What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-12 compared with 2021-05-13 · 277 added, 227 removed, 17 unchanged (97% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited Interim Consolidated Financial Statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our annual audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission (“SEC”) on March 29, 2021.

In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties.

Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements.

Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K, particularly in Item 1A.

“Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

We are a biopharmaceutical company that was previously primarily focused on developing novel treatments for endocrine diseases where current therapies do not exist or are insufficient.

The endocrine system is a collection of glands that secrete hormones into the blood stream to regulate a number of functions, including appetite, metabolism, growth, development and reproduction.

Diseases of the endocrine system can cause multiple and varied symptoms, including appetite dysregulation, metabolic dysfunction, obesity, cardiovascular disease, menstrual irregularity, hirsutism, and infertility.

We had been developing livoletide (AZP-531) as a potential treatment for Prader-Willi syndrome (“PWS”), a rare and complex genetic endocrine disease characterized by hyperphagia, or insatiable hunger.

As previously announced, we discontinued the development of livoletide as a potential treatment for PWS in April 2020, including the 9-month extension study and the initiation of the Phase 3 ZEPHYR trial.

The decision to discontinue the PWS program was based on results from the Phase 2b ZEPHYR study, which showed that treatment with livoletide did not result in a statistically significant improvement in hyperphagia and food-related behaviors as measured by the Hyperphagia Questionnaire for Clinical Trials (HQ-CT) compared to placebo.

We do not expect to incur future material expenses related to our livoletide program for the treatment of PWS.

In an effort to streamline costs after discontinuing our PWS program, we eliminated employee positions representing approximately 30% of our prior headcount, which were completed in the second quarter of 2020.

We also began evaluating corporate strategic plans to prioritize and allocate resources to our remaining product candidates at the time and any future pipeline assets.

We had also been developing nevanimibe (ATR-101) as a potential treatment for patients with classic congenital adrenal hyperplasia (“CAH”), a rare, monogenic adrenal disease that requires lifelong treatment with exogenous cortisol, often at high doses.

As we previously announced, we elected to cease investing in the development of nevanimibe as a potential treatment for CAH in June 2020.

The decision to cease investment in the CAH program was based on the interim review of results from the Phase 2b clinical study and the changing competitive environment.

Results from 10 subjects, nine from cohort 1 and one from cohort 2, with at least 12 weeks of treatment with nevanimibe in this open-label, continuous dose escalation study showed that one patient (10%) met the primary endpoint of achieving 17-hydroxyprogesterone (17-OHP) levels less than or equal to 2-times the upper limit of normal.

Treatment under the amended protocol with dose titration starting at 500 mg BID improved tolerability of nevanimibe.

We do not expect to incur future material expenses related to our nevanimibe program for the treatment of CAH as we are no longer developing this program.

We had also been developing a selective neurokinin 3-receptor (NK3R) antagonist (MLE-301) as a potential treatment of vasomotor symptoms (“VMS”), commonly known as hot flashes and night sweats, in menopausal women.

As we previously announced, in January 2021, we discontinued further investment in MLE-301 for the treatment of VMS based on an analysis of the pharmacokinetic and pharmacodynamic data from the single ascending dose portion of the Phase 1 study.

Given our limited expected financing options, we began exploring an expanded range of strategic alternatives that included, but was not limited to, the potential sale or merger of the Company or our assets.

In January 2021, as a result of our decision to discontinue our investment in MLE-301, our Board also approved a corporate restructuring plan (the “Plan”) furthering our ongoing efforts to align our resources with our current strategy and operations.

In connection with the Plan, we plan to reduce our workforce by up to 85%, and the majority of the reduction in personnel completed was by April 15, 2021.

We initiated this reduction in force in January 2021 and we have provided or will provide severance payments and continuation of group health insurance coverage for a specified period to the affected employees.

We have also entered into retention arrangements with employees who are expected to remain with the Company.

We estimate that we will incur costs of approximately $5.5 million for termination benefits and retention arrangements related to the Plan, of

which approximately $4.2 million has been recorded in the first quarter of 2021.

Substantially all termination benefits will be cash expenditures.

In 2020, we undertook a strategic review process, which was intended to result in an actionable plan that leverages our assets, capital and capabilities to maximize stockholder value.

Following an extensive process of evaluating strategic alternatives, including identifying and reviewing potential candidates for a strategic acquisition or other transaction, on March 29, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Tempest Therapeutics, Inc.

(“Tempest”) under which the privately held Tempest will merge with a wholly owned subsidiary of Millendo (the “Merger”).

If the Merger is completed, the business of Tempest will continue as the business of the combined company.

We expect to devote significant time and resources to the completion of the Merger.

However, there can be no assurances that such activities will result in the completion of the Merger.

Further, the completion of the Merger may ultimately not deliver the anticipated benefits or enhance shareholder value.

If the Merger is not completed, we will reconsider our strategic alternatives.

We consider one of the following courses of action to be the most likely alternatives if the Merger is not completed:

• Dissolve and liquidate our assets .

If, for any reason, the Merger does not close, our Board may conclude that it is in the best interest of stockholders to dissolve the Company and liquidate our assets.

In that event, we would be required to pay all of our debts and contractual obligations, and to set aside certain reserves for potential future claims.

There would be no assurances as to the amount or timing of available cash remaining to distribute to stockholders after paying our obligations and setting aside funds for reserves.

• Pursue another strategic transaction .

We may resume the process of evaluating a potential strategic transaction in order to attempt another strategic transaction like the Merger.

• Operate our business.

Although less likely than the alternatives above, our Board may elect to seek new product candidates for development.

Since inception, we have incurred significant operating losses and negative operating cash flows and there is no assurance that we will ever achieve or sustain profitability.

