NeuroBo Pharmaceuticals(NRBO) - 2019 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents Gemphire Therapeutics Inc.'s unaudited condensed financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1 – FINANCIAL STATEMENTS This section presents Gemphire Therapeutics Inc.'s unaudited condensed financial statements, including balance sheets, statements of comprehensive loss, changes in stockholders' (deficit) equity, and cash flows, along with detailed notes explaining the company's financial position, operations, significant accounting policies, and key events such as the proposed merger and license agreements Condensed Balance Sheets This section provides a snapshot of Gemphire's financial position, detailing assets, liabilities, and stockholders' equity at specific points in time Condensed Balance Sheet Highlights (in millions): | Metric | September 30, 2019 (in millions) | December 31, 2018 (in millions) | | :-------------------------- | :------------------- | :------------------- | | Cash and cash equivalents | $1.855 | $18.954 | | Total current assets | $2.048 | $19.686 | | Total assets | $2.048 | $19.694 | | Total current liabilities | $3.073 | $11.919 | | Total liabilities | $3.073 | $11.920 | | Total stockholders' (deficit) equity | $(1.025) | $7.774 | | Accumulated deficit | $(94.262) | $(84.111) | - Total assets decreased significantly from $19.694 million at December 31, 2018, to $2.048 million at September 30, 2019[8] - The company's stockholders' equity shifted to a deficit of $(1.025) million as of September 30, 2019, from $7.774 million at December 31, 2018[8] Condensed Statements of Comprehensive Loss This section details Gemphire's financial performance over specific periods, focusing on operating expenses and net loss Condensed Statements of Comprehensive Loss Highlights (in millions): | Metric | Three Months Ended Sep 30, 2019 (in millions) | Three Months Ended Sep 30, 2018 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | Nine Months Ended Sep 30, 2018 (in millions) | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total operating expenses | $2.318 | $5.906 | $7.467 | $19.504 | | Net loss | $(3.430) | $(6.079) | $(10.151) | $(19.981) | | Net loss per share (Basic and diluted) | $(0.240) | $(0.430) | $(0.710) | $(1.460) | - Net loss decreased by $2.649 million for the three months ended September 30, 2019, compared to the same period in 2018, and by $9.830 million for the nine months ended September 30, 2019, primarily due to reduced operating expenses[11] Condensed Statements of Changes in Stockholders' (Deficit) Equity This section tracks changes in Gemphire's equity, including common stock, additional paid-in capital, and accumulated deficit over time Changes in Stockholders' (Deficit) Equity (in millions): | Metric | Balance at January 1, 2019 (in millions) | Balance at September 30, 2019 (in millions) | | :-------------------------- | :------------------------- | :-------------------------- | | Common Stock (Shares) | 14,265,411 | 14,872,411 | | Common Stock (Amount) | $0.022 | $0.023 | | Additional Paid–In Capital | $91.863 | $93.214 | | Accumulated Deficit | $(84.111) | $(94.262) | | Total Stockholders' (Deficit) Equity | $7.774 | $(1.025) | - The company's accumulated deficit increased from $(84.111) million at January 1, 2019, to $(94.262) million at September 30, 2019, reflecting ongoing net losses[14] - 607,000 restricted stock awards were issued during the three and nine months ended September 30, 2019, contributing to the increase in common stock shares[14] Condensed Statements of Cash Flows This section summarizes Gemphire's cash inflows and outflows from operating, investing, and financing activities Condensed Statements of Cash Flows Highlights (in millions): | Metric | Nine Months Ended Sep 30, 2019 (in millions) | Nine Months Ended Sep 30, 2018 (in millions) | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(6.825) | $(17.798) | | Net cash (used in) provided by financing activities | $(10.259) | $23.131 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(17.084) | $5.333 | | Cash, cash equivalents and restricted cash at end of period | $1.870 | $23.806 | - Net cash used in operating activities decreased by $10.973 million for the nine months ended September 30, 2019, compared to the same period in 2018[18] - Financing activities shifted from providing $23.131 million in 2018 (due to common stock sale) to using $(10.259) million in 2019 (due to term loan repayment)[18] Notes to Condensed Financial Statements This section provides detailed explanations and additional information supporting the condensed financial statements 1. The Company and Basis of Presentation Gemphire Therapeutics Inc. is a clinical-stage biopharmaceutical company focused on developing therapies for dyslipidemia and NAFLD/NASH, with gemcabene as its primary product candidate. The company has incurred significant operating losses and faces substantial