Oruka Therapeutics, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS ARCA BIOPHARMA, INC. BALANCE SHEETS (Unaudited) September 30, December 31, 2022 2021 (in thousands, except share and per share amounts) ASSETS Current assets: Cash and cash equivalents $ 43,939 $ 53,359 Other current assets 611 1,062 Total current assets 44,550 54,421 Right-of-use asset - operating 367 437 Property and equipment, net 30 48 Other assets 18 18 Total assets $ 44,965 $ 54,924 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 593 $ 1,117 Accrued compensation and employee benefits 333 925 Accrued expenses and other liabilities 1,011 1,456 Total current liabilities 1,937 3,498 Operating lease liability, net of current portion 301 383 Total liabilities 2,238 3,881 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.001 par value; 100 million shares authorized at September 30, 2022 and December 31, 2021; 14,410,143 shares issued and outstanding at September 30, 2022 and December 31, 2021 14 14 Additional paid-in capital 224,941 224,505 Accumulated deficit ( 182,228 ) ( 173,476 ) Total stockholders’ equity 42,727 51,043 Total liabilities and stockholders’ equity $ 44,965 $ 54,924 See accompanying Notes to Financial Statements 3 ARCA BIOPHARMA, INC. STATEMENTS OF OPERATIONS (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (in thousands, except share and per share amounts) Costs and expenses: Research and development $ 1,024 $ 3,438 $ 4,688 $ 9,891 General and administrative 1,528 1,278 4,360 3,764 Total costs and expenses 2,552 4,716 9,048 13,655 Loss from operations ( 2,552 ) ( 4,716 ) ( 9,048 ) ( 13,655 ) Interest and other income 222 4 301 9 Other loss ( 3 ) — ( 5 ) — Net loss $ ( 2,333 ) $ ( 4,712 ) $ ( 8,752 ) $ ( 13,646 ) Net loss per share: Basic and diluted $ ( 0.16 ) $ ( 0.33 ) $ ( 0.61 ) $ ( 0.99 ) Weighted average shares outstanding: Basic and diluted 14,410,143 14,410,143 14,410,143 13,733,259 See accompanying Notes to Financial Statements 4 ARCA BIOPHARMA, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited) Stockholders’ Equity Additional Common stock Paid-In Accumulated Shares Amount Capital Deficit Total (in thousands, except share amounts) Balance, December 31, 2020 9,548,150 $ 10 $ 200,665 $ ( 154,154 ) $ 46,521 Issuance of common stock for cash, net of offering costs 4,861,993 4 23,343 — 23,347 Share-based compensation — — 141 — 141 Net loss — — — ( 4,100 ) ( 4,100 ) Balance, March 31, 2021 14,410,143 14 224,149 ( 158,254 ) 65,909 Share-based compensation — — 133 — 133 Net loss — — — ( 4,834 ) ( 4,834 ) Balance, June 30, 2021 14,410,143 14 224,282 ( 163,088 ) 61,208 Share-based compensation — — 104 — 104 Net loss — — — ( 4,712 ) ( 4,712 ) Balance, September 30, 2021 14,410,143 14 224,386 ( 167,800 ) 56,600 Share-based compensation — — 119 — 119 Net loss — — — ( 5,676 ) ( 5,676 ) Balance, December 31, 2021 14,410,143 14 224,505 ( 173,476 ) 51,043 Share-based compensation — — 167 — 167 Net loss — — — ( 3,272 ) ( 3,272 ) Balance, March 31, 2022 14,410,143 14 224,672 ( 176,748 ) 47,938 Share-based compensation — — 172 — 172 Net loss — — — ( 3,147 ) ( 3,147 ) Balance, June 30, 2022 14,410,143 14 224,844 ( 179,895 ) 44,963 Share-based compensation — — 97 — 97 Net loss — — — ( 2,333 ) ( 2,333 ) Balance, September 30, 2022 14,410,143 $ 14 $ 224,941 $ ( 182,228 ) $ 42,727 See accompanying Notes to Financial Statements 5 ARCA BIOPHARMA, INC. STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended September 30, 2022 2021 (in thousands) Cash flows from operating activities: Net loss $ ( 8,752 ) $ ( 13,646 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 15 11 Amortization of right-of-use asset - operating 70 52 Share-based compensation 436 378 Loss from disposal of property and equipment 5 — Change in operating assets and liabilities: Other current assets 451 ( 439 ) Other assets — ( 6 ) Accounts payable ( 524 ) ( 405 ) Accrued compensation and employee benefits ( 592 ) ( 670 ) Accrued expenses and other liabilities ( 527 ) 910 Net cash used in operating activities ( 9,418 ) ( 13,815 ) Cash flows from investing activities: Purchases of property and equipment ( 2 ) ( 36 ) Net cash used in investing activities ( 2 ) ( 36 ) Cash flows from financing activities: Proceeds from the issuance of common stock — 24,070 Common stock offering costs — ( 977 ) Net cash provided by financing activities — 23,093 Net (decrease) increase in cash and cash equivalents ( 9,420 ) 9,242 Cash and cash equivalents, beginning of period 53,359 49,071 Cash and cash equivalents, end of period $ 43,939 $ 58,313 Supplemental cash flow information: Interest paid $ — $ — Income tax refund received $ — $ — Supplemental disclosure of noncash investing and financing transactions: Leased assets obtained in exchange for operating lease liabilities $ — $ 84 Purchases of property and equipment in accrued liabilities $ — $ 2 See accompanying Notes to Financial Statements 6 ARCA BIOPHARMA, INC. NOTES TO FINANCIAL STATEMENTS (unaudited) (1) The Company and Summary of Significant Accounting Policies Description of Business ARCA biopharma, Inc. (the Company or ARCA), a Delaware corporation, is headquartered in Westminster, Colorado. The Company is a