Our net losses were $8.4 million and $12.0 million for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, we had an accumulated deficit of $253.4 million.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future.

You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited Interim Financial Statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

This discussion and other parts of this report contains forward-looking statements that involve risks and uncertainties, such as its plans, objectives, expectations, intentions, and beliefs, as well as assumptions made by, and information currently available to, our management.

Our actual results could differ materially from those discussed in these forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors,” under Part II, Item 1A of this report and those discussed in our other disclosures and filings.

are a clinical-stage oncology company focused on leveraging a deep scientific understanding of cancer biology and medicinal chemistry to develop and advance novel, orally available therapies for the treatment of solid tumors.

Our philosophy is to build a company based upon not only creative science and thoughtful management, but also upon the efficient translation of those ideas into therapies that will improve patient’s lives.

To this end, we currently are advancing three programs, TPST-1495, TPST-1120 and a TREX-1 antagonist.

TPST-1495 is a dual antagonist of the EP2 and EP4 prostaglandin E2 receptors, and, to our knowledge, is the only such dual antagonist in clinical development.

TPST-1495 is currently in a Phase 1 trial in solid tumors.

Our second clinical program, TPST-1120, is a selective antagonist of peroxisome proliferator-activated receptor alpha, or PPARα, and is also in a Phase 1 trial in solid tumors.

Similar to TPST-1495, we believe TPST-1120 is the only PPARα antagonist in clinical development.

We also have a third program in preclinical studies that could be the first to target TREX-1, a cellular enzyme that regulates the innate immune response in

We have no products approved for commercial sale and have not generated any revenue from product sales.

From inception to June 30, 2021, we have raised $145 million, through sales of common stock, convertible preferred stock and issuance of debt.

We have never been profitable and has incurred operating losses in each period since inception.

Our net losses were $12.4 million and $9.5 million for the six months period ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, we had an accumulated deficit of $84.0 million.

Substantially all of its operating losses resulted from expenses incurred in connection with its research and development programs and from general and administrative costs associated with its operations.

We expect to incur significant expenses and increasing operating losses for at least the next several years as it initiates and continues the clinical development of, and seeks regulatory approval for, its product candidates and adds personnel necessary to advance our pipeline of clinical-stage product candidates.

In addition, operating as a publicly traded company will involve the hiring of additional financial and other personnel, upgrading its financial information and other systems, and incurring substantial costs associated with operating as a public company.

We expect that its operating losses will fluctuate significantly from quarter to quarter and year to year due to timing of clinical development programs and efforts to achieve regulatory approval.

As of June 30, 2021, we had cash and cash equivalents of $68.5 million.

Our ability to fund continued development will require additional capital, and we intend to raise such capital through the issuance of additional debt or equity including in connection with potential merger opportunities, or through business development activities.

Our ability to continue as a going concern is dependent upon its ability to successfully accomplish these plans and secure sources of financing and ultimately attain profitable operations.

If we are unable to obtain adequate capital, it could be forced to cease operations.

Recent Developments

Oxford Loan and Security Agreement

On January 15, 2021, we entered into a loan and security agreement with Oxford Finance LLC (“Oxford”) to borrow a term loan amount of $35.0 million to be funded in three tranches.

Tranche A of $15.0 million was funded to us on January 15, 2021.

Tranche B of $10.0 million will be available through March 31, 2022 contingent upon achievement of each of the following:

i) receipt of at least $50.0 million in Series C equity capital, ii) initiation of the Phase 1 combination study of TPST-1495 or monotherapy expansion study, and iii) initiation of Phase 2 trial of TPST-1120 or the 1L Triplet Collaboration study.

Tranche C of $10.0 million is available at Oxford’s option.

The term loan matures on August 1, 2025 and has an annual floating interest rate of 7.15% which is an Index Rate plus 7.15% which is an index rate plus 7%.

The index rate is the greater of (i) 30-day

US LIBOR or (ii) 0.15%.

Merger Agreement

After conducting a diligent and extensive process of evaluating strategic alternatives for the Company and identifying and reviewing potential candidates for a strategic acquisition or other transaction, which included the careful evaluation and consideration of proposals from interested parties, and following extensive negotiation with Tempest, on March 29, 2021, we, Mars Merger Corp.

(“Merger Sub”), a wholly owned subsidiary of the Company, and Tempest entered into the Merger Agreement.

Pursuant to the Merger Agreement, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Tempest, with Tempest continuing as a wholly owned subsidiary of the Company and the surviving corporation of the Merger.

Subject to the terms and conditions of the Merger Agreement, at the closing of the Merger, (a) each outstanding share of Tempest common stock (including shares of Tempest common stock issued upon conversion of Tempest preferred stock and shares of Tempest common stock issued in the financing transaction described below) will be converted into the right to receive a number of shares of Millendo common stock (subject to the payment of cash in lieu of fractional shares and after giving effect to a reverse stock split of Millendo common stock described below) calculated in accordance with the Merger Agreement (the “Exchange Ratio”) and (b) each then outstanding Tempest stock option and warrant to purchase Tempest common stock will be assumed by Millendo, subject to adjustment as set forth in the Merger Agreement.

Under the terms of the Merger Agreement, the Millendo board of directors may accelerate the vesting of any Millendo stock options that are outstanding as of immediately prior to the closing of the Merger.

Under the Exchange Ratio formula in the Merger Agreement, upon the closing of the Merger, on a pro forma basis and based upon the number of shares of Millendo common stock expected to be issued in the Merger, pre-Merger Millendo shareholders will own approximately 18.5% of the combined company and pre-Merger Tempest stockholders will own approximately 81.5% of the combined company (assuming the financing transaction described below results in gross proceeds of approximately $30 million).

