoing open-label extension trial, and that it plans to work with external advisors to explore and evaluate strategic options. The Company anticipates that it will incur less than $0.5 million of additional expenses related to the early termination of contracts.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our most recent Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics.

On October 26, 2020, we announced that the Phase 3 PolarisDMD trial of our lead product candidate, edasalonexent for the treatment of Duchenne muscular dystrophy, or DMD, did not meet the primary endpoint, which was a change from baseline in the North Star Ambulatory Assessment over one year of edasalonexent compared to placebo. In addition, we announced that the secondary endpoint timed function tests (time to stand, 10-meter walk/run and 4-stair climb) did not show statistically significant improvements. Based on these results, we stopped activities related to the development of edasalonexent, including the ongoing GalaxyDMD open-label extension trial. The Phase 3 Polaris DMD trial was a one-year placebo-controlled trial designed to evaluate the safety and efficacy of edasalonexent in boys ages 4-7 (up to 8th birthday) with DMD. The trial enrolled 131 boys across eight countries, with any mutation type, who were not on steroids. Edasalonexent was well-tolerated, consistent with the safety profile seen to date. The majority of adverse events were mild in nature and the most common treatment-related adverse events were diarrhea, vomiting, abdominal pain and rash. There were no treatment-related serious adverse events and no dose reductions. The global COVID-19 pandemic had no meaningful impact on the trial or its results. Data from the Phase 3 PolarisDMD trial will be further analyzed and are expected to be presented at an upcoming scientific conference and published.

In addition to edasalonexent, we have developed CAT-5571 and have completed investigational new drug, or IND, application-enabling activities. In August 2020, we announced that we entered into an agreement with the Bill & Melinda Gates Medical Research Institute to study CAT-5571 as a potential oral therapy to promote autophagy and clear persistent lung infections in patients with both drug-sensitive and drug-resistant tuberculosis.

In light of our decision to stop activities related to the development of edasalonexent, we plan to work with external advisors to explore and evaluate strategic options going forward, which may potentially result in changes to our business strategy and future operations. Potential strategic options that may be evaluated include a merger, business combination, in-licensing, out-licensing or other strategic transaction. On November 12, 2020, we announced that we engaged Ladenburg Thalmann & Co., Inc. as our strategic financial advisor. Pending any decision to change our strategic direction, our current operating plan provides for us to stop all activities related to the development of edasalonexent and to explore and evaluate strategic options. We do not have a defined timeline for the exploration and evaluation of strategic options and cannot confirm that the process will result in any strategic option being announced or consummated. We cannot provide any commitment regarding when or if this strategic evaluation process will result in any type of transaction, and there can be no assurance that such activities will result in any agreements or transactions that will enhance stockholder value. We do not intend to discuss or disclose further developments during this process unless and until our board of directors has approved a specific action or we otherwise determined that further disclosure is appropriate.

Since our inception in June 2008, we have devoted substantially all of our resources to developing our proprietary platform technology, identifying potential product candidates, undertaking preclinical studies and conducting clinical trials for three clinical-stage compounds, building our intellectual property portfolio, organizing and staffing our company, business planning, raising capital, and providing general and administrative support for these operations. To date, we have primarily financed our operations through private placements of our preferred stock, registered offerings of our common stock, including our initial public offering, or IPO, as well as a secured debt financing. From our inception through September 30, 2020, we raised an aggregate of $315.9 million through various private placements of preferred stock, our IPO, debt financing as well as various other registered equity offerings, including underwritten public offerings, at-the-market, or ATM, offerings, and stock option and warrant exercises.

As of September 30, 2020, we had cash and cash equivalents of $52.9 million. Over the next several quarters, we expect that our research and development expenses will be significantly reduced due to stopping activities related to the development of edasalonexent. We expect to continue to incur costs associated with operating as a public company. Based on our current operating plan, we believe our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. However, because of the numerous uncertainties associated with our exploration and evaluation of strategic options and our future business strategies and operations, we are unable to predict our future levels of expenses with certainty and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.”

