Tempest Therapeutics, Inc. quarterly report, Q3 FY2013

Business context and reporting period

This filing is OvaScience, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013, not a filing identified as Tempest Therapeutics, Inc. OvaScience was a development-stage life sciences company developing infertility treatments, principally AUGMENT and OvaTure. It reported no revenue.

Financial results and liquidity

Amounts below are in millions of dollars unless stated otherwise. Because the company had no revenue, profit margins are not meaningful.

• At September 30, 2013, cash and cash equivalents were $21.077 million and short-term investments were $28.489 million, totaling $49.566 million. Working capital was $48.251 million.
• Total liabilities were $2.221 million, including $2.156 million of current liabilities. The balance sheet reports no borrowings or other debt.
• For the first nine months of 2013, operating cash use was $13.406 million, investing cash use was $12.781 million, and financing provided $32.488 million. The investing outflow included purchases of short-term investments; capital expenditures were $0.507 million.
• Cash and cash equivalents increased by $6.301 million in the nine-month period, to $21.077 million.

Material changes versus the prior comparable period

• Q3 operating expenses more than doubled year over year; nine-month R&D expense rose 119% and G&A expense rose 77%. Management attributed increases to hiring and compensation, greater AUGMENT-related research and consulting costs, and public-company and commercial-preparation costs.
• Net loss increased to $18.044 million for the first nine months, from $9.318 million in 2012. Interest income rose to $0.077 million from $0.002 million, primarily because of higher average cash and investment balances.
• Stock-based compensation was $3.830 million for the first nine months of 2013, versus $0.859 million in the comparable 2012 period.
• In March 2013, the company sold 3,888,880 common shares at $9.00 per share, receiving $32.7 million in net proceeds.

Outlook, commentary, risks and unusual items

• Management estimated that $49.6 million of cash, cash equivalents and investments would fund its current operating plan into 2015, assuming no product revenue. It expected to need additional funding for 2015 and beyond; no external funding source was committed.
• After an FDA untitled letter dated September 6, 2013 questioned whether AUGMENT qualified as a 361 HCT/P and advised the company to file an IND, OvaScience suspended enrollment in its U.S. AUGMENT study. The company continued to believe AUGMENT qualified as a 361 HCT/P and planned further FDA discussions; it intended to provide AUGMENT to selected clinics outside the United States in 2014. Management said the U.S. study suspension was not due to safety concerns.
• OvaTure remained in development, with animal proof-of-concept work and plans to pursue further studies; it had not been tested in humans. The company anticipated increased expenses for this program.
• A $0.4 million impairment of laboratory equipment was recorded in R&D expense after a change in contract manufacturer made certain equipment unnecessary.
• A purported shareholder class action filed September 16, 2013 alleged securities-law misrepresentations concerning AUGMENT’s regulatory status. The company intended to defend the case; it said the outcome and potential materiality could not then be assessed.
• Key risks included regulatory uncertainty for AUGMENT, unproven science and clinical outcomes, dependence on third-party manufacturing, future financing needs and potential dilution, and the possibility that products may never be approved or commercially successful.
• Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

1. Confirm the intended issuer: the supplied filing is for OvaScience, Inc., not Tempest Therapeutics, Inc.
2. Check subsequent FDA communications and the eventual regulatory pathway for AUGMENT, including whether an IND was required.
3. Verify the status, results and safety evidence from AUGMENT studies and any planned or completed activity outside the United States.
4. Assess actual cash burn, financing needs and runway against management’s estimate of funding into 2015.
5. Review developments and potential exposure in the shareholder class action.
6. Track OvaTure’s scientific progress, funding requirements and any transition to human studies.