For purposes of calculating the Exchange Ratio, shares of Millendo common stock underlying Millendo stock options outstanding as of the immediately prior to the closing of the Merger with an exercise price per share of less than or equal to $5.00 (as adjusted for the reverse stock split described below) will be deemed to be outstanding and all shares of Tempest

common stock underlying outstanding Tempest stock options, warrants and other derivative securities will be deemed to be outstanding.

The Exchange Ratio will be adjusted to the extent that Millendo’s net cash at closing is less than $15.3 million or greater than $18.7 million and based on the amount of the financing transaction described below, as further described in the Merger Agreement.

In connection with the Merger, Millendo will seek the approval of its stockholders to (a) issue the shares of Millendo common stock issuable in connection with the Merger under the rules of The Nasdaq Stock Market LLC (“Nasdaq”) and (b) amend its certificate of incorporation to effect a reverse split of Millendo common stock at a ratio of between 1:10 and 1:15, as determined by a committee of the Millendo board of directors prior to the closing of the Merger (the “Millendo Voting Proposals”).

Each of Millendo and Tempest has agreed to customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants relating to (1) using reasonable best efforts to obtain the requisite approval of its stockholders, (2) non-solicitation of alternative acquisition proposals, (3) the conduct of their respective businesses during the period between the date of signing the Merger Agreement and the closing of the Merger, (4) Millendo using reasonable best efforts to maintain the existing listing of the Millendo common stock on Nasdaq and Millendo causing the shares of Millendo common stock to be issued in connection with the Merger to be approved for listing on Nasdaq prior to the closing of the Merger, and (5) Millendo filing with the U.S.

Securities and Exchange Commission (the “SEC”) and causing to become effective a registration statement to register the shares of Millendo common stock to be issued in connection with the Merger (the “Registration Statement”).

Consummation of the Merger is subject to certain closing conditions, including, among other things, the (1) approval by Millendo stockholders of the Millendo Voting Proposals, (2) approval by the Tempest stockholders of the adoption of the Merger Agreement, (3) Nasdaq’s approval of the listing of the shares of Millendo common stock to be issued in connection with the Merger, (4) the effectiveness of the Registration Statement, and (5) the determination of Millendo’s net cash in accordance with the Merger Agreement.

Each party’s obligation to consummate the Merger is also subject to other specified customary conditions, including the representations and warranties of the other party being true and correct as of the date of the Merger Agreement and as of the closing date of the Merger, generally subject to an overall material adverse effect qualification, and the performance in all material respects by the other party of its obligations under the Merger Agreement required to be performed on or prior to the date of the closing of the Merger.

Millendo’s obligation to consummate the Merger also is subject to the completion of at least $25.0 million of the financing transaction described below.

The Merger Agreement contains certain termination rights of each of Millendo and Tempest, including, subject to compliance with the applicable terms of the Merger Agreement, the right of each party to terminate the Merger Agreement to enter into a definitive agreement for a superior proposal.

Upon termination of the Merger Agreement under specified circumstances, Millendo may be required to pay Tempest a termination fee of $1.4 million or reimburse Tempest’s expenses up to a maximum of $1.0 million and Tempest may be required to pay Millendo a termination fee of $2.8 million or reimburse Millendo’s expenses up to a maximum of $1.0 million.

Concurrently with the execution of the Merger Agreement, (i) certain executive officers, directors and stockholders of Tempest (solely in their respective capacities as Tempest stockholders) holding approximately 87% of the outstanding shares of Tempest capital stock have entered into support agreements with Millendo and Tempest to vote all of their shares of Tempest capital stock in favor of adoption of the Merger Agreement and against any alternative acquisition proposals (the “Tempest Support Agreements”) and (ii) certain executive officers, directors and stockholders of Millendo (solely in their respective capacities as Millendo stockholders) holding approximately 16% of the outstanding shares of Millendo common stock have entered into support agreements with Millendo and Tempest to vote all of their shares of Millendo common stock in favor of the Millendo Voting Proposals and against any alternative acquisition proposals (the “Millendo Support Agreements”, and together with the Tempest Support Agreements, the “Support Agreements”).

Concurrently with the execution of the Merger Agreement, certain executive officers, directors and stockholders of Tempest have entered into lock-up agreements (the “Lock-Up Agreements”) pursuant to which, subject to specified exceptions, they agreed not to transfer their shares of Millendo common stock for the 180-day period following the closing of the Merger.

In addition, each of Millendo and Tempest is obligated under the Merger Agreement to use reasonable best efforts prior to the closing of the Merger to obtain a Lock-Up Agreement from any person who will serve as a director or officer of Millendo following completion of the Merger.

At the effective time of the Merger, the Board of Directors of Millendo is expected to consist of seven members, six of whom will be designated by Tempest and one of whom will be designated by Millendo.

Concurrently with the execution and delivery of the Merger Agreement, certain parties have entered into agreements with Tempest pursuant to which they have agreed, subject to the terms and conditions of such agreements, to purchase prior to the consummation of the Merger shares of Tempest common stock for an aggregate purchase price of approximately $30 million.

The consummation of the transactions contemplated by such agreements is conditioned on the satisfaction or waiver of the conditions set forth in the Merger Agreement.

Shares of Tempest common stock issued pursuant to this financing transaction will be converted into shares of Millendo common stock in the Merger in accordance with the Exchange Ratio.

At-the-Market Equity Distribution Agreement

In April 2019, we entered into an "at-the-market" ("ATM") equity distribution agreement with Citigroup Global Markets Inc.

acting as sole agent with an aggregate offering value of up to $50.0 million.

Subject to the terms of the ATM equity distribution agreement, we are able to determine, at our sole discretion, the timing and number of shares to be sold under this ATM facility.

In March 2020, we amended and restated the equity distribution agreement to include SVB Leerink LLC as an additional sales agent for the ATM.

