Index to Financial StatementsItem 6. | SELECTED FINANCIAL DATA |
The selected financial data in the tables below should be read together with our financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report onForm 10-K. The selected financial data in this section is not intended to replace our financial statements and the accompanying notes. Our historical results are not necessarily indicative of our expected future results. The statements of operations data for 2017 and 2016 and the balance sheet data as of December 31, 2017 and 2016 were derived from our audited financial statements included elsewhere in this Annual Report on Form10-K.
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| | | (in thousands, except per share data) | |
Consolidated Statements of Operations Data: | | | | | | | | |
Revenue | | $ | - | | | $ | - | |
Operating expenses: | | | | | | | | |
Research and development | | | 20,188 | | | | 20,457 | |
General and administrative | | | 8,182 | | | | 8,176 | |
| | | | | | | | |
Total operating expenses | | | 28,370 | | | | 28,633 | |
| | | | | | | | |
Loss from operations | | | (28,370 | ) | | | (28,633 | ) |
Other income (expense): | | | | | | | | |
Interest expense, net | | | (742 | ) | | | (1,192 | ) |
Other income (expense), net | | | 7 | | | | (7 | ) |
| | | | | | | | |
Net loss | | $ | (29,105 | ) | | $ | (29,832 | ) |
| | | | | | | | |
Net loss per common share — basic and diluted | | $ | (16.82 | ) | | $ | (43.36 | ) |
| | | | | | | | |
Weighted-average common shares outstanding — basic and diluted | | | 1,730 | | | | 688 | |
| | | | | | | | |
| |
| | | December 31, | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
Selected Balance Sheets Data: | | | | | | | | |
Cash and cash equivalents | | $ | 11,651 | | | $ | 15,003 | |
Working capital | | | 2,936 | | | | 5,457 | |
Total assets | | | 18,000 | | | | 20,906 | |
Total promissory note | | | 6,687 | | | | 12,542 | |
Accumulated deficit | | | (225,874 | ) | | | (196,769 | ) |
Total stockholders’ equity | | $ | 7,049 | | | $ | 4,485 | |
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the notes to those statements included elsewhere in this Annual Report on
Form 10-K. In addition to historical financial information, this discussion and analysis contains forward-looking statements
that that reflect our plans, estimates and beliefs. You should not place undue reliance on these forward-looking statements, which involve risks and uncertainties. As a result of many factors, including but not limited to those set forth under ‘‘Risk Factors,’’ our actual results may differ materially from those anticipated in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”
On January 23, 2018, our stockholders approved an increase to the number of authorized shares of the Company’s common stock from 100,000,000 to 250,000,000 shares. Our stockholders also approved a proposal authorizing the board of directors, in its discretion, to effect a reverse stock split of our outstanding shares of common stock at a ratio ranging from1-for-5 to1-for-20 to be determined by the board of directors and effected, if at all, no later than November 23, 2018. On January 23, 2018, our board of directors approved a1-for-20 reverse stock split of our outstanding common stock, which was effected on January 25, 2018. At the effective time, every twenty shares of common stock issued and outstanding were automatically combined into one share of issued and outstanding common stock. The par value of our stock remained unchanged at $0.0001 per share. No fractional shares of our common stock were issued in the reverse stock split, but in lieu thereof, each holder of our common stock who would otherwise have been entitled to a fraction of a share in the reverse stock split received a cash payment. In addition, by reducing the number of our outstanding shares, our loss per share in all prior periods increased by a factor of twenty. In addition, a proportionate adjustment was made to the per share exercise price and the number of shares issuable upon the exercise of our outstanding equity awards, options and warrants to purchase shares of our common stock and to the number of shares reserved for issuance pursuant to our equity incentive compensation plans. The reverse stock split affected all stockholders of our common stock uniformly, and did not affect any stockholder’s percentage of ownership interest. Unless otherwise noted, all share and per share information included in this report has been retroactively adjusted to give effect to the reverse stock split.
The reverse stock split did not affect the number of authorized shares of common stock, which, after giving effect to the authorized share increase, is 250,000,000 shares.
Zosano Pharma Corporation is a clinical stageclinical-stage biopharmaceutical company focused on providing rapid systemic administration of therapeutics and other bioactive molecules to patients using our proprietary Adhesive Dermally-Applied Microarray, or ADAM, technology. In February 2017, we announced positive results from our ZOTRIP pivotal efficacy trial, or ZOTRIP trial, that evaluated M207, whichtransdermal microneedle system (the “System”). Our System is our proprietarydesigned to facilitate rapid drug absorption into the bloodstream, and to provide an improved pharmacokinetic (“PK”) profile compared to original dosage forms. The System consists of a 3cm2 to 6cm2 array of titanium microneedles approximately 200-350 microns in length, coated with a hydrophilic formulation of zolmitriptan delivered via our ADAM technology, asdrug, mounted on an acute treatmentadhesive patch. The patch is designed to be applied with a reusable hand-held applicator that presses the microneedles into the skin to a uniform depth in each application, close to the capillary bed, allowing for migraine.dissolution and absorption of the drug, but not deep enough to contact the nerve endings in the skin. The microneedles are designed to penetrate the stratum corneum in an effort to allow the drug to be absorbed into the microcapillary system of the skin. We are focused on developing products for indications in which we believe rapid onset, ease of use and product stability may offer significant therapeutic and practical advantages, and on developing products where we believe rapid administration of established moleculesapproved drugs with knownestablished safety and efficacy profiles providescould provide an increased benefit to patients, forin markets where patients remain underserved by existing therapies. We anticipate that many of our current and future development programs may enable us to utilize a regulatory pathway in the United States that would streamline clinical development and acceleratepotentially reduce the path towards commercialization.ADAM isamount of clinical data we need to obtain prior to seeking FDA approval.
We have no product sales to date, and we will not have product sales unless and until we receive approval from the FDA, or equivalent foreign regulatory bodies, to market and sell our proprietary, investigational technology platform designed to offer rapid drug absorption intoproduct candidates. Accordingly, our success depends not only on the bloodstream, which can result in an improved pharmacokinetic profile compared to original dosage forms. ADAM consists of an array of drug-coated titanium microprojections mounted on an adhesive backing that is pressed on to the skin using a reusable handheld applicator. The microprojections penetrate the stratum corneum and allow the drug to be absorbed into the microcapillary system of the skin. We focus on developing products baseddevelopment, but also on our ADAM technologyability to finance the development of each of our product candidates. We will require substantial additional funding to complete development and seek regulatory approval for indications in which rapid onset, ease of usethese products. In addition, our clinical and stability offer significant therapeutic and practical advantages,pre-commercial manufacturing activities have been curtailed following our March 2022 workforce reduction.
M207 for
markets where there is a need for more effective therapies.Migraine
Our development efforts are currently focused on our product candidate, M207. M207, is our proprietary formulation of zolmitriptan delivered utilizing our ADAM technology.System. Zolmitriptan is one of a class of serotonin receptor
agonists known as triptans and is used as an acute treatment for migraine. Migraine is a debilitating neurological disease, symptoms of which include moderate to severe headache pain, nausea and vomiting, and abnormal sensitivity to light and sound. The objectiveM207 was developed with the intent of M207 is to provideproviding faster onset of efficacy and sustained freedom from migraine symptoms by deliveringsymptoms. M207 is designed to provide rapid absorption while avoiding GIof zolmitriptan into the bloodstream without dependence on the gastrointestinal (“GI”) tract. Feedback from
We submitted a 505(b)(2) New Drug Application (“NDA”) for M207 to the United StatesU.S. Food and Drug Administration (the “FDA”) on December 20, 2019, and on October 20, 2020, we received a Complete Response Letter (“CRL”) from the FDA with respect to the NDA. The CRL cited inconsistent zolmitriptan exposure levels observed across clinical pharmacology studies, which had been previously identified in the FDA’s discipline review letter that we received on September 29, 2020. Specifically, the CRL noted differences in zolmitriptan exposures observed between subjects receiving different lots of M207 in our trials and inadequate PK bridging between the lots that made interpretation of some safety data unclear. The CRL referenced unexpected high plasma concentrations of zolmitriptan observed in five study subjects enrolled in our PK studies. The FDA recommended that we conduct a repeat bioequivalence study comparing lots manufactured with the equipment used during development. The CRL noted that additional product quality validation data, which were planned to be submitted following approval, if received, were required to be submitted with the application. In addition, the CRL mentioned that due to U.S. Government and/or Agency-wide restrictions on travel, inspections of our contract manufacturing and/or critical subcontractor facilities were not able to be conducted before the FDA's goal date for completing its review of the original NDA, but that such inspections would be required and would have to be conducted before the application may be approved. In addition, a pre-approval inspection of our Fremont, California facility by the FDA is expected. However, following a March 2022 workforce reduction, we would need to hire additional employees to support any pre-approval inspection.
On January 29, 2021, we held a Type A meeting with the FDA Division of Neurology II (the “Division”) regarding the requirements for resubmission of the M207 NDA and, in February 2021, we received the final meeting minutes from the FDA. The Type A meeting minutes were generally consistent with our expectations to conduct an additional PK study for inclusion in an NDA resubmission package. In a post-meeting comment, the FDA recommended a skin assessment on M207’s regulatory path has alsopatients in the PK study to generate additional safety information, which was included in the proposed study protocol submitted to the FDA for review. After the receipt of FDA comments and recommendations to our proposed PK study protocol for M207, we made the recommended changes and established an agreement with a contract research organization to conduct the PK study required to support the resubmission of the M207 505(b)(2) NDA.
On October 4, 2021, we announced that we had received preliminary top-line results from the PK study and had been encouraging.granted a Type C written response-only meeting with the FDA regarding the resubmission of the M207 NDA. On October 25, 2021, we received full data tables from our PK study, which were consistent with the previously announced preliminary top-line results. On October 27, 2021, we submitted a briefing package to the FDA in advance of the Type C written-response-only meeting previously granted by the FDA to obtain feedback on our strategy for resubmitting the M207 505(b)(2) NDA.
We received Type C written responses from the FDA with respect to our strategy for resubmitting the M207 505(b)(2) NDA, which, among other things, noted concerns regarding our approach for establishing a PK bridge to ZOMIG® nasal spray (NDA 21-450) (the “Listed Drug”) through comparisons across multiple PK studies of M207, particularly Study CP-2019-002, which included PK outliers.
On January 18, 2022, we resubmitted our NDA to the FDA. In line with our previously disclosed resubmission strategy, the NDA was resubmitted under Section 505(b)(2) of the Food, Drug, and Cosmetic Act. The agency has indicated505(b)(2) submission relies on the FDA’s findings of safety and efficacy of the Listed Drug. The resubmitted NDA relied primarily on data from the recently completed Phase 1 PK study (CP 2021-001), along with previous PK studies evaluating M207 (CP-2018-002 and CP-2019-002), with the goal of establishing comparative bioavailability to the Listed Drug.
On February 17, 2022, we received a response letter from the FDA with regard to our January 18, 2022 NDA resubmission. The response letter stated that one positive pivotal efficacythe FDA did not consider the resubmitted M207 NDA to be a complete response to the deficiencies identified in the FDA’s October 20, 2020 CRL, and that the FDA will not begin substantive review of the application until a complete response is received. Among other things, the FDA’s response letter stated that our strategy for establishing a PK bridge to the Listed Drug by relying primarily on data from the Study CP-2021-001 was not acceptable, due in part to differences between the design of Study CP-2021-001, which compared the PK of M207 to two sequential doses of the Listed Drug, and the criteria for re-dosing set forth in the labeling instructions for the Listed Drug. The FDA’s response letter described alternative methods through which we may establish a PK bridge to the Listed Drug, including: (i) by demonstrating bioequivalence to the Listed Drug using standard criteria for all PK exposure metrics, including through a combination of relevant PK data and modeling or simulation procedures; or (ii) by conducting a relative bioavailability study in additionhealthy volunteer subjects. We are continuing to evaluate our next steps in relation to the requiredFDA’s response letter. There is no guarantee that we will be able to adequately address the issues raised to the FDA’s satisfaction. In addition, if the FDA does not allow us to resubmit our M207 NDA using our existing PK data comparing ZOMIG® nasal spray and patches produced on manufacturing equipment at our Fremont, California facility that also produced patches for our long-term safety study, wouldthen the approval pathway for M207 will likely take significantly longer than expected, cost significantly more than anticipated, and may not be sufficientsuccessful.
We have incurred and will incur additional costs and delays in our previously anticipated timeline for potential commercialization due to the additional PK study and the FDA’s response to our January 18, 2022 NDA resubmission, and we may incur higher than anticipated additional costs should any additional studies or other requirements be required by the FDA.
If FDA approval is ultimately received, we plan to manufacture a limited supply of commercial product at our facility in Fremont, California, which is designed to comply with the FDA's current good manufacturing practices (“cGMP”) regulations on a timeline yet to be determined. We will also rely on various Contract Manufacturing Organizations (“CMOs”) to produce various components of our product, our applicator and final packaging of the finished product. If M207 is approved, we and our CMOs will be required to produce commercial supply of M207 in accordance with cGMP regulations. Should M207 be approved, we may consider expanding production through the use of CMOs for drug product as well as for production of the various components that comprise our patch, our applicator and the final packaging of the finished product. However, we will not be able to produce M207 drug product on our manufacturing equipment at our third-party CMOs without subsequent FDA approvals, which may require us to conduct additional clinical studies and incur significant time and cost. We do not anticipate realizing product revenues unless and until the FDA approves the M207 NDA and we begin commercializing M207, which events may never occur.
Eversana Agreement
On August 6, 2020, we entered into a master services agreement (the “Eversana Agreement”) with Eversana Life Science Services, LLC (“Eversana”) for the commercialization of M207 in the United States, if approved by the FDA. Under the terms of the Eversana Agreement, we maintain ownership of the M207 NDA as well as all legal, regulatory and manufacturing responsibilities for M207. Eversana receives an exclusive right to conduct agreed commercialization activities and will utilize its internal sales organization along with its other commercial capabilities for market access, marketing, distribution and patient support services for M207. Eversana will receive reimbursement of certain commercialization costs pursuant to a commercialization budget originally estimated at approximately $250.0 million and a low double digit to mid-teen percentage of product profits if and when our net sales of M207 surpass certain costs incurred by the parties pursuant to the commercialization budget.
The term of the Eversana Agreement is five years following the date, if any, that the FDA approves the M207 NDA. We may terminate the Eversana Agreement if Eversana fails to provide pre-commercial or commercial plans and budgets by specified dates, if we decide to discontinue development or commercialization efforts for M207 in the United States (subject to a termination payment if such termination occurs within a specified time period), or upon a change of control. Either party could terminate the Eversana Agreement if FDA approval was not received by July 31, 2021, if net profits are not realized within a specified time period following commercial launch, for material breach of the Eversana Agreement by the other party that is not cured within a defined time period, for insolvency of the other party, if M207 is subject to a safety recall in the United States or if M207 is not commercially launched within a specified time period after FDA approval of the NDA (other than by reason of the terminating party’s failure to perform its obligations under the Eversana Agreement).
In addition, under the Eversana Agreement, following FDA approval of the M207
for the treatmentNDA, Eversana agreed to provide a revolving credit facility of
migraine.We have no product salesup to date,$5.0 million (the “Credit Facility”) to us pursuant to a loan agreement to be entered into between Eversana and us on a subsequent date. The loan will bear interest at an annual rate equal to 10.0%, to be paid monthly, and we will not have product sales unlessbe able to prepay any amounts borrowed under the Credit Facility at any time without penalty or premium. The Credit Facility will be secured by substantially all of our assets, subject to prior liens and untilsecurity interests.
On September 28, 2021, we receive approval fromentered into Amendment No. 1, effective as of September 29, 2021 (the “Eversana Amendment”), to the United States Food and Drug Administration (“FDA”) or equivalent foreign regulatory bodies, to market and sell our product candidate. Accordingly, our success depends not only onEversana Agreement, which modified the development, but also on our ability to financeprovision in the developmentEversana Agreement that provided for termination by either party of the product. WeEversana Agreement if FDA approval was not received by July 31, 2021 to December 31, 2021, with written notice within sixty days of such date. In addition, the Eversana Amendment provides that if the NDA is approved, the deferral mechanism, payment terms and loan terms in the Eversana Agreement will require substantial additional fundingbe adjusted as mutually agreed by both parties. Neither party exercised its right to complete development and seek regulatoryterminate the Eversana Agreement due to FDA approval for these products. Additionally, wenot being received by December 31, 2021.
We currently have no
internal sales, marketing or distribution capabilities and
thus our abilitywe plan to
market our products inrely on Eversana and other third parties for the
future will depend in part on our ability to develop such capabilities either alone or with collaboration partners.commercialization of M207, if approved.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our audited
consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting
principles.principles (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported
revenue generated and expenses incurredresults of operations during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K, we believe that the accounting policies discussed below are those that are most critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.
Stock-Based Compensation
We have irrevocably electedequity incentive plans under which various types of equity-based awards including, but not limited to, avail ourselvesnon-qualified stock options and restricted stock awards, may be granted to employees, non-employee directors, and non-employee consultants. Our equity incentive plans also allow incentive stock options to be awarded to employees and, beginning in 2021, we have granted options and restricted stock awards to certain employees which vest based on the achievement of this exemption fromcertain
metrics. We have also awarded inducement grants to purchase common stock to new
or revised accounting standards, and, therefore, will be subject toemployees outside the
same new or revised accounting standards as other public companies that are not emerging growth companies.Research and Development Expenses
Research and development costs are charged to expense as incurred and consist of costs related to (i) servicing our collaborative development effortsexisting equity incentive plans in accordance with other pharmaceutical companies, (ii) furthering our research and development efforts, and (iii) designing and manufacturing our intracutaneous applicator for our clinical and nonclinical studies. Research and development costs include salaries and related employee benefits, costs associated with clinical trials, nonclinical research and development activities, regulatory activities, costs of active pharmaceutical ingredients and raw materials, research and development related overhead expenses, fees paid to contract research organizations that conduct clinical trials on behalf of the Company, and fees paid to contract manufacturing organizations that conduct manufacturing activities on behalf of the Company.
Stock-Based Compensation
Nasdaq listing rule 5635(c)(4).
We account for its stock-based compensation recorded as an expense, based on the fair value of the stock- basedstock-based awards aton the grant date that are ultimately expected to vest.of grant. The fair value of employee stock option grants is estimated on the date of grant using the Black-Scholes option pricing model and areis recognized as expense on
a straight- linestraight-line basis over the employee’sgrantee’s requisite service period (generally the vesting period), netperiod. The fair value of estimated forfeitures.
We record the expense attributed tonon-employee services paid with stock-based awards which vest based on the estimated fair valueachievement of the awards determined using the Black-Scholes option pricing model. The measurement of stock-based compensation fornon-employees is subject tore-measurement as the options vest, and the expensecertain metrics is recognized over the expected service period duringonly when the achievement of the metrics is considered probable. Due to the lack of historical exercise data to provide a reasonable basis upon which services are received.
to estimate an expected term, we have opted to use the simplified method, which is the use of the midpoint of the vesting term and the contractual term of the award to estimate the expected term. We recognize the impact of stock option forfeitures on stock-based compensation expense in the period the award is forfeited.
