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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from                      to                     .

Commission File Number: 001-31918

Graphic

IDERA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

04-3072298

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

505 Eagleview Blvd., Suite 212

Exton, Pennsylvania

(Address of principal executive offices)

19341

(Zip code)

(484) 348-1600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

IDRA

Nasdaq Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Common Stock, par value $.001 per share

    

62,355,434

Class

Outstanding as of November 14, 2022

Table of Contents

IDERA PHARMACEUTICALS, INC.

FORM 10-Q

TABLE OF CONTENTS

    

Page

PART I — FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

1

Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2022 and December 31, 2021

1

Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021

2

Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2022 and 2021

3

Condensed Consolidated Statements of Redeemable Preferred Stock and Stockholders’ Equity (Deficit) (unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021

4

Notes to Condensed Consolidated Financial Statements

6

Item 2.

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

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

41

PART II — OTHER INFORMATION

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 6.

Exhibits

45

Signatures

48

Unless the context otherwise indicates, references in this Quarterly Report on Form 10-Q to “Idera,” the “Company,” “we,” “us,” and “our” refer to Idera Pharmaceuticals, Inc.

IMO® and Idera® are our trademarks. All other trademarks and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

i

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included or incorporated in this report regarding, among other things, our strategy, strategic alternatives, future operations, clinical trials, collaborations, intellectual property, cash resources and projected cash runways, financial position, future revenues, projected costs, fundraising and/or financing plans, prospects, the ongoing impacts of the coronavirus (“COVID-19”) pandemic, the benefits related to the Company’s acquisition of Aceragen, Inc. (“Aceragen”), the Special Meeting (as defined below), including with respect to stockholder approval of the conversion rights of the Series Z Preferred Stock, and the reverse stock split, and the plans and objectives of management are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “could,” “should,” “potential,” “likely,” “projects,” “continue,” “will,” “schedule,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. These important factors include those set forth under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022 (the “2021 Form 10-K”), in this Form 10-Q, and in our other disclosures and filings with the SEC. These factors and the other cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements whenever they appear in this Form 10-Q.

In addition, any forward-looking statements represent our estimates only as of the date that this Form 10-Q is filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. All forward-looking statements included in this Form 10-Q are made as of the date hereof and are expressly qualified in their entirety by this cautionary notice. We disclaim any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as may be required by law.

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PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

IDERA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

    

September 30, 

    

December 31, 

 

(In thousands)

2022

2021*

 

ASSETS

Current assets:

Cash and cash equivalents

$

26,795

$

32,545

Accounts receivable

1,964

Prepaid expenses and other current assets

 

1,311

 

1,493

Total current assets

 

30,070

 

34,038

Property and equipment, net

 

11

 

22

Intangible assets

63,067

Goodwill

9,934

Operating lease right-of-use assets

600

734

Other assets

 

 

70

Total assets

$

103,682

$

34,864

LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

6,761

$

565

Accrued expenses

 

10,691

 

4,088

Acquisition obligation, net

 

1,534

 

Operating lease liability

245

209

Total current liabilities

 

19,231

 

4,862

Acquisition obligation, net

 

5,942

 

Series X preferred stock liability

 

20,400

 

Operating lease liability

380

549

Deferred tax liability

3,895

Warrant liabilities

3,750

Other liabilities

 

141

 

Total liabilities

 

53,739

 

5,411

Commitments and contingencies

Series Z convertible redeemable preferred stock, $0.01 par value, Authorized — 150 shares:
Issued and outstanding — 81 shares at September 30, 2022

29,175

Stockholders’ equity:

Preferred stock, $0.01 par value, Authorized — 5,000 shares:

Series A convertible preferred stock; Designated — 1,500 shares, Issued and outstanding — 1 share

 

 

Common stock, $0.001 par value, Authorized — 140,000 shares; Issued and outstanding — 59,018 and 52,818 at September 30, 2022 and December 31, 2021, respectively

 

59

 

53

Additional paid-in capital

 

768,754

 

764,861

Accumulated deficit

 

(748,045)

 

(735,461)

Total stockholders’ equity

 

20,768

 

29,453

Total liabilities, convertible redeemable preferred stock, and stockholders’ equity

$

103,682

$

34,864

*

The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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IDERA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(In thousands, except per share amounts)

    

2022

    

2021

    

2022

    

2021

 

