Aldeyra Therapeutics, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended September 30, 2014, filed November 12, 2014. Aldeyra is an early-stage biotechnology company developing aldehyde-trapping therapies, principally NS2, for Sjögren-Larsson Syndrome and acute anterior uveitis. The company had no approved products and had generated no revenue.
The company completed its initial public offering on May 7, 2014, selling 1.5 million shares at $8.00 per share and receiving approximately $10.0 million in net proceeds. Series A and Series B preferred stock and related warrants were converted or exercised into common stock in connection with the offering.
Financial Metrics
| Metric | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | Comparable 2013 Period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Research and development expense | $1.20 million | $2.30 million | $0.67 million and $1.14 million, respectively |
| General and administrative expense | $0.77 million | $2.56 million | $0.50 million and $1.30 million, respectively |
| Loss from operations | $1.97 million | $4.86 million | $1.17 million loss and $2.44 million loss, respectively |
| Net income (loss) | $(2.01) million | $(2.74) million | $9.31 million income and $3.77 million income, respectively |
| Net income (loss) attributable to common stockholders | $(2.01) million | $(7.13) million | $0.88 million income and $0.32 million income, respectively |
| Basic loss per share | $(0.36) | $(2.21) | $2.76 income and $1.00 income, respectively |
| Cash and cash equivalents | $10.14 million at September 30, 2014 | $3.26 million at December 31, 2013 |
Net cash used in operating activities was $3.17 million for the nine months ended September 30, 2014, compared with $1.11 million in the comparable 2013 period. Net cash used in investing activities was $6,107. Net cash provided by financing activities was $10.06 million, principally from the initial public offering. Cash increased by $6.88 million during the period.
At September 30, 2014, total assets were $10.35 million, total liabilities were $2.09 million, and stockholders’ equity was $8.26 million. Credit facility debt was approximately $1.4 million outstanding, including approximately $1.24 million net of debt discount presented as long-term debt. The facility was secured by substantially all company assets, including intellectual property.
Operating margins and profitability margins are not meaningful because the company had no revenue and was operating at a loss. Stock-based compensation was $1.57 million for the nine months ended September 30, 2014.
Material Changes Versus the Prior Comparable Period
- Research and development expense increased 79% for the quarter and 102% for the nine-month period, primarily due to higher external development costs, preclinical, manufacturing and clinical efforts, and increased personnel costs.
- General and administrative expense increased 54% for the quarter and 96% for the nine-month period, reflecting higher headcount, insurance, legal, audit, tax and other public-company costs.
- Results shifted from reported net income in 2013 to losses in 2014. The 2013 results benefited substantially from noncash changes in the fair value of preferred stock warrant and related derivative liabilities. Those liabilities were converted, exercised or otherwise eliminated in connection with the IPO.
- Net loss attributable to common stockholders for the nine months included a $4.05 million deemed dividend related to preferred securities and approximately $2.33 million of noncash fair-value effects.
- Cash increased primarily because of the $10.06 million of net IPO financing, despite higher operating cash usage.
- Preferred stock was eliminated from the balance sheet through conversion into 3,642,799 common shares. Common shares outstanding increased to 5,565,415 at September 30, 2014, from 327,365 at December 31, 2013.
Guidance, Outlook, Risks and Unusual Items
Management expected research and development and general and administrative expenses to increase as NS2 advanced through clinical development and as public-company compliance costs expanded. The company expected operating losses for the foreseeable future and did not expect NS2 to be commercially available, if at all, for several years.
Management stated that cash resources were expected to fund operations through approximately the end of 2015, but would not be sufficient to commercialize product candidates or conduct substantial additional development required by the FDA. The company expected to require substantial additional capital through equity, debt, collaborations or partnerships.
The company planned to file IND applications for a Phase II/III trial in Sjögren-Larsson Syndrome and a Phase II trial in acute anterior uveitis, with trial data then expected in the second half of 2015. The filing states that an IND for SLS had not yet been submitted and that the existing ocular IND required amendment or additional regulatory work for acute anterior uveitis.
As a subsequent event, on November 10, 2014, Square 1 Bank made a new credit facility of up to $5.0 million available. A $2.0 million tranche was made available immediately; a further $3.0 million tranche was contingent on conditions including positive Phase II data in SLS or acute anterior uveitis. The debt bears interest at the greater of prime plus 2.0% or 5.25%, is interest-only through November 2015, and is secured by company assets.
Important risks include dependence on NS2, lack of demonstrated efficacy in patients, regulatory and clinical-trial uncertainty, reliance on third-party manufacturers and contract research organizations, need for additional financing, potential dilution, secured debt covenants, intellectual-property challenges and competition from established therapies.
Management reported that disclosure controls and procedures were not effective as of September 30, 2014 because of a material weakness in internal control over financial reporting. The weakness related to insufficient accounting resources and expertise for complex accounting matters. Remediation efforts had begun, but the filing did not state that the weakness had been fully remediated.
The company entered into a 37-month office lease with total base rent of approximately $205,000 and remained subject to potential license milestone payments of up to $2.15 million, plus royalties upon commercialization.
Investor Verification Points
- Verify the company’s cash runway against actual clinical-trial spending and the stated expectation that existing resources would fund operations through approximately the end of 2015.
- Confirm receipt, terms and use of the $2.0 million November 2014 debt tranche and the conditions and probability of obtaining the additional $3.0 million tranche.
- Review the status and timing of the planned IND submissions and clinical trials for SLS and acute anterior uveitis.
- Assess the impact of the disclosed material weakness in internal control over financial reporting and subsequent remediation disclosures.
- Reconcile reported net losses with noncash items, including the preferred-stock deemed dividend, stock-based compensation and fair-value changes in warrant liabilities.
- Monitor future financing needs, potential equity dilution, secured debt covenants and the lien on intellectual property.
- Evaluate whether NS2 demonstrates efficacy and acceptable safety in patients, since the filing reports only Phase I safety results in healthy volunteers and no demonstrated clinical efficacy.