Financial Operations Overview
As of December 31, 2017,2021, we had an accumulated deficit of approximately $225.9$362.1 million. We have incurred significant losses and expect to incur significant and increasing losses in the foreseeable futurefuture. We will require additional capital to undertake our planned research and development activities, pre-commercialization activities, and to meet our operating requirements in and beyond 2022.
We have retained SierraConstellation Partners, LLC, as an independent financial advisor to assist in exploring financial and strategic alternatives to maximize value, which may include, but not be limited to, asset or equity sales, joint venture and partnership opportunities, and restructuring, amendment or refinancing of existing liabilities. Any potential equity sales will be dependent upon and potentially restricted by available authorized shares. We are also evaluating various alternatives to improve our liquidity, including but not limited to, further reductions of operating and capital expenditures and other contractual obligations. In March 2022, we advanceimplemented a workforce reduction impacting approximately 31% of our product candidates into later stagesemployees as part of development and, if approved, commercialization.an expense reduction plan. We cannot assure youexpect to incur severance costs related to the workforce reduction of approximately $0.1 million in the first quarter of 2022.
However, there can be no assurances that we will
receivebe able to successfully raise capital, improve our financial position and liquidity, restructure our obligations, enter into any asset or equity sale, joint venture or partnership opportunity and/or otherwise achieve any of these objectives. If we are not successful in obtaining additional capital,
we may be required to further reduce our operating expenses and suspend, delay or
collaboration revenue inreduce the
future, pursuantscope of our M207 development program, out-license intellectual property rights to
any partnership that we might pursue.our transdermal delivery technology, or a combination of the above, which may have a material adverse effect on our business, results of operations, financial condition and/or our ability to fund our scheduled obligations on a timely basis or at all.
We expect our
research and development expenses and manufacturingpre-commercialization expenses related to
the development of our M207 product candidate
towill increase
asif we continue to advance this program towards regulatory
filingapproval and,
approval.if approved, commercialization. We are evaluating next steps in relation to the FDA’s response letter as part of our financial and strategic planning; however, current available resources will not enable continued pursuit of FDA approval in the event an additional study is required to continue to pursue FDA approval of M207. Because of the numerous risks and uncertainties associated with our technology and drug development, we cannot forecast with any degree of certainty the timing or amount of expenses incurred or when, or if, we will be able to achieve profitability.
We will require additional capitaldo not anticipate realizing product revenues unless and until the FDA approves our M207 NDA and we begin commercializing M207, which may never occur.
We are actively seeking opportunities to
undertake our planned research and development activities and to meet our operating requirements beyond 2017. We intend to raise such capital through the issuance of additional equity through public or private offerings, debt financing,evaluate collaborations with strategic
alliances with pharmaceutical partners
or any combination of the above. However, if such financing is not available at adequate levels or on acceptable terms, we could be required to further
reduce our operating expensesthe clinical and
suspend, delay or reduce the scope of our M207 development program,out-license intellectual property rights to our intracutaneous delivery technology, or a combination of the above, which may have a material adverse effect on our business, results of operations, financial condition and/or our ability to fund our scheduled obligations on a timely basis or at all.Debt Financing
We have funded, and will continue to fund, our operations in part through debt financing. In June 2014, we entered into a $4.0 million term loan facility with Hercules Capital, Inc. (“Hercules”), previously known as Hercules Technology Growth Capital, Inc. In June 2015, we entered into a first amendment to the loan and security agreement with Hercules to increase the aggregate principal amount of the loan to $15.0 million (the Hercules Term Loan). Upon the execution of the first amendment to the loan and security agreement, we used approximately $11.4 million of the Hercules Term Loan to prepay all amounts owing under the secured promissory note held by BMV Direct SOTRS LP, an affiliate of BioMed Realty Holdings, Inc. The first amendment to the loan and security agreement with Hercules provides that the $15.0 million principal balance will be subject to a12-month interest-only period beginning July 1, 2015, followed by equal monthly installment payments of principal and interest, with all outstanding amounts due and payable on December 1, 2018. The outstanding principal balance bears interest at a variable rate of the greater of (i) 7.95%, or (ii) 7.95% plus the prime rate as quoted in the Wall Street Journal minus 5.25%. The interest rate on the secured term loan with Hercules was 7.95% for the years ended December 31, 2017 and 2016. On June 1, 2017, we paid a $100,000 legacy end of term charge and is required to pay an additional $351,135 end of term charge on the earlier of loan maturity or at the date we prepay the Hercules Term Loan. We may prepay all, but not less than all, of the Hercules Term Loan with no prepayment charge. The Hercules Term Loan is secured by a first priority security interest and lien in and to all of our tangible and intangible properties and assets, including intellectual properties.
Research and Development Expenses
Research and development expenses represent costs incurred to conduct research, such as the discovery andcommercial development of our proprietary product candidates.technology. We recognize all research and development costscannot forecast with any degree of certainty if we will receive additional capital or collaboration revenue in the future, as they are incurred.
Research and development expenses consist of:
production costs which include, but are not limited to, employee-related expenses, including salaries, benefits and stock-based compensation expense and fees paid to conduct clinical studies, drug formulation, and costa result of consumables used in nonclinical and clinical trials;
expenses related to the purchase of active pharmaceutical ingredients and raw materialsany partnership that we might pursue for the productionM207 or any other potential future use of our intracutaneous delivery system, including fees paidtechnology or how such arrangements would affect our development plans or capital requirements. As a result of these uncertainties, we are unable to contract manufacturing organizations;
fees paid to contract research organizations (“CROs”), clinical consultants, clinical trial sitesdetermine the duration and vendors, including institutional review boards (“IRBs”), in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;
fees paid to conduct clinical studies, drug formulation, and costcompletion of consumables used in nonclinical and clinical trials;
other consulting fees paid to third parties; and
allocationcosts of certain shared costs, such as facilities-related costs and IT support services.
The following table summarizes our research and development expenses incurred during the years ended December 31, 2017projects or if, when and 2016,to what extent we will generate revenue from their commercialization and fromsale. Additionally, a future collaborative partner may only be interested in applying our inception to December 31, 2017:
| | | | | | | | | | | | |
| | | | | | | | | For the Period
from
inception
to
December 31,
2017 | |
| | | Year Ended December 31, | | |
| | | 2017 | | | 2016 | | |
| | | (In thousands) | |
Product candidate: | | | | | | | | | | | | |
M207 (1) | | $ | 15,569 | | | $ | 13,281 | | | $ | 34,676 | |
Suspended programs(2) | | | 7 | | | | 126 | | | | 52,409 | |
Other research projects(3) | | | 173 | | | | 1,984 | | | | 12,746 | |
Collaborative development support(4) | | | - | | | | - | | | | 2,630 | |
Unallocated research and development expenses (5) | | | 4,439 | | | | 5,066 | | | | 79,573 | |
| | | | | | | | | | | | |
Total research and development expenses | | $ | 20,188 | | | $ | 20,457 | | | $ | 182,034 | |
| | | | | | | | | | | | |
| (1) | We initiated our M207 project in September 2013.
|
| (2) | In April 2016, we suspended further development related to Daily B104, Weekly B104 and D107.
|
| (3) | Our other research projects include programs other than our lead development candidate, M207.
|
| (4) | Collaborative development support consists of support services provided to Asahi in 2011 and 2012 and to Novo Nordisk in 2014 and 2015 in connection with our collaboration and license agreements with Asahi and Novo Nordisk.
|
| (5) | Unallocated costs include research and development expenses not allocated to a specific program or product candidate, and personnel-related costs prior to the implementation of our timesheet tracking system in 2011.
|
The project-specific expenses summarizedtechnology in the table above include costs directly attributable to ourdevelopment and advancement of their own product candidates. We allocate research and development salaries, benefits, stock-based compensation and indirect costs to our product candidates on a project-specific basis, and we include these costs in the project- specific expenses. We expect our research and development expenses to increase in the future.
The process of conducting the necessary clinical trials to obtain regulatory approval is costly and time consuming. We consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and clinical program may be affected by a variety of factors, including, but not limited to: the quality of the product candidate, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. In situations in which third parties have control over the clinical development of a product candidate, the estimated completion dates are largely under the control of such third parties and not under our control. Additionally, a future collaborative partner may only be interested
Service revenue
Service revenue is related to feasibility studies in
applyingwhich we provide research and development services to customers to determine the feasibility of using our
technologySystem in
connection with the
customers’ pharmaceutical agents. In the years ended December 31, 2021 and 2020, we recognized revenue on agreements with three and two pharmaceutical companies, respectively, for such studies. Subsequent to the successful completion of all of our development
responsibilities, one such agreement, with Mitsubishi Tanabe Pharma Corporation, ended in 2021 as Mitsubishi Tanabe Pharma Corporation determined that they would not continue with the in vivo portion of the study. We expect service revenue to fluctuate based on the volume and
advancementactivity of
their own product candidates.feasibility studies.
Cost of service revenue
Cost of service revenue consists of personnel and material costs associated with feasibility studies. In 2017,2021 and 2020, we incurred costs related to three and two such studies, respectively. We expect cost of service revenue to fluctuate based on the volume and activity of feasibility studies.
Research and development expenses
Research and development expenses consist primarily of:
•Salaries and related expenses for personnel in research and development functions, including stock-based compensation;
•Expenses related to the production of our System, including the purchase of active pharmaceutical ingredients and raw materials as well as fees paid to contract manufacturing organizations;
•Expenses related to the performance of drug formulation and clinical trials and studies, including fees paid to CROs, clinical consultants, clinical trial sites and vendors, including Institutional Review Boards, in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis; and
•Allocation of certain shared costs, such as facilities-related costs.
In the year ended December 31, 2021, our research and development efforts and resources focused primarily on advancing the development of M207.
While we currently intend to continue clinical development of M207 through commercialization in the United States ourselves, we remain open to opportunities with potential strategic partners to ensure M207 will receive the best chance of commercial success. We are actively seeking opportunities to evaluate collaborations with strategic partners to further the clinical and commercial development of our other product candidates. We cannot forecast with any degree of certainty if M207 or any of our future product candidates, if any, will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements. As a result of these uncertainties, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
General and
Administrative Expensesadministrative expenses
General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services rent and other general operating expenses not otherwise included in research and development. As a public company, we expect
Other income and expense
Interest income. Interest income consists primarily of interest, amortization of purchase premiums and accretion of purchase discounts, if any, related to invest significant resources to comply with evolving laws, regulations and standards, including the implementation of effective internal controls over financial reporting and compliance with Sarbanes-Oxley Act.Other Income and Expense
our investments in marketable securities.
Interest expense.Interest expense net. Interest expense, net consists primarily of interest costs related to our short-term borrowings and long-term debt and theassociated amortization of debt discountdiscounts and issuance costs. Interest expense for the year ended December 31, 2017 and 2016 consisted of accrued interestcosts, if any, related to the Hercules Term Loan and the related amortization of debt discount and issuance costs.financing.
Other expense, net.income (expense). Other expense,income (expense), net consists of miscellaneous income orand expenses that are not included in other categories of the consolidated statement of operations(See detailed explanations under the next subheading, Resultsoperations.
Comparison of the year ended December 31,
20172021 and
2016 | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Change | |
| | | 2017 | | | 2016 | | | Amount | | | % | |
| | | (In thousands) | | | | | | | |
Research and development | | $ | 20,188 | | | $ | 20,457 | | | $ | (269 | ) | | | (1%) | |
2020
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2021 | | 2020 | | Amount | | % |
| | (In thousands) | | |
| Service revenue | $ | 785 | | | $ | 224 | | | $ | 561 | | | 250 | % |
| Operating expenses: | | | | | | | |
| Cost of service revenue | $ | 796 | | | $ | 171 | | | $ | 625 | | | 365 | % |
| Research and development | $ | 20,974 | | | $ | 21,622 | | | $ | (648) | | | (3) | % |
| General and administrative | $ | 10,547 | | | $ | 11,189 | | | $ | (642) | | | (6) | % |
| | | | | | | |
| Other income (expense): | | | | | | | |
| Interest income | $ | 3 | | | $ | 18 | | | $ | (15) | | | (83) | % |
| Interest expense | $ | (189) | | | $ | (719) | | | $ | 530 | | | (74) | % |
| Other income (expense), net | $ | 1,793 | | | $ | 90 | | | $ | 1,703 | | | * |
* Not meaningful.
Service revenue
In 2021 and 2020, service revenue related to agreements with three and two pharmaceutical companies, respectively, for feasibility studies. We expect service revenue to fluctuate based on the volume and activity of feasibility studies.
Cost of service revenue
In 2021 and 2020, cost of service revenue related to three and two feasibility studies, respectively.We expect cost of service revenue to fluctuate in 2022 based on the volume and activity of feasibility studies.
Research and development expenses
Research and development expenses decreased approximately $0.3$0.6 million, or 1%3%, for the year ended December 31, 20172021, as compared to the year ended December 31, 2016.2020. The decrease was primarily due to $1.4 million of lower full-time and temporary employee costs due to decreased headcount and employee expenses classified as cost of service revenue and $0.4 million of lower clinical
supplies and materials, offset by $0.8 million of clinical trial costs based onassociated with our decision2021 PK study and $0.4 million of additional depreciation related to primarily focusassets placed into service at our resources on M207, which is our proprietary formulation of zolmitriptan delivered via our ADAM technology, as an acute treatment for migraine. We also completed our efficacy study in February 2017 and in November 2017, we initiated the required long-term safety study in the development of M207.
CMOs.
General and administrative expenses
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Change | |
| | | 2017 | | | 2016 | | | Amount | | | % | |
| | | (In thousands) | | | | | | | |
General and administrative | | $ | 8,182 | | | $ | 8,176 | | | $ | 6 | | | | 0% | |
General and administrative expenses increased slightly by $6,000decreased approximately $0.6 million, or 6%, for the year ended December 31, 20172021, as compared to the year ended December 31, 2020. The decrease was primarily due to a decrease of $0.5 million in market research activities and other professional service fees and $0.3 million in lower employee and consulting costs, offset by an increase of $0.2 million in insurance costs.
Other income and expense
Interest income. For the years ended December 31, 2021 and 2020, interest income resulted primarily from interest recognized related to our cash and cash equivalents. The decrease for the year ended December 31, 2021 as compared to the same period in 2016.Other income and expense
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Change | |
| | | 2017 | | | 2016 | | | Amount | | | % | |
| | | (In thousands) | | | | | | | |
Interest expense, net | | $ | (742 | ) | | $ | (1,192 | ) | | $ | 450 | | | | 38% | |
Other income (expense), net | | | 7 | | | | (7 | ) | | | 14 | | | | 200% | |
2020 resulted primarily from lower interest rates.
Interest expense, net, decreased approximately $0.5 million forexpense. For the yearyears ended December 31, 2017 as compared to the same period in 2016. Interest2021 and 2020, interest expense consistsconsisted primarily of interest and amortization of debt discount and amortization of deferred financing costs associated with the Hercules Loan Agreement. We expect that ourdiscount. The decrease in interest expense will decrease for 2018resulted from lower outstanding balances on our build-to-suit obligation with Trinity Funding 1, LLC (successor to Trinity Capital Fund III, L.P.) (“Trinity”) and increased capitalization of a portion of interest paid to Trinity as compared to 2017 as a resultconstruction-in-progress.
Other income (expense). Other income (expense), net consists of miscellaneous income and expenses that are not included in other categories of the repaymentstatement of the Hercules Loan Agreement in December 2018.Other expense, net, increased approximately $14,000 for the year ended December 31, 2017 as compared to the same period in 2016.operations. For the year ended December 31, 2017, we recorded a2021, other income (expense), net gainconsisted primarily of approximately $9,000 on a sale of equipment. For the year ended December 31, 2016, we recorded a gain of approximately $51,000 on a sale of equipment, offset by a loss in other expenses of approximately $57,000 on the saleforgiveness of Zosano Inc., a public shell corporation that was a subsidiaryour Paycheck Protection Program loan.
As of December 31,
2017,2021, we had
net deferred tax assets of
$16.9$39.4 million and deferred tax liabilities of $0.9 million. The deferred tax assets primarily consisted of federal and state tax net operating losses and research and development tax credit carryforwards. Due to uncertainties surrounding our ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset our
net deferred tax assets. As of December 31,
2017,2021, we had federal net operating loss carryforwards of approximately
$43.8$137.1 million and state net operating loss carryforwards of approximately
$43.5$42.4 million.
If not utilized, theAs of December 31, 2020, we had federal net operating loss carryforwards
of approximately $106.5 million and state net operating loss carryforwards of approximately $25.8 million. If not utilized, certain federal net operating loss carryforwards incurred before January 1, 2018, will
begin to expire
from 2017 through 2038,beginning in 2026, and state net operating loss carryforwards will
begin to expire
beginning in 2028. The federal net operating losses incurred in 2018
through 2038.and beyond do not expire.
As of December 31,
2017,2021, we had federal and state research and development credit carryforwards of approximately
$0.4$1.0 million and
$4.6$6.3 million, respectively. As of December 31,
2016,2020, we had federal and state research and development credit carryforwards of approximately $0.5 million and
$4.2$6.0 million, respectively. If not utilized, the federal tax credits will begin to expire in
2026;2040 and state tax credits currently do not expire.
Utilization of net operating loss carryforwards and research and development credit carryforwards may also be subject to an annual limitation due to the ownership change limitations. These annual limitations may result in the expiration of the net operating loss carryforwards and research and development credit carryforwards before
utilization. We have performed an analysis under Internal Revenue Code SectionSections 382 and 383 to determine the amount of our net operating loss carryforwards and research and development credit carryforwards that will be subject to annual limitation. As a result of the analysis, a portion of the net operating loss carryforwards and research and development credit carryforwards have beenwere derecognized due to the annual limitation.
Refer to Note 11. Income Taxes, for discussions on While our analysis indicated there was no ownership change under IRC Sections 382 and 383 during 2021, we may experience a Section 382 or 383 ownership change as a result of our February 2022 offering. If this is the impactcase, additional portions of the Tax Cutsnet operating loss carryforwards and Jobsresearch and development credit carryforwards will be derecognized.
On March 27, 2020 and December 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (the
“2017 Tax“CARES Act”)
and the Consolidated Appropriation Act (“CAA”), respectively, as a result of the COVID-19 pandemic, which
was enactedcontain, among other things, numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. We have evaluated the current legislation and at this time, do not anticipate that the tax provisions in
December 2017.the CARES Act or CAA will have a material impact on our financial statements.
Liquidity and Capital Resources
As
Our liquidity and capital resources are summarized as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| (In thousands) |
| Cash and cash equivalents | $ | 11,043 | | | $ | 35,263 | |
| Working capital* | $ | 476 | | | $ | 21,205 | |
| Accumulated deficit | $ | (362,115) | | | $ | (332,190) | |
* We define working capital as current assets less current liabilities. See our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K for further details regarding our current assets and current liabilities.
Our cash and cash equivalents totaled $11.0 million as of December 31, 2017, we had an accumulated deficit of $225.92021 compared to $35.3 million as wellof December 31, 2020. The decrease in cash and cash equivalents and working capital as negativeof December 31, 2021 compared to December 31, 2020 was primarily the result of our loss from operations, investments made in property and equipment and our payments to Trinity, offset primarily by cash flowsreceived from operating activities. the sale of shares of our common stock through our at-the-market offering programs and warrant exercises.