Government contracts revenue

$

49

$

$

49

$

Operating expenses:

Research and development

1,470

3,507

5,960

14,271

General and administrative

 

2,268

 

2,331

 

7,325

 

7,959

Acquisition-related costs

2,836

 

 

2,836

 

Restructuring and other costs

2,802

130

2,802

1,322

Total operating expenses

 

9,376

 

5,968

 

18,923

 

23,552

Loss from operations

 

(9,327)

 

(5,968)

 

(18,874)

 

(23,552)

Other income (expense):

Interest income

 

111

 

2

 

156

 

7

Interest expense

 

 

 

 

(7)

Warrant revaluation gain

116

116

6,983

Future tranche right revaluation gain

118,803

Foreign currency exchange and other gain (loss)

 

(38)

 

1

 

(21)

 

(24)

(Loss) income before income tax benefit

$

(9,138)

$

(5,965)

$

(18,623)

$

102,210

Income tax benefit

6,039

6,039

Net (loss) income

$

(3,099)

$

(5,965)

$

(12,584)

$

102,210

Net (loss) income applicable to common stockholders (Note 15)

— Basic

$

(3,099)

$

(5,965)

$

(12,584)

$

100,574

— Diluted

$

(3,099)

$

(5,965)

$

(12,584)

$

(23,576)

Net (loss) income per share applicable to common stockholders (Note 15)

— Basic

$

(0.06)

$

(0.11)

$

(0.24)

$

2.10

— Diluted

$

(0.06)

$

(0.11)

$

(0.24)

$

(0.46)

Weighted-average number of common shares used in computing net (loss) income per share applicable to common stockholders

— Basic

53,286

52,740

 

53,052

 

47,990

— Diluted

53,286

52,740

 

53,052

 

51,613

The accompanying notes are an integral part of these condensed consolidated financial statements.

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IDERA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended

September 30, 

(In thousands)

    

2022

    

2021

 

Cash Flows from Operating Activities:

Net (loss) income

$

(12,584)

$

102,210

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Stock-based compensation

 

1,518

 

1,990

Warrant liability revaluation gain

(116)

(6,983)

Future tranche right liability revaluation gain

(118,803)

Issuance of common stock for services rendered

66

 

130

Accretion of discounts on short-term investments

 

(1)

Depreciation and amortization expense

 

11

 

17

Deferred tax benefit

(6,039)

Changes in operating assets and liabilities, net of effects from Acquisition:

 

Accounts receivable

(49)

Prepaid expenses and other assets

806

 

1,930

Accounts payable, accrued expenses, and other liabilities

4,954

 

(1,040)

Other

142

5

Net cash used in operating activities

 

(11,291)

 

(20,545)

Cash Flows from Investing Activities:

Cash acquired in acquisition of Aceragen

5,482

Proceeds from maturity of available-for-sale securities

 

 

4,500

Net cash provided by investing activities

 

5,482

 

4,500

Cash Flows from Financing Activities:

Proceeds from common stock financings, net

 

19,534

Proceeds from employee stock purchases

 

43

 

48

Proceeds from exercise of common stock options and warrants

 

16

271

Payments on seller-financed purchases

 

(435)

Net cash provided by financing activities

 

59

 

19,418

Net (decrease) increase in cash and cash equivalents

 

(5,750)

 

3,373

Cash and cash equivalent, beginning of period

 

32,545

 

33,229

Cash and cash equivalents, end of period

$

26,795

$

36,602

Supplemental disclosure of cash flow information:

Cash paid for interest

$

$

5

Supplemental disclosure of non-cash financing and investing activities:

Offering costs in accounts payable and accrued expenses

$

15

$

The accompanying notes are an integral part of these condensed consolidated financial statements.

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IDERA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

For the Nine Months Ended September 30, 2021

Series B1 Preferred

Common Stock

Additional

Total

Number of

$0.01 Par

Number of

$0.001 Par

Paid-In

Accumulated

Stockholders’

(In thousands)

Shares

 

Value

 

Shares

 

Value

 

Capital

 

Deficit

 

Equity (Deficit)

Balance, December 31, 2020

24

$

38,291

$

38

$

742,342

$

(833,552)

$

(91,172)

Sale of common stock, net of issuance costs

 

3,195

3

16,258

16,261

Conversion of Series B1 preferred stock

(14)

1,415

1

(1)

Issuance of common stock under employee stock purchase plan

 