In March 2020, we sold 719,400 shares of our common stock under our ATM equity distribution agreement for net proceeds of approximately $5.5 million.

We do not expect to sell additional shares under this ATM facility.

Sales of our common stock pursuant to the ATM have been made pursuant to our registration statement on Form S-3 (Registration Statement No.

333-230749), which was declared effective by the Securities and Exchange Commission on April 18, 2019.

COVID-19 Business Update

With the global impacts of the ongoing COVID-19 pandemic continuing in the first quarter of 2021, we are maintaining the business continuity plans we established and implemented in the first quarter of 2020, which are designed to address and mitigate the impact of the COVID-19 pandemic on our employees, operations and our business.

While we are experiencing limited financial impacts from the pandemic at this time, given the global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic, our business, financial condition, and results of operations, could be materially adversely affected.

We continue to closely monitor the COVID-19 situation as we evolve our business continuity plans and response strategy.

In March 2020, our global workforce transitioned to working remotely.

Throughout the first quarter of 2021, we continued our plan to allow some employees to return to the office voluntarily, which was based on a phased approach that is principles-based, flexible and local in design, with a focus on employee safety and optimal work environment.

Our current plans remain fluid as federal, state and local guidelines, rules and regulations continue to evolve.

Components of Our Results of Operations

On March 29, 2021, TempestTx, Inc.

(“Private Tempest”) and Millendo Therapeutics, Inc.

(“Millendo”) entered into an Agreement and Plan of Merger (the Merger Agreement).

Concurrent with the execution and delivery of the Merger Agreement, Private Tempest entered into funding agreements with certain investors named therein, pursuant to which the investors agreed to purchase, in the aggregate, $30.0 million of common stock of Private Tempest, convertible into securities of Millendo.

On June 25, 2021, Private Tempest closed the merger with Millendo.

Pursuant to the Merger Agreement, Mars Merger Corp.

(“Merger Sub”), a direct, wholly owned subsidiary of Millendo merged with and into Private Tempest, with Private Tempest surviving as a wholly owned subsidiary of Millendo.

Following the closing of the merger, Millendo changed its corporate name to Tempest Therapeutics, Inc.

Financial Operations Overview

Research and Development Expense

Research and development expense consists primarily of costs incurred in connection with the development of our product candidates.

We expense research and development costs as incurred.

These expenses include:

• personnel expenses, including salaries, benefits and stock-based compensation expense;

• costs of funding research performed by third-parties, including pursuant to agreements with contract research organizations, (“CROs”), as well as investigative sites and consultants that conduct our preclinical studies and clinical trials;

• expenses incurred under agreements with contract manufacturing organizations (“CMOs”), including manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical study and clinical trial materials;

• payments made under our third-party licensing agreements;

• consultant fees and expenses associated with outsourced professional scientific development services;

• expenses for regulatory activities, including filing fees paid to regulatory agencies;

• allocated expenses for facility costs, including rent, utilities, depreciation and maintenance.

Milestone payment obligations incurred prior to regulatory approval of a product candidate, which are accrued when the event requiring payment of the milestone occurs are included in research and development expense.

We typically use our employee, consultant and infrastructure resources across our development programs.

We track certain outsourced development costs by product candidate, but do not allocate all personnel costs or other internal costs to specific product candidates.

The following table summarizes our research and development expenses by product candidate, personnel expense and other expenses for the three months ended March 31, 2021 and 2020, respectively:

Three Months Ended

(dollars in thousands)

Livoletide expenses $ (45) $ 4,846

Nevanimibe expenses — 252

MLE-301 expenses 384 430

Personnel expenses 1,805 1,774

Other expenses 8 238

Total $ 2,152 $ 7,540

Our research and development costs related to livoletide and nevanimibe have decreased significantly due to our decision to discontinue the livoletide and nevanimibe programs based on results from the Phase 2b ZEPHYR study in PWS and the Phase 2b clinical study in CAH, respectively.

All costs, including estimated program closeout costs associated with these programs, were primarily recognized during the second quarter of 2020.

Any revisions to estimated program closeout costs have been recognized as of March 31, 2021.

Future expenses may be recorded as a result of changes to these estimated costs as closeout activities continue.

Our research and development costs related to MLE-301 have decreased due to our decision in January 2021 to discontinue the MLE-301 program based on the data from the single ascending dose portion of the Phase 1 study.

We do not expect to incur material costs in the future related to the MLE-301 program.

If we decide to resume product candidate development, the successful development of any future product candidates would be highly uncertain.

We are also unable to predict when, if ever, material net cash inflows would commence from sales of any future product candidates that we may develop due to the numerous risks and uncertainties associated with clinical development, including risks and uncertainties related to:

• the ongoing COVID-19 pandemic, including the potential impact on various aspects and stages of the clinical development process;

• the number of clinical sites included in the trials;

• the length of time required to enroll suitable patients;

• the number of patients that ultimately participate in the trials;

• the number of doses patients receive;

• the duration of patient follow-up and number of patient visits;

• the results of our clinical trials;

• the establishment of commercial manufacturing capabilities;

• the receipt of marketing approvals;

• the commercialization of product candidates.

We may never succeed in obtaining regulatory approval for any future product candidates we may develop.

General and administrative expense

General and administrative expense consists primarily of personnel expenses, including salaries, benefits and stock-based compensation expense, for employees in executive, finance, accounting, business development, legal and human resource functions.

General and administrative expense also includes corporate facility costs, including rent, utilities, depreciation and maintenance, not otherwise included in research and development expense, as well as legal fees related to intellectual property and corporate matters and fees for accounting, recruiting and consulting services.

Our general and administrative expenses increased during the three months ended March 31, 2021 mainly due to termination benefits incurred related to our corporate restructuring plan and increased professional fees incurred due to the proposed Merger.