We may need substantial additional funding to support our continuing operations and pursue any future business strategies arising from our exploration and evaluation of strategic options. In addition, we expect that we will not be able to achieve profitability unless we determine to pursue development of additional product candidates, and we expect that we would require substantial additional funding to complete development of, and ultimately commercialize, any such product candidate. Even if we are able to generate product sales from any such future product candidates, we may not become profitable. To the extent that we seek to raise additional capital, we expect that a majority of such proceeds would be derived from the sale of equity. We may be unable to raise additional funds when needed on favorable terms, or at all. If we fail to raise capital as, and when, needed, we may be unable to continue our operations at planned levels and be forced to modify our business strategies and reduce or terminate our operations.

Financial Overview

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including drug discovery efforts, and the development of any future product candidates, which include:

	·	employee-related expenses including salaries, benefits and stock-based compensation expense;
	·	expenses incurred under agreements with third parties, including contract research organizations that conduct clinical trials and research and development and preclinical activities on our behalf;
	·	the cost of consultants;
	·	the cost of acquiring, developing and manufacturing study materials; and
	·	facilities and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.

Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

We typically use our employee, consultant and infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, other internal costs or external consultant costs to specific product candidates or development programs. We record our research and development expenses net of any research and development tax incentives we are entitled to receive from government authorities.

The following table summarizes our research and development expenses by program (in thousands):

	Nine Months Ended September 30,
	2020		2019
Edasalonexent	$	13,765	$	9,375
CAT-5571		10		11
Costs not directly allocated to programs:
Employee expenses including cash compensation, benefits and stock-based compensation		4,421		3,740
Facilities		427		168
Consultants and professional expenses, including stock-based compensation		924		504
Other		298		256
Total costs not directly allocated to programs		6,070		4,668
Total research and development expenses	$	19,845	$	14,054

Since inception of the edasalonexent and the CAT-5571 programs, total direct expenses to support the programs have been $63.2 million and $4.2 million, respectively.

Based on the results of the Phase 3 PolarisDMD trial of edasalonexent for the treatment of DMD, we are stopping all activities related to the development of edasalonexent, including the ongoing GalaxyDMD open-label extension trial, and we are not actively pursuing the development of any product candidate at this time. We expect to continue to incur significant research and development expenses in connection with stopping activities related to the edasalonexent program, although we expect that our research and development expenses will be significantly reduced over the next several quarters. We plan to work with Ladenburg Thalmann & Co., Inc., our strategic financial advisor, to explore and evaluate strategic options going forward, which may potentially result in changes to our business strategy and future operations. Potential strategic options that may be evaluated include a merger, business combination, in-licensing, out-licensing or other strategic transaction. Our research and development expenses beyond 2020 will be heavily dependent on the outcome of our exploration and evaluation of strategic options. If we determine to pursue development of additional product candidates, the successful development of any such product candidates would be highly uncertain and we cannot reasonably estimate at this time the nature, timing and costs of the efforts that would be necessary to complete the development of any such product candidates. We are also unable to predict when, if ever, material net cash inflows would commence from any such potential product candidates. This is due to the fact that we would need to raise substantial additional capital to fund the clinical development of any such product candidates and the numerous risks and uncertainties associated with developing product candidates, including the uncertainties of:

	·	establishing an appropriate safety profile with IND-enabling toxicology studies;
	·	successful enrollment in, and completion of clinical trials;
	·	receipt of marketing approvals from applicable regulatory authorities;
	·	establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;
	·	obtaining and maintaining patent and trade secret protection and regulatory exclusivity for any future product candidates;
	·	launching commercial sales of any future product candidates, if and when approved, whether alone or in collaboration with others; and
	·	a continued acceptable safety profile of any future product candidates following approval.

A change in the outcome of any of these variables with respect to the development of any future product candidates, or the occurrence of any of the development, commercialization, financial and other applicable risks set forth in Part II, Item 1A – Risk Factors, included elsewhere in this Quarterly Report on Form 10-Q, would significantly change the costs and timing associated with the development of that product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, commercial, business development, legal and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters, and fees for accounting and consulting services.

We expect our general and administrative expenses to remain relatively consistent through the remainder of 2020. Our general and administrative expenses beyond 2020 will be heavily dependent on the outcome of our exploration and evaluation of strategic options.

Other Income (Expense)

Other income (expense), net consists of interest income earned on our cash, cash equivalents, and short-term investments, foreign currency fluctuations, and net amortization expense on short-term investments.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with United States generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be 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.