On March 11, 2022, we entered into a Second Amendment to Lease Documents (the “Second Amendment”) with Trinity. The Second Amendment, among other things, provided for an upfront payment of $2.0 million in remaining rent to Trinity and modified the rent and purchase price payments due to Trinity to $215,441 per month from April 1, 2022 to December 1, 2022 (inclusive of the amounts required to exercise the option to purchase the leased equipment) and establishes a minimum cash covenant equal to three times the remaining aggregate amount of rent due.
On February 8, 2022, we entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC (“Maxim”) related to the public offering by us of 51,250,000 units (“Units”), each consisting of one share of our common stock and one Series F Common Stock Purchase Warrant (“Series F Warrant”) to purchase one share of our common stock, at a public offering price of $0.30 per Unit. We also granted Maxim an option for a period of 30 days to purchase up to an additional 7,687,500 shares of common stock and/or additional Series F Warrants to purchase up to 7,687,500 shares of common stock. Maxim partially exercised the option and purchased the additional Series F Warrants to purchase up to 7,687,500 shares of common stock. The option to purchase additional shares expired unexercised. The net proceeds from the offering were approximately $14.1 million after deducting the underwriting discounts and commissions and offering expenses payable by us.
The Series F Warrants are immediately exercisable and have an exercise price per share equal to $0.30. The Series F Warrants will remain exercisable until their expiration on the fifth anniversary of the issuance date. Subject to certain exceptions, the Series F Warrants contain a full-ratchet anti-dilution exercise price adjustment upon the issuance of any common stock, securities convertible into common stock or certain other issuances at a price below the then-existing exercise price of the Series F Warrants. The offering was made pursuant to an effective shelf registration statement and a prospectus supplement and accompanying prospectus filed with the SEC.
Presently, we do not have sufficient cash resourcesand cash equivalents to enable us to fund our anticipated level of operations and meet our plans inobligations as they become due during the next twelve months from issuancefollowing the date of filing of this Annual Report on Form 10-K, and we will need to obtain additional capital resources through equity offerings, debt financings, a license or collaboration agreement, or through a combination of such sources of capital. The aforementioned factors raise substantial doubt about our ability to continue as a going concern.
We have retained SierraConstellation Partners, LLC, as an independent financial advisor to assist in exploring financial and strategic alternatives to maximize value, which may include, but not be limited to, asset or equity sales, joint venture and partnership opportunities, and restructuring, amendment or refinancing of existing liabilities. Any potential equity sales will be dependent upon and potentially limited by available authorized shares. We are also evaluating various alternatives to improve our liquidity, including but not limited to, further reductions of operating and capital expenditures and other contractual obligations. In March 2022, we implemented a workforce reduction impacting approximately 31% of our employees as part of an expense reduction plan.
However, there can be no assurances that we will be able to successfully raise capital, improve our financial position and liquidity, restructure our obligations, enter into any asset or equity sale, joint venture or partnership opportunity and/or otherwise achieve any of these financial statements. We will continue to require substantial funds to continue researchobjectives.
In 2020 and
development, including clinical trials of M207 and any future product candidates. Management’s plans in order to meet its operating cash flow requirements include financing activities such as public or private offerings of its common stock, preferred stock offerings, issuances of debt and convertible debt instruments and collaborative or other arrangements with corporate sources. Accordingly, on December 22, 2017,2021, we filed
ashelf registration
statementstatements on Form S-3 with the SEC
forto provide us with the
offerability to issue common stock and
saleother securities as described in the registration statements. We currently have approximately $120.6 million available on the two outstanding shelf registration statements. Utilization of
the shelf registration statements is subject to and potentially limited by available authorized shares. However, our
common stock. Our ability to complete the sale
of equity securities and access the market as a source of liquidity is dependent on investor demand, market conditions and other factors. Therefore, we can provide no assurance that any such offering will be on terms favorable to us or our stockholders, or that such offering will be successful at all.
We alsoIn addition, we have
an equity line of credit pursuant to a purchase agreement with Lincoln Park, which provides for the purchase of up to $35.0 million worthissued or reserved substantially all of our
available shares of authorized common stock
over the termunder our certificate of
the purchase agreement, subject to certain conditionsincorporation, and
limitations.Our accumulated deficit, negative cash flows and insufficient cash resources raise substantial doubt regarding the Company’sas a result, our ability to continue as a going concern. There are no assurances thatobtain additional funding will be achieved and that we will succeed in our future operations.through equity offerings is limited. Our inability to obtain required funding in the near future or our inability to obtain funding on favorable terms will have a material adverse effect on our operations and strategic development plan for future growth. If we cannot successfully raise additional capital and implement our strategic development plan, our liquidity, financial condition and business prospects will be materially and adversely affected, and we may have to cease operations.
Since our inception in October 2006, we have funded our operations primarily through a combination of equity offerings, secured and unsecured borrowings from private investors, bank credit facilities, and licensing and service revenue from our license and collaboration agreements. We have incurred recurring operating losses and negative cash flows from operating activities since inception, and as of December 31, 2017, had an accumulated deficit of $225.9 million.
We expect to incur additional losses in the future
to conduct research and
development of our M207 product candidate and to conductpre-commercialization manufacturing activities.In accordance with ASUNo. 2014-15 Presentation of Financial Statements – Going Concern (Subtopic205-40), our management evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
As of December 31, 2017, we had approximately $11.7 million in cash and cash equivalents. Presently, we do not have sufficient cash resources to meet our obligations as they become due within one year after the issuance date of this filing.
We will continue to require additional financing to develop our M207 product candidatescandidate, conduct pre-commercialization manufacturing activities and fund our operations. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate partners, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our
financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:
the scope, progress, expansion, costs, and results of our clinical trials;
the scope, progress, expansion, and costs of manufacturing our product candidates;
the timing of and costs involved in obtaining regulatory approvals;
the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;
our ability to establish and maintain development partnering arrangements;
the timing, receipt and amount of contingent, royalty, and other payments from any of our future development partners;
the emergence of competing technologies and other adverse market developments;
the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
the resources we devote to marketing, and, if approved, commercializing our product candidates;
our ability to draw funds from our loan and security agreement; and
the costs associated with being a public company.
If we are unable to raise additional funds when needed, we may be required to suspend, delay, reduce or terminate our development programs and any clinical trials. We may also be required to sell or license to othersour technologies, or clinical product candidates, or programs, if any, that we would prefer to develop and commercialize ourselves. This raises
We anticipate that we will need to raise substantial doubt about additional capital, the requirements of which will depend on many factors, including:
•the timing of and costs involved in obtaining regulatory approvals;
•the scope, progress, expansion and costs of manufacturing our product candidates;
•the scope, progress, expansion, costs and results of any clinical trials;
•the type, number, costs and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;
•our ability to continue asestablish and maintain development partnering arrangements;
•the timing, receipt and amount of contingent, royalty and other payments from any of our future development partners;
•the emergence of competing technologies and other adverse market developments;
•the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
•the economic and global financial market uncertainty resulting from the COVID-19 pandemic;
•the resources we devote to marketing and commercializing our product candidates, if approved; and
•the costs associated with being a going concern. As of December 31, 2017, we had an accumulated deficit of $225.9 million and we do not have sufficient cash resources to meet our planspublic company.
The COVID-19 pandemic has caused volatility in the
next twelve months followingglobal financial markets and threatened a slowdown in the
issuanceglobal economy, which may adversely affect our ability to raise additional capital on attractive terms or at all. A recession, depression or other sustained adverse market event resulting from the spread of
these financial statements.The following table shows a summary ofCOVID-19 may also limit our cash flowsability to obtain financing for the years ended December 31, 2017 and 2016:
| | | | | | | | |
| | | 2017 | | | 2016 | |
| | | (In thousands) | |
Net cash (used in) provided by: | | | | | | | | |
Operating activities | | $ | (27,119 | ) | | $ | (25,686 | ) |
Investing activities | | | (1,228 | ) | | | 30,272 | |
Financing activities | | | 24,995 | | | | 3,771 | |
| | | | | | | | |
Net (decrease) in cash and cash equivalents | | $ | (3,352 | ) | | $ | 8,357 | |
| | | | | | | | |
our operations.
Cash Flows
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| | (In thousands) |
| Net cash provided by (used in): | | | |
| Operating activities | $ | (27,590) | | | $ | (31,718) | |
| Investing activities | (5,423) | | | (8,487) | |
| Financing activities | 8,793 | | | 69,152 | |
| (Decrease) increase in cash, cash equivalents, and restricted cash | $ | (24,220) | | | $ | 28,947 | |
Operating Cash Flow: Net cash used in operating activities was $27.1 millionboth 2021 and $25.7 million for the years ended December 31, 2017 and 2016, respectively. Net cash used during 20172020 was primarily due to the costs of completion of the ZOTRIP trial, and start up and initiation costs related to personnel, manufacturing, facility and technology transfer and development costs in conjunction with services performed by our long-term safety study, in addition tocontract manufacturers, clinical development and trial costs, other professional feespre-commercial activities and other administrative expenses incurred in the course of our continuing operations. The changes in net cash used in operating activities were primarily related to our net loss, working capital fluctuations and changes in our non-cash expenses, all of which are highly variable.
Net cash used in 2016operating activities for the year ended December 31, 2021 of $27.6 million was primarily due to our net loss of $29.9 million, adjusted for non-cash items of $3.3 million, consisting primarily of $1.9 million of stock-based compensation, $1.8 million of depreciation and amortization and $1.2 million of change in operating lease right-of-use assets, offset by $1.6 million of a gain on forgiveness of our Paycheck Protection Program loan. Additionally, we used cash of $1.4 million for changes in operating lease liabilities. These cash outflows were offset by a $0.6 million increase in our accounts payable. Net cash used in operating activities for 2020 of $31.7 million was primarily due to our net loss of $33.4 million adjusted for non-cash stock-based compensation of $1.6 million, depreciation and amortization of $1.4 million and a decrease in our accounts payable of $1.5 million.
Investing Cash Flow: Net cash used in investing activities of $5.4 million for 2021 and $8.5 million for 2020 was the result of clinicalproperty andnon-clinical development costs of the ZOTRIP trial, personnel costs related equipment purchases to hiring key personnel with critical manufacturingknow-how to ramp upsupport our production of clinical trial material of our Phase 2 and Phase 3 clinical trials, professional fees and administrative expenses incurred in the course of continuing operations.Investingpre-commercialization activities.
Financing Cash Flow: Net cash usedprovided by investingfinancing activities was $1.2of $8.8 million for the year ended December 31, 2017, and net cash provided by investing activities2021 was $30.3 million forprimarily due to the year ended December 31, 2016. Net cash used by investing activities during 2017 was mostly the result of purchases of property and equipment. Net cash provided by investing activities during 2016 resulted primarily from $30.2 million in proceeds from maturitiesthe issuance of common stock under our investments in marketable securities.Financing Cash Flow:2020 and 2021 at-the-market offering programs of $10.2 million and from the exercise of warrants of $3.4 million. These proceeds were offset by repayments on the Trinity build-to-suit obligation of $4.8 million. Net cash provided by financing activities was $25.0 million and $3.8of $69.2 million for the years ended December 31, 2017 and 2016, respectively. Net cash provided by financing activities for 20172020 was primarily due to the proceeds from a registered public offeringthe issuance of $26.6 million,common stock and warrants, net of underwriter’s discounts,
commissions and offering expensesdiscounts, of $38.7 million in connection with our offerings in 2020, and proceeds of $4.0$14.9 million from the exercise of the related warrants, the proceeds from issuance of common stock in connection with at-the-market offerings, net of commissions of $16.2 million, and $1.6 million from a PPP loan. These proceeds were offset by repayments on the Trinity build-to-suit obligation of $2.2 million. See below for a further discussion of our equity activity in 2021 and 2020.
At-the-Market Offering Programs
At-the-Market Offering Program - 2021
On June 28, 2021, we entered into a Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co. and H.C. Wainwright & Co., LLC (together, the “Sales Agents”) to establish an at-the-market offering program (the “2021 ATM”), under which we may sell from time to time, at our option, up to an aggregate of $30.0 million of shares of our common stock. Shares sold under the 2021 ATM are issued pursuant to an effective shelf registration statement and a prospectus supplement dated June 28, 2021. We are required to pay the Sales Agents a commission of 3% of the gross proceeds from the sale of shares and have also agreed to provide the Sales Agents with customary indemnification rights. During the year ended December 31, 2021, we issued and sold 6,869,022 shares of our common stock at an average price of $0.72 per share under the 2021 ATM for aggregate net proceeds of $4.6 million after deducting commissions and offering expenses payable by us. As of December 31, 2021, we have up to approximately $25.0 million available to be offered and sold under the 2021 ATM. We have issued or reserved substantially all of our available shares of authorized common stock under our certificate of incorporation, and as a result, our ability to sell and issue shares under the 2021 ATM is limited.
At-the-Market Offering Program - 2020
On June 8, 2020, we entered into a sales agreement with BTIG, LLC (“BTIG”) as sales agent to establish an at-the-market offering program (the “2020 ATM”), under which we were permitted to offer and sell, from time to time, shares of common stock having a maximum aggregate offering price of up to $20.0 million. We were required to pay BTIG a commission of 3% of the gross proceeds from the sale of shares and also agreed to provide BTIG with customary indemnification rights. During the year ended December 31, 2021, we issued and sold 6,931,607 shares of our common stock at an average price of $0.84 per share under the 2020 ATM for aggregate net proceeds of $5.5 million after deducting commissions and offering expenses payable by us. During the year ended December 31, 2020, we issued and sold 13,237,026 shares of our common stock at an average price of $1.07 per share under the 2020 ATM with aggregate net proceeds of approximately $13.5 million after deducting commission and offering expenses. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement dated June 8, 2020. No shares remain available for sale under the 2020 ATM.
At-the-Market Offering Program - 2019
On August 19, 2019, we entered into a sales agreement with BTIG, as sales agent, to establish an at-the-market offering program (the “2019 ATM”), under which we were permitted to offer and sell, from time to time, shares of common stock having a maximum aggregate offering price of up to $15.0 million. We were required to pay BTIG a commission of 3% of the gross proceeds from the sale of shares and also agreed to provide BTIG with customary indemnification rights. During the year ended December 31, 2020, we issued and sold 2,151,346 shares of our common stock at an average price of $1.30 per share under the 2019 ATM. The aggregate net proceeds were approximately $2.7 million after BTIG's commissions and other offering expenses. The shares were sold pursuant to an effective registration statement and a prospectus supplement dated August 19, 2019. On March 4, 2020, we delivered notice of termination of the sales agreement to BTIG. We did not incur any termination penalties as a result of our termination of the sales agreement.
Offerings
Offering - September 2020
On August 31, 2020, we entered into an underwriting agreement with BTIG, pursuant to which we issued and sold 15,937,130 shares of its common stock to BTIG at a price of $1.304 per share. The offering closed on September 3, 2020. We received net proceeds of approximately $20.3 million after deducting expenses payable by us in connection with the offering. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement dated August 31, 2020.
Registered Direct Offering - March 2020
On March 4, 2020, we entered into a securities purchase agreement with certain institutional investors for the issuance and sale in a registered direct offering of (i) 11,903,506 shares of our common stock and (ii) Series E Warrants to purchase 136,301up to a total of 11,903,506 shares of common stock at an offering price of $0.9275 per share and accompanying warrant. The Series E Warrants have an exercise price of $0.8025 per share, were immediately exercisable and expire five years from the date of issuance. The aggregate net proceeds from the offering were approximately $10.2 million, after deducting the placement agent fees and other offering expenses. During the year ended December 31, 2021, Series E Warrants to purchase 4,078,667 shares of common stock were exercised at an exercise price of $0.8025 per share for aggregate proceeds of approximately $3.3 million. During the year ended December 31, 2020, Series E Warrants to purchase 7,194,004 shares of common stock were exercised at an exercise price of $0.8025 per share for aggregate proceeds of approximately $5.8 million. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement dated March 4, 2020. As of the date of this Annual Report on Form 10-K, we have Series E Warrants to purchase 630,835 shares of common stock outstanding.
Public Offering - February 2020
On February 14, 2020, we closed an underwritten offering for the issuance and sale of (i) 10,146,154 Class A Units, each consisting of one share of common stock and one Series C Warrant to purchase one share of common stock, at a public offering price of $0.65 per Class A Unit, and (ii) 2,161,539 Class B Units, each consisting of one Series D Pre-Funded Warrant to purchase one share of common stock and one Series C Warrant to purchase one share of common stock, at a public offering price of $0.6499 per Class B Unit. The Series C Warrants have an exercise price of $0.65 per share, were immediately exercisable and expire five years from the date of issuance. The Series D Pre-Funded Warrants had an exercise price of $0.0001 per share and were fully exercised in connection with the closing of the offering. We granted the underwriter a 30-day option to purchase up to an additional 1,846,153 shares of common stock and/or additional Series C Warrants to purchase up to 1,846,153 shares of common stock. These increases were partially offset by payments onThe underwriter fully exercised its option to purchase the Hercules Term Loan of approximately $5.8 million. Net cash generated from financing activities during 2016 included $6.6 million ofshares and the Series C Warrants. The aggregate net proceeds from the offering were $8.3 million after deducting underwriting discounts and commissions and other offering expenses. During the year ended December 31, 2021, Series C Warrants to purchase 145,000 shares of common stock were exercised at an exercise price of $0.65 per share for aggregate proceeds of approximately $0.1 million. During the year ended December 31, 2020, Series C Warrants to purchase 13,986,146 shares of common stock were exercised at an exercise price of $0.65 per share for aggregate proceeds of approximately $9.1 million. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement dated February 12, 2020. As of the date of this Annual Report on Form 10-K, we have Series C Warrants to purchase 22,700 shares of common stock outstanding.
PPP Loan
On April 21, 2020, we executed a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $1.6 million under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (“PPP”) was established under the CARES Act and is administered by the U.S. Small Business Administration (“SBA”). Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. On June 10, 2021, we were notified by our private investmentlender, Silicon Valley Bank, that our PPP Loan, in public equity (“PIPE”) financing, partially offsetthe amount of $1,610,000 in principal and $18,515 in accrued interest, was forgiven in its entirety by $2.9 million in repaymentthe SBA. The forgiveness of loan principalthe PPP Loan and accrued interest to Hercules.was recorded as a gain in other income (expense), net in our statement of operations in the second quarter of 2021.
Material Cash Requirements from Known Contractual
and Other Obligations
The following table summarizes our
material cash requirements from known contractual
and other obligations as of December 31,
2017: | | | | | | | | | | | | | | | | | | | | |
| | | Payment Due by Period | |
| | | Total | | | Less than
One Year | | | 1-3 Years | | | 3-5 Years | | | More than
5 Years | |
| | | (in thousands) | |
Contractual Obligations | | | | | | | | | | | | | | | | | | | | |
Short and long-term debt obligations (including interest) (1) | | $ | 6,947 | | | $ | 6,947 | | | $ | - | | | $ | - | | | $ | - | |
Operating lease obligations (2) | | | 12,204 | | | | 1,558 | | | | 3,561 | | | | 7,085 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 19,151 | | | $ | 8,505 | | | $ | 3,561 | | | $ | 7,085 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating Lease Obligations (1) | | Build-to-suit Obligation (2) | | Contract Manufacturing Commitments (3) | | Total |
| 2022 | $ | 2,042 | | | $ | 4,030 | | | $ | 1,429 | | | $ | 7,501 | |
| 2023 | 2,017 | | | 1,098 | | | — | | | 3,115 | |
| 2024 | 1,371 | | | — | | | 1,914 | | | 3,285 | |
| Total | $ | 5,430 | | | $ | 5,128 | | | $ | 3,343 | | | $ | 13,901 | |
(1) | Short and long-term debt obligations
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Secured financing with Hercules
In June 2014, we entered into a loan and security agreement with Hercules Capital Inc. for a $4.0 million term loan facility. In June 2015, we entered into a first amendment to the loan and security agreement with Hercules to increase the aggregate principal amount of the loan to $15.0 million. Upon the execution of the first amendment to the loan and security agreement, we used approximately $11.4 million of the Hercules Term Loan to prepay all amounts owing under the secured promissory note held by BMV Direct SOTRS LP, an affiliate of BioMed Realty Holdings, Inc.