Interest expense (income), net

Interest expense (income) represents amounts earned on our cash, cash equivalents, marketable securities and restricted cash balances.

Research and development expenses represent costs incurred to conduct research and development, such as the development of our product candidates.

We recognize all research and development costs as they are incurred.

Research and development expenses consist primarily of the following:

salaries, benefits and stock-based compensation;

licensing costs;

allocated occupancy;

materials and supplies;

contracted research and manufacturing;

consulting arrangements;

other expenses incurred to advance our research and development activities.

The largest component of our operating expenses has historically been the investment in research and development activities.

We expect research and development expenses will increase in the future as we advance our product candidates into and through clinical trials and pursues regulatory approvals, which will require a significant investment in costs of clinical trials, regulatory support and contract manufacturing and inventory build-up.

In addition, we continue to evaluate opportunities to acquire or in-license

other product candidates and technologies, which may result in higher research and development expenses due to license fee and/or milestone payments, as well as added clinical development costs.

The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming.

We may never succeed in timely developing and achieving regulatory approval for its product candidates.

The probability of success of our product candidates may be affected by numerous factors, including clinical data, competition, manufacturing capability and commercial viability.

As a result, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will generate revenue from the commercialization and sale of any of its product candidates.

General and Administrative Expenses

General and administrative expenses consist of employee-related expenses, including salaries, benefits, travel and noncash stock-based compensation, for our personnel in executive, finance and accounting, and other administrative functions, as well as fees paid for legal, accounting and tax services, consulting fees and occupancy costs not otherwise included in research and development expense.

Legal costs include general corporate legal fees and patent costs.

We expect to incur additional expenses as a result of becoming a public company following completion of the merger, including expenses related to compliance with the rules and regulations of the SEC and Nasdaq, additional insurance, investor relations and other administrative expenses and professional services.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest expense, interest income, and various income or expense items of a non-recurring

Results of Operations

Comparison of the three months ended March 31, 2021 and 2020

Comparison of the three months ended June 30, 2021 and 2020

The following table summarizes our operating results for the periods indicated:

Three Months Ended

2021 2020 Change

(dollars in thousands)

Operating expenses:

(in thousands)

Research and development

General and administrative

Loss from operations 8,562 12,135 (3,573) (29.4)

Other expenses (income):

Interest expense (income), net 1 (162) 163 (100.6)

Other (gain) / loss (174) 25 (199) (796.0)

Net loss $ (8,389) $ (11,998) $ 3,609 (30.1) %

Research and development expense

Research and development expense decreased by $5.4 million to $2.2 million for the three months ended March 31, 2021 from $7.5 million for the three months ended March 31, 2020.

The following table summarizes our research and development expenses for the three months ended March 31, 2021 and 2020:

Total expenses

Operating loss

Interest expense

Interest income and other income, net

Provision for income taxes

Research and development

Our research and development expenses for the three months period ended June 30, 2021 and 2020 were primarily incurred in connection with our most advanced product candidates, TPST-1120 and TPST-1495.

We have not historically tracked research and development expense by program other than direct external expenses in conducting clinical trials for TPST-1120 and TPST-1495.

We typically have various early-stage research and drug discovery projects, as well as various potential product candidates undergoing clinical trials.

Our internal resources, employees and infrastructure are not directly tied to any one research and drug discovery project and our resources are typically deployed across multiple projects.

As such, we do not maintain information regarding these costs incurred for these early-stage research and drug discovery programs on a project specific basis.

Research and development expense increased by $0.1 million to $4.2 million for the three months period ended June 30, 2021.

The following table summarizes our research and development expenses for the three months period ended June 30, 2021 and 2020:

Three Months Ended

2021 2020 Change

(dollars in thousands)

Preclinical and clinical development expense $ 339 $ 5,528 $ (5,189) (93.9) %

Compensation expense, other than stock-based compensation 2,063 1,474 589 40.0

(in thousands)

Research and development outside services

Compensation expense

Stock-based compensation expense

Consulting and professional services

Other expenses

Total research and development expense

The decrease in total research and development expense is attributable to:

• a $5.2 million decrease in preclinical and clinical development expense primarily related to decreased spend due to discontinuing our development of the livoletide, nevanimibe and MLE-301 programs;

• a $0.6 million increase in compensation expense, other than stock-based compensation, primarily due to termination benefits incurred related to the reduction in force initiated in the first quarter of 2021;

• a $0.6 million decrease in stock-based compensation expenses primarily related to the reduction in force initiated in the first quarter of 2021.

General and administrative expense

General and administrative expense increased by $1.8 million to $6.4 million for the three months ended March 31, 2021 from $4.6 million for the three months ended March 31, 2020.

The increase was primarily due to higher compensation and professional fees offset by a decrease in stock-based compensation.

The increase in compensation of $1.6 million was a result of termination benefits incurred related to the reduction in force initiated in the first quarter of 2021, as a result of the discontinuance of our MLE-301 program.

The increase in professional fees of $0.4 million was a result of the proposed merger in the first quarter of 2021.

These increases were offset by a decrease of $0.1 million in stock-based compensation as a result of the reduction in force completed in the first quarter of 2021.

Interest expense (income), net

Interest expense (income), net decreased by $0.2 million to $1,000 interest expense, net for the three months ended March 31, 2021 from interest income, net of $0.2 million for the three months ended March 31, 2020.

The change was primarily due to lower interest income received as a result of lower cash and cash equivalent and marketable securities balances and lower interest rates.

Other (gain) / loss

Other (gain) / loss increased by $0.2 million to a gain of $0.2 million for the three months ended March 31, 2021 from a loss of $25,000 for the three months ended March 31, 2020 due to lower foreign currency losses as a result of exchange rate fluctuations on transactions denominated in a currency other than our functional currency.