8

 

 

28

 

 

28

Issuance of common stock under equity incentive plan (vesting of restricted stock units)

 

237

 

 

 

 

Issuance of common stock upon exercise of common stock options and warrants

 

3,375

4

267

271

Issuance of common stock for services rendered

 

16

 

 

67

 

 

67

Stock-based compensation

 

 

 

1,111

 

 

1,111

Net income

 

 

 

115,738

 

115,738

Balance, March 31, 2021

10

$

46,537

$

46

$

760,072

$

(717,814)

$

42,304

Sale of common stock, net of issuance costs

2,076

2

2,510

2,512

Conversion of Series B1 preferred stock

(10)

953

1

(1)

Issuance of common stock under employee stock purchase plan

6

6

6

Issuance of common stock upon exercise of common stock options and warrants

2,496

3

(3)

Issuance of common stock for services rendered

47

63

63

Stock-based compensation

404

404

Net loss

(7,563)

(7,563)

Balance, June 30, 2021

$

52,115

$

52

$

763,051

$

(725,377)

$

37,726

Sale of common stock and prefunded warrants, net of issuance costs

647

1

760

761

Issuance of commitment shares

Issuance of common stock under employee stock purchase plan

15

14

14

Stock-based compensation

475

475

Net loss

(5,965)

(5,965)

Balance, September 30, 2021

$

52,777

$

53

$

764,300

$

(731,342)

$

33,011

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IDERA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)

(UNAUDITED)

For the Nine Months Ended September 30, 2022

Series Z Preferred

Common Stock

Additional

Total

Number of

$0.01 Par

Number of

$0.001 Par

Paid-In

Accumulated

Stockholders’

(In thousands)

Shares

 

Value

 

Shares

 

Value

 

Capital

 

Deficit

 

Equity (Deficit)

Balance, December 31, 2021

$

52,818

$

53

$

764,861

$

(735,461)

$

29,453

Sale of common stock, net of issuance costs

 

(15)

(15)

Issuance of common stock under employee stock purchase plan

 

42

 

 

16

 

 

16

Issuance of common stock under equity incentive plan (vesting of restricted stock units)

 

27

 

 

 

 

Issuance of common stock for services rendered

 

37

 

 

22

 

 

22

Stock-based compensation

 

 

 

545

 

 

545

Net loss

 

 

 

(4,178)

 

(4,178)

Balance, March 31, 2022

$

52,924

$

53

$

765,429

$

(739,639)

$

25,843

Issuance of common stock under employee stock purchase plan

34

12

12

Issuance of common stock for services rendered

41

22

22

Stock-based compensation

562

562

Net loss

(5,307)

(5,307)

Balance, June 30, 2022

$

52,999

$

53

$

766,025

$

(744,946)

$

21,132

Issuance of common stock under employee stock purchase plan

36

15

15

Issuance of common stock upon exercise of common stock options and warrants

1,533

2

14

16

Issuance of common stock for services rendered

50

22

22

Stock-based compensation

411

411

Issuance of preferred stock upon Acquisition of Aceragen

81

29,175

Issuance of common stock upon Acquisition of Aceragen

4,399

4

2,267

2,271

Net loss

(3,099)

(3,099)

Balance, September 30, 2022

81

$

29,175

59,018

$

59

$

768,754

$

(748,045)

$

20,768

The accompanying notes are an integral part of these condensed consolidated financial statements.

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IDERA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2022

Note 1. Business and Organization

Business Overview

Idera Pharmaceuticals, Inc. (“Idera” or the “Company”), a Delaware corporation, is a biopharmaceutical company with a business strategy focused on the clinical development, and ultimately the commercialization, of drug candidates for rare disease indications characterized by small, well-defined patient populations with significant unmet medical needs. The Company’s strategic focus has been to identify and acquire rights to novel development and commercial stage rare disease programs through business development opportunities, including additional strategic alternatives. In these notes, the terms “we,” “our,” “our company” and “us” may refer, as the context requires, to Idera or collectively to Idera and its subsidiaries. 