The first amendment to the loan and security agreement with Hercules provides that the $15.0 million principal balance will be subject to a12-month interest-only period beginning July 1, 2015, followed by equal monthly installment payments of principal and interest, with all outstanding amounts due and payable on December 1, 2018. The outstanding principal balance bears interest at a variable rate of the greater of (i) 7.95%, or (ii) 7.95% plus the prime rate as quoted in the Wall Street Journal minus 5.25%. In addition, we paid a $100,000 legacy end of term charge on June 1, 2017 and is required to pay a $351,135 end of term charge on the earlier of loan maturity or at the date we prepay the Hercules Term Loan. We may prepay all, but not less than all, of Hercules Term Loan with no prepayment charge. The Hercules Term Loan is secured by a first priority security interest and lien in and to all of our tangible and intangible properties and assets, including intellectual properties.
The loan and security agreement with Hercules contains customary conditions related to borrowing, events of default, and covenants, including covenants limiting our ability to dispose of collateralized assets, undergo a change of control, incur debt or incur liens, subject to certain exceptions. The loan and security agreement also requires us to comply with certain basic affirmative covenants, such as maintenance of financial records, insurance and prompt payment of taxes.
We have an
(1)Operating leases
Our operating lease obligations primarily consist of a lease withBMR-34790 Ardentech Court LP, an affiliate of BMR Holdings, and related party, for itsour office, research and development, and manufacturing facilities in Fremont, California. On June 6, 2017, we entered into the seventh amendmentIn addition to the existing lease (“Seventh Amendment”)minimum rental commitments, our leases may require us to pay additional amounts for taxes, insurance, maintenance and other operating expenses. See Note 6. Leases, effective as of May 30, 2017.Under the Seventh Amendment, we extended the term of the LeaseNotes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
(2)Build-to-suit obligation
The build-to-suit obligation consists of principal and interest payments and purchase option fees related to our headquartersbuild-to-suit obligation with Trinity and does not take into account the modified payment schedule under the Second Amendment described above. See Note 7. Debt Financing and Note 13. Subsequent Events of the Notes to Financial Statements included in Fremont, California through August 31, 2024,Item 8 of this Annual Report on Form 10-K for additional information.
(3)Contract manufacturing commitments
Our contract manufacturing commitments consist of non-cancelable commitments with an option to further extendour contract manufacturing organizations for the lease for an additional 65 months,construction of dedicated manufacturing space and technology transfer fees.
subjectAdditionally, we have agreements with a CMO that call for annual fees of $2.8 million in 2021, $4.6 million in 2022, $11.5 million in 2023 and $14.0 million in 2024 and beyond, to be paid in equal monthly installments that we may terminate upon denial of regulatory approvals or if regulatory approvals are withdrawn under certain termscircumstances for the cost to remove our equipment and conditions.restore the CMO's facility. We agreedmay also elect to terminate the contracts for convenience, which would result in cancellation fees in the amount of 50% of the annual fee due in the year that the contract is terminated, and costs to remove our equipment and restore the CMO's facility.
We also have additional agreements with CMOs to provide services related to the manufacture and assembly of component parts of M207. Under these agreements, we may be required to pay a monthly base rentup to an aggregate of $136,191 for$7.4 million in various fees and minimum purchase requirements; however, significant portions of these payments may not be required if the period commencing September 1, 2017,FDA does not approve M207.
See Note 10. Commitments and ending on August 31, 2018, with an increase on September 1, 2018, and annual increases on September 1 of each subsequent year until the lease year beginning September 1, 2023. The Seventh Amendment also provides for rent abatements, subject to certain conditions, totaling $275,552 and certain tenant improvements to be completed at the Landlord’s expense (not to exceed $975,000 or, under certain conditions, $1,100,000). We may incur additional expenses under the lease in connection with roof repairs that will be treated as additional rent and paid over the termContingencies, of the lease.Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Off-Balance Sheet Arrangements
We have not entered into any
off-balance sheet arrangements and do not have any holdings in variable interest entities.
Recently Issued Accounting Pronouncements
See Note 22. Summary of Significant Accounting Policies, of the Notes to the accompanying condensed consolidated financial statementsFinancial Statements included in Item 8 of this Annual Report on Form 10-K for Recently Issueda summary of Recent Accounting Pronouncements.
Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. Some of the securities that we may invest in have market risk where a change in prevailing interest rates may cause the principal amount of the marketable securities to fluctuate. Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, as well as investments in marketable securities, if any. We had cash and cash equivalents of $11.0 million as of December 31, 2021, which consisted of bank deposits. The primary objectives of our investment activities are to ensure liquidity and to preserve principal while at the same time maximizing the income we receive from any investment in marketable securities without significantly increasing risk. Additionally, we established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.
Our cash and cash equivalents are held for working capital purposes. Cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to regulatory limits, and we are exposed to credit risk when our cash balances exceed FDIC insurance limits. Our total cash and cash equivalent balances exceed the maximum amounts insured by the FDIC.
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of
U.S.United States interest
rates, particularly because our investments are in short-term securities.rates. We
had cash and cash equivalents of $11.7 million and $15.0 million as of December 31, 2017 and 2016, respectively,hold interest-earning instruments, which
consist of bank deposits and money market funds. Any interest-bearing instruments carry a degree of
risk; however, weinterest rate risk. To date, fluctuations in interest income and expense have not been
exposed to, nor do we anticipate being exposed to, material risks due to changessignificant. However, fluctuations in
interest rates. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, a hypothetical immediate 10% change inmarket interest rates
during any ofin the
periods presented would notfuture could have
had a material impact on our financial
statements.condition and results of operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Zosano Pharma Corporation
Financial Statements
December 31, 2021 and 2020
Contents
Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | | | | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Zosano Pharma Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Zosano Pharma Corporation (the “Company”) as of December 31, 2021 and 2020, the related statements of operations, changes in stockholders’ equity and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring operating losses and negative cash flows from operating activities since inception and has an accumulated deficit, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be filed pursuantindependent with respect to this Item 8the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of Part IIthe Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Deloitte & Touche LLP
San Francisco, California
March 17, 2022
We have served as the Company's auditor since 2019.
ZOSANO PHARMA CORPORATION
BALANCE SHEETS
(in thousands, except par value and share amounts)
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 11,043 | | | $ | 35,263 | |
| Accounts receivable | 146 | | | — | |
| Prepaid expenses and other current assets | 420 | | | 453 | |
| Total current assets | 11,609 | | | 35,716 | |
| Restricted cash | 455 | | | 455 | |
| Property and equipment, net | 32,557 | | | 30,909 | |
| Operating lease right-of-use assets | 3,769 | | | 4,928 | |
| Other long-term assets | — | | | 3 | |
| Total assets | $ | 48,390 | | | $ | 72,011 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 2,120 | | | $ | 1,884 | |
| Accrued compensation | 1,767 | | | 2,294 | |
| Build-to-suit obligation, current portion, net of debt issuance costs and discount | 3,822 | | | 4,779 | |
| Operating lease liabilities, current portion | 1,606 | | | 1,378 | |
| Paycheck Protection Program loan, current portion | — | | | 809 | |
| Other accrued liabilities | 1,818 | | | 3,367 | |
| Total current liabilities | 11,133 | | | 14,511 | |
| Build-to-suit obligation, long-term portion, net of debt issuance costs and discount | 970 | | | 4,359 | |
| Operating lease liabilities, long-term portion | 3,081 | | | 4,687 | |
| Paycheck Protection Program loan, long-term portion | — | | | 812 | |
| Other long-term liabilities | 231 | | | 127 | |
| Total liabilities | 15,415 | | | 24,496 | |
| Commitments and contingencies (see note 10) | 0 | | 0 |
| Stockholders’ equity: | | | |
| Preferred stock, $0.0001 par value, 5,000,000 shares authorized; none issued and outstanding as of December 31, 2021 and 2020 | — | | | — | |
| Common stock, $0.0001 par value; 250,000,000 shares authorized; 120,205,813 and 102,066,218 shares issued and outstanding as of December 31, 2021 and 2020, respectively | 12 | | | 10 | |
| Additional paid-in capital | 395,078 | | | 379,695 | |
| Accumulated deficit | (362,115) | | | (332,190) | |
| | | |
| Total stockholders’ equity | 32,975 | | | 47,515 | |
| Total liabilities and stockholders’ equity | $ | 48,390 | | | $ | 72,011 | |
The accompanying notes are an integral part of these financial statements.
ZOSANO PHARMA CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
| Service revenue | $ | 785 | | | $ | 224 | |
| Operating expenses: | | | |
| Cost of service revenue | 796 | | | 171 | |
| Research and development | 20,974 | | | 21,622 | |
| General and administrative | 10,547 | | | 11,189 | |
| | | |
| Total operating expenses | 32,317 | | | 32,982 | |
| Loss from operations | (31,532) | | | (32,758) | |
| Other income (expense): | | | |
| Interest income | 3 | | | 18 | |
| Interest expense | (189) | | | (719) | |
| Other income (expense), net | 1,793 | | | 90 | |
| Loss before provision for income taxes | (29,925) | | | (33,369) | |
| Provision for income taxes | — | | | — | |
| Net loss | $ | (29,925) | | | $ | (33,369) | |
| | | |
| | | |
| | | |
| Net loss per common share – basic and diluted | $ | (0.27) | | | $ | (0.49) | |
Weighted-average common shares used in computing net loss per common share –
basic and diluted | 112,064 | | | 67,907 | |
The accompanying notes are an integral part of these financial statements.
ZOSANO PHARMA CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-In Capital | | Accumulated
Deficit | | | | Total
Stockholders’
Equity |
| | Shares | | Amount | |
| Balance at January 1, 2020 | 23,503,214 | | | $ | 2 | | | $ | 308,211 | | | $ | (298,821) | | | | | $ | 9,392 | |
| Issuance of common stock in connection with offering, net | 15,937,130 | | | 1 | | | 20,335 | | | — | | | | | 20,336 | |
| Issuance of common stock in connection with at-the-market offering program, net | 15,388,372 | | | 2 | | | 16,232 | | | — | | | | | 16,234 | |
| Issuance of common stock and Series E warrants in connection with registered direct offering, net | 11,903,506 | | | 1 | | | 10,210 | | | — | | | | | 10,211 | |
| Issuance of common stock and Series C and Series D pre-funded warrants in connection with public offering, net | 11,992,307 | | | 2 | | | 8,262 | | | — | | | | | 8,264 | |
| Issuance of common stock upon exercise of Series D pre-funded warrants | 2,161,539 | | | — | | | — | | | — | | | | | — | |
| Issuance of common stock upon exercise of Series C warrants | 13,986,146 | | | 1 | | | 9,090 | | | — | | | | | 9,091 | |
| Issuance of common stock upon exercise of Series E warrants | 7,194,004 | | | 1 | | | 5,772 | | | — | | | | | 5,773 | |
| Stock-based compensation | — | | | — | | | 1,583 | | | — | | | | | 1,583 | |
| Net loss | — | | | — | | | — | | | (33,369) | | | | | (33,369) | |
| Balance at December 31, 2020 | 102,066,218 | | | 10 | | | 379,695 | | | (332,190) | | | | | 47,515 | |
| Issuance of common stock in connection with at-the-market offering program, net | 13,800,629 | | | 1 | | | 10,116 | | | — | | | | | 10,117 | |
| Issuance of common stock upon exercise of Series E warrants | 4,078,667 | | | 1 | | | 3,273 | | | — | | | | | 3,274 | |
| Issuance of common stock upon exercise of Series C warrants | 145,000 | | | — | | | 94 | | | — | | | | | 94 | |
| Release of restricted stock units | 115,299 | | | — | | | — | | | — | | | | | — | |
| Stock-based compensation | — | | | — | | | 1,900 | | | — | | | | | 1,900 | |
| | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (29,925) | | | | | (29,925) | |
| Balance at December 31, 2021 | 120,205,813 | | | $ | 12 | | | $ | 395,078 | | | $ | (362,115) | | | | | $ | 32,975 | |
The accompanying notes are an integral part of these financial statements.
ZOSANO PHARMA CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (29,925) | | | $ | (33,369) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Stock-based compensation | 1,900 | | | 1,583 | |
| Depreciation and amortization | 1,751 | | | 1,426 | |
| Change in operating lease right-of-use assets | 1,159 | | | 980 | |
| Effective interest on financing obligations | 441 | | | 722 | |
| Capitalized effective interest | (364) | | | (447) | |
| Gain on forgiveness of Paycheck Protection Program loan | (1,629) | | | — | |
| Other | 80 | | | 7 | |
| Change in operating assets and liabilities: | | | |
| Accounts receivable, prepaid expenses and other assets | (110) | | | (17) | |
| Accounts payable | 582 | | | (1,472) | |
| Accrued compensation and other accrued liabilities | (97) | | | 21 | |
| Operating lease liabilities | (1,378) | | | (1,152) | |
| Net cash used in operating activities | (27,590) | | | (31,718) | |
| Cash flows from investing activities: | | | |
| | | |
| | | |
| Purchases of property and equipment | (5,423) | | | (8,487) | |
| | | |
| Net cash used in investing activities | (5,423) | | | (8,487) | |
| Cash flows from financing activities: | | | |
| Proceeds from issuance of securities in connection with at-the-market offering program, net of commissions and offering costs | 10,216 | | | 16,183 | |
| Proceeds from exercise of Series E warrants | 3,274 | | | 5,773 | |
| Proceeds from exercise of Series C warrants | 94 | | | 9,091 | |
| Proceeds from offering of securities, net of commissions and offering costs | — | | | 20,336 | |
| Proceeds from registered direct offering of securities, net of commissions and offering costs | — | | | 10,135 | |
| Proceeds from public offering of securities and exercise of pre-funded Series D warrants, net of commissions and offering costs | — | | | 8,264 | |
| Proceeds from Paycheck Protection Program loan | — | | | 1,610 | |
| | | |
| Principal payments on financing obligations | (4,791) | | | (2,240) | |
| Net cash provided by financing activities | 8,793 | | | 69,152 | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (24,220) | | | 28,947 | |
| Cash, cash equivalents and restricted cash at beginning of year | 35,718 | | | 6,771 | |
| Cash, cash equivalents and restricted cash at end of year | $ | 11,498 | | | $ | 35,718 | |
| Supplemental cash flow information: | | | |
| Cash paid for interest | $ | 620 | | | $ | 961 | |
| | | |
| Non-cash investing and financing activities: | | | |
| Forgiveness of Paycheck Protection Program loan | $ | 1,629 | | | $ | — | |
| Acquisition of property and equipment under accounts payable and other accrued liabilities | $ | 1,108 | | | $ | 3,088 | |
| Accrued offering costs | $ | 99 | | | $ | — | |
| Asset retirement obligation | $ | 89 | | | $ | 97 | |
The accompanying notes are an integral part of these financial statements.
Zosano Pharma Corporation
Notes to Financial Statements
For the Years Ended December 31, 2021 and 2020
1. Organization
The Company
Zosano Pharma Corporation (the “Company”) is a clinical-stage biopharmaceutical company focused on providing rapid systemic administration of therapeutics and other bioactive molecules to patients using its proprietary transdermal microneedle system (“System”).
The Company submitted a 505(b)(2) New Drug Application (“NDA”) for M207 to the U.S. Food and Drug Administration (the “FDA”) on December 20, 2019, and on October 20, 2020, the Company received a Complete Response Letter (“CRL”) from the FDA with respect to the NDA.
On January 18, 2022, the Company resubmitted its NDA to the FDA under Section 505(b)(2) of the Food, Drug, and Cosmetic Act. On February 17, 2022, the Company received a response letter from the FDA stating that they did not consider the resubmitted M207 NDA to be a complete response to the deficiencies identified in the FDA’s October 20, 2020 CRL, and that the FDA will not begin substantive review of the application until a complete response is received. The Company is evaluating its next steps in relation to the FDA's response letter.
The Company does not anticipate realizing product revenues unless and until the FDA approves the M207 NDA and the Company begins commercializing M207, which events may never occur.
2. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of the accompanying financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of expenses during the periods reported. Actual results could differ from those estimates. Assets and liabilities reported in the Company’s balance sheet and expenses and income reported for each of the periods presented are affected by estimates and assumptions, which are used for, but are not limited to, determining the fair value of assets and liabilities, income tax uncertainties, and measurement of stock-based compensation. Actual results could differ from such estimates or assumptions.
Liquidity and Substantial Doubt about Going Concern
Since inception, the Company has incurred recurring operating losses and negative cash flows from operating activities, and as of December 31, 2021, had an accumulated deficit of $362.1 million. As of December 31, 2021, the Company had approximately $11.0 million in cash and cash equivalents. Presently, the Company does not have sufficient cash and cash equivalents to enable it to fund its anticipated level of operations and meet its obligations as they become due within twelve months following the date of filing of this Annual Report onForm 10-K are appended10-K. The aforementioned factors raise substantial doubt about the Company’s ability to this report and are incorporated herein by reference. An indexcontinue as a going concern for a period of thoseone year from the issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company has retained SierraConstellation Partners, LLC, as an independent financial advisor to assist in exploring financial and strategic alternatives to maximize value, which may include, but not be limited to, asset or equity sales, joint venture and partnership opportunities, and restructuring, amendment or refinancing of existing liabilities. Any potential equity sales will be dependent upon and potentially restricted by available authorized shares. The Company is foundalso evaluating various alternatives to improve its liquidity, including but not limited to, further reductions of operating and capital expenditures and other contractual obligations. In March 2022, the Company implemented a workforce reduction impacting approximately 31% of its employees as part of an expense reduction plan.
The Company’s inability to obtain required funding in Item 15the near future or its inability to obtain funding on favorable terms will have a material adverse effect on its operations and strategic development plan for future growth. If the Company cannot successfully raise additional capital, its liquidity, financial condition and business prospects will be materially and adversely affected, and it may have to cease its operations.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. Due to the COVID-19 pandemic, there has been uncertainty in the global financial markets and economic conditions. The Company is closely monitoring the impact of the COVID-19 pandemic on its business, including how it will impact its employees and third-party service providers who perform critical services for the Company's business. The pandemic negatively impacted enrollment and conduct of the Company's cluster headache study. In addition, the impact of the COVID-19 pandemic on the global financial markets and economic conditions could impact the Company's ability to raise capital through an equity financing, debt financing, a license or collaboration or a combination of such sources of capital, and as a result, its ability to continue as a going concern. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations and financial condition will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it. As of the date of issuance of this Annual Report on
Form 10-K.10-K, management is not aware of any specific event or circumstances that would require an update to its estimates or a revision of the carrying value of its assets or liabilities. These estimates may change, as new events occur, and additional information is obtained. Segment Reporting
The Company operates in 1 reportable segment: the development of human pharmaceutical products. All long-lived assets are maintained in the United States.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.
As of December 31, 2021 and 2020, the Company had restricted cash of approximately $0.5 million primarily consisting of deposits of $0.3 million to secure its building lease until the end of the lease term and a deposit of approximately $0.1 million to a utility provider.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets and as presented as cash, cash equivalents and restricted cash in the statements of cash flows.
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (in thousands) |
| Cash and cash equivalents | $ | 11,043 | | | $ | 35,263 | |
| Restricted cash | 455 | | | 455 | |
| Total | $ | 11,498 | | | $ | 35,718 | |
Fair Value Instruments
The Company records its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities.
Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying values of certain assets and liabilities of the Company, such as cash and cash equivalents and accounts payable, approximate fair value due to their relatively short maturities. The carrying value of the Company’s short-term financial obligations approximates their fair value as the terms of the borrowing are consistent with current market rates and the duration to maturity is short. The carrying value of the Company's long-term financial obligations approximates fair value as interest rates approximate market rates that the Company could obtain for debt with similar terms and maturities.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents and marketable securities, if any. The Company invests its excess cash in money market funds, U.S. treasuries, corporate notes and commercial paper. The Company’s investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. Other than for obligations of the U.S. government, the Company’s policy is that no single issuer in the portfolio shall exceed 10% or $1 million, whichever is greater, of the total portfolio at the time of purchase. Bank deposits are held by a single financial institution having a strong credit rating and these deposits may at times be in excess of FDIC insured limits. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash and cash equivalents to the extent recorded on the balance sheets.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, which range from two to five years for software, computer and office equipment and seven to nine years for furniture, fixtures, and manufacturing and laboratory equipment. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the respective assets.
The Company records as construction-in-progress (“CIP”) property and equipment that has not yet been placed in service for its intended use. All costs prior to a project becoming probable of being constructed are expensed as incurred. After the construction is considered probable, all directly identifiable costs related to an asset are capitalized.
Interest related to construction of assets is capitalized when the financial statement effect of capitalization is material, construction of the asset has begun, and interest is being incurred. Interest capitalization ends at the earlier of the asset being substantially complete and ready for its intended use or when interest costs are no longer being incurred.
When assets are retired or otherwise disposed of, the costs and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statement of operations in the period realized.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for indications of possible impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
There was no impairment of long-lived assets during the years ended December 31, 2021 and 2020.
Leases
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. If the interest rate implicit in the Company's lease contracts is not readily determinable, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
Finance leases are reflected as a liability at the inception of the lease based on the present value of the minimum lease payments or, if lower, the fair value of the property. Assets under finance leases are recorded in property and equipment, net on the balance sheets and depreciated in a manner similar to other property and equipment.
Deferred Financing Costs
Deferred financing costs represent legal, accounting and other direct costs related to the Company’s efforts to raise capital through a public or private sale of the Company’s common stock. These costs are generally deferred until the completion of the applicable offering, at which time such costs are reclassified to additional paid-in-capital as a reduction of the proceeds. In the instance where costs are incurred for a canceled or delayed offering, the deferred financing costs are recorded as expense in the period the offering is canceled or delayed beyond 90 days.
Revenue
On October 1, 2020, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“Topic 606”). Topic 606 supersedes the revenue recognition requirements in Topic 605 Revenue Recognition (“Topic 605”) and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 using the modified retrospective transition method on October 1, 2020 as the Company did not have revenue from the required adoption date of Topic 606 until October 1, 2020.
For all revenue transactions, the Company evaluates its contracts with customers to determine revenue recognition using the following five-step model:
1.Identify the contract(s) with a customer;
2.Identify the performance obligations in the contract;
3.Determine the transaction price;
4.Allocate the transaction price to the identified performance obligations; and
5.Recognize revenue when (or as) the Company satisfies a performance obligation.
Currently, the Company's revenue is related to feasibility studies in which the Company provides research and development services to customers to determine the feasibility of using its System in connection with the customers’ pharmaceuticals. All studies are evidenced by signed contracts delineating the terms of the services provided. Performance obligations generally consist of various phases of research and development activities and the agreements may also include provisions for exclusivity, future licensing negotiation options and most favored pricing. Such additional provisions are analyzed on an individual basis to determine whether they represent performance obligations. The transaction price is stipulated in the specific agreement and is allocated to research and development activities using the cost-plus-margin method and to any additional provisions using the residual value method. Revenue for research and development activities is typically recognized over time using a percentage of completion input method as there is open communication and transfer of understanding and know-how between the parties during the research and development activities. Revenue recognition for exclusivity agreements is recognized ratably over the duration of the exclusivity. The Company analyzes its agreements regularly to determine the need for any reserves for unexpected payment. As of December 31, 2021, the Company has not recorded any such reserves.
Research and Development Expenses
Research and development costs are charged to expense as incurred and consist primarily of costs related to seeking regulatory approval of the Company's primary product candidate, M207, pre-commercialization efforts for M207, clinical trial costs and furthering the Company's research and development efforts. Research and development costs include salaries and related employee benefits, fees paid to contract manufacturing organizations (“CMOs”) that conduct manufacturing activities on behalf of the Company, costs associated with clinical trials, nonclinical research and development activities, regulatory activities, costs of active pharmaceutical ingredients and raw materials and research and development related overhead expenses.
For the year ended December 31, 2021, the Company incurred research and development costs of approximately $7.7 million in connection with the Company's research and development efforts and approximately $13.3 million in the manufacturing of the Company’s System and facility set-up and technology transfer fees to its CMOs. For the year ended December 31, 2020, the Company incurred research and development costs of approximately $7.2 million in connection with the Company’s research and development efforts and approximately $14.4 million in the manufacturing of the Company’s System and facility set-up and technology transfer fees to its CMOs.
Clinical Trial Costs
Clinical trial costs are a component of research and development expenses. The Company expenses clinical trial activities performed by third-parties based upon actual work completed in accordance with agreements established with clinical research organizations and clinical sites. The Company accrues clinical trial expenses each reporting period. The Company estimates the actual costs through discussions with internal personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.
Stock-Based Compensation
The Company has equity incentive plans under which various types of equity-based awards including, but not limited to, non-qualified stock options and restricted stock awards, may be granted to employees, non-employee directors, and non-
employee consultants. The Company’s equity incentive plans also allow incentive stock options to be awarded to employees and, beginning in 2021, the Company has granted options and restricted stock awards to certain employees which vest based on the achievement of certain metrics. The Company has also awarded inducement grants to purchase common stock to new employees outside the existing equity compensation plans in accordance with Nasdaq listing rule 5635(c)(4).
The Company accounts for stock-based compensation based on the fair value of the stock-based awards on the date of grant. The fair value of employee stock option grants is estimated on the date of grant using the Black-Scholes option pricing model and is recognized as expense on a straight-line basis over the awardee’s requisite service period. The fair value of awards which vest based on the achievement of certain metrics is recognized over the expected service period only when the achievement of the metrics is considered probable. Due to the lack of historical exercise data to provide a reasonable basis upon which to estimate an expected term, the Company has opted to use the simplified method, which is the use of the midpoint of the vesting term and the contractual term of the award to estimate the expected term. The Company recognizes the impact of stock option forfeitures on stock-based compensation expense in the period the award is forfeited.
Stock-based compensation expense related to stock options granted to non-employees, if any, is recognized based on the fair value of the stock options as determined using the Black-Scholes option pricing model, as earned.
Common Stock Warrants
The Company has issued freestanding warrants to purchase shares of common stock in connection with equity offerings, debt agreements and a build-to-suit arrangement. The warrants are recorded at fair value using the Black-Scholes option pricing model.
Income Taxes
The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Financial statement effects of uncertain tax positions are recognized when it is more-likely-than-not, based on the technical merits of the position, that they will be sustained upon examination. Interest and penalties related to unrecognized tax benefit, if any, would be included within the provision for income tax. As of December 31, 2021 and 2020, the Company has a full valuation allowance on its net deferred tax assets.
Interest Expense
Interest expense includes cash and non-cash components with the non-cash components consisting of (i) interest recognized from the amortization of debt discount and issuance costs that are generally derived from cash payments or warrants issued related to financing obligations, (ii) interest recognized from the amortization of purchase option and termination fees related to financing obligations, offset by (iii) interest capitalized for assets constructed for use in operations.
The capitalized amounts related to the debt issuance costs and debt discounts are generally amortized to interest expense over the term of the related debt instruments unless they are attributable to assets constructed for use in operations and are therefore capitalized as construction-in-progress until the asset is substantially complete and ready for its intended use.
Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, common stock warrants, stock options and restricted stock units (“RSUs”) are considered to be potential dilutive securities but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.
The following outstanding common stock equivalents were excluded from the computations of diluted net loss per common share for the periods presented as the effect of including such securities would be antidilutive:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (shares) |
| Options to purchase common stock | 5,315,721 | | | 2,724,537 | |
| RSUs | 995,396 | | | 335,004 | |
| Warrants to purchase common stock | 728,535 | | | 5,148,108 | |
| Total | 7,039,652 | | | 8,207,649 | |
Smaller Reporting Company Status
As of December 31, 2020, the Company was no longer an emerging growth company as designated by the U.S. Securities and Exchange Commission (the “SEC”) as a result of its status as a public entity for five years. Because the aggregate worldwide market value of the voting and non-voting common equity of the Company held by non-affiliates as of June 30, 2021 was less than $700 million and the Company's revenues for the year ended December 31, 2021 were less than $100 million, the Company will continue as a smaller reporting company as designated by the SEC, and as such, it will be able to use the exemptions from certain reporting requirements available to smaller reporting companies.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This new guidance simplifies the accounting for income taxes by removing certain exceptions to general principles, clarifying requirements and including amendments to improve consistent application of the guidance. The guidance specifically removes the exception to the incremental approach for intra period tax allocation when there is a loss from continuing operations and income or a gain from other items, such as discontinued operations or other comprehensive income. The guidance also requires an entity to recognize a franchise tax that is partially based on income as an income-based tax and to account for any other amounts incurred as a non-income based tax. The Company adopted the guidance beginning January 1, 2021 using a prospective approach. The adoption of the guidance did not have a material impact on its financial statements.
3. Master Services Agreement with Eversana
On August 6, 2020, the Company entered into a master services agreement (the “Eversana Agreement”) with Eversana Life Science Services, LLC (“Eversana”) for the commercialization of M207 in the United States, if approved by the FDA. Under the terms of the Eversana Agreement, the Company maintains ownership of the M207 NDA as well as all legal, regulatory and manufacturing responsibilities for M207. Eversana receives an exclusive right to conduct agreed commercialization activities and will utilize its internal sales organization along with its other commercial capabilities for market access, marketing, distribution and patient support services for M207. Eversana will receive reimbursement of certain commercialization costs pursuant to a commercialization budget originally estimated at approximately $250.0 million and a low double digit to mid-teen percentage of product profits if and when the Company's net sales of M207 surpass certain costs incurred by the parties pursuant to the commercialization budget.
The term of the Eversana Agreement is five years following the date, if any, that the FDA approves the M207 NDA. The Company may terminate the Eversana Agreement if Eversana fails to provide pre-commercial or commercial plans and budgets by specified dates, if the Company decides to discontinue development or commercialization efforts for M207 in the United States (subject to a termination payment if such termination occurs within a specified time period), or upon a change of control of the Company. Either party could terminate the Eversana Agreement if FDA approval was not received by July 31, 2021, if net profits are not realized within a specified time period following commercial launch, for material breach of the Eversana Agreement by the other party that is not cured within a defined time period, for insolvency of the other party, if M207 is subject to a safety recall in the United States or if M207 is not commercially launched within a specified time period after FDA approval of the NDA (other than by reason of the terminating party’s failure to perform its obligations under the Eversana Agreement).
In addition, under the Eversana Agreement, following FDA approval of the M207 NDA, Eversana agreed to provide a revolving credit facility of up to $5.0 million (the “Credit Facility”) to the Company pursuant to a loan agreement to be entered into between Eversana and the Company on a subsequent date. The loan will bear interest at an annual rate equal to 10.0%, to be paid monthly, and the Company will be able to prepay any amounts borrowed under the Credit Facility at any time without
penalty or premium. The Credit Facility will be secured by substantially all of the Company’s assets, subject to prior liens and security interests.
On September 28, 2021, the Company entered into Amendment No. 1, effective as of September 29, 2021 (the “Eversana Amendment”), to the Eversana Agreement, which modified the provision in the Eversana Agreement that provided for termination by either party of the Eversana Agreement if FDA approval was not received by July 31, 2021 to December 31, 2021, with written notice within sixty days of such date. In addition, the Eversana Amendment provides that if the NDA is approved, the deferral mechanism, payment terms and loan terms in the Eversana Agreement will be adjusted as mutually agreed by both parties. Neither party exercised its right to terminate the Eversana Agreement due to FDA approval not being received by December 31, 2021.
The Company is accounting for the Eversana Agreement as a collaborative arrangement. As of December 31, 2021, no material accruals, expenses, payments, or revenues have been recorded by the Company in connection with the Eversana Agreement.
4. Cash Equivalents
The following table summarizes the Company's cash equivalents at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021: | | | Fair Value Measurements |
| | Total | | Quoted prices in active market
Level 1 | | Significant other observable inputs
Level 2 | | Significant unobservable inputs
Level 3 |
| | (in thousands) |
| Money market funds classified as cash equivalents | $ | 9,421 | | | $ | 9,421 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020: | | | Fair Value Measurements |
| | Total | | Quoted prices in active market
Level 1 | | Significant other observable inputs
Level 2 | | Significant unobservable inputs
Level 3 |
| | (in thousands) |
| Money market funds classified as cash equivalents | $ | 33,918 | | | $ | 33,918 | | | $ | — | | | $ | — | |
5. Balance Sheet Components
Prepaid Expenses and Other Current Assets
The following table summarizes the Company’s prepaid expenses and other current assets for each of the periods presented:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| | (in thousands) |
| Prepaid services | $ | 146 | | | $ | 97 | |
| Prepaid software and subscriptions | 87 | | | 118 | |
| Deferred offering costs | 85 | | | 48 | |
| Prepaid insurance | 79 | | | 66 | |
| Unbilled revenue | — | | | 124 | |
| Other | 23 | | | — | |
| Total | $ | 420 | | | $ | 453 | |
Property and Equipment
The following table summarizes the Company’s property and equipment for each of the periods presented:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (in thousands) |
| Leasehold improvements | $ | 24,301 | | | $ | 24,212 | |
| Manufacturing equipment | 15,075 | | | 14,893 | |
| Laboratory and office equipment | 1,641 | | | 1,641 | |
| | | |
| Computer equipment and software | 181 | | | 172 | |
| | | |
| Construction-in-progress | 21,348 | | | 18,239 | |
| Property and equipment at cost | 62,546 | | | 59,157 | |
| Less: accumulated depreciation | (29,989) | | | (28,248) | |
| | | |
| Total | $ | 32,557 | | | $ | 30,909 | |
Depreciation expense was approximately $1.8 million and $1.4 million for the years ended December 31, 2021 and 2020, respectively.
Construction-in-progress included $16.5 million and $14.6 million of an asset relating to the build-to-suit arrangement for construction of the Company's commercial coating and primary packaging system as of December 31, 2021 and 2020, respectively, of which capitalized construction period interest was $3.3 million and $2.4 million as of December 31, 2021 and 2020, respectively (See Note 7. Debt Financing).
Other Accrued Liabilities
The following table summarizes the Company’s other accrued liabilities for each of the periods presented:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (in thousands) |
| Construction-in-progress obligations | $ | 918 | | | $ | 2,993 | |
| Pre-clinical and clinical studies | 397 | | | 22 | |
| Professional service fees | 258 | | | 175 | |
| Deferred revenue | 26 | | | — | |
| Contract manufacturing services | 17 | | | 71 | |
| | | |
| Other | 202 | | | 106 | |
| Total | $ | 1,818 | | | $ | 3,367 | |
6. Leases
Operating Leases
The Company has a non-cancelable operating lease for office, research and development, and manufacturing facilities in Fremont, California through August 31, 2024, with an option to further extend the lease for an additional 60 months subject to certain terms and conditions. The operating lease right-of-use asset and associated lease liability do not consider the option to extend the term after August 31, 2024, as the Company is not reasonably certain of exercising the extension option. Per the terms of the agreement, the Company does not have any residual value guarantees, restrictions or covenants. In calculating the present value of the lease payments, the Company utilized its incremental borrowing rate, as the rates implicit in the lease were not readily determinable. The Company estimates its incremental borrowing rate based on qualitative factors including company specific credit offers, lease term, general economics and the interest rate environment. The Company accounts for lease and non-lease components separately. The building lease includes non-lease components (i.e. common area maintenance) which are charged and paid separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and lease liability but reflected in operating expense in the period incurred.
As of December 31, 2021, the Company had operating leases for manufacturing space at its CMOs. The operating leases are embedded in agreements with these CMOs that include lease and non-lease components. The Company accounts for lease and non-lease components separately and determined the value of the lease and non-lease components of the agreements based upon estimates of relative standalone prices and a residual estimation approach for components that are highly variable or uncertain and where standalone prices were not readily available or estimable. These agreements have initial terms and options to extend that are dependent upon FDA approval of the Company's NDA for M207. Both agreements have cancellation clauses if the FDA does not approve the NDA for M207. The Company has recorded right-of-use assets and lease liabilities at the present value of the amount in each CMO agreement that was identified as an embedded operating lease. The lease term does not extend past the estimated date of an FDA approval decision, as it is not reasonably certain that the Company would continue in the agreements in the event that M207 was not approved. Pursuant to the terms of the agreements, the Company does not have any residual value guarantees, restrictions or covenants. In calculating the present value of the lease payments, the Company utilized its incremental borrowing rate, as the rates implicit in the leases were not readily determinable. The Company estimates its incremental borrowing rate based on qualitative factors including company specific credit offers, lease term, general economics and the interest rate environment. Prior to the receipt of a discipline review letter from the FDA on September 29, 2020, which indicated that an approval was unlikely, any embedded leases within these agreements were not considered long-term and were not separately disclosed as lease commitments, but included as commitments to CMOs in the commitments and contingencies footnote of the financial statements. The establishment of the embedded leases resulted in $146,000 of right-of-use assets and associated lease liabilities and was reflected as a non-cash operating activity in the statement of cash flows for the year ended December 31, 2020.
The following table summarizes the impact of the Company's operating leases on its financial statements for each period presented:
| | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 |
| (in thousands) |
| Statements of Operations: | | | |
| Operating lease costs | $ | 1,756 | | | $ | 1,706 | |
| Statements of Cash Flows: | | | |
| Operating cash flows from operating leases - cash paid for operating leases | $ | 1,976 | | | $ | 1,877 | |
The following table summarizes the lease terms and discount rates for the Company's operating leases as of December 31, 2021:
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | | | | |
| Operating leases |
| |
| Weighted-average remaining lease term (in years) | 2.64 |
| Weighted average discount rate | 11 | % |
None.
The following table summarizes the maturities of the Company's operating lease liabilities for each year ending December 31, as of December 31, 2021:
| | | | | |
| Operating leases |
| (in thousands) |
| 2022 | $ | 2,042 | |
| 2023 | 2,017 | |
| 2024 | 1,371 | |
| Total undiscounted cash flows | 5,430 | |
| Less: amount representing interest | (743) | |
| Present value of lease liabilities | $ | 4,687 | |
| |
| Current portion | $ | 1,606 | |
| Long-term portion | 3,081 | |
| Total | $ | 4,687 | |
7. Debt Financing
Build-to-Suit Obligation with Trinity
The Company has a build-to-suit arrangement (the “Trinity Agreement”) with Trinity Funding 1, LLC (successor to Trinity Capital Fund III, L.P.) (“Trinity”) to finance the third-party construction of the Company's commercial coating and primary packaging system (the “Equipment”), which was delivered to the Company's CMO in the first quarter of 2021 for installation and qualification. Under the Trinity Agreement, Trinity provided the Company $14.0 million for equipment costs and associated soft costs (“Total Cost”), with an initial drawdown of $5.0 million and additional drawdowns in increments of not less than $0.5 million. Under the Trinity Agreement, each individual drawdown represents a separate financing arrangement with its own term and stated interest rate. Each drawdown is non-cancelable, with no prepayment options. In consideration of the financing arrangement, as collateral, the Company granted Trinity a first-priority lien and security interest in substantially all of the Company's assets.
On May 27, 2020, the Company entered into the First Amendment to Lease Documents (the “Trinity Amendment”). The Trinity Amendment, among other things, extended each individual drawdown term from 36 months to 42 months by providing for an interest-only period from May 2020 through October 2020. Principal payments recommenced November 1, 2020. Additionally, the Trinity Amendment removed all end-of-term options other than the option to purchase the equipment at 12% of the Total Cost, which is equal to the drawdown amount (“Purchase Option Fee”), which the Company intends to exercise at the end of each 42-month-term. The transfer of title from Trinity to the Company will occur at the end of the final 42-month-term, provided that the purchase option was executed, and the Purchase Option Fee was paid in full at the end of each 42-month-term. The security interest will terminate on the earlier to occur of (i) the date that falls six (6) months after the delivery and installation of the Equipment or (ii) payment in full of all amounts owed. The Company accounted for the Trinity Amendment as a debt modification under ASC 470-50, as the amended terms were not substantially different from the terms of the Trinity Agreement. On March 11, 2022, the Company entered into the Second Amendment to Lease Documents with Trinity, as described in Note 13. Subsequent Events.
The Company determined that it controls the Equipment during the construction period due to its involvement in and its obligations related to the construction of the Equipment. Accordingly, construction costs incurred were recorded as construction-in-progress, a component of property and equipment on the balance sheet, and the Trinity financing obligation was recorded as a build-to-suit obligation on the balance sheet. As of December 31, 2021, the Company had an aggregate commercial coating and primary packaging system CIP balance of $16.5 million, that included $3.3 million of interest related to its build-to-suit obligation.
In connection with the build-to-suit arrangement, the Company issued common stock warrants (“Trinity Warrants”) for a total of 75,000 shares of common stock at an exercise price of $3.5928 per share. The Trinity Warrants expire on September 25, 2025. Proceeds allocated to the Trinity Warrants based on their relative fair value approximated $0.2 million and were recorded as a discount to the initial $5.0 million drawdown under the Trinity financing arrangement and are being amortized as interest over the term of the September 2018 drawdown.
The Trinity build-to-suit arrangement requires compliance with various affirmative and restrictive covenants in regard to making certain investments and other restricted payments, engaging in mergers or consolidations, and the sale or transfer of certain assets. Failure to comply with any of these covenants, or pay principal, interest or other amounts when due, would constitute an event of default under the applicable agreement. The Company was in compliance with its covenants with respect to the Trinity build-to-suit arrangement as of December 31, 2021.
The following table summarizes the debt obligations as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Drawdown Date | | Drawdown Amount | | Principal Balance | | Purchase Option Fee | | Discount on Purchase Option Fee | | Unamortized Discounts and Issuance Costs | | Monthly Payment | | | | Stated Interest Rate | | Amended Effective Interest Rate | | Maturity Date |
| | (in thousands) | | | | | | |
| 09/25/2018 | | $ | 5,000 | | | $ | 314 | | | $ | 600 | | | $ | (1) | | | $ | (7) | | | $ | 160 | | | | | 9.43 | % | | 24.38 | % | | 04/01/2022 |
| 12/11/2018 | | 2,800 | | | 435 | | | 336 | | | (2) | | | (7) | | | 90 | | | | | 9.68 | % | | 18.25 | % | | 07/01/2022 |
| 06/06/2019 | | 2,300 | | | 770 | | | 276 | | | (7) | | | (23) | | | 74 | | | | | 9.93 | % | | 18.08 | % | | 01/01/2023 |
| 09/13/2019 | | 2,300 | | | 968 | | | 276 | | | (12) | | | (36) | | | 74 | | | | | 9.93 | % | | 18.04 | % | | 04/01/2023 |
| 11/27/2019 | | 1,600 | | | 764 | | | 192 | | | (10) | | | (34) | | | 52 | | | | | 9.93 | % | | 18.16 | % | | 06/01/2023 |
| Total | | $ | 14,000 | | | $ | 3,251 | | | $ | 1,680 | | | $ | (32) | | | $ | (107) | | | $ | 450 | | | | | | | | | |
The following table summarizes of the Company's build-to-suit obligation as of December 31, 2021 (in thousands):
Item 9A. | CONTROLS AND PROCEDURES | | | | | | | |
| Build-to-suit obligation principal amount | | $ | 3,251 | |
| Build-to-suit obligation Purchase Option Fees at present value | | 1,648 | |
| Less: unamortized Purchase Option Fees, discounts and issuance costs | | (107) | |
| | |
| | |
| | |
| Build-to-suit obligation, net of debt issuance costs and discounts | | $ | 4,792 | |
| | |
| Build-to-suit obligation, current portion, net of debt issuance costs and discounts | | $ | 3,822 | |
| Build-to-suit obligation, long-term portion, net of debt issuance costs and discounts | | 970 | |
| Build-to-suit obligation, net of debt issuance costs and discount | | $ | 4,792 | |
The following table summarizes future minimum payments on the Company’s build-to-suit obligation, including payments of principal and interest and Purchase Option Fees for each year ending December 31 as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Principal | | Interest | | Purchase Option Fees | | Total |
| (in thousands) |
| 2022 | $ | 2,905 | | | $ | 189 | | | $ | 936 | | | $ | 4,030 | |
| 2023 | 346 | | | 8 | | | 744 | | | 1,098 | |
| | | | | | | |
| Total | $ | 3,251 | | | $ | 197 | | | $ | 1,680 | | | $ | 5,128 | |
The following table summarizes interest incurred on the Company's build-to-suit obligation for each of the periods presented:
| | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 |
| (in thousands) |
| Build-to-suit obligation, cash interest expense | $ | 618 | | | $ | 926 | |
| Build-to-suit obligation, effective interest expense | 433 | | | 711 | |
| Less: build-to-suit obligation, interest capitalized | (872) | | | (965) | |
| Build-to-suit obligation interest expense | $ | 179 | | | $ | 672 | |
PPP Loan
On April 21, 2020, the Company executed a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $1.6 million under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (“PPP”) was established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). On June 10, 2021, the Company was notified by its lender, Silicon Valley Bank, that its PPP Loan, in the amount of $1,610,000 in principal and $18,515 in accrued interest, was forgiven in its entirety by the SBA. The forgiveness of the PPP Loan and accrued interest was recorded as a gain in other income (expense), net in the Company's statement of operations in the second quarter of 2021.
8. Stockholders’ Equity
Shelf Registration Statements
2021 Shelf Registration Statement
The Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective by the SEC on July 14, 2021 (the “2021 Shelf Registration Statement”). The 2021 Shelf Registration Statement provides the Company with the ability to issue common stock and other securities as described in the registration statement from time to time up to an aggregate amount of $150.0 million, dependent upon available shares. In February 2022, the Company used approximately $33.1 million of the $150.0 million.
2020 Shelf Registration Statement
The Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective by the SEC on April 16, 2020 (the “2020 Shelf Registration Statement”). The 2020 Shelf Registration Statement provides the Company with the ability to issue common stock and other securities as described in the registration statement from time to time up to an aggregate amount of $74.5 million, of which approximately $3.7 million was available at December 31, 2021, dependent upon available shares.
At-the-Market Offering Programs
At-the-Market Offering Program - 2021
On June 28, 2021, the Company entered into a Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co. and H.C. Wainwright & Co., LLC (together, the “Sales Agents”) to establish an at-the-market offering program (the “2021 ATM”), under which the Company may sell from time to time, at its option, up to an aggregate of $30.0 million of shares of its common stock. Shares sold under the 2021 ATM are issued pursuant to the Company’s 2020 Shelf Registration Statement and a prospectus supplement dated June 28, 2021. The Company is required to pay the Sales Agents a commission of 3% of the gross proceeds from the sale of shares and has also agreed to provide the Sales Agents with customary indemnification rights. During the year ended December 31, 2021, the Company issued and sold 6,869,022 shares of its common stock at an average price of $0.72 per share under the 2021 ATM for aggregate net proceeds of $4.6 million after deducting commissions and offering expenses payable by the Company. As of December 31, 2021, the Company has up to approximately $25.0 million available to be offered and sold under the 2021 ATM, dependent upon available authorized shares.
At-the-Market Offering Program - 2020
On June 8, 2020, the Company entered into a sales agreement with BTIG, LLC (“BTIG”) as sales agent to establish an at-the-market offering program (the “2020 ATM”), under which the Company was permitted to offer and sell, from time to time, shares of common stock having a maximum aggregate offering price of up to $20.0 million. The Company was required to pay BTIG a commission of 3% of the gross proceeds from the sale of shares and also agreed to provide BTIG with customary indemnification rights. During the year ended December 31, 2021, the Company issued and sold 6,931,607 shares of its common stock at an average price of $0.84 per share under the 2020 ATM for aggregate net proceeds of $5.5 million after deducting commissions and offering expenses payable by the Company. During the year ended December 31, 2020, the Company issued and sold 13,237,026 shares of its common stock at an average price of $1.07 per share under the 2020 ATM with aggregate net proceeds of approximately $13.5 million after deducting commissions and offering expenses payable by the Company. The shares were sold pursuant to the Company’s 2020 Shelf Registration Statement and a prospectus supplement dated June 8, 2020. No shares remain available for sale under the 2020 ATM.
At-the-Market Offering Program – 2019
On August 19, 2019, the Company entered into a sales agreement with BTIG, as sales agent, to establish an at-the-market offering program (the “2019 ATM”), under which the Company was permitted to offer and sell, from time to time, shares of common stock having a maximum aggregate offering price of up to $15.0 million. The Company was required to pay BTIG a commission of 3% of the gross proceeds from the sale of shares and also agreed to provide BTIG with customary indemnification rights. During the year ended December 31, 2020, the Company issued and sold 2,151,346 shares of its common stock at an average price of $1.30 per share under the 2019 ATM. The aggregate net proceeds were approximately $2.7 million after BTIG's commissions and other offering expenses. The shares were sold pursuant to an effective registration statement and a prospectus supplement dated August 19, 2019. On March 4, 2020, the Company delivered notice of termination of the sales agreement to BTIG. The Company did not incur any termination penalties as a result of its termination of the sales agreement.
Offerings
Offering - September 2020
On August 31, 2020, the Company entered into an underwriting agreement with BTIG, pursuant to which the Company issued and sold 15,937,130 shares of its common stock to BTIG at a price of $1.304 per share. The offering closed on September 3, 2020. The Company received net proceeds of approximately $20.3 million after deducting expenses payable by the Company in connection with the offering. The shares were sold pursuant to the 2020 Shelf Registration Statement and the prospectus supplement dated August 31, 2020.
Registered Direct Offering - March 2020
On March 4, 2020, the Company entered into a securities purchase agreement with certain institutional investors for the issuance and sale in a registered direct offering (the “March 2020 Offering”) of (i) 11,903,506 shares of the Company’s
common stock and (ii) Series E Warrants to purchase up to a total of 11,903,506 shares of common stock at an offering price of $0.9275 per share and accompanying warrant. The Series E Warrants have an exercise price of $0.8025 per share, were immediately exercisable and expire five years from the date of issuance. The aggregate net proceeds from the offering were approximately $10.2 million, after deducting the placement agent fees and other offering expenses. During the year ended December 31, 2021, Series E Warrants to purchase 4,078,667 shares of common stock were exercised at an exercise price of $0.8025 per share for aggregate proceeds of approximately $3.3 million. During the year ended December 31, 2020, Series E Warrants to purchase 7,194,004 shares of common stock were exercised at an exercise price of $0.8025 per share for aggregate proceeds of approximately $5.8 million. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement dated March 4, 2020.
Public Offering - February 2020
On February 14, 2020, the Company closed an underwritten offering (the “February 2020 Offering”) for the issuance and sale of (i) 10,146,154 Class A Units, each consisting of 1 share of common stock and 1 Series C Warrant to purchase 1 share of common stock, at a public offering price of $0.65 per Class A Unit, and (ii) 2,161,539 Class B Units, each consisting of 1 Series D Pre-Funded Warrant to purchase 1 share of common stock and 1 Series C Warrant to purchase 1 share of common stock, at a public offering price of $0.6499 per Class B Unit. The Series C Warrants have an exercise price of $0.65 per share, were immediately exercisable and expire five years from the date of issuance. The Series D Pre-Funded Warrants had an exercise price of $0.0001 per share and were fully exercised in connection with the closing of the offering. The Company granted the underwriter a 30-day option to purchase up to an additional 1,846,153 shares of common stock and/or additional Series C Warrants to purchase up to 1,846,153 shares of common stock. The underwriter fully exercised its option to purchase the shares and the Series C Warrants. The aggregate net proceeds from the offering were $8.3 million after deducting underwriting discounts and commissions and other offering expenses. During the year ended December 31, 2021, Series C Warrants to purchase 145,000 shares of common stock were exercised at an exercise price of $0.65 per share for aggregate proceeds of approximately $0.1 million. During the year ended December 31, 2020, Series C Warrants to purchase 13,986,146 shares of common stock were exercised at an exercise price of $0.65 per share for aggregate proceeds of approximately $9.1 million. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement dated February 12, 2020.
Common Stock Warrants
The following table summarizes the Company's issued and outstanding common stock warrants:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Warrants Outstanding as of December 31, 2020 | | Issued | | Exercised | | Expired | | Warrants Outstanding as of December 31, 2021 | | Exercise Price | | Expiration Date |
| Series E - March 2020 | | 4,709,502 | | | — | | | (4,078,667) | | | — | | | 630,835 | | | $ | 0.8025 | | | 03/06/25 |
| Series C - February 2020 | | 167,700 | | | — | | | (145,000) | | | — | | | 22,700 | | | $ | 0.6500 | | | 02/14/25 |
| Trinity - September 2018 | | 75,000 | | | — | | | — | | | — | | | 75,000 | | | $ | 3.5928 | | | 09/25/25 |
| Series B - August 2016 | | 195,906 | | | — | | | — | | | (195,906) | | | — | | | 0 | | |
| Total | | 5,148,108 | | | — | | | (4,223,667) | | | (195,906) | | | 728,535 | | | | | |
Each warrant grants the holder the right to purchase 1 share of common stock. Equity warrants are recorded at their relative fair market value in the stockholders’ equity section of the balance sheet. The Company’s equity warrants can only be settled through the issuance of shares and do not have any anti-dilution or price reset provision.
Series C and Series E Warrants
The Company issued Series C Warrants in its February 2020 Offering and Series E Warrants in its March 2020 Offering. The Company evaluated the Series C and Series E Warrants under ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, and determined permanent equity treatment was appropriate for these freestanding financial instruments. The March 2020 Offering and the February 2020 Offering did not include any embedded features that would require bifurcation. Each Series C and Series E common stock warrant grants the holder the right to purchase 1 share of common stock, subject to proportional adjustments in the event of stock splits, combinations or similar events. The Series C and Series E Warrants do not have any dividend or liquidation preferences or participation rights. Subject to certain conditions, the warrants are exercisable on a cashless basis, and subject to certain beneficial ownership limitations, any unexercised Series C or Series E Warrants will be automatically exercised via cashless exercise on the expiration date pursuant to the terms of the respective warrant agreements.
Trinity Warrants
In connection with its build-to-suit arrangement, the Company issued the Trinity Warrants for a total of 75,000 shares of common stock at an exercise price of $3.5928 per share. The Trinity Warrants expire on September 25, 2025. Proceeds allocated to the Trinity Warrants based on their relative fair value approximated $0.2 million and were recorded as a discount to the initial $5.0 million drawdown under the Trinity financing arrangement and are being amortized as interest over the 36-month-term of the September 2018 drawdown.
Series B Warrants
On August 15, 2016, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) between the Company and certain investors, including members of the Company’s board of directors and executive management, pursuant to which the Company sold and issued shares of common stock and warrants to purchase shares of common stock. In connection with the Purchase Agreement, the Company issued Series B Warrants, which had a per share exercise price of $31.00 and expired in August 2021.
9. Stock-Based Compensation
The 2012 Stock Incentive Plan
The 2012 Stock Incentive Plan (“2012 Plan”) provided for the granting of stock options and restricted stock awards to employees, directors and consultants of the Company. Options granted under the 2012 Plan were either incentive stock options or nonqualified stock options. Incentive stock options were granted only to Company employees. Nonqualified stock options were granted to Company employees, outside directors and consultants. Options and awards under the 2012 Plan were granted for periods of up to ten years. Employee options granted by the Company generally vested over four years. In connection with the Company’s initial public offering of its common stock, the Company’s Board of Directors terminated the 2012 Plan effective as of January 27, 2015 and no further awards were issued under the 2012 Plan. However, any awards outstanding under the 2012 Plan at January 27, 2015 continue to be governed by the terms of the 2012 Plan.
The Amended and Restated 2014 Equity and Incentive Plan
The Amended and Restated 2014 Equity and Incentive Plan (“2014 Plan”) provides for the issuance of (i) cash awards and (ii) equity-based awards, denominated in shares of the Company’s common stock, including incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs, unrestricted stock awards, performance share awards and dividend equivalent rights. Incentive stock options may be granted only to Company employees. Nonqualified stock options may be granted to Company employees, outside directors and consultants.
Options and awards under the 2014 Plan may be granted for periods of up to ten years. Employee options granted by the Company generally vest over four years. Options granted by the Company to outside directors typically vest over four years from the initial grant and over one year for annual refresh grants. RSUs granted to employees typically vest annually over four years. Upon vesting, each RSU is settled into 1 share of the Company’s common stock. RSUs granted to members of the Board of Directors typically vest fully after one year. The value of an RSU award is based on the Company’s closing stock price on the date of grant. Stock-based compensation expense is recognized straight-line over the vesting term.
Beginning in 2021, the Company granted options and RSUs to certain employees which vest based on the achievement of certain metrics. The terms of each such awards are specific to the individual award. The fair value of such awards is determined on the grant date. Stock-based compensation associated with such awards is recognized over the expected service period only when the achievement of the metrics is considered probable. In 2021, the Company granted a total of 407,500 metrics-based options with a weighted-average exercise price per share of $0.63 and 203,750 metrics-based RSUs with a weighted-average grant date fair value per share of $0.63. All of these options and RSUs were outstanding as of December 31, 2021. As of December 31, 2021, the achievement of the metrics associated with these awards was not considered probable and, as such, no stock-based compensation was recorded in connection with these awards.
On January 1, 2021, the number of shares of common stock authorized for issuance under the 2014 Plan was increased by 3,572,317 shares pursuant to the automatic annual increase provisions of the 2014 Plan. As of December 31, 2021, 289,439 shares of common stock were available for issuance under the 2014 Plan.
Inducement Grants
The Company has granted non-statutory stock options to purchase common stock to new employees as inducement grants outside the existing equity compensation plans in accordance with Nasdaq listing rule 5635(c)(4). Such options vest at a rate of
25% of the shares on the first anniversary of the commencement of such employee’s employment with the Company, and then one forty-eighth (1/48) of the shares monthly thereafter subject to such employee’s continued service.
Options and RSUs
The following table summarizes activity under the 2012 Plan, the 2014 Plan and inducement grants issued to new employees outside of the 2014 Plan in accordance with Nasdaq Listing Rule 5635(c)(4) for the years ended December 31, 2020 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options | | RSUs |
| | Number
of Options | | Weighted-
Average
Exercise
Price per Share | | Weighted-
Average
Remaining
Contractual
Term
(In Years) | | Number of RSUs | | Weighted Average Grant Date Fair Value per Share |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Balance as of January 1, 2020 | | 2,260,307 | | | $ | 4.29 | | | 7.20 | | — | | | 0 |
| Granted | | 923,925 | | | $ | 0.97 | | | | | 343,442 | | | $ | 0.84 | |
| Canceled/forfeited/expired | | (459,695) | | | $ | 3.40 | | | | | (8,438) | | | $ | 0.84 | |
| Balance as of December 31, 2020 | | 2,724,537 | | | $ | 3.31 | | | 8.19 | | 335,004 | | | $ | 0.84 | |
| Granted | | 2,994,000 | | | $ | 1.00 | | | | | 874,000 | | | $ | 1.04 | |
| Released | | — | | | $ | — | | | | | (115,299) | | | $ | 0.84 | |
| Canceled/forfeited/expired | | (402,816) | | | $ | 2.71 | | | | | (98,309) | | | $ | 1.08 | |
| Balance as of December 31, 2021 | | 5,315,721 | | | $ | 2.06 | | | 8.05 | | 995,396 | | | $ | 0.99 | |
| Exercisable at December 31, 2021 | | 2,029,032 | | | $ | 3.58 | | | 6.24 | | | | |
The weighted-average grant-date fair value of options granted during the years ended December 31, 2021 and 2020 was $0.87 and $0.77, respectively. The aggregate intrinsic value of outstanding options at December 31, 2021 was $2,000. The aggregate intrinsic value is calculated as the difference between the exercise price of the option and the estimated fair value of the Company’s common stock for in-the-money options at December 31, 2021. The total fair value of options and awards that vested during the years ended December 31, 2021 and 2020 was $1.4 million and $1.6 million, respectively.
Stock-Based Compensation Expense
Total stock-based compensation expense recognized was as follows:
| | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | (in thousands) |
| Research and development | $ | 646 | | | $ | 674 | |
| General and administrative | 1,254 | | | 909 | |
| Total | $ | 1,900 | | | $ | 1,583 | |
At December 31, 2021, the Company had $3.6 million of total unrecognized stock-based compensation related to outstanding stock options and RSUs. The weighted-average remaining vesting period for non-vested stock options was 2.51 years.
The following table presents the weighted-average assumptions for the Black-Scholes option-pricing model used in determining the fair value of options granted to employees:
| | | | | | | | | | | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| Risk-free interest rate | 0.80% - 1.35% | | 0.37% - 0.95% |
| Expected volatility | 118.00%-122.86% | | 114.58%-120.42% |
| Expected term (years) | 5.50 - 6.08 | | 5.50 - 6.08 |
| Dividend yield | —% | | —% |
10. Commitments and Contingencies
Contract Manufacturing Organizations
The Company has a technology transfer agreement and a manufacturing and supply agreement with a CMO to provide services related to the manufacture and commercialization of M207. During the term of the agreement, the CMO will provide services related to processing, packaging, labeling and storing M207, in addition to other services such as stability testing, quality control and assurance, and waste disposal.
The agreements call for annual fees of $2.8 million in 2021, $4.6 million in 2022, $11.5 million in 2023 and $14.0 million in 2024 and beyond, to be paid in equal monthly installments. The annual fee includes the production of a defined number of units with an option to purchase additional units at a defined price, the technology transfer in 2021 and 2022, and other operating expenses. The agreement contains negotiated representations and warranties, indemnification, limitations of liability, and other provisions. The initial term of the manufacturing and supply agreement continues until the seventh anniversary of the date on which the Company receives NDA approval of M207 in the United States.
The Company may terminate the agreements upon denial of regulatory approvals or if regulatory approvals are withdrawn under certain circumstances for the cost to remove the Company's equipment and restore the CMO's facility, which is recorded at present value as a liability on the balance sheet. The Company may also elect to terminate the contracts for convenience, which would result in cancellation fees in the amount of 50% of the annual fee due in the year that the contract is terminated, and costs to remove the Company's equipment and restore the CMO's facility. The Company or the CMO may terminate the agreement for the other’s uncured material breach, uncured force majeure or bankruptcy or insolvency-related events.
The Company has non-cancelable commitments with this CMO for the construction of manufacturing space and technology transfer fees totaling $3.3 million, of which $0.8 million was a current liability on the balance sheet as of December 31, 2021.
The Company has additional agreements with CMOs to provide services related to the manufacture and assembly of component parts of M207. Under these agreements, the Company may be required to pay up to an aggregate of $7.4 million in various fees and minimum purchase requirements; however, significant portions of these payments may not be required if the FDA does not approve M207, and no such payment will be required in the event of a material breach by a CMO.
Indemnification and Guarantees
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. The Company also has indemnification obligations to its officers and directors for specified events or occurrences, subject to some limits, while they are serving at the Company’s request in such capacities. There have been no claims to date and the Company has director and officer insurance that may enable the Company to recover a portion of any amounts paid for future potential claims. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2021.
Legal Proceedings
On October 29, 2020 and November 6, 2020, 2 stockholders filed alleged class action lawsuits against the Company and certain of its current and former executive officers in the United States District Court for the Northern District of California: Carr v. Zosano Pharma Corporation, et al., Case No. 3:20-cv-07625, and Becerra v. Zosano Pharma Corporation, et al., Case No. 3:20-cv-07850. The complaints were filed purportedly on behalf of all persons who purchased or otherwise acquired the Company's securities between February 13, 2017 and September 30, 2020 (the “Class Period”). The complaints alleged that the Company and certain of its current and former executive officers made false and/or misleading statements and failed to disclose material adverse facts about the Company's business, operations and prospects in violation of Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The plaintiffs sought damages, interest, costs, attorneys’ fees and other unspecified relief. On February 4, 2021, the Carr and Becerra actions were consolidated and the court appointed 2 Co-Lead Plaintiffs and 2 law firms as Co-Lead Counsel in the consolidated action (the “Securities Action”). The Co-Lead Plaintiffs filed their consolidated amended complaint on March 30, 2021, which alleged the same claims as the previous complaints and extended the Class Period through October 20, 2020. The Company filed a motion to dismiss the consolidated amended complaint on May 14, 2021; the Co-Lead Plaintiffs filed their opposition brief on June 14, 2021; and the Company filed a reply brief on July 6, 2021. The hearing on the motion was held on July 22, 2021 and the Court took the motion under submission. On September 1, 2021, the Court issued an order granting the
Company’s motion and dismissing in full the Securities Action (“Dismissal Order”), but granting the Co-Lead Plaintiffs in the Securities Action leave to file an amended complaint within 30 days. The Co-Lead Plaintiffs in the Securities Action elected not to file an amended complaint and, on October 8, 2021, the parties to the Securities Action filed a Joint Stipulation of Dismissal dismissing the Securities Action with prejudice and waiving Co-Lead Plaintiffs’ right to appeal the Dismissal Order. The Joint Stipulation was approved by the Court the same day, ending the Securities Action.
On February 9, 2021, a stockholder filed a derivative action, purportedly on behalf of the Company (named as a nominal defendant), against certain of the Company's current and former executive officers and directors in the United States District Court for the District of Delaware: Gensemer v. Lo, et al., Case No. 1:21-cv-00168 (the “Derivative Action”). The complaint alleged breaches of the defendants’ fiduciary duties as the Company's directors and/or officers, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, violations of Section 14(a) of the Exchange Act, and for contribution under Sections 10(b) and 21D of the Exchange Act. The plaintiff sought damages, restitution, interest, attorneys’ fees and costs, and other unspecified relief. Pursuant to stipulation of the parties, on March 24, 2021, the Court entered an order staying the Derivative Action, including all deadlines, conferences and hearings, until the final resolution of the Company's motion to dismiss in the Securities Action, including through any amendments and/or appeals. On October 18, 2021, the plaintiff elected to voluntarily dismiss the Derivative Action without prejudice, with each side bearing their own costs and fees. The dismissal was approved by the Court on October 19, 2021, ending the Derivative Action.
Although both the Securities Action and Derivative Action have ended, the Company, from time to time, may be involved in other lawsuits and legal proceedings, which arise in the ordinary course of business. Lawsuits and legal proceedings are subject to inherent uncertainties and an adverse result in any lawsuit or legal proceeding may materially adversely affect the Company's business, financial condition and results of operations. The Company accrues for contingencies when it believes that a loss is probable and that it can reasonably estimate the amount of any such loss. To the extent that there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred and the amount of such additional loss would be material, the Company will either disclose the estimated additional loss or state that such an estimate cannot be made.
11. Income Taxes
The Company has incurred cumulative net operating losses (“NOLs”) in the United States since inception and, consequently, has not recorded any income tax expense for the years ended December 31, 2021 and 2020 due to its net operating loss position.
The reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:
| | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| Federal statutory tax rate | (21.0) | % | | (21.0) | % |
| State statutory tax rate, net of federal benefit | (3.5) | | | (1.9) | |
| Change in effective tax rate | (0.5) | | | 1.0 | |
| Research and development credits, net of uncertain tax positions | (2.0) | | | (2.1) | |
| Derecognition due to Section 382 and 383 | — | | | 15.2 | |
| Stock-based compensation | 1.1 | | | 0.6 | |
| PPP Loan forgiveness | (1.2) | | | — | |
| Permanent items | (0.1) | | | (0.4) | |
| Change in valuation allowance | 27.2 | | | 8.6 | |
| Total | — | % | | — | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance increased by approximately $8.2 million and $2.9 million during the years ended December 31, 2021 and 2020, respectively.
Significant components of the Company’s net deferred tax assets and liabilities are as follows:
| | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | (in thousands) |
| Net operating loss carryforwards | $ | 31,671 | | | $ | 24,143 | |
| Research and development credits | 4,760 | | | 4,150 | |
| Depreciation and amortization | 552 | | | 508 | |
| Accruals | 447 | | | 517 | |
| Inventory | 178 | | | 239 | |
| Lease liability | 1,146 | | | 1,391 | |
| Stock-based compensation | 611 | | | 459 | |
| Capital loss carryforwards | — | | | 23 | |
| Other | 15 | | | 4 | |
| Total gross deferred tax assets | 39,380 | | | 31,434 | |
| Valuation allowance | (38,458) | | | (30,304) | |
| 922 | | | 1,130 | |
| Right-of-use assets | (922) | | | (1,130) | |
| Net deferred tax assets | $ | — | | | $ | — | |
As of December 31, 2021, the Company had federal net operating loss carryforwards of approximately $137.1 million and state net operating loss carryforwards of approximately $42.4 million. As of December 31, 2020, the Company had federal net operating loss carryforwards of approximately $106.5 million and state net operating loss carryforwards of approximately $25.8 million. If not utilized, certain federal net operating loss carryforwards incurred before January 1, 2018, will expire beginning in 2026, and state net operating loss carryforwards will expire beginning in 2028. The federal net operating losses incurred in 2018 and beyond do not expire.
If the Company experiences a greater than 50 percentage point aggregate change in ownership over a 3-year period (a Section 382 ownership change), utilization of its pre-change NOL carryforwards is subject to annual limitation under Section 382 of the Internal Revenue Code. California has similar provisions. The annual limitation is determined by multiplying the value of the Company's stock at the time of such ownership change by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. As of December 31, 2021, the Company determined that ownership changes occurred on February 26, 2014, November 30, 2015, March 22, 2017, April 3, 2018 and March 4, 2020. As a result of the ownership changes, approximately $221.7 million and $249.0 million of the NOLs will expire unutilized for federal and California purposes, respectively. As of December 31, 2021, the Company has derecognized NOL related deferred tax assets in the tax effected amounts of $46.6 million and $17.4 million for federal and California purposes, respectively. The ability of the Company to use its remaining NOL carryforwards may be further limited if the Company experiences a Section 382 ownership change as a result of its February 2022 offering (See Note 13, Subsequent Events) or future changes in its stock ownership.
As of December 31, 2021, the Company had federal and state research credit carry forwards of approximately $1.0 million and $6.3 million, respectively. As of December 31, 2020, the Company had federal and state research credit carry forwards of approximately $0.5 million and $6.0 million, respectively. If not utilized, the federal tax credits will begin to expire in 2040 and the state tax credits do not expire. Research and development credits are subject to IRC section 383. In the event of a change in ownership as defined by this code section, the usage of the credits may be limited. As a result of the previously mentioned ownership changes, the Company has derecognized approximately $6.9 million of gross federal research and development credit-related deferred tax assets due to the Section 383 limitation as of December 31, 2021 and may experience a Section 383 ownership change as a result of its February 2022 offering (See Note 13, Subsequent Events) or future changes in its stock ownership. The Company has not derecognized any of the California research and development credit-related deferred tax assets because the credits do not expire.
CARES Act and CAA
On March 27, 2020 and December 27, 2020, the United States enacted the CARES Act and the Consolidated Appropriation Act (“CAA”), respectively, as a result of the Coronavirus pandemic, which acts contain, among other things, numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of
enactment. The Company has evaluated the current legislation and, at this time, does not anticipate that the tax provisions in the CARES Act or CAA will have a material impact on its financial statements.
Uncertain Income Tax Positions
The Company only recognizes tax benefits if it is more likely than not that they will be sustained upon audit by the relevant tax authority based upon their technical merits. An uncertain tax position is not recognized if it has less than a 50% likelihood of being sustained.
The Company had approximately $1.5 million of unrecognized tax benefits as of December 31, 2021 and approximately $1.3 million of unrecognized tax benefits as of December 31, 2020. As the Company has a full valuation allowance on its deferred tax assets, the unrecognized tax benefits reduce the deferred tax assets and the valuation allowance in the same amount. The Company does not expect the amount of unrecognized tax benefits to materially change in the next twelve months. A reconciliation of the beginning and ending balance of the unrecognized tax benefits is as follows:
| | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | (in thousands) |
| Balance at the beginning of year | $ | 1,288 | | | $ | 1,439 | |
| Decrease related to prior year tax positions | — | | | (312) | |
| Increase related to current year tax positions | 166 | | | 161 | |
| Balance at the end of year | $ | 1,454 | | | $ | 1,288 | |
As of December 31, 2021 and 2020, the Company had not recognized any tax-related interest or penalties in its financial statements. Any interest and penalties related to unrecognized tax benefits would be included as income tax expense in the Company’s statements of operations.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is not currently under audit by the Internal Revenue Service or any other similar state, local, or foreign authority. All tax years remain open to examination by major taxing jurisdictions to which the Company is subject.
12. Employee Benefit Plan
The Company has established a 401(k) tax-deferred savings plan (the “401(k) Plan”), which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code. The Company may, at its discretion, make matching contributions to the 401(k) Plan. No employer contributions have been made during the periods ended December 31, 2021 and 2020.
13. Subsequent Events
Offering - February 2022
On February 8, 2022, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC (“Maxim”) related to the public offering by the Company of 51,250,000 units (“Units”), each consisting of 1 share of the Company's common stock and 1 Series F Common Stock Purchase Warrant (“Series F Warrant”) to purchase 1 share of the Company's common stock, at a public offering price of $0.30 per Unit. The Company also granted Maxim an option for a period of 30 days to purchase up to an additional 7,687,500 shares of common stock and/or additional Series F Warrants to purchase up to 7,687,500 shares of common stock. Maxim partially exercised the option and purchased the additional Series F Warrants to purchase up to 7,687,500 shares of common stock. The option to purchase additional shares expired unexercised. The net proceeds from the offering and the exercise by Maxim of the option to purchase the additional Series F Warrants were approximately $14.1 million after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company.
The Series F Warrants are immediately exercisable and have an exercise price per share equal to $0.30. The Series F Warrants will remain exercisable until their expiration on the fifth anniversary of the issuance date. Subject to certain exceptions, the Series F Warrants contain a full-ratchet anti-dilution exercise price adjustment upon the issuance of any common stock, securities convertible into common stock or certain other issuances at a price below the then-existing exercise price of the Series F Warrants.
The offering was made pursuant to the 2021 Shelf Registration Statement and a prospectus supplement and accompanying prospectus filed with the SEC.
FDA Response to M207 NDA Resubmission
On February 17, 2022, the Company received notice from the FDA stating that the resubmitted M207 NDA was incomplete, and that the M207 NDA would have to be resubmitted with additional data analysis. The Company is evaluating next steps in relation to the FDA’s response letter as part of its financial and strategic planning; however, current available resources will not enable continued pursuit of FDA approval in the event an additional study is required to continue to pursue FDA approval of M207. The Company believes this subsequent event to be an impairment indicator and will review its assets for impairment in addition to its asset retirement obligation during the quarter ended March 31, 2022. The Company and its independent financial advisor are exploring financial and strategic alternatives to maximize value, which may include, but not be limited to, asset or equity sales, joint venture and partnership opportunities, and the Company is currently unable to estimate the amount of any potential impairment of assets, if any, that it will record in the quarter ended March 31, 2022 as a result of this notice.
Second Amendment to Trinity Agreement
On March 11, 2022, the Company entered into a Second Amendment to Lease Documents (the “Second Amendment”) with Trinity. The Second Amendment, among other things, provides for an upfront payment of $2.0 million in remaining rent from the Company to Trinity on the date of the Second Amendment, modifies the rent and purchase price payments due under the Trinity Agreement, dated as of September 25, 2018, as previously amended (the “Lease”), to $215,441 per month from April 1, 2022 to December 1, 2022 (inclusive of the amounts required to exercise the option to purchase the leased equipment), establishes a minimum cash covenant under the Lease equal to three times the remaining aggregate amount of rent due, and amends the definition of material adverse effect, certain events of default, and certain operating covenants under the Lease.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our
Chief Business Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31,
2017.2021. The term “disclosure controls and procedures,” as defined in
Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the
Companycompany in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Based on the evaluation of our disclosure controls and procedures as of December 31, 2017,2021, our Chief Executive Officer and our Chief Business Officer and Chief Financial Officer concluded that, as of such date, our
disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Business Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate controls over financial reporting, as such term is defined in Exchange ActRules 13a-15(f) and15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Business Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20172021 based on the guidelines establishedin Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).Commission. Our internal control over financial reporting includes policies and procedures that 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. Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31,
2017.2021. We reviewed the results of management’s assessment with our
Audit Committee.Thisaudit committee.
Since we are a smaller reporting company, this Annual Report on Form
10-K does not include an attestation report of our independent registered public accounting firm on internal control over financial
reporting due to the deferral allowed under the JOBS Act for emerging growth companies.reporting.
Changes in Internal Control over Financial Reporting
There
werehave been no changes in our internal control over financial reporting
(as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended) during the
fourth fiscal quarter
of the annual reporting period ended December 31,
20172021, that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Controls
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within the Company have been detected.
Item 9B. | OTHER INFORMATION |
None.
PARTItem 9B. OTHER INFORMATION
Second Amendment to Trinity Agreement
On March 11, 2022, we entered into a Second Amendment to Lease Documents (the “Second Amendment”) with Trinity Funding 1, LLC (“Trinity”) (as successor in interest to Trinity Capital Fund III,
Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Executive Officers, Directors L.P.). The Second Amendment, among other things, provides for an upfront payment of $2.0 million in remaining rent from us to Trinity on the date of the Second Amendment, modifies the rent and Key Employees
Our executive officers, directors and key employees, their positions and their agespurchase price payments due under the Master Lease Agreement, dated as of MarchSeptember 25, 2018, as previously amended (the “Lease”), to $215,441 per month from April 1, 2018 are set forth below:
| | | | | | |
Name
| | Age | | | Position
|
John P. Walker
| | | 69 | | | President, Chief Executive Officer, and Director
|
Kenneth R. Greathouse(1) (3)
| | | 65 | | | Director
|
Joseph “Jay” P. Hagan(1) (2)
| | | 49 | | | Director
|
Troy Wilson, Ph.D., J.D.(1) (2) (3)
| | | 49 | | | Director
|
Kleanthis G. Xanthopoulos, Ph.D.(2) (3)
| | | 59 | | | Director
|
Georgia L. Erbez
| | | 51 | | | Chief Business Officer and Chief Financial Officer
|
Donald Kellerman, PharmD
| | | 63 | | | VP Clinical Development and Medical Affairs
|
Hayley Lewis
| | | 42 | | | Senior Vice President, Operations
|
(1) | Member of the Audit Committee
|
(2) | Member of the Nominating and Corporate Governance Committee.
|
(3) | Member of the Compensation Committee.
|
Business Experience
2022 to December 1, 2022 (inclusive of the amounts required to exercise the option to purchase the leased equipment), establishes a minimum cash covenant under the Lease equal to three times the remaining aggregate amount of rent due, and amends the definition of material adverse effect, certain events of default, and certain operating covenants under the Lease.
The following is a briefforegoing description of the educationSecond Amendment does not purport to be complete and business experienceis qualified in its entirety by reference to the full text of the Second Amendment, which is filed with this Annual Report on Form 10-K as Exhibit 10.43 and is incorporated herein by reference.
Retention Bonus Program
Our board of directors (the “Board”) and the compensation committee of the Board (“Compensation Committee”) have conducted a comprehensive review of our
current directorscompensation program for certain key employees to determine whether such compensation program continues to be appropriately designed to effectively incentivize and
executive officers:John P. Walker has served asretain such employees in light of the FDA letter indicating that our resubmitted M207 NDA did not constitute a complete response to deficiencies identified by the FDA’s CRL, the workforce reduction described elsewhere in this Annual Report on Form 10-K, and our ongoing evaluation of financial and strategic alternatives. After consulting with outside compensation and financial advisors, on March 11, 2022, the Compensation Committee recommended to the Board for approval, and on March 14, 2022, the Board (with Steven Lo, our President and Chief Executive Officer since August 2017 and Board member, abstaining with respect to his incentive) approved incentives to be paid to certain key employees, including two of its named executive officers, in an effort to retain and incentivize such employees to support our operations and strategic process.
The terms of the incentives will be specified in an incentive letter agreement. We expect to make the incentive payments in March 2022, and the after-tax portion of the paid incentives will be subject to claw back in full in the event that the incentive is not earned. The incentive will be earned in full so long as memberthe recipient is employed by us on the earlier of July 31, 2022 or a “Change of Control.” A “Change of Control” is defined as (i) any “Person”, as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than us or our subsidiary, becoming a beneficial owner (within the meaning of Rule 13d-3, as amended, as promulgated under the Exchange Act), directly or indirectly, in one or a series of transactions, of securities representing more than 50% of the combined voting power of our boardthen outstanding securities; (ii) the consummation of directors since May 2016. Mr. Walker servedour merger or consolidation with any other Person, other than a merger or consolidation which would result in our voting securities outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), more than 50% of the combined voting power of our voting securities or such surviving entity outstanding immediately after such merger or consolidation; or (iii) the closing of a sale or other disposition by us of all or substantially all of our assets; provided, that a sale of equipment owned by us shall not constitute a sale of all or substantially all of our assets.
The incentive will also be fully earned in the event the recipient’s employment with us is terminated without “Cause.” “Cause” is as defined in a participant’s employment agreement or, for a participant without an employment agreement or if Cause is not defined therein: (i) any material breach by the participant of any agreement to which the participant and we are both parties, (ii) any act (other than retirement) or omission to act by the participant that may have a material and adverse effect on our Interim Chief Executive Officer from May 2017 until August 2017. Mr. Walker is currently the Executive Chairman of Vizuri Health Sciences, LLC and served as a Managing Director of Four Oaks Partners, a life sciences transaction advisory firm, which heco-founded in March 2012 until January 2015. As part of his activities with Four Oaks Partners, Mr. Walker served as the Chairman and Interim Chief Executive Officer of Neuraltus Pharmaceuticals, Inc., a privately held biopharmaceutical company, until October 2013. From February 2009 until July 2010, Mr. Walker was the Chief Executive Officer at iPierian Inc., a company focusedbusiness or on the useparticipant’s ability to perform services for us, including, without limitation, the commission of inducible stem cellsany crime (other than minor traffic violations), or (iii) any material misconduct or material neglect of duties by the participant in connection with our business or affairs.
The following incentive amounts were awarded to our named executive officers: $178,500 for
drug discovery. From 2006 until 2009, Mr. Walker served as the Chairman and Chief Executive Officer of Novacea, Inc., a pharmaceutical company that merged with Trancept Pharmaceuticals, Inc., in 2009. Since 2001, Mr. Walker, acting as a consultant, was Chairman and Interim Chief Executive Officer at Kai Pharmaceuticals, Guava Technologies, Centaur Pharmaceuticals, Inc., and Chairman and Chief Executive Officer of Bayhill Therapeutics. From 1993 until 2001, Mr. Walker was the Chairman and Chief Executive Officer of Arris Pharmaceuticals Corporation and its successor, Axys Pharmaceuticals Inc. Mr. Walker previously served on the board of directors of Geron Corporation and Evotec AG. Mr. Walker is a graduate of the Advance Executive Program at the Kellogg School of Management at Northwestern University and holds a B.A. from the State University of New York at Buffalo. We believe Mr. Walker’s 40 years in the life sciences industry and his experience as Chairman and Chief Executive Officer of a number of development and commercial stage companies, including his service as our President and Chief Executive Officer qualify him to serve as a member of our board of directors.Joseph“Jay” P. Hagan has served as a member of our board of directors since May 2015. Mr. Hagan has served as Regulus’ Chief Executive Officer since May 2017. Previously, he served as Regulus’ Chief Operating Officer, Principal Financial Officer and Principal Accounting Officer since January 2016. From 2011 to December 2015, Mr. Hagan served as Orexigen’s Chief Business & Financial Officer. From May 2009 to June 2011, Mr. Hagan served as Orexigen’s Senior Vice President, Corporate Development, Strategy and Communications. Prior to Orexigen, Mr. Hagan worked at Amgen, from September 1998 to April 2008, where
he served in various senior business development roles, including founder and Managing Director of Amgen Ventures. Prior to starting the Amgen Ventures fund, Mr. Hagan was Head of Corporate Development at Amgen, leading such notable transactions as the acquisition of Immunex and Tularik and the spinouts of Novatrone and Relypsa, as well as numerous other business development efforts totaling over $15 billion in value. Before joining Amgen, Mr. Hagan spent five years in the bioengineering labs at Genzyme and Advance Tissue Sciences. He received an M.B.A. from Northwestern University and a B.S. in Physiology and Neuroscience from the University of California, San Diego. We believe that Mr. Hagan’s education and professional background in science and business management, and his work as a senior executive in the biotechnology industry qualify him to serve as a member of our board of directors.
Troy Wilson, Ph.D., J.D. has served as a member of our board of directors since June 2014. Dr. Wilson has beenSteven Lo, President and Chief Executive Officer, and a member$93,333 for Christine Matthews, Chief Financial Officer.
The foregoing description of the
board of directors of Kura Oncology, Inc., a public company, since August 2014. He has served as Presidentincentive does not purport to be complete and
Chief Executive Officer and a memberis qualified in its entirety by reference to the full text of the
board of managers of Avidity Biosciences LLC, a private biopharmaceutical company, since November 2012 and as President and Chief Executive Officer and a member ofform incentive letter agreement, which will be filed subsequently with the
board of managers of Wellspring Biosciences, Inc., a private biopharmaceutical company, since July 2012 and May 2012, respectively. He has been a Director of Puma Biotechnology, Inc., a public company, since October 2013. He has also been a member of the board of managers of Araxes Pharma LLC, a private biopharmaceutical company, since May 2012. Previously, Dr. Wilson served as President and Chief Executive Officer and a member of the board of directors of Intellikine, Inc., a private biopharmaceutical company, from April 2007 to January 2012 and from August 2007 to January 2012, respectively, until its acquisition by Takeda Pharmaceuticals. Dr. Wilson holds a J.D. from New York University and graduated with a Ph.D. in bioorganic chemistry and a B.A. in biophysics from the University of California, Berkeley. We believe that Dr. Wilson’s senior executive experience managing, leading and developing various biopharmaceutical companies and his extensive industry knowledge and board-level experience in the biopharmaceutical industry qualify him to serve as a member of our board of directors.Kleanthis G. Xanthopoulos, Ph.D. has served as a member of our board of directors since April 2013. Dr. Xanthopoulos is a serial entrepreneur whose passion is building healthcare companies focused on innovation. Dr. Xanthopoulos has over two decades of experience in the biotechnology and pharmaceutical research industries as an executive, company founder, chief executive officer, investor and board member. He has founded three companies, has introduced two life science companies to Nasdaq and has financed and brokered numerous creative strategic alliance and partnership deals with large pharmaceutical partners. Dr. Xanthopoulos has served as the Chairman and CEO of IRRAS AB, a commercial stage medical device and drug delivery company, since June 2015 and has served as Managing General Partner at Cerus DMCC since August 2015, which focuses on investing and building innovative biotechnology companies. Dr. Xanthopoulos served as President and Chief Executive Officer of Regulus Therapeutics Inc. (Nasdaq: RGLS) from the time of its formation in 2007 until June 2015. Prior to that, he was a managing director of Enterprise Partners Venture Capital. Dr. Xanthopoulosco-founded and served as President and Chief Executive Officer of Anadys Pharmaceuticals, Inc. (Nasdaq: ANDS) from its inception in 2000 to 2006, and remained a Director until its acquisition by Roche in 2011. He was Vice President at Aurora Biosciences (acquired by Vertex Pharmaceuticals, Inc.) from 1997 to 2000. Dr. Xanthopoulos participated in The Human Genome Project as a Section Head of the National Human Genome Research Institute from 1995 to 1997. Prior to this, Dr. Xanthopoulos was an Associate Professor at the Karolinska Institute, in Stockholm, Sweden, after completing a Postdoctoral Research Fellowship at The Rockefeller University, New York. An Onassis Foundation scholar, he was named the E&Y Entrepreneur of the year in 2006 in San Diego and the San Diego Business Journal’s Most Admiredmid-size company CEO in 2013. Dr. Xanthopoulos received his B.Sc. in Biology with honors from Aristotle University of Thessaloniki, Greece, and received both his M.Sc. in Microbiology and Ph.D. in Molecular Biology from the University of Stockholm, Sweden. In addition to his roles at IRRAS AB, Dr. Xanthopoulos is chairman of the board of directors of Apricus Biosciences (Nasdaq: APRI), a director of LDO S.p.a. (Milan, Italy),SEC and is theco-founder and a memberincorporated herein by reference.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
Kenneth R. Greathouse has served as a memberPART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be included in our proxy statement relating to our 2022 annual meeting of stockholders to be filed by us with the SEC no later than 120 days after the close of our
board of directors since October 2017. Mr. Greathouseco-founded and has served as President of Argent Development Group since 2004,co-founded and has served as Chief Executive Officer of Melbourne Laboratories since 2012,co-founded and has served as Chief Executive Officer of Valcrest Pharmaceuticals since 2015 andco-founded and has served as Chief Executive Officer of Hesperian BioPharma since 2015. Mr. Greathouse has served as a member of the board of directors of Grove Sleep Holdings since 2009 and as a member of the board of directors of The Zitter Group since 2000. Mr. Greathouse received a B.S. from the University of California. We believe that Mr. Greathouse’s extensive experience in the pharmaceutical industry and as an executive officer of pharmaceutical and biotechnology companies qualifies him to serve as a member of our board of directors.Georgia L. Erbez has served as our Chief Business Officer since September 2016 and Interim Chief Financial Officer since May 2017. Ms. Erbez also served as our Interim Chief Financial Officer from June 2016 until May 2017. From May 2016 until September 2016, Ms. Erbez served as Senior Vice President and Chief Financial Officer of Revolution Medicines, a drug development company. From November 2015 to March 2016, Ms. Erbez served as Executive Vice President and Chief Financial Officer of Asterias Biotherapeutics, a development stage biotechnology company, and from September 2012 to November 2014, Mr. Erbez served as Chief Financial Officer, Secretary and Treasurer of Raptor Pharmaceutical Corp., a commercial-stage biopharmaceutical company. Prior to Raptor, from March 2008 to September 2012, Ms. Erbez was a founder and Managing Director of Beal Advisors, a boutique investment bank providing advisory and capital acquisition services to emerging growth companies. Ms. Erbez also served as Managing Director and Consultant at Collins Stewart LLC from April 2011 to January 2012. From 2005 to 2008, Ms. Erbez was a Senior Vice President in the life sciences investment banking group at Jefferies & Co. From 1998 to 2002, she was with the healthcare investment banking group at Cowen and Co., most recently as Director. From 1997 to 1998, Ms. Erbez was an associate at Hambrecht & Quist, where she provided investment banking services to life sciences companies and healthcare services. From July 1989 to January 1997, Ms. Erbez was with Alex Brown & Sons in the healthcare investment banking group, where she focused on life sciences, medical technology and healthcare services companies. Ms. Erbez currently serves as a member of the board of directors of Artelo Biosciences, a public biotechnology company. Ms. Erbez holds a B.A. in International Relations with an emphasis in Economics from the University of California at Davis.
Donald Kellerman, Pharm.D. has served as our Vice President of Clinical Operations since July 2015. Prior to joining us, Dr. Kellerman served as Senior Vice President of Clinical Development and Regulatory Affairs at Tonix Pharmaceuticals from April 2014 to April 2015. Previously, from 2008 to 2013, Dr. Kellerman served as Senior Vice President of Clinical Development and Medical Affairs at MAP Pharmaceuticals, Inc. (acquired by Allergan, Inc.). Dr. Kellerman also held the position of Senior Vice President of Development at Inspire Pharmaceuticals, Inc. from 1999 to 2008, where he was responsible for all aspects of drug development, including clinical research, regulatory affairs, project management and biostatistics. He also led groups responsible for running several clinical programs in the respiratory, ophthalmology and cardiovascular areas. In addition, Dr. Kellerman has served in various clinical and project leadership positions at Glaxo Wellcome, Sepracor, Inc., and E.R. Squibb and Sons, Inc. He has more than 25 years of experience in the development of prescription pharmaceuticals and has lead- orco-authored more than 80 publications. Dr. Kellerman holds Doctor of Pharmacy and Bachelor of Science degrees from the College of Pharmacy at the University of Minnesota.
Hayley Lewis has served as our Senior Vice President, Operations since July 2017 and Vice President of Regulatory Affairs and Quality from October 2015 until June 2017. Prior to joining the Company, Ms. Lewis was Vice President of Regulatory Affairs and Quality at Carbylan Therapeutics from May 2014 until May 2015. While at Carbylan, Ms. Lewis was part of the executive team that took the company public in April 2015, as well as being responsible for all regulatory and quality activities, both internally and for Carbylan’s external development programs. From 2003 to 2014, Ms. Lewis held positions of increasing responsibility, most recently as the Senior Director of Regulatory Affairs at Depomed, Inc. During her tenure, she led the company in the approvals of three NDAs, Proquin® , Glumetza® , and Gralise® , as well as approvals of several supplemental NDAs for Gralise® , Cambia® , Zipsor® and Lazanda® , including a line extension for Glumetza® , CMC, and
labeling changes for the neurology and pain product lines for Depomed’s portfolio. Ms. Lewis received a B.S. in Pharmaceutical Sciences from the University of Greenwich, and completed the Executive Program for Women Leaders at the Stanford Graduate School of Business.
There are no family relationships among any of our directors or executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who beneficially own more than ten percent of a registered class of our equity securities, to file reports of ownership of, and transactions in, our securities with the Securities and Exchange Commission. These directors, executive officers andten-percent stockholders are also required to furnish us with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms received by us, and on written representations from certain reporting persons, we believe that during fiscal year 2017 our directors, executive officersended December 31, 2021 (the “Proxy Statement”) andten-percent stockholders complied with all applicable Section 16(a) filing requirements.
is incorporated herein by reference.
We have adopted a written code of ethics that applies to our
officers, directors
executive officers and employees,
and we also have adopted corporate governance guidelines. A copy of our code of ethicswhich is
postedavailable on our website
which is located at www.zosanopharma.com,(www.zosanopharma.com) under “Investors — Corporate Governance.”
IfThe code of ethics is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002, as amended, and Item 406 of Regulation S-K. In addition, we
makeintend to promptly disclose on our website (1) the nature of any
substantive amendmentsamendment to
our code of ethics that applies to our directors or
grantour principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions that is required to be disclosed under Item 5.05 of Form 8-K and (2) the nature of any
waiverswaiver, including an implicit waiver, from a provision of our code of ethics
for any officerthat is granted to a director or
director, we will discloseone of these specified officers, the
naturename of such
amendment orperson who is granted the waiver
on our website.Audit Committee
Our board of directors has established an audit committee. The audit committee, which is one of three standing committees of our board of directors, operates under a charter that has been approved by our board of directors.
The current members of our audit committee are Mr. Greathouse, Mr. Hagan and Dr. Wilson. Our board of directors has determined that Mr. Greathouse, Mr. Hagan, and Dr. Wilson satisfy the Nasdaq Stock Market independence standards and the independence standards of Rule10A-3(b)(1)date of the Exchange Act. Eachwaiver.
Item 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.
the integrity of our financial statements;
our compliance with legal and regulatory requirements;
the qualifications and independence of our independent registered public accounting firm; and
the performance of our independent registered public accounting firm.
The audit committee has direct responsibility for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm. The audit committee establishes and implements policies and procedures for thepre-approval of all audit services and all permissiblenon-audit services provided by our independent registered public accounting firm and reviews and approves any related party transactions entered into by us.