doubt about its ability to continue as a going concern, necessitating a proposed all-stock merger with NeuroBo Pharmaceuticals, Inc - Gemphire is a clinical-stage biopharmaceutical entity focused on developing and commercializing therapies for dyslipidemia and NAFLD/NASH, with gemcabene as its primary product candidate[20] - The company entered into a definitive all-stock merger agreement with NeuroBo Pharmaceuticals, Inc. on July 24, 2019 (amended October 29, 2019)[20] - As of September 30, 2019, Gemphire had an accumulated deficit of $94.3 million and a total stockholders' deficit of $1 million, with cash and cash equivalents of $1.9 million, which are not sufficient to fund operations for the next 12 months, raising substantial doubt about its going concern ability[28] 2. Summary of Significant Accounting Policies This section outlines Gemphire's key accounting policies, including the use of estimates, classification of cash and cash equivalents, fair value measurements, and the expensing of general and administrative and research and development costs. It also details the company's revenue recognition under ASC Topic 606 and the adoption of several recent accounting pronouncements, none of which had a material impact on its financial statements - The company follows ASC Topic 606 for revenue recognition but has not recognized any revenue to date, though the Beijing SL Agreement will have future implications[37] - Research and development expenses, including compensation, preclinical/clinical studies, regulatory activities, and license fees, are expensed as incurred[36] - Gemphire adopted ASU 2016-01 (Financial Instruments), ASU 2016-02 (Leases), ASU 2016-18 (Restricted Cash), ASU 2017-09 (Stock Compensation), and ASU 2018-07 (Nonemployee Share-Based Payment) with no material impact on its financial statements[50][51][52][53][55] 3. Merger Agreement Gemphire entered into an all-stock merger agreement with NeuroBo Pharmaceuticals, Inc., where NeuroBo will be the surviving entity and accounting acquirer. Post-merger, Gemphire security holders are expected to own approximately 3.74% of the combined company, which will focus on neurodegenerative diseases and operate under the NeuroBo name and ticker symbol. The agreement also includes Contingent Value Rights (CVRs) for Gemphire stockholders related to future gemcabene monetization and specifies executive severance and restricted stock awards - Gemphire entered into an all-stock merger agreement with NeuroBo Pharmaceuticals, Inc., with NeuroBo surviving as a wholly-owned subsidiary and considered the accounting acquirer[57][58] - Post-merger, Gemphire security holders are expected to own approximately 3.74% and NeuroBo security holders approximately 96.26% of the combined company on a fully-diluted basis[60] - The combined company will be named NeuroBo Pharmaceuticals, Inc., trade under 'NRBO', and focus on neurodegenerative diseases, with NeuroBo's CEO leading and its designees forming the majority of the board[64] - Gemphire stockholders will receive Contingent Value Rights (CVRs) entitling them to 80% of future gross consideration from gemcabene rights (excluding the Beijing SL upfront payment), with the combined company committing $1 million for gemcabene development through Q1 2020[66][67] - Executives received reduced cash severance and restricted stock awards (Dr. Gullans: 300,000 shares, Dr. Bisgaier: 100,000 shares, Mr. Reno: 100,000 shares) vesting immediately prior to the merger's effective time[68][69] 4. Accrued Liabilities Accrued liabilities primarily consist of compensation, legal costs, and non-operating transactional costs, showing a slight decrease from December 31, 2018, to September 30, 2019 Accrued Liabilities (in millions): | Category | September 30, 2019 (in millions) | December 31, 2018 (in millions) | | :-------------------------------- | :------------------- | :------------------- | | Accrued compensation and other payroll liabilities | $0.092 | $0.137 | | Legal costs | $0.052 | $0.106 | | Non-operating transactional costs | $0.176 | $0.000 | | Total Accrued Liabilities | $0.396 | $0.438 | 5. Debt Gemphire fully prepaid its term loan with Silicon Valley Bank (SVB) in January 2019, including principal, interest, and a final payment fee. The company remains obligated for a $350,000 success fee upon the merger's completion and an outstanding warrant to SVB - The company fully prepaid its term loan with Silicon Valley Bank (SVB) on January 28, 2019, including approximately $8.9 million in principal and interest, and a $1.0 million final payment fee[74] - A success fee of $350,000 (3.5% of the funded principal) will be triggered upon the completion of the merger[75] - A warrant to purchase 36,000 shares of common stock issued to SVB remains outstanding and exercisable[75] 6. Commitments and Contingencies This section details the Pfizer License Agreement for gemcabene, which includes potential milestone and