During the nine months ended September 30, 2020, there were no material changes to our critical accounting policies as reported in our 2019 Annual Report on Form 10-K.

Results of Operations

Comparison of the Three Months Ended September 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended September 30, 2020 and 2019, together with the dollar change in those items (in thousands):

	Three Months Ended September 30,						Period-to-
	2020			2019			Period Change
Operating expenses:
Research and development	$	7,806		$	4,697		$	3,109
General and administrative		3,057			1,985			1,072
Total operating expenses		10,863			6,682			4,181
Loss from operations		(10,863	)		(6,682	)		(4,181	)
Other income, net		1			168			(167	)
Net loss	$	(10,862	)	$	(6,514	)	$	(4,348	)

Research and Development Expenses

Research and development expenses increased by $3.1 million to $7.8 million for the three months ended September 30, 2020 from $4.7 million for the three months ended September 30, 2019, an increase of 66%. The increase in research and development expenses was attributable to a $2.8 million increase in costs to support our edasalonexent program due to activities associated with conducting ongoing clinical trials, a $0.1 million increase in employee related expenses, a $0.2 million increase in other expenses such as consulting fees and the research and development portion of facilities.

General and Administrative Expenses

General and administrative expenses increased by $1.1 million to $3.1 million for the three months ended September 30, 2020 from $2.0 million for the three months ended September 30, 2019, an increase of 54%. The increase was attributable to a $0.6 million increase in consulting and other professional services associated with ongoing commercialization activities, a $0.3 million increase in employee related expenses, a $0.1 million increase in insurance expense, and a $0.1 million increase in the general and administrative portion of facilities.

Other Income, Net

Other income, net decreased by $167,000 to $1,000 for the three months ended September 30, 2020 from $168,000 for the three months ended September 30, 2019, which was attributable to a decrease in interest and investment income due to lower interest rates.

Comparison of the Nine Months Ended September 30, 2020 and 2019

The following table summarizes our results of operations for the nine months ended September 30, 2020 and 2019, together with the dollar change in those items (in thousands):

	Nine Months Ended September 30,						Period-to-
	2020			2019			Period Change
Operating expenses:
Research and development	$	19,845		$	14,054		$	5,791
General and administrative		8,612			6,287			2,325
Total operating expenses		28,457			20,341			8,116
Loss from operations		(28,457	)		(20,341	)		(8,116	)
Other income, net		135			658			(523	)
Net loss	$	(28,322	)	$	(19,683	)	$	(8,639	)

Research and Development Expenses

Research and development expenses increased by $5.8 million to $19.9 million for the nine months ended September 30, 2020 from $14.1 million for the nine months ended September 30, 2019, an increase of 41%. The increase in research and development expenses was attributable to a $4.4 million increase in costs to support our edasalonexent program due to activities associated with conducting ongoing clinical trials, a $0.7 million increase in employee related expenses, a $0.4 million increase in consulting fees and a $0.3 million increase in the research and development portion of facilities expense.

General and Administrative Expenses

General and administrative expenses increased by $2.3 million to $8.6 million for the nine months ended September 30, 2020 from $6.3 million for the nine months ended September 30, 2019, an increase of 37%. The increase was attributable to a $1.5 million increase in consulting and other professional services primarily related to ongoing commercialization activities, a $0.3 million increase in employee related expenses, $0.3 million increase in insurance and general office expenses, and a $0.2 million increase in the general and administrative portion of facilities expense.

Other Income, Net

Other income, net decreased by $0.5 million to $0.1 million for the nine months ended September 30, 2020 from $0.7 million for the nine months ended September 30, 2019. This was attributable to a $0.5 million decrease in interest and investment income due to lower interest rates.

Liquidity and Capital Resources

From our inception through September 30, 2020, we raised an aggregate of $315.9 million, through various private placements of preferred stock, our IPO, as well as various other registered equity offerings, including underwritten public offerings, ATM programs, and stock option and warrant exercises. As of September 30, 2020, we had $52.9 million in cash and cash equivalents.