The growth in total research and development expense of $0.1 million for the three months period ended June 30, 2021 was attributable to increased compensation expenses.

General and administrative

General and administrative expenses increased by $1.4 million to $2.5 million for the three months period ended June 30, 2021.

The increase was due to growth in compensation related expense of $0.7 million and fees associated with audit and tax services related to the Millendo merger of $0.6 million.

Other income and expense

For the three months period ended June 30, 2021, total interest expense was $276 related to the Oxford Loan.

There was no interest expense for the three months period ended June 30, 2020.

Interest income was $3 and $9 for the three months period ended June 30, 2021 and 2020, respectively.

Comparison of the six months ended June 30, 2021 and 2020

The following table summarizes our operating results for the periods indicated:

(in thousands)

Research and development

General and administrative

Total expenses

Operating loss

Interest expense

Interest income and other income, net

Provision for income taxes

Research and development

Our research and development expenses for the six months period ended June 30, 2021 and 2020 were primarily incurred in connection with our most advanced product candidates, TPST-1120 and TPST-1495.

We have not historically tracked research and development expense by program other than direct external expenses in conducting clinical trials for TPST-1120 and TPST-1495.

We typically have various early-stage research and drug discovery projects, as well as various potential product candidates undergoing clinical trials.

Our internal resources, employees and infrastructure are not directly tied to any one research and drug discovery project and our resources are typically deployed across multiple projects.

As such, we do not maintain information regarding these costs incurred for these early-stage research and drug discovery programs on a project specific basis.

Research and development expense increased by $0.7 million to $7.8 million for the six months period ended June 30, 2021.

The following table summarizes our research and development expenses for the six months period ended June 30, 2021 and 2020:

Six Months Ended

(in thousands)

Research and development outside services

Compensation expense

Stock-based compensation expense

Consulting and professional services

Other expenses

Total research and development expense

The growth in total research and development expense of $0.7 million for the six months period ended June 30, 2021 was attributable to increased compensation expenses and consulting services.

General and administrative

General and administrative expenses increased by $1.7 million to $4.1 million for the six months period ended June 30, 2021.

The increase was due to growth in compensation related expense of $0.7 million and fees associated with audit and tax services related to the Millendo merger of $0.6 million.

Other income and expense

For the six months period ended June 30, 2021, total interest expense was $507 related to the Oxford Loan.

There was no interest expense for the six months period ended June 30, 2020.

Interest income was $6 and $84 for the six months period ended June 30, 2021 and 2020, respectively.

Liquidity and Capital Resources

The following table sets forth the primary uses of cash and cash equivalents for the three months ended March 31, 2021 and 2020:

Three Months Ended

Sources of Liquidity

Since inception through June 30, 2021, our operations have been financed primarily by net cash proceeds from the sale of its common stock, convertible preferred stock and issuance of debt.

As of June 30, 2021, we had $68.5 million in cash and cash equivalents and an accumulated deficit of $84.0 million.

We expect that our research and development and general and administrative expenses will increase, and, as a result, we anticipate that we will continue to incur increasing losses in the foreseeable future.

Therefore, we will need to raise additional capital to fund its operations, which may be through the issuance of additional equity or through borrowings, including in connection with the merger, or through business development activities.

On January 15, 2021, Tempest entered into a loan and security agreement with a lender to borrow a term loan amount of $35.0 million to be funded in three tranches.

Tranche A of $15.0 million was funded to Tempest on January 15, 2021.

Tranche B of $10.0 million will be available through March 31, 2022 contingent upon achievement of each of the following:

And Tranche C of $10.0 million is available at Oxford’s option.

The term loan matures on August 1, 2025 and has an annual floating interest rate of 7.15% which is an Index Rate plus 7.15% which is an index rate plus 7%.

The index rate is the greater of (i) 30-day

US LIBOR or (ii) 0.15%.

On March 29, 2021, Private Tempest entered into the Merger Agreement with Millendo.

On June 25, 2021, Private Tempest closed the merger with Millendo.

Pursuant to the Merger Agreement, Merger Sub merged with and into Private Tempest, with Private Tempest surviving as a wholly owned subsidiary of Millendo.

Following the closing of the merger, Millendo changed its corporate name to Tempest Therapeutics, Inc.

The following table summarizes Tempest’s cash flows for the six months period indicated:

(in thousands)

Net cash used in operating activities $ (11,835) $ (10,161)

Net cash provided by (used in) investing activities 8 (26)

Net cash provided by financing activities 22 5,589

Effect of foreign currency exchange rate changes on cash (6) (37)

Net decrease in cash, cash equivalents and restricted cash $ (11,811) $ (4,635)

Operating activities

During the three months ended March 31, 2021, we used $11.8 million of cash to fund operating activities.

During the three months ended March 31, 2021, cash used in operating activities reflected our net loss of $8.4 million and a net change in operating assets and liabilities of $3.8 million, offset by non-cash charges of $0.4 million, principally related to stock-based compensation.

During the three months ended March 31, 2020, we used $10.2 million of cash to fund operating activities.

During the three months ended March 31, 2020, cash used in operating activities reflected our net loss of $12.0 million and a net change in operating assets and liabilities of $0.5 million, offset by non-cash charges of $1.4 million, principally related to stock-based compensation and the amortization of our right-of-use assets.

Investing activities

During the three months ended March 31, 2021, we received proceeds of $8,000 related to the sale of equipment.

During the three months ended March 31, 2020, we paid $26,000 in purchases of property and equipment.

Financing activities

During the three months ended March 31, 2021, we received $86,000 in proceeds from option exercises offset by the repayment of debt and principal on a finance lease.

During the three months ended March 31, 2020, we received proceeds of $5.7 million received from the issuance of common stock, net of issuance costs paid.

These proceeds were offset by $0.2 million in the payment of financing costs.

