Savara Inc. (formerly Mast Therapeutics) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The quarter’s financial statements report the pre-merger Mast Therapeutics business and do not reflect the April 27, 2017 merger with Private Savara. Share and per-share data are retroactively adjusted for the 1-for-70 reverse split completed on April 27.
Business context
After the merger, the company’s business became primarily the development-stage respiratory drug business of Private Savara. Its pipeline includes AeroVanc (Phase 3 ready), Molgradex (Phase 2/3), and Aironite (Phase 2). The reported quarter principally reflects Mast’s legacy operations, including Aironite and discontinued vepoloxamer programs.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $0.094 million | $0 |
| Research and development expense | $1.443 million | $7.875 million |
| Selling, general and administrative expense | $1.585 million | $2.835 million |
| Transaction-related expense | $2.752 million | $0 |
| Operating loss | $5.697 million | $10.742 million |
| Net loss | $5.869 million | $11.207 million |
| Net loss per share | $1.61 | $4.40 |
| Net cash used in operating activities | $3.179 million | $11.328 million |
- Revenue was grant reimbursement for vepoloxamer nonclinical research; the company had no product sales. Product gross margin was not applicable.
- Cash and cash equivalents were $7.771 million at March 31, 2017, down from $8.542 million at December 31, 2016. Investment securities declined from $2.740 million to zero. Working capital was $1.6 million.
- Operating cash use was partly offset by $2.829 million of investing cash inflows, mainly certificate-of-deposit maturities and sales. Financing activities used $0.421 million, mainly debt payments. Cash declined $0.771 million during the quarter.
- Debt facility carrying value was $3.513 million ($1.580 million current and $1.933 million long-term); the Hercules facility’s stated interest rate was 9.70% at quarter-end. Total liabilities were $9.535 million and stockholders’ equity was $4.350 million.
Changes versus prior period and notable events
- Net loss narrowed by approximately 48% year over year. R&D expense fell approximately 82%, chiefly because vepoloxamer studies and manufacturing work were completed or wound down; SG&A decreased approximately 44%, largely following workforce reductions.
- The lower operating loss was partly offset by $2.752 million of merger-related and anticipated severance expense, absent in Q1 2016. Q1 2017 revenue was $94,000 versus none in the prior-year quarter.
- On April 27, 2017, Mast changed its name to Savara, completed the merger, and issued shares so former Private Savara stockholders became the majority owners. Mast employees were terminated after closing; approximately $1.8 million in cash severance was paid, along with $153,000 in bonuses and settlement of vested RSUs.
- The Hercules debt was repaid and terminated on May 2, 2017. A new SVB facility provides up to $15 million in two conditional $7.5 million tranches; the first $7.5 million was funded May 2, of which $3.7 million repaid Hercules. The loan bears interest at prime plus 4.25%, matures March 1, 2021, and includes a 6% final payment and restrictive covenants.
Outlook, risks and contingencies
- Management said the combined company expected cash, cash equivalents and investments to fund operations for at least 12 months, citing approximately $10.5 million of Private Savara cash and investments at March 31, plus approximately $4.0 million of subsequent pre-merger warrant proceeds and additional investment. The company separately reported approximately $16.8 million cash as of April 28 and stated existing resources were expected to fund operations into 2018. It also emphasized that substantial additional capital would be needed to advance development.
- Mast had substantial doubt about its ability to continue as a going concern at March 31; its 2016 audit opinion included a going-concern qualification. Management’s post-merger funding expectation is forward-looking, not a representation that the legacy quarter-end balance alone was sufficient.
- Management anticipated rising development and manufacturing expenses and no product revenue unless and until a candidate receives regulatory approval and is commercialized. Key milestones cited include starting AeroVanc’s Phase 3 study in the U.S. and Canada in Q3 2017 and reporting Molgradex Phase 2/3 top-line results in Q1 2018.
- Material risks include clinical or regulatory failure and delay, manufacturing and supply dependence, need for additional financing and potential dilution, and restrictive debt covenants. Molgradex manufacturing was being transferred to a new site; the transfer could require further studies, time, or expense.
- A CRO dispute related to the vepoloxamer Phase 3 study remained unresolved. Mast disputed the CRO’s claim and asserted its own damages claim; approximately $0.8 million was accrued, and management expected settlement at that amount.
- The merger may limit use of pre-merger tax attributes under Section 382. The filing also reports that approximately 10.5 million shares were subject to lock-up restrictions beginning to expire October 27, 2017.
Most important facts for investors to verify
- Post-merger cash, cash burn, and the actual runway after severance, debt repayment, and planned clinical spending; distinguish the legacy March 31 balances from later combined-company figures.
- Availability and conditions for the second SVB loan tranche, effective borrowing costs, covenant compliance, and any resulting financing needs or dilution.
- Progress and timing of AeroVanc’s Phase 3 start and Molgradex’s anticipated Q1 2018 results, including manufacturing-transfer and regulatory requirements.
- Resolution and final cost of the CRO dispute, and any other merger-related or severance obligations.
- Potential stock supply from lock-up expirations and the extent to which Section 382 limits pre-merger tax attributes.