clinical-stage biopharmaceutical company applying a precision medicine approach to the development and commercialization of genetically targeted therapies for cardiovascular diseases. The Company’s lead product candidates are rNAPc2 (AB201) as a potential treatment for COVID-19, the disease caused by SARS-CoV-2 virus, and potentially other viral diseases and Gencaro™ (bucindolol hydrochloride) for the treatment of atrial fibrillation (AF) in patients with chronic heart failure (HF). In April 2022, the Board of Directors established a Special Committee and, in May, retained Ladenburg Thalmann & Co. Inc. to evaluate strategic options, including transactions involving the merger or sale of all or part of the Company’s assets, and other alternatives with the goal of maximizing stockholder value. The Company does not have a defined timeline for the strategic review process and the review may not result in any specific action or transaction . In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. The Company does not expect a material financial effect as a result of the pandemic. However, if the pandemic continues to be a severe worldwide crisis, it could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows. Liquidity and Going Concern The Company devotes substantially all of its efforts towards clinical research and development, obtaining regulatory approval and raising capital necessary to fund its operations and it is subject to a number of risks associated with clinical research and development, including dependence on key individuals, the development of and regulatory approval of commercially viable products, the need to raise adequate additional financing necessary to fund the development and commercialization of its products, and competition from larger companies. The Company has no t generated revenue to date and has incurred substantial losses and negative cash flows from operations since its inception. The Company has historically funded its operations through issuances of common and preferred stock. The Company believes that its current cash and cash equivalents as of September 30, 2022 will be sufficient to fund its operations at the current levels through at least the end of fiscal year 2023. The Company’s review of its strategic options may impact this projection. Changing circumstances may cause us to consume capital significantly faster or slower than currently anticipated. The Company has based these estimates on assumptions that may prove to be wrong, and the Company could exhaust its available financial resources sooner than the Company currently anticipates. Therefore, the Company may have to raise additional capital for clinical trials of rNAPc2 and will have to raise additional capital for clinical trials of Gencaro. The Company may not be able to raise sufficient capital on acceptable terms, or at all, to continue development of rNAPc2 or Gencaro or to otherwise continue operations and may not be able to execute any strategic transaction . 7 The Company’s liquidity, and its ability to raise additional capital or complete any strategic transaction, depends on a number of factors , including, but not limited to, the following: ● the costs and timing for the potential additional clinical trials in order to gain possible regulatory approval for rNAPc2, Gencaro or any other product candidate; ● the market price of the Company’s stock and the availability and cost of additional equity capital from existing and potential new investors; ● the Company’s ability to retain the listing of its common stock on the Nasdaq Capital Market; ● general economic and industry conditions affecting the availability and cost of capital, including as a result of the COVID-19 pandemic; ● the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and ● the terms and conditions of the Company’s existing collaborative and licensing agreements. The sale of additional equity or convertible debt securities would likely result in substantial additional dilution to the Company’s stockholders. If the Company raises additional funds through the incurrence of indebtedness, the obligations related to such indebtedness would be senior to rights of holders of the Company’s capital stock and could contain covenants that would restrict the Company’s operations. The Company also cannot predict what consideration might be available, if any, to the Company or its stockholders, in connection with any strategic transaction. Should strategic alternatives or additional capital not be available to the Company, or not be available on acceptable terms, the Company may be unable to realize value from its assets and discharge its liabilities in the normal course of business which may, among other alternatives, cause the Company to further delay, substantially reduce or discontinue operational activities to conserve its cash resources. Basis of Presentation The accompanying unaudited financial statements of the Company were prepared in accordance with generally accepted accounting principles for interim financial information and instructions to Form 10-Q and pursuant to Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments considered necessary for a fair presentation of these interim financial statements. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of results expected for the full year ending December 31, 2022. The Company has generated no revenue to date and its activities have consisted of seeking regulatory approval, research and development, exploring strategic alternatives for further developing and commercializing rNAPc2 and Gencaro, and raising capital. These unaudited financial statements should be read in conjunction with the audited financial statements and footnotes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Amounts presented are rounded to the nearest thousand, where indicated, except per share data and par values. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company has no off-balance-sheet concentrations of credit risk, such as foreign exchange contracts, option contracts, or foreign currency hedging arrangements. The Company maintains cash and cash equivalent balances in the form of bank demand deposits and money market fund accounts with financial institutions that management believes are creditworthy. Such balances may at times exceed the insured amount. Comprehensive Loss Comprehensive loss is defined as the change in equity during a period from transactions and other events and/or circumstances from non-owner sources. If the Company had comprehensive gains (losses), they would be reflected in the statement of operations and comprehensive loss and as a separate component in the statement of stockholders’ equity. There were no elements of comprehensive loss during the three and nine months ended September 30, 2022 and 2021. 8 Leases The Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use (ROU) asset – operating and lease obligations are included in accrued expenses and other liabilities and operating lease liability on the Company’s September 30, 2022 and December 31, 2021 balance sheets. ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease. Operating ROU lease assets are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate a lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Accrued Outsourcing Expenses As part of the process of preparing its financial statements, the Company is required to estimate accrued outsourcing expenses. This process involves identifying services that third parties have performed on the Company’s behalf and estimating the level of service performed and the associated cost incurred for these services as of the balance sheet date. Examples of estimated accrued outsourcing expenses include contract service fees, such as fees payable to contract manufacturers in connection with the production of materials related to the Company’s drug product, and service fees and pass through costs from clinical research organizations. The Company develops estimates of liabilities using its judgment based upon the facts and circumstances known at the time. Recent Accounting Pronouncements The Company reviewed recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the financial statements. (2) Net Loss Per Share The Company calculates basic earnings per share by dividing net loss by the weighted average common shares outstanding during the period. Diluted earnings per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period increased to include, if dilutive, the number of additional common shares that would have been outstanding if the potential common shares had been issued. The Company’s potentially dilutive shares include stock options and warrants for common stock . Because the Company reported a net loss for the three and nine months ended September 30, 2022 and 2021, all potentially dilutive shares of common stock have been excluded from the computation of the dilutive net loss per share for all periods presented. Such potentially dilutive shares of common stock consist of the following: September 30, 2022 2021 Potentially dilutive securities, excluded: Outstanding stock options 729,232 640,623 Warrants to purchase common stock — 133,401 729,232 774,024 9 (3) Fair Value Disclosures There were no marketable securities as of September 30, 2022 or December 31, 2021. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Inputs used to measure fair value are classified into the following hierarchy: ● Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets consist of money market investments. The Company does not have any Level 1 liabilities. ● Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities; unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability. The Company does not have any Level 2 assets or liabilities. ● Level 3—Unobservable inputs for the asset or liability. The Company does not have any Level 3 assets or liabilities. As of September 30, 2022 and December 31, 2021, the Company had $ 43.9 million and $ 53.3 million, respectively, of cash equivalents consisting of money market funds with original maturities of 90 days or less. The Company has the ability to liquidate these investments without restriction. The Company determines fair value for these money market funds with Level 1 inputs through quoted market prices. There were no transfers of assets between fair value hierarchy levels during