On September 28, 2022, the Company acquired Aceragen, Inc. (“Aceragen”), a Delaware corporation and its wholly owned subsidiaries. Aceragen is a privately-held biotechnology company addressing severe, rare, and orphan pulmonary and rheumatic diseases for which there are limited or no available treatments. The Company acquired Aceragen as a strategic extension of its rare disease business and focus with the primary objective of further developing Aceragen’s portfolio of rare disease product candidates. Specifically, as a result of the Acquisition (as defined below), the Company will focus on developing ACG-701 to treat pulmonary exacerbations associated with cystic fibrosis and melioidosis, a severe, life-threatening infection, and ACG-801 to treat a rare lysosomal storage disorder known as Farber disease. For additional information on the Acquisition of Aceragen, see Note 4.

Tilsotolimod Update

Until December 2021, the Company was developing tilsotolimod, via intratumoral injection, for the treatment of solid tumors in combination with nivolumab, an anti-PD1 antibody marketed as Opdivo® by Bristol Myers Squibb Company (“BMS”), and/or ipilimumab, an anti-CTLA4 antibody marketed as Yervoy® by BMS. Due to Phase 3 results in anti-PD-1 refractory advanced melanoma, reported in March 2021, which showed the study failed to meet its primary endpoint, as well as a decision in December 2021 to discontinue enrollment in ILLUMINATE-206, the Company’s Phase 2 study in solid tumors, Company-sponsored development of tilsotolimod has been discontinued.

Although clinical trials with tilsotolimod have not yet translated into a new treatment alternative for patients, the Company believes that data supporting tilsotolimod’s mechanism of action and encouraging safety profile from across the array of pre-clinical and clinical work to date, together with its intellectual property protection, are noteworthy. As a result, in December 2021, the Company announced it would consider, and continues to consider, additional development opportunities for the compound in alignment with the Company’s rare disease business and/or out-licensing arrangements such that tilsotolimod’s full potential might continue to be explored on behalf of patients.

Nasdaq Compliance

As previously disclosed in the Current Report on Form 8-K filed with the SEC on December 1, 2021, on November 26, 2021, Idera received a deficiency letter from the Nasdaq Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market, LLC (“Nasdaq”), notifying the Company that it is not in compliance with Nasdaq Listing Rule 5550(a)(2), which requires the Company to maintain a minimum bid price of at least $1 per share for continued listing on The Nasdaq Capital Market (the “Minimum Bid Requirement”).

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On May 26, 2022, the Company received notice (the “Nasdaq Notice”) from the Staff indicating that, while the Company has not regained compliance with the Minimum Bid Requirement, the Staff has determined that the Company is eligible for an additional 180-day period, or until November 21, 2022, to regain compliance. If at any time during this second 180-day compliance period, the closing bid price of the Company’s common stock is at least $1 per share for a minimum of ten consecutive business days, the Staff will provide the Company with written confirmation of compliance. If compliance cannot be demonstrated by November 21, 2022, the Staff will provide written notification that the Company’s common stock will be subject to delisting. The Company would then be entitled to appeal the Staff’s determination to a Nasdaq hearings panel. The Company intends to monitor the closing bid price of its common stock and consider implementing available options to regain compliance with the Minimum Bid Requirement.

Liquidity, Financial Condition and Consideration as a Going Concern

The Company has incurred substantial losses and negative cash flows from operations since its inception and has an accumulated deficit of$748.0 million as of September 30, 2022. The Company’s cash and cash equivalents at September 30, 2022 of $26.8 million are expected to fund its operations into the third quarter of fiscal 2023. In connection with the Acquisition of Aceragen, the Company assumed a debt obligation that has a final payment of $6.0 million due in October 2023. In addition, the newly-designated Series Z non-voting convertible preferred stock, par value $0.01 per share (the “Series Z”), issued to Aceragen stockholders could be redeemed for cash in the event the Company is unable to obtain an affirmative stockholder vote within six months following the closing of the Acquisition to convert the shares of Series Z into shares of common stock, there can be no assurance that the Series Z stockholders will not exercise their right to demand redemption. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited interim condensed consolidated financial statements have been prepared on a going concern basis, which contemplate the realization of assets and satisfaction of liabilities in the normal course of business. The unaudited interim condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its product candidates currently in development. Substantial additional financing will be needed by the Company to fund its operations and to commercially develop its product candidates. Management is currently evaluating different strategies to obtain the required funding for future operations. These strategies may include, but are not limited to: private placements of equity and/or debt, payments from potential strategic research and development, licensing and/or marketing arrangements with pharmaceutical companies, and public offerings of equity and/or debt securities. There can be no assurance that these future funding efforts will be successful.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments, and disclosures considered necessary for a fair presentation of interim period results have been included. Interim results for the nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2022. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s 2021 Form 10-K.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets

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and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances and are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from these estimates. Estimates that are critical to the accompanying unaudited condensed consolidated financial statements include the estimated fair value of the net assets acquired in connection with the Acquisition of Aceragen, the estimated fair value of the liability classified warrants issued to Aceragen warrant holders and accrued clinical trial expenses.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of 90 days or less when purchased to be cash equivalents. Cash and cash equivalents at September 30, 2022 and December 31, 2021 consisted of cash and money market funds.