royalty payments, though no liabilities were recorded due to significant uncertainty. It also notes the expiration of the company's headquarters lease in August 2019, with no new office space currently leased - The Pfizer License Agreement for gemcabene includes potential milestone payments up to $37 million and tiered royalties on future sales, but no liabilities were recorded as of September 30, 2019, due to uncertainty regarding clinical trial outcomes and funding[78][84] - The company's headquarters lease expired in August 2019, and no office space is currently being leased[79] Operating Lease Rent Expense (in millions): | Period | 2019 (in millions) | 2018 (in millions) | | :-------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $0.017 | $0.026 | | Nine Months Ended Sep 30 | $0.069 | $0.078 | 7. License Agreements Gemphire holds an exclusive worldwide license for gemcabene from Pfizer, involving equity issuance, milestone payments, and royalties. Additionally, the company entered into the Beijing SL License and Collaboration Agreement, granting exclusive rights for gemcabene in specific Asian territories in exchange for a $2.5 million upfront payment (received October 2019), up to $6 million in developmental/regulatory milestones, up to $20 million in global net sales milestones, and tiered royalties - The Pfizer Agreement grants Gemphire a worldwide exclusive license for gemcabene, involving up to $37 million in milestone payments and tiered royalties on net sales[82][84][85] - On July 23, 2019, Gemphire entered into the Beijing SL Agreement, granting an exclusive royalty-bearing license for gemcabene in mainland China, Hong Kong, Macau, and Taiwan[89] - Under the Beijing SL Agreement, Gemphire is eligible to receive a non-refundable upfront gross payment of $2.5 million (received October 2019), up to $6 million in developmental/regulatory milestones, up to $20 million in global net sales milestones, and tiered royalties ranging from mid-teens to twenty percent on net sales[91][92] 8. Stockholders' (Deficit) Equity This section details the company's common stock, warrants, and shareholder rights. As of September 30, 2019, 14,872,411 common shares were outstanding, an increase from December 31, 2018, partly due to restricted stock issuance. The company also has 1,014,204 outstanding warrants and has not declared any dividends Common Stock and Warrants Outstanding: | Metric | September 30, 2019 | December 31, 2018 | | :-------------------------- | :------------------- | :------------------- | | Common Stock Shares Outstanding | 14,872,411 | 14,265,411 | | Warrants Outstanding | 1,014,204 | 1,014,204 | - In Q1 2018, a Follow-On Offering of 3,592,858 common shares generated net proceeds of approximately $23.1 million[99] - No dividends have been declared on common stock as of September 30, 2019[101] 9. Share‑Based Compensation Gemphire's share-based compensation expense significantly decreased year-over-year. The company granted 607,000 restricted stock awards in 2019, vesting upon the merger's close, but no stock options were granted in the nine months ended September 30, 2019. Unrecognized share-based compensation cost for stock options and RSAs totals $2.7 million, expected to be recognized over 0.2 years Share-Based Compensation Expense (in millions): | Period | Three Months Ended Sep 30, 2019 (in millions) | Three Months Ended Sep 30, 2018 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | Nine Months Ended Sep 30, 2018 (in millions) | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total share-based compensation | $0.441 | $1.627 | $1.352 | $3.556 | - 607,000 restricted stock awards (RSAs) were granted in 2019 to officers, directors, and employees, vesting immediately upon the close of the merger[111] - No stock options were granted during the nine months ended September 30, 2019, compared to 822,000 options granted in the comparable 2018 period[112] - Unrecognized share-based compensation cost was $2.3 million for stock options and $0.4 million for RSAs as of September 30, 2019, expected to be recognized over a weighted average period of 0.2 years[117] 10. Net Loss Per Common Share The company reported basic and diluted net losses per share of $(0.24) and $(0.71) for the three and nine months ended September 30, 2019, respectively. Common stock equivalents, including stock options, warrants, and restricted stock awards, were excluded from diluted EPS calculations as their inclusion would be anti-dilutive Net Loss Per Share (Basic and Diluted): | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss per share | $(0.24) | $(0.43) | $(0.71) | $(1.46) | - Potential common shares (stock options, warrants, restricted stock awards) were not included in diluted net loss per share calculations as their effect would have been anti-dilutive[118][119] 11. Fair Value Measurements Gemphire adheres to fair value accounting guidance, classifying financial instruments into