Funding requirements

We expect our expenses to decrease as a result of our discontinuing the development of livoletide, nevanimibe and MLE-301 as compared to previous operations.

However, we expect to continue to incur costs associated with operating as a public company.

Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations.

If we are unable to raise capital when needed or on attractive terms, we may be forced to liquidate our assets.

The COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets.

If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our operations.

In April 2019, we entered into an “at-the-market” (“ATM”), equity distribution agreement with Citigroup Global Markets Inc.

acting as sole agent with an aggregate offering value of up to $50.0 million.

Subject to the terms of the ATM equity distribution agreement, we are able to determine, at our sole discretion, the timing and number of shares to be sold under this ATM facility.

In March 2020, we amended and restated the equity distribution agreement to include SVB Leerink LLC as an additional sales agent for the ATM.

In March 2020, we sold 719,400 shares of common stock under our ATM equity distribution agreement for net proceeds of approximately $5.5 million.

We do not expect to sell additional shares under this ATM facility.

As of March 31, 2021, we had cash, cash equivalents, marketable securities and restricted cash of $27.3 million, which we believe are sufficient to fund our planned operations through at least the next 12 months.

Our future capital requirements will depend on the results of our ongoing strategic evaluation, including whether we complete the Merger with Tempest.

If the Merger is not completed, we will reconsider our strategic alternatives which may include a dissolution of the company, pursuit of another strategic transaction or the continued operation of product development.

In the event we resume product candidate development, our future capital requirements will depend on many factors, including:

• the scope, progress, results and costs of preclinical studies and clinical trials;

• the scope, prioritization and number of our research and development programs;

• the costs, timing and outcome of regulatory review of our product candidates;

• our ability to establish and maintain collaborations on favorable terms, if at all;

• the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under collaboration agreements, if any;

• the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

• the extent to which we acquire or in-license other product candidates and technologies;

• the costs of securing manufacturing arrangements for commercial production;

• the costs of establishing or contracting for sales and marketing capabilities if we obtain regulatory approvals to market our product candidates.

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales.

In addition, any future product candidates, if approved, may not achieve commercial success.

If we elect to resume product candidate development, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder.

Cash used in operating activities

Cash used in provided by investing activities

Cash provided by financing activities

Net increase in cash and cash equivalents

Cash flows from operating activities

Cash used in operating activities for the six months period ended June 30, 2021 was $6.2 million, consisting of a net loss of $12.3 million, add back of non-cash

adjustments for depreciation, stock-based compensation, non-cash

operating lease expense and other non-cash

items totaling $1.1 million, less changes in operating assets and liabilities of $5.0 million.

Cash used in operating activities for the six months period ended June 30, 2020 was $10.1 million consisting of a net loss of $9.5 million, add back of non-cash

adjustments for depreciation, stock-based compensation, non-cash

operating lease expense and other non-cash

items totaling $0.7 million, less changes in operating assets and liabilities of $1.3 million.

Cash flows from investing activities

Cash used in investing activities for the six months period ended June 30, 2021 was related to purchases of property and equipment, primarily related to office, laboratory and computer equipment.

Cash provided by investing activities for the six months period ended June 30, 2020 was due to a repayment of a promissory note.

Cash flows from financing activities

Cash provided by financing activities for the six months period ended June 30, 2021 was $55.9 million consisting of (i) proceeds from Oxford Loan of $14.9 million (net of issuance costs), (ii) issuance of common stock of $30.0 million concurrent with closing of the merger with Millendo and (iii) cash brought over by Millendo as a result of the merger, offset by payment of reverse recapitalization costs of $6.1 million.

Cash provided by financing activities for the six months period ended June 30, 2020 was primarily related to proceeds from the issuance of Series B-1

preferred stock of $34.5 million (net of issuance costs).

Future Funding Requirements

We have not generated any revenue from product sales, and does not know when, or if, it will generate any revenue from product sales.

We do not expect to generate any revenue from product sales unless and until it obtains regulatory approval of and commercializes any of its product candidates.

At the same time, we expect our expenses to increase in connection with its ongoing development activities, particularly as we continue the research, development and clinical trials of, and seeks regulatory approval for, its product candidates.

In addition, subject to obtaining regulatory approval of any of our product candidates, we anticipate that we will need substantial additional funding in connection with its continuing operations.

We plan to continue to fund its operations and capital requirements through equity financing, debt financing and/or business development activities, but there are no assurances that we will be able to raise sufficient amounts of funding in the future on acceptable terms, or at all.

Until we can generate a sufficient amount of product revenue to finance its cash requirements, it expects to finance its future cash needs primarily through the issuance of additional equity, borrowings and strategic alliances with partner companies.

To the extent that we raise additional capital through the issuance of additional equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders.

Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third-parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

During the three months ended March 31, 2021, there were no material changes to our contractual obligations and commitments described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2021, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Critical Accounting Policies and Estimates

Other than as described under Note 2 to our Unaudited Interim Consolidated Financial Statements, the Critical Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 29, 2021, have not materially changed.

If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate its product development or commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market itself.

Contractual Obligations

We enter into contracts in the normal course of business with various third parties for preclinical research studies, clinical trials, testing and other services.

These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable

obligations under these agreements are not material.

Sheet Arrangements

We have not entered into any off-balance

sheet arrangements and does not have any holdings in variable interest entities.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of its business.

These risks primarily include interest rate fluctuation.

As of June 30, 2021, and December 31, 2020, we had cash and cash equivalents of approximately $68.5 million and $18.8 million, respectively, which consisted primarily of bank deposit and money market funds.

Such interest-earning instruments carry a degree of interest rate risk;

however, historical fluctuations of interest income have not been significant.

Critical Accounting Polices and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on its financial statements, which have been prepared in accordance with U.S.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses.