Financial Instruments

At September 30, 2022 and December 31, 2021, the Company’s financial instruments included accounts payable, accrued expenses, stockholder notes and debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these instruments. Each of the carrying values of the preferred stock warrant liabilities and Series X preferred stock liability issued to Aceragen stockholders and the acquisition obligation assumed in connection with the Acquisition of Aceragen are recorded at their estimated fair values. As of September 30, 2022, the Company did not have any derivatives, hedging instruments or other similar financial instruments.

Accounts Receivable

Accounts receivables are recorded net of an estimated expected credit losses. The Company’s measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. To date, there have been no expected credit losses as the Company’s customer is the U.S. government. Unbilled accounts receivable at September 30, 2022 which is included in accounts receivables is $1.1 million and relates to revenue recognized for work that has been performed but the invoicing has not yet occurred.

Foreign Currency

Upon completion of the Acquisition of Aceragen in September 2022, the Company has a wholly-owned subsidiary in Switzerland and the functional currency is the Swiss Franc. The results of the Company’s non-US dollar based functional currency operations are translated to US dollars at the average exchange rates during the period. Assets and liabilities are translated at the exchange rate prevailing at the balance sheet date. Equity is translated at the prevailing exchange rate at the date of the equity transaction. Translation adjustments are included in stockholders' equity, as a component of accumulated other comprehensive income.

The Company realizes foreign currency transaction gains (losses) in the normal course of business based on movements in the applicable exchange rates. These gains (losses) are included as a component of other (expense) income, net.

Business Combinations

The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs, which would meet the requirements of a business. If determined to be a business combination, the Company accounts for the transaction under the acquisition method of accounting as indicated in Accounting Standard Update (“ASU”) 2017-01, Business

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Combinations, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations based on the fair value estimates as of the date of acquisition. In accordance with ASC 805, Business Combinations, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.

Goodwill

Goodwill represents the amount of consideration paid in excess of the fair value of net assets acquired as a result of the Company’s business acquisitions accounted for using the acquisition method of accounting. The intangible assets acquired represented the fair value of in-process research and development (IPR&D) which has been recorded on the accompanying condensed consolidated balance sheet as indefinite-lived intangible assets. A deferred tax liability was recorded for the difference between the fair value of the acquired IPR&D and its tax basis which was recognized as goodwill in applying the purchase method of accounting. Goodwill is not amortized and is subject to impairment testing at a reporting unit level on an annual basis or when a triggering event occurs that may indicate the carrying value of the goodwill is impaired. An entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount.

We evaluate goodwill for impairment at least annually on October 1 and whenever facts and circumstances indicate that their carrying amounts may not be recoverable. For the nine months ended September 30, 2022, the Company determined that there was no impairment to goodwill.

Indefinite-Lived Intangible Assets

Indefinite-lived intangible assets consist of In-Process Research and Development(“IPR&D”). The fair values of IPR&D project assets acquired in business combinations are capitalized. The Company generally utilizes the Multi-Period Excess Earning Method to determine the estimated fair value of the IPR&D assets acquired in a business combination. The projections used in this valuation approach are based on many factors, such as relevant market size and share, probabilities of success, anticipated patent protection, and expected pricing. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. These assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are amortized over the remaining useful life or written off, as appropriate.

Intangible assets with indefinite lives, including IPR&D, are tested for impairment if impairment indicators arise and, at a minimum, annually. However, an entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We consider many factors in evaluating whether the value of our intangible assets with indefinite lives may not be recoverable, including, but not limited to, expected growth rates, the cost of equity and debt capital, general economic conditions, our outlook and market performance of our industry and recent and forecasted financial performance.

We evaluate indefinite-lived intangible assets for impairment at least annually on October 1 and whenever facts and circumstances indicate that their carrying amounts may not be recoverable. For the nine months ended September 30, 2022, the Company determined that there was no impairment to IPR&D.

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents. The Company’s credit risk is managed by investing in highly rated money market instruments, U.S. treasury bills, corporate bonds, commercial paper and/or other debt securities. Due to these factors, no significant additional

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credit risk is believed by management to be inherent in the Company’s assets. As of September 30, 2022, all the Company’s cash and cash equivalents were held at five high credit-quality financial institutions.

Operating Lease Right-of-Use Assets and Lease Liability

The Company accounts for leases under ASC 842, Leases. Operating leases are included in “Operating lease right-of-use assets” within the Company’s consolidated balance sheets and represent the Company’s right to use an underlying asset for the lease term. The Company’s related obligation to make lease payments are included in “Operating lease liability” and “Operating lease liability, net of current portion” within the Company’s consolidated balance sheets. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The ROU assets are tested for impairment according to ASC 360, Property, Plant, and Equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term.

As of September 30, 2022 and December 31, 2021, the Company’s operating lease ROU assets and corresponding short-term and long-term lease liabilities primarily relate to its existing Exton, PA facility operating lease which expires on May 31, 2025. In connection with the Aceragen Acquisition, as defined and described in Note 4, the Company acquired an operating lease for an office in Basel, Switzerland which expires on March 31, 2023.

Acquisition-Related Costs

Acquisition-related costs include direct expenses incurred in connection with the Acquisition of Aceragen as well as integration-related professional fees and other incremental costs directly associated to the acquisition.

Restructuring and Other Charges

The Company accounts for exit or disposal activities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 420, Exit or Disposal Cost Obligations (“ASC 420”). A business restructuring is defined as an exit or disposal activity that includes, but is not limited to, a program that is planned and controlled by management and materially changes either the scope of a business or the manner in which that business is conducted. Business restructuring charges include (i) one-time termination benefits related to employee separations (i.e. severance costs), (ii) contract termination costs, and (iii) other related costs associated with exit or disposal activities. In the third quarter of 2022, the Company implemented a restructuring plan to streamline the organization, reduce costs, and direct resources to advance the Company’s primary operating goals.

The Company recognizes and measures a liability for one-time termination benefits, for which no future service is required, once the plan of termination meets all of the following criteria for an established communication date: (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated and their job classifications or functions, locations and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement, and (iv) it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. For one-time termination benefits for which future service is required, a liability is measured at the communication date based on its value as of the termination date and recognized ratably over the future service period. The Company recognizes and measures a liability for other related costs in the period in which the liability is incurred.

Series X Preferred Stock Liability

In conjunction with the Acquisition of Aceragen, the Company evaluated the newly issued Series X preferred stock and determined its revised terms represents a sale of future revenues and is classified as a liability under ASC 470, Debt and the Company has elected to account for the Series X preferred stock liability under the fair value option. The fair value of the Series X preferred stock liability represents the present value of estimated future payments, including royalty payments, as well as estimated payments that are contingent upon the achievement of

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specified milestones. The fair value of the Series X preferred stock liability is based on the cumulative probability of the various estimated payments. The fair value measurement is based on significant Level 3 unobservable inputs such as the probability of achieving the milestones, anticipated timelines, probability and timing of an early redemption of all obligations under Series X preferred liability and the discount rate. Any changes in the fair value of the liability in each reporting period are recognized in the consolidated statement of operations until it is settled.

Warrant Liability

In connection with the Aceragen Acquisition, a portion of the consideration paid to Aceragen warrant holders was in the form of warrants to purchase shares of Series Z (the “Series Z warrants”). The Series Z warrants were classified as a liability on the condensed consolidated balance sheet at September 30, 2022 because the underlying Series Z are contingently redeemable. The fair value of the Series Z warrants on the date of issuance was recorded as a component to the carrying value of the shares Series Z and as a long-term liability in the condensed consolidated balance sheet. The warrants are remeasured to fair value at each balance sheet date until the warrants are exercised, reclassified, expire or otherwise settled. Changes in the fair values of the Series Z warrants are recognized as other income or expense in the consolidated statements of operations and comprehensive loss.

The Company used the Black-Scholes option pricing model, which incorporated assumptions and estimates, to value the Series Z warrants. Estimates and assumptions impacting the fair value measurement of the Series Z warrants included the remaining contractual term of the warrants, risk-free interest rate, expected dividend yield and expected volatility of the price of the underlying shares of Series Z. The estimated the expected stock volatility based on the Company’s historical volatility for a term equal to the remaining contractual term of the warrants at the time of issuance and again at the remeasurement date. The risk-free interest rate was determined by reference to the US Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. Expected dividend yield was determined based on the fact that the Company had never paid cash dividends and did not expect to pay any cash dividends in the foreseeable future.

Redeemable Preferred Stock

The Company applies ASC 480 when determining the classification and measurement of its preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as stockholders’ equity.

The carrying value of the shares of Series Z is accreted to redemption value using the estimated fair value of the redemption value at each reporting period until the redeemable convertible preferred stock cease to be outstanding or the redemption right has expired.

The accretion for the three and nine months ended September 30, 2022 was immaterial.

Revenue Recognition

The Company recognizes revenue when the Company's customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services by analyzing the following five steps: (i) identify the contract with a customer(s); (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

Revenues from reimbursable contracts are recognized as costs are incurred, generally based on allowable direct costs incurred during the period, plus allocable overheads together with any recognizable earned fee. The Company uses this input method to measure progress as the customer has access to the development research under these projects and benefits incrementally as R&D activities occur.

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Income Taxes

In accordance with ASC 270, Interim Reporting, and ASC 740, Income Taxes, the Company is required at the end of each interim period to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. At September 30, 2022, the Company evaluated the realizability of its deferred tax assets and determined that the valuation allowance should be decreased by approximately $6.0 million in consideration of positive and negative evidence bearing upon its ability to realize certain of its deferred tax assets. Such is reflected as an income tax benefit for the three and nine months ended September 30, 2022 in the condensed consolidated statement of operations. As of September 30, 2022 and December 31, 2021, the Company had no uncertain tax positions.

      As a result of the Aceragen Acquisition, the Company will have a significant change in ownership.  In general, if the Company experiences a greater than 50% aggregate change in ownership of certain significant stockholders over a three-year period (a “Section 382 ownership change”), utilization of its pre-change net operating loss and credit carryforwards is subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) (and similar state laws). The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such Section 382 ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the net operating loss and credit carryforwards before utilization and may be substantial. The ability of the Company to use its net operating loss and credit carryforwards may be limited or lost if the Company experiences a Section 382 ownership change in connection with offerings or as a result of future changes in its stock ownership. Losses from a specific period may be subject to multiple limitations and would generally be limited by the lowest of those limitations. As of September 30, 2022, the Company had not completed a Section 382 ownership change assessment to determine the amount of any potential limitations. A formal analysis of ownership changes and associated tax impacts will be completed prior to utilization of any tax net operating losses or other tax credits.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB and rules are issued by the SEC that the Company has or will adopt as of a specified date. Unless otherwise noted, management does not believe that any other recently issued accounting pronouncements issued by the FASB or guidance issued by the SEC had, or is expected to have, a material impact on the Company’s present or future consolidated financial statements.

Recently Adopted Accounting Pronouncements

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the guidance on an issuer’s accounting for convertible instruments and contracts in its own equity. The Company adopted ASU 2020-06 in the first quarter of 2021. The adoption of ASU 2020-06 did not have a material effect on the Company’s consolidated financial statements.

Note 3. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company applies the guidance in ASC 820, Fair Value Measurement, to account for financial assets and liabilities measured on a recurring basis.  Fair value is measured at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.

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The Company uses a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity's own assumptions (unobservable inputs). The guidance requires that fair value measurements be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each reporting period. There were no transfers between Level 1, 2, and 3 during the nine months ended September 30, 2022.

The table below presents the assets and liabilities measured and recorded in the condensed consolidated financial statements at fair value on a recurring basis at September 30, 2022 and December 31, 2021 categorized by the level of inputs used in the valuation of each asset and liability.

 

September 30, 2022

 

(In thousands)

Total

Level 1

Level 2

Level 3

 

Assets

Cash

$

4,680

$

4,680

$

$

Cash equivalents – money market funds

22,115

22,115

Total assets

$

26,795

$

26,795

$

$

Liabilities

Warrant liability

$

3,750

$

$

$

3,750

Series X preferred stock liability

20,400

20,400

Total liabilities

$

24,150

$

$

$

24,150