a three-level hierarchy. Most financial instruments, such as cash, accounts payable, and accrued liabilities, approximate their carrying values due to their short-term nature. No instruments were measured on a recurring fair value basis during the reported periods - The company defines fair value measurements using a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[120] - The carrying amounts of cash and cash equivalents, restricted cash, other assets, accounts payable, accrued liabilities, and other liabilities approximate their fair values due to their short-term nature[121] - No financial instruments were measured on a recurring fair value basis as of September 30, 2019, and December 31, 2018[122] 12. Income Taxes Gemphire utilizes the liability method for income taxes but reported a zero effective tax rate for the three and nine months ended September 30, 2019, and 2018, due to operating losses and a full valuation allowance on its net deferred tax assets - The effective tax rate was zero percent for the three and nine months ended September 30, 2019, and 2018[123] - A full valuation allowance has been provided on the net deferred tax assets due to incurred operating losses[123] 13. Defined Contribution Plan The company adopted a 401(k) defined contribution plan in 2017, with employer matching contributions beginning in January 2018. Employer matching contributions for the nine months ended September 30, 2019, were $60,000 - The company adopted a 401(k) defined contribution plan on September 5, 2017, effective January 1, 2017[124] Employer Matching Contributions (in millions): | Period | Three Months Ended Sep 30, 2019 (in millions) | Three Months Ended Sep 30, 2018 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | Nine Months Ended Sep 30, 2018 (in millions) | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Matching contributions | $0.013 | $0.030 | $0.060 | $0.084 | 14. Related Party Transactions In the first quarter of 2018, Gemphire's public offering included sales of common stock to an officer and an affiliate of an officer and board member, totaling approximately $0.6 million - In Q1 2018, 14,286 common shares were sold to an officer for approximately $0.1 million, and 71,429 shares were sold to an affiliate of an officer and board member for approximately $0.5 million during a public offering[126] 15. Subsequent Events Key events after September 30, 2019, include an amendment to the NeuroBo merger agreement, the scheduling of the annual stockholders' meeting for December 6, 2019, the receipt of a $2.5 million upfront payment from Beijing SL, and Nasdaq granting an extension until February 10, 2020, for Gemphire to regain compliance with listing requirements, contingent on the merger's consummation - On October 29, 2019, the Merger Agreement with NeuroBo was amended to reduce the minimum net cash amount, clarify pre-closing payments, increase the board size, and extend the termination date to February 22, 2020[128] - The annual meeting of stockholders, including votes on the merger, is scheduled for December 6, 2019[129] - A non-refundable upfront payment of $2.5 million was received in October 2019 under the Beijing SL Agreement and recorded as a deferred revenue liability[130] - Nasdaq granted an extension until February 10, 2020, for Gemphire to regain compliance with minimum stockholders' equity, contingent on NeuroBo's initial listing approval and the merger's consummation[132] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides an overview of Gemphire's financial condition and operational results, highlighting its status as a clinical-stage biopharmaceutical company focused on gemcabene. It details significant net losses, liquidity challenges, and the proposed merger with NeuroBo. The discussion also covers clinical trial updates, workforce reductions, and ongoing Nasdaq compliance issues, emphasizing the company's need for additional capital or the successful completion of the merger to continue operations - Gemphire is a clinical-stage biopharmaceutical company focused on developing gemcabene for dyslipidemia and NAFLD/NASH, with no products approved for sale and no revenue generated to date[140][145] Financial Performance Summary (in millions): | Metric | Nine Months Ended Sep 30, 2019 (in millions) | Nine Months Ended Sep 30, 2018 (in millions) | | :-------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(10.151) | $(19.981) | | Accumulated deficit (Sep 30, 2019) | $94.300 | N/A | | Total stockholders' deficit (Sep 30, 2019) | $1.000 | N/A | | Cash and cash equivalents (Sep 30, 2019) | $1.900 | N/A | - The company entered into an all-stock merger agreement with NeuroBo Pharmaceuticals, Inc. on July 24, 2019, which is expected to close in Q4 2019, subject to stockholder approvals and other conditions[141][171] - Clinical trial updates include successful Phase 2b trials for gemcabene, but a Phase 2a pediatric NAFLD trial was halted early