the nine-month period ended September 30, 2022. Fair Value of Other Financial Instruments The carrying amount of other financial instruments, including accounts payable and a vendor finance agreement, which are included in accounts payable and accrued expenses and other liabilities, approximated fair value due to their short maturities. (4) Property and Equipment Property and equipment consist of the following (in thousands): Estimated Life September 30, 2022 December 31, 2021 Computer equipment 3 years $ 41 $ 50 Lab equipment 5 years 130 133 Furniture and fixtures 5 years 44 44 Computer software 3 years 16 16 231 243 Accumulated depreciation and amortization ( 201 ) ( 195 ) Property and equipment, net $ 30 $ 48 For the nine months ended September 30, 2022 and 2021, depreciation and amortization expense was $ 15,000 and $ 11,000 , respectively. (5) Related Party Arrangements Transactions with the Company’s President and Chief Executive Officer The Company has entered into unrestricted research grants with its President and Chief Executive Officer’s academic research laboratory at the University of Colorado. Funding of any unrestricted research grants is contingent upon the Company’s financial condition, and can be deferred or terminated at the Company’s discretion. Total expense under these arrangements for the nine months ended September 30, 2022 and 2021 was $ 324,000 and $ 331,000 respectively, of which $ 108,000 was unpaid and included in accrued expenses and other liabilities as of September 30, 2022. 10 (6) Commitments and Contingencies The Company has or is subject to the following commitments and contingencies. Employment Agreements and Reduction of Workforce The Company maintains employment agreements with several key executive employees. The agreements may be terminated at any time by the Company with or without cause upon written notice to the employee, and entitle the employee to wages in lieu of notice for periods not exceeding one calendar year from the date of termination without cause or by the employee for good reason. Certain of these agreements also provide for payments to be made under certain conditions related to a change in control of the Company. In July 2022, the Company implemented a strategic reduction of the workforce by approximately 67 %, or 12 employees. Personnel reductions were primarily focused in research and development and general and administrative functions. The restructuring was a result of the Company’s decision to manage operating costs and expenses. During the quarter ended September 30, 2022, the Company recorded total restructuring charges of approximately $ 790,000 , of which $ 490,000 and $ 300,000 were recognized in research and development and general and administrative expenses, respectively, in connection with the restructuring, all in the form of one-time termination benefits. As of September 30, 2022, approximately $ 250,000 of the total restructuring charges remains unpaid and was included in accrued compensation and employee benefits. Operating Leases On August 29, 2020 the Company entered into a lease agreement for approximately 5,200 square feet of office facilities in Westminster, Colorado which serves as the Company’s primary business office effective October 1, 2020 (October 2020 Lease). The lease term is 42 months beginning October 1, 2020 and includes an option to renew for an additional 36 month term at the then prevailing rental rate. The exercise of the lease renewal option is at the Company’s sole discretion. The amounts recorded assume the Company will exercise its renewal option. In June 2021, the Company entered into a sublease agreement for approximately 3,000 square feet of additional office facilities in the Company’s primary business office (2021 Lease). The sublease term is 29 months beginning June 2021, with no renewal option. The leases include real estate taxes and insurance, which is not a lease component and is not included in the lease obligation. In addition, common area maintenance charges are based on actual costs incurred and are a non-lease component that is not included in the lease obligation. 11 Future minimum commitments due under the October 2020 and 2021 Lease agreements as of September 30, 2022 are as follows (in thousands): Remainder of 2022 $ 33 2023 127 2024 93 2025 96 2026 100 Thereafter 25 Total remaining lease payments 474 Less: imputed lease interest ( 65 ) Less: Current portion ( 108 ) Operating lease liability, net of current portion $ 301 Rent expense, which is included in general and administrative expense, for the nine months ended September 30, 2022 and 2021 was $ 94,000 and $ 78,000 , respectively. As of September 30, 2022, the lease liability was $ 409,000 , and the current portion is included in accrued expenses and other liabilities and the non-current portion is in operating lease liability, net of current portion in the accompanying balance sheet. Cash paid for amounts included in the measurement of lease liabilities and the operating cash flows from operating leases for the nine months ended September 30, 2022 and 2021 were $ 98,000 and $ 52,000 , respectively. The weighted-average remaining lease term for the operating lease as of September 30, 2022 is 4.1 years. The discount rate for the operating lease is 7 %. Patent Agreement In July 2021, the Company entered into a patent assignment agreement (the Agreement) with the University Medical Center of Johannes Gutenberg University Mainz , Germany. Under the terms of the Agreement, the Company received exclusive world-wide patent rights relating to the use of rNAPc2 as a potential treatment for COVID-19, and other indications, based on the research and discoveries from Univ.