On an ongoing basis, we evaluate these estimates and judgments.

We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances.

These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources.

Actual results may differ materially from these estimates.

We believe that the accounting policies discussed below are critical to understanding its historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Accrued Research and Development Expenses

We record accrued expenses for estimated costs of its research and development activities conducted by third-party service providers, which include the conduct of preclinical studies and clinical trials and contract manufacturing activities.

We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced, and we include these costs in accrued liabilities in the balance sheets and within research and development expense in the statement of operations.

These costs are a significant component of our research and development expense.

We record accrued expenses for these costs based on the estimated amount of work completed and in accordance with agreements established with these third parties.

We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services.

We make significant judgments and estimates in determining the accrued balance in each reporting period.

As actual costs become known, we adjust our accrued estimates.

Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed, the number of patients enrolled and the rate of patient enrollment may vary from its estimates and could result in us reporting amounts that are too high or too low in any particular period.

Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers.

Stock-based Compensation

We recognize noncash stock-based compensation expense related to stock-based awards to employees, non-employees

and directors, including stock options, based on the fair value on the grant date using the Black-Scholes option pricing model.

The related stock-based compensation is recognized as expense on a straight line-basis over the employee’s, non-employee’s

or director’s requisite service period (generally the vesting period).

Noncash stock compensation expense is based on awards ultimately expected to vest and is reduced by an estimate for future forfeitures.

In determining the fair value of stock options, we use the Black-Scholes option-pricing model and assumptions discussed below.

Each of these inputs is subjective and generally requires significant judgment to determine.

Fair Value of Common Stock

—The fair value of the shares of common stock underlying stock options has historically been determined by our board of directors.

Because there has been no public market for its common stock, the board of directors exercises reasonable judgment and considers a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including important developments in its operations, sales of redeemable convertible preferred stock, actual operating results and financial performance, the conditions in the life sciences industry and the economy in general, the stock price performance and volatility of comparable public companies, and the lack of liquidity of its common stock, among other factors.

Expected Term

—Our expected term represents the period that the stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point

between the vesting date and the end of the contractual term) for employee options.

Expected Volatility

—The expected stock price volatility assumption was determined by examining the historical volatilities for industry peers, as the Company did not have any trading history for the Company’s common stock.

The Company will continue to analyze the historical stock price volatility and expected term assumption as more historical data for the Company’s common stock becomes available.

Risk-Free Interest Rate

—The risk-free interest rate is based on the U.S.

Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Expected Dividend

—We have never paid dividends on its common stock and has no plans to pay dividends on its common stock.

Therefore, we use an expected dividend yield of zero.

For the six months period ended June 30, 2021 and 2020, stock-based compensation expense was $531 thousand and $230 thousand, respectively.

Of the amount of $531 thousand in stock-based compensation expense, $122 thousand was recorded in research and development and $409 thousand was recorded in general and administrative for the six months period ended June 30, 2021.

Of the amount of $230 thousand in stock-based compensation expense, $231 thousand was recorded in research and development and a credit of $1 thousand was recorded in general and administrative for the six months period ended June 30, 2020.

As of June 30, 2021, we had $3.0 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, which it expects to recognize over a weighted-average period of 1.6 years.

Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (principal executive officer) and Vice-President, Strategy and Finance (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, as of June 30, 2021.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2021, our Chief Executive Officer and Vice-President, Strategy and Finance concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level because of the material weaknesses in internal control over financial reporting set forth below;

provided, however, that Tempest has made improvements with respect to addressing such material weaknesses and will continue to execute on an existing plan to remedy them.

Internal Control Over Financial Reporting

Management of Tempest is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d (f) under the Exchange Act).

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of Tempest’s annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

In preparing the financial statements as of and for the year ended December 31, 2020, management of Tempest identified material weaknesses in its internal control over financial reporting.

The material weaknesses identified were as follows:

There was a material weakness in Tempest’s internal control environment over financial reporting as a result of insufficient resources with appropriate knowledge and expertise to design, implement, document and operate effective internal controls over financial reporting.

There was a material weakness in Tempest’s internal control activities due to a failure in the design and implementation of controls to review clinical trial expenses, including the evaluation of the terms of clinical trial contracts.

Specifically, Tempest failed to properly review and evaluate progress of expense incurred in clinical trial contracts which resulted in the inaccurate accrual of its clinical trial expenses.

As a result of the material weaknesses described above, management concluded that, as of December 31, 2020, our internal control over financial reporting was ineffective.

Remediation of Material Weaknesses in Internal Control over Financial Reporting

Tempest’s management, under the supervision of its Chief Executive Officer, has undertaken a plan to remediate the material weaknesses identified above.

The remediation efforts summarized below, which are in the process of being implemented, are intended to address the identified material weaknesses.

Tempest will seek to recruit and hire additional accounting personnel with appropriate experience, certification, education and training to help design, implement, document and operate effective internal controls over financial reporting;

Tempest will design and implement controls related to review of clinical trial expenses to properly evaluate progress of expense incurred in clinical trial contracts.

Tempest management cannot assure you that the material weaknesses identified at Tempest will be remediated by the combined company on the timelines currently anticipated by Tempest, or at all, and/or that there will not be additional material weaknesses or significant deficiencies in the combined company’s internal control over financial reporting in the future.

Notwithstanding the existence of the material weaknesses as described above, we believe that the Consolidated Financial Statements in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in conformity with U.S.

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We have not experienced any material impact to our internal controls over financial reporting despite the fact that our employees are working remotely due to the COVID-19

We are continually monitoring and assessing the COVID-19

situation on our internal controls to minimize the impact on their design and operating effectiveness.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Vice-President, Strategy and Finance, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level.

However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake.

Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions;

over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.

Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis