Business context and reporting period
The supplied filing is OvaScience, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2014, not a filing identified as Tempest Therapeutics, Inc. OvaScience was developing fertility treatments based on egg precursor cells. It had launched AUGMENT internationally through an access program; OvaPrime and OvaTure remained in development. The company reported no treatment revenue.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data. The filing reports quarterly and six-month comparisons with 2013.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development expense | 4.534 | 2.576 | 9.186 | 5.256 |
| Selling, general and administrative expense | 5.061 | 3.445 | 8.059 | 5.940 |
| Net loss | 9.893 | 5.996 | 17.707 | 11.153 |
| Basic and diluted net loss per share | $0.42 | $0.36 | $0.83 | $0.74 |
| Net cash used in operating activities | Not presented by quarter | Not presented by quarter | 11.529 | 9.220 |
Operating margins are not meaningful because the company had no revenue. At June 30, cash and cash equivalents were $16.553 million and short-term investments were $64.815 million, totaling $81.368 million. Working capital was $75.561 million. Total liabilities were $7.132 million, with no conventional borrowing reported; liabilities included a $2.353 million fair-value estimate for the Intrexon technology access fee payable in December 2014. Stockholders’ equity was $78.697 million.
For the first half, investing cash use was $41.635 million, largely reflecting purchases of short-term investments and a $1.5 million OvaXon investment. Financing provided $51.639 million, principally from a March 2014 common-stock offering. Cash and cash equivalents declined by $1.525 million, while cash plus short-term investments rose from $44.427 million at year-end 2013 to $81.368 million.
Material changes versus the prior comparable period
- Q2 operating expenses rose 59% to $9.595 million; R&D increased 76% and SG&A increased 47%. For the first half, operating expenses increased 54% to $17.245 million.
- Q2 net loss increased 65%; first-half net loss increased 59%. The increases reflected expanded staffing, R&D services and lab activity, AUGMENT access-program setup costs, and OvaXon’s equity-method losses.
- The March 2014 public offering raised $51.6 million net, compared with $32.7 million net from a March 2013 private placement. Common shares outstanding increased to 23.595 million at June 30 from 17.541 million at December 31, 2013.
- First-half stock-based compensation was $3.082 million. The filing cites additional mark-to-market expense for founders’ shares following directors’ departures from the board, partly offset by a $0.6 million reversal related to an executive’s departure and option modification.
Outlook, commentary, risks and unusual items
- Management estimated that $81.4 million of cash, cash equivalents and marketable securities would fund its current operating plan into 2016, but said additional funding may be needed for 2016 and beyond. This estimate depends on assumptions that may prove incorrect; no committed external funding source was reported.
- Management planned further AUGMENT international expansion, targeting at least 40 treatment cycles in 2014 and conversion of ACE clinics to commercial centers by year-end. It planned additional OvaPrime proof-of-concept work in 2014 and an international introduction in 2015; OvaTure proof-of-concept results were expected in 2014. These are plans, not assured outcomes.
- Regulatory uncertainty is material: the FDA had sent an “untitled” letter in September 2013 advising an Investigational New Drug application for AUGMENT. The company anticipated further FDA discussions and warned that disagreement by regulators could require approval efforts, cause delays or lead it to abandon the treatment in a region.
- A purported shareholder class action, initially dismissed without prejudice and re-filed in June 2014, alleges securities-law misstatements concerning AUGMENT’s regulatory classification. The company intended to defend the case; its outcome and potential materiality were not estimable.
- Other risks include treatment-development and commercialization uncertainty, potential dilution or unfavorable financing terms, and interest-rate exposure. Management estimated that a 100-basis-point rate increase would reduce investment fair value by approximately $0.6 million. The filing reported no material change in other risk factors from its 2013 Form 10-K.
- OvaScience and Intrexon each held 50% of OvaXon and shared costs and profits; OvaScience recorded $0.392 million of equity-method losses for the first half. A separate $0.5 million MGH license-fee installment remained due in March 2015.
Important facts for investors to verify
- Confirm the issuer: the supplied document names OvaScience, Inc., whereas the request metadata names Tempest Therapeutics, Inc.
- Review the FDA’s position and the regulatory pathway, clinical or proof-of-concept evidence, and commercial progress for AUGMENT and the pipeline treatments.
- Assess the assumptions underlying management’s runway estimate and the timing, availability and potential dilution of future financing.
- Track the re-filed shareholder litigation, the Intrexon/OvaXon obligations, and the MGH payment due in 2015.
- Reconcile cash-flow disclosure: the cash-flow statement reports first-half operating cash use of $11.529 million, while the MD&A capital-resources table reports $11.502 million.