Tempest Therapeutics, Inc. 10-Q

Item 2. 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 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. Overview We 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 tumors. 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 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 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; 22 Table of Contents • licensing costs; • allocated occupancy; • materials and supplies; • contracted research and manufacturing; • consulting arrangements; and • 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 nature. Results of Operations 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 June 30, 2021 2020 (in thousands) Expenses: Research and development $ 4,229 $ 4,094 General and administrative 2,556 1,144 Total expenses 6,785 5,238 Operating loss (6,785 ) (5,238 ) Interest expense (276 ) — Interest income and other income, net 3 9 Provision for income taxes — — Net loss $ (7,058 ) $ (5,229 ) 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. 23 Table of Contents 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 June 30, 2021 2020 (in thousands) Research and development outside services $ 2,850 $ 2,820 Compensation expense 679 539 Stock-based compensation expense 44 176 Consulting and professional services 425 320 Other expenses 231 239 Total research and development expense $ 4,229 $ 4,094 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: Six months ended June 30, 2021 Six months ended June 30, 2020 (in thousands) Expenses: Research and development $ 7,821 $ 7,121 General and administrative 4,091 2,420 Total expenses 11,912 9,541 Operating loss (11,912 ) (9,541 ) Interest expense (507 ) — Interest income and other income, net 6 84 Provision for income taxes — — Net loss $ (12,413 ) $ (9,457 ) 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. 24 Table of Contents 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 June 30, 2021 2020 (in thousands) Research and development outside services $ 4,963 $ 4,885 Compensation expense 1,400 974 Stock-based compensation expense 122 232 Consulting and professional services 891 556 Other expenses 445 474 Total research and development expense $ 7,821 $ 7,121 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 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: 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. 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. 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, 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. Cash Flows The following table summarizes Tempest’s cash flows for the six months period indicated: Six Months Ended June 30, 2021 Six Months Ended June 30, 2020 (in thousands) Cash used in operating activities $ (6,183 ) $ (10,121 ) Cash used in provided by investing activities (84 ) 7 Cash provided by financing activities 55,905 34,558 Net increase in cash and cash equivalents $ 49,638 $ 29,444 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. 25 Table of Contents 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 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. Off-Balance 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. GAAP. 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. 26 Table of Contents 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. 27 Table of Contents Item 3. Quantitative and Qualitative Disclosures about Market Risk Not required for smaller reporting companies. Item 4. 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. GAAP. 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: (i) 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. (ii) 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. (i) 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; and (ii) 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. GAAP. 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 pandemic. 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. 28 Table of Contents