-Prof. Dr. Wolfram Ruf, the Scientific Director and Alexander von Humboldt Professor at the Center for Thrombosis and Hemostasis (CTH) of the University Medical Center Mainz, and his collaborators. The Company has upfront and potential milestone obligations to the University Medical Center Mainz that could total approximately € 1.6 million and royalty obligations in the low single digit range, if rNAPc2 receives regulatory approval and is commercialized. The term of the Agreement extends to the date of expiration of the last to expire of any of the assigned patents. (7) Equity Financings At the Market Equity Financing On July 22, 2020, the Company entered into a Capital on Demand TM Sales Agreement (the Sales Agreement) with JonesTrading Institutional Services LLC, as agent (JonesTrading), pursuant to which the Company may offer and sell, from time to time through JonesTrading, shares of the Company’s common stock, par value $ 0.001 per share (the Common Stock), having an aggregate offering price of up to $ 54.0 million (the Shares). Under the Sales Agreement, JonesTrading may sell the Shares by any method permitted by law and deemed to be an “at the market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on or through the Nasdaq Capital Market, on any other existing trading market for the Common Stock or to or through a market maker. In addition, under the amended Sales Agreement, JonesTrading may sell the Shares by any other method permitted by law, including in negotiated transactions. The Company may instruct JonesTrading not to sell Shares if the sales cannot be effected at or above the price designated by the Company from time to time. The Company is not obligated to make any sales of the Shares under the Sales Agreement. The offering of Shares pursuant to the Sales Agreement will terminate upon the earlier of (a) the sale of all of the Shares subject to the Sales Agreement or (b) the termination of the Sales Agreement by JonesTrading or the Company, as permitted therein. 12 The Company paid JonesTrading a commission rate equal to 3.0 % of the aggregate gross proceeds from each sale of Shares and agreed to provide JonesTrading with customary indemnification and contribution rights. The Company will also reimburse JonesTrading for certain specified expenses in connection with entering into the Sales Agreement. No sales were made in 2022. During the year ended December 31, 2021, the Company had sold an aggregate of 4,861,993 shares of its Common Stock pursuant to the terms of the Sales Agreement for net proceeds of approximately $ 23.3 million, after deducting expenses for executing the “at the market offering” and commissions paid to the placement agent. In April 2021, the Company amended the 2020 Sales Agreement and the amount available for the offering under its prospectus to the Company’s registration statement on Form S-3 (No. 333-254585). The amount available for the offering under the prospectus supplement is subject to the limitation of not selling a total value amount of shares exceeding more than one-third of the Company’s public float in any 12-month period. (8) Share-based Compensation For the three and nine month periods ended September 30, 2022 and 2021, the Company recognized the following non-cash, share-based compensation expense in the statements of operations (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Research and development $ 17 $ 41 $ 109 $ 115 General and administrative 80 63 327 263 Total $ 97 $ 104 $ 436 $ 378 Stock option transactions for the nine month period ended September 30, 2022 under the Company’s stock incentive plans were as follows: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Options outstanding at December 31, 2021 904,123 $ 5.59 9.18 Granted 12,000 2.27 Exercised — — Forfeited and cancelled ( 186,891 ) 3.31 Options outstanding at September 30, 2022 729,232 $ 6.12 7.59 Options exercisable at September 30, 2022 335,467 $ 9.34 6.34 Options vested and expected to vest 729,037 $ 6.12 7.59 (9) Income Taxes In accordance with GAAP, a valuation allowance should be provided if it is more likely than not that some or all of the Company’s deferred tax assets will not be realized. The Company’s ability to realize the benefit of its deferred tax assets will depend on the generation of future taxable income. Due to the uncertainty of future profitable operations and taxable income, the Company has recorded a full valuation allowance against its net deferred tax assets. The Company believes its tax filing positions and deductions related to tax periods subject to examination will be sustained upon audit and, therefore, has no reserve for uncertain tax positions. 13