January 2020 Financing

On January 30, 2020, we entered into an underwriting agreement with Oppenheimer & Co. Inc. relating to an underwritten public offering, or the January 2020 Financing, of 5,290,000 shares of common stock at a price to the public of $5.00 per share, including 690,000 shares issued upon the exercise in full by Oppenheimer & Co. Inc. of its overallotment option. This resulted in gross proceeds of $26.5 million, and net proceeds of $24.6 million.

At-the-Market Offering

During the nine months ended September 30, 2020, we sold an aggregate of 2,353,737 shares of common stock pursuant to our ATM programs, at a weighted average price of $7.13 per share, for gross proceeds of $16.8 million and net proceeds of $16.3 million.

Cash Flows

Comparison of the Nine Months Ended September 30, 2020 and 2019

The following table provides information regarding our cash flows for the nine months ended September 30, 2020 and 2019 (in thousands):

	Nine Months Ended September 30,
	2020			2019
Net cash used in operating activities	$	(24,424	)	$	(18,799	)
Net cash provided by (used) in investing activities		26,310			(578	)
Net cash provided by financing activities		40,829			21,848
Net increase in cash, cash equivalents and restricted cash	$	42,715		$	2,471

Net Cash Provided by (Used in) Operating Activities

Net cash used in operating activities was $24.4 million for the nine months ended September 30, 2020 and consisted primarily of a net loss of $28.3 million adjusted for non-cash items of $1.1 million and a net decrease in operating assets of $2.8 million, which resulted primarily from an increase in accrued expenses of $2.3 million, an increase in accounts payable of $0.2 million, and a decrease in prepaid expense, other assets and operating lease of $0.3 million.

Net cash used in operating activities was $18.8 million for the nine months ended September 30, 2019 and consisted primarily of a net loss of $19.7 million adjusted for non-cash items, including stock-based compensation and depreciation and amortization expense of $1.3 million and a net increase in operating assets of $0.4 million, which resulted primarily from an increase in prepaid expenses of $0.7 million, a decrease in accrued expenses of $0.3 million and an increase long-term other assets and the net operating leases of $0.1 million, partially offset by an increase in accounts payable of $0.7 million.

Net Cash Used in Investing Activities

Net cash provided by investing activities was $26.3 million for the nine months ended September 30, 2020 and consisted of proceeds from maturities of short-term investments of $69.1 million partially offset by purchases of short-term investments of $42.8 million. Net cash used in investing activities was $0.6 million for the nine months ended September 30, 2019 and consisted of purchases of short-term investments of $123.4 million substantially offset by proceeds from maturities of short-term investments of $122.8 million.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $40.8 million during the nine months ended September 30, 2020, which was primarily attributable to net proceeds of $24.6 million from the January 2020 Financing and net proceeds of $16.3 million from our ATM programs. Net cash provided by financing activities was $21.8 million during the nine months ended September 30, 2019, which was primarily attributable to net proceeds of $18.5 million from our February 2019 public offering and net proceeds of $3.3 million from our ATM programs.

Funding Requirements

Absent a change in our strategic plan, our current operating plan consists primarily of stopping activities related to our edasalonexent program and exploring and evaluating strategic options.

As of September 30, 2020 we had an accumulated deficit of $251.9 million. We have been primarily involved with research and development activities and have incurred operating losses and negative cash flows from operations since our inception. While we are stopping activities related to the edasalonexent program, we still expect to continue to incur significant expenses and operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital. We anticipate that we will continue to incur significant expenses and operating losses as we implement our review of strategic options and we may incur increased expenses if and to the extent we:

are unable to stop activities related to the edasalonexent program on our anticipated timelines or we incur unexpected material expenses during this process;

initiate and continue research and preclinical and clinical development efforts for any future product candidate;

seek to identify and develop any future product candidate;

seek regulatory and marketing approvals for any future product candidate that successfully completes clinical trials, in the United States and other markets;

establish sales, marketing, market access, distribution, supply chain and other commercial infrastructure in the future to commercialize products for which we may obtain marketing approval, if any;

require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;

maintain, expand and protect our intellectual property portfolio;

need to respond to any investigations or inquiries, or defend against any litigation, that may result from the announcement of the results of our Phase 3 PolarisDMD trial; and

hire and retain additional personnel or add information systems, equipment or physical infrastructure to support our operations, including to help us comply with our obligations as a public company.