due to 'unanticipated problems,' and the FDA maintains a partial clinical hold on studies longer than six months[147][148][153] - Gemphire faces Nasdaq compliance issues related to minimum stockholders' equity and minimum bid price, with an extension granted until February 10, 2020, contingent on the merger's consummation[158][160][162][164] - Cash on hand of $1.9 million (as of Sep 30, 2019) is only sufficient through Q4 2019, excluding merger transaction costs, indicating a critical need for additional capital if the merger does not close[211] Operating Expenses (in millions): | Category | Three Months Ended Sep 30, 2019 (in millions) | Three Months Ended Sep 30, 2018 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | Nine Months Ended Sep 30, 2018 (in millions) | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | General and administrative | $1.250 | $2.364 | $3.772 | $7.025 | | Research and development | $1.068 | $3.542 | $3.695 | $12.479 | | Total operating expenses | $2.318 | $5.906 | $7.467 | $19.504 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section states that there are no quantitative and qualitative disclosures about market risk applicable to the company ITEM 4. CONTROLS AND PROCEDURES Gemphire's management, including its principal executive and financial officer, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2019, and concluded they were effective. No material changes in internal control over financial reporting occurred during the quarter - Management concluded that disclosure controls and procedures were effective as of September 30, 2019[239] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2019[240] PART II – OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits ITEM 1. LEGAL PROCEEDINGS Gemphire may be subject to claims and lawsuits in the ordinary course of business, but management believes their ultimate resolution will not have a material adverse effect on the company's financial position, results of operations, or cash flows ITEM 1A. RISK FACTORS This section outlines significant risks, including Gemphire's non-compliance with Nasdaq listing requirements and the potential for delisting. It emphasizes the critical uncertainties surrounding the proposed merger with NeuroBo, such as the risk of non-completion, the resulting liquidity crisis, and the potential for company dissolution. Other risks include substantial dilution for current stockholders, the uncertain value of Contingent Value Rights (CVRs), reliance on Beijing SL for gemcabene development in certain territories, and the challenge of retaining key employees during the merger process - Gemphire is not in compliance with Nasdaq's minimum stockholders' equity and minimum bid price requirements, facing potential delisting if the merger with NeuroBo is not consummated by February 10, 2020[245][248][252][254] - Failure to complete the merger could lead to inadequate liquidity, requiring additional capital or potentially resulting in the dissolution and liquidation of the company, with no assurances on the amount or timing of distributions to stockholders[257][259][261] - The proposed merger will substantially dilute the voting power of current Gemphire stockholders, who are expected to own approximately 3.74% of the combined company[265] - Stockholders may not receive any payment on the CVRs, which could expire valueless, as payments are contingent on specific events and consideration exceeding permitted deductions[272][274] - The company is substantially dependent on its remaining 7 full-time employees to facilitate the merger, and the loss of any could harm its ability to complete the transaction and maintain operations[282] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section states that there are no unregistered sales of equity securities and use of proceeds to report ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section states that there are no defaults upon senior securities to report ITEM 4. MINE SAFETY DISCLOSURES This section states that there are no mine safety disclosures applicable to the company ITEM 5. OTHER INFORMATION This section states that there is no other information to report ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including key agreements related to the NeuroBo merger, the Contingent Value Rights (CVR) Agreement, executive employment amendments, and the License and Collaboration Agreement with Beijing SL - Key exhibits include the Agreement and Plan of Merger (2.1, 2.2), Form of CVR Agreement (2.3), various employment agreement amendments (10.1, 10.2, 10.3, 10.7, 10.8, 10.9), and the License and Collaboration Agreement with Beijing SL (10.6)[291][293] SIGNATURES This section contains the official signatures certifying the accuracy and completeness of the report - The report was signed by Steven Gullans, President and Chief Executive Officer (Principal Executive Officer and Principal Financial Officer), on November 8, 2019[296]