As of September 30, 2020, we had available cash and cash equivalents of $52.9 million. Based on our current operating plan, we believe our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. However, because of the numerous uncertainties associated with our ongoing exploration and evaluation of strategic options and our future business strategies and operations, we are unable to predict our future levels of expenses with certainty and we could exhaust our available capital resources sooner than we expect. Our future funding requirements will depend on many factors, including:

our ability to successfully complete our exploration and evaluation of strategic options and implement any such options;

our ability to eliminate all material edasalonexent-related expenses on the timelines that we anticipate;

our ability to limit our ongoing operating costs as we work to explore and evaluate strategic options;

the progress, timing, costs and results of clinical trials of, and research and preclinical development efforts for, any future product candidates, including potential future clinical trials;

the impact of the COVID-19 pandemic on our operations, business and prospects;

our ability to enter into and the terms and timing of any additional collaborations, licensing or other arrangements that we may establish;

the number and characteristics of future product candidates that we pursue and their development requirements;

the outcome, timing and costs of seeking regulatory approvals for any future product candidates;

the costs of commercialization activities for any future product candidates for which we pursue marketing approval to the extent such costs are not the responsibility of any future collaborators;

subject to receipt of marketing approval, revenue, if any, received from commercial sales of any future product candidate;

the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims;

the costs of responding to any investigations or inquiries, or defending against any litigation, that may result from the announcement of the results of our Phase 3 PolarisDMD trial; and

the costs of operating as a public company, including additional costs that we would incur if we cease to be an emerging growth company or smaller reporting company, as defined in U.S. Securities and Exchange Commission regulations.

We may need substantial additional funding to support our continuing operations and pursue any future business strategies arising from our exploration and evaluation of strategic options. In addition, we expect that we will not be able to achieve profitability unless we determine to pursue development of additional product candidates, and we expect that we would require substantial additional funding to complete development of, and ultimately commercialize, any such product candidate. Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, any future product candidates, if approved, may not achieve commercial success.

We do not have any committed external source of funds. To the extent that we seek to raise additional capital, we expect that a majority of such proceeds would be derived from the sale of equity, which may result in the dilution of our existing stockholders’ ownership interests, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business.

If we raise 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 or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity, debt or other financings when needed, we may be unable to continue our operations at planned levels and be forced to modify our business strategies and reduce or terminate our operations.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable Securities and Exchange Commission rules.

Contractual Obligations

As of September 30, 2020, there had been no material changes to our contractual obligations and commitments disclosed under Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2019 Annual Report on Form 10-K.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of September 30, 2020, we had cash and cash equivalents of $52.9 million and, as of December 31, 2019, we had cash, cash equivalents and short-term investments of $36.2 million. Our cash equivalents as of September 30, 2020 consisted of money market funds. Our cash equivalents as of December 31, 2019 consisted of money market funds and corporate debt securities. Our short-term investments as of December 31, 2019 consisted of corporate debt securities, U.S. reverse repurchase agreements and commercial paper. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our investment portfolio and interest income.

As of September 30, 2020 and December 31, 2019, we had no material liabilities denominated in foreign currencies.

Item 4. Controls and Procedures

Management’s Evaluation of our Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of September 30, 2020, our disclosure controls and procedures were effective at the reasonable assurance level.

We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control over Financial Reporting.

During the three months ended September 30, 2020, there were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

We operate in a dynamic and rapidly changing business environment that involves risks and substantial uncertainty. The following discussion addresses risks and uncertainties that could cause, or contribute to causing, actual results to differ from expectations in material ways. In evaluating our business, investors should pay particular attention to the risks and uncertainties described below and in other sections of this Quarterly Report on Form 10-Q and in our subsequent filings with the Securities and Exchange Commission, or SEC. These risks and uncertainties, or other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition. The trading price of our common stock could also decline due to any of these risks, and you could lose all or part of your investment.

Our business has been almost entirely dependent on the success of edasalonexent as a potential treatment for DMD, a program for which we recently stopped all activities on due to the failure to meet the primary or secondary endpoints of the Phase 3 PolarisDMD trial.

On October 26, 2020, we announced that we were stopping all activities related to the edasalonexent program and that we plan to work with external advisors to explore and evaluate strategic options. Potential strategic options that may be evaluated include a merger, business combination, in-licensing, out-licensing or other strategic transaction We have engaged Ladenburg Thalmann & Co., Inc., a strategic financial advisor, to support our exploration and evaluation of strategic options that could maximize both near and long-term value for our stockholders. We do not have a defined timeline for the exploration and evaluation of strategic options and cannot confirm that the process will result in any strategic option being announced or consummated. We cannot provide any commitment regarding when or if this strategic evaluation process will result in any type of transaction, and there can be no assurance that such activities will result in any agreements or transactions that will enhance stockholder value. If we determine to engage in a transaction as a result of our exploration and evaluation of strategic options, our future business, prospects, financial position and operating results could be significantly different than those in historical periods or projected by our management. Because of the significant uncertainty regarding our future plans, we are not able to accurately predict the impact of a potential change in our existing business strategy. We do not intend to discuss or disclose further developments during this process unless and until our board of directors has approved a specific action or we otherwise determined that further disclosure is appropriate.

Pending the results of our exploration and evaluation of strategic options, our current operating plan provides for stopping all activities related to the edasalonexent program and focusing on activities necessary to explore and evaluate strategic options.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since inception. We expect to incur losses for at least the next several years and may never achieve or maintain profitability.

Our net losses were $28.3 million for the nine months ended September 30, 2020 and $26.3 million and $25.9 million for the years ended December 31, 2019 and 2018, respectively. As of September 30, 2020, we had an accumulated deficit of $251.9 million. We have not generated any revenues from product sales, have not completed the development of any product candidate and may never have a product candidate approved for commercialization. We have financed our operations to date primarily through private placements of our preferred stock, registered offerings of our common stock, including our initial public offering, or IPO, our June 2018 and February 2019 registered offerings of common stock and common stock warrants and our January 2020 registered offering of common stock, our at-the-market programs, and a secured debt financing, and have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and clinical development programs. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

Since 2018, we have devoted a significant portion of our financial resources and efforts to the development of edasalonexent as a potential treatment for DMD. On October 26, 2020, based on the results of the Phase 3 PolarisDMD trial, we announced that we were stopping all activities related to the edasalonexent program and that we plan to work with external advisors to explore and evaluate strategic options.

While we are stopping activities related to the edasalonexent program, we still expect to continue to incur significant expenses and operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital. We anticipate that we will continue to incur significant expenses and operating losses as we implement our exploration and evaluation of strategic options and we may incur increased expenses if and to the extent we:

are unable to stop activities related to the edasalonexent program on our anticipated timelines or we incur unexpected material expenses during this process;

initiate and continue research and preclinical and clinical development efforts for any future product candidate;

seek to identify and develop any future product candidate;

seek regulatory and marketing approvals for any future product candidate that successfully completes clinical trials, in the U.S. and other markets;

establish sales, marketing, market access, distribution, supply chain and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval, if any;

require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;

maintain, expand and protect our intellectual property portfolio;

need to respond to any investigations or inquiries, or defend against any litigation, that may result from the announcement of the results of our Phase 3 PolarisDMD trial; and

hire and retain additional personnel or add information systems, equipment or physical infrastructure to support our operations, including to help us comply with our obligations as a public company.

To become and remain profitable, we or any potential future collaborators must develop and eventually commercialize at least one product candidate with significant market potential. This will require that we or our collaborators be successful in a range of challenging activities, including completing preclinical studies and clinical trials of one or more product candidates, obtaining marketing approval for one or more these product candidates, manufacturing, marketing and selling those products for which we or our collaborators may obtain marketing approval and satisfying any post-marketing requirements. We or our collaborators may never succeed in any or all of these activities and, even if we or our collaborators do succeed, we or our collaborators may never generate revenue that is significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause investors to lose all or part of their investments in us.

If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our operations and may not achieve our strategic objectives.

Absent a change in our strategic plan, our current operating plan consists primarily of stopping activities related to our edasalonexent program and exploring and evaluating strategic options. Based on this operating plan, we believe our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. Our estimate as to how long we expect our cash and cash equivalents securities to be able to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our future funding requirements will depend on many factors, including: