UNITED STATES
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2021
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 45-4488360 | |||||||
(State or other jurisdiction of
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Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||
Common stock, par value $0.0001 per share | ZSAN | The Nasdaq |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to thisForm 10-K ☒
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Non-accelerated filer |
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Emerging growth company |
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$104,972,443.
No documents are incorporated
Zosano Pharma Corporation
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Cautionary Note Regarding Forward-Looking Statements
•our expectations regarding our expenses and revenue, the sufficiency of our cash resources and needs for additional financing;
•our expectations regarding the clinical effectiveness and safety of our product candidates;
•the ability to obtain and maintain regulatory approval of our product candidates, and the labeling for any approved products;
•our manufacturing capabilities and strategy, and our ability to establish and maintain relationships with contract manufacturing organizationsorganization(s) (“CMOs”) to expand our manufacturing capacity;
our expectations regarding our expenses•the anticipated timing, costs and revenue, the sufficiencyconduct of our cash resourcesplanned clinical trials and needs for additional financing;
•our intellectual property position and our ability to obtain and maintain intellectual property protection for our product candidates;
•our expectations regarding competition;
•the anticipated trends and challenges in our business and the markets in which we operate;
•the scope, progress, expansion, and costs of developing and commercializing our product candidates;
•the size and growth of the potential markets for our product candidates and the ability to serve those markets;
•the rate and degree of market acceptance of any of our product candidates;
•our ability to establish and maintain development partnerships;
•our ability to attract or retain key personnel;
•our expectations regarding federal, state and foreign regulatory requirements;
•our retention bonus program, and incentive payments under the program; and
Unless the context otherwise indicates, references in this Annual Report to the terms “Zosano”, the “Company”, “we”, “our” and “us” refer to Zosano Pharma Corporation.
ADAM is our proprietary, investigational technology platform designed to offerfacilitate rapid drug absorption into the bloodstream, which can result inand to provide an improved pharmacokinetic (“PK”) profile compared to original dosage forms. ADAMThe System consists of ana 3cm
these products. In addition, as further described below, our clinical and pre-commercial manufacturing activities have been curtailed following our March 2022 workforce reduction.
ZOTRIP Phase 3 Trial Results
The ZOTRIP trial wasFDA recommended a multicenter, double-blind, randomized, placebo-controlled trial comparing three doses of M207 (1.0mg, 1.9mg, and 3.8mg) to placebo for the treatment of a single migraine attack. As illustratedskin assessment on patients in the table below, the ZOTRIP trial results showed that the 3.8mg M207 dose demonstrated statistically significant pain freedom and most bothersome symptom freedom at two hours,the co-primary endpoints of the study.
ZOTRIP Trial Primary Endpoints Results
Primary endpoint | Placebo | 3.8mg M207 | p-value* | |||
Pain freedom | 14.3% | 41.5% | 0.0001 | |||
Most bothersome symptom freedom | 42.9% | 68.3% | 0.0009 |
The 3.8mg dose also achieved statistical significancePK study to generate additional safety information, which was included in the secondary endpointsproposed study protocol submitted to the FDA for review. After the receipt of pain freedom at 45 minutesFDA comments and 60 minutes and showed durabilityrecommendations to our proposed PK study protocol for M207, we made the
ZOTRIP Trial Secondary Endpoints Results
Pain Freedom | Placebo | 3.8mg M207 | p-value* | |||
Pain freedom at 45 minutes | 5.2% | 17.1% | 0.0175 | |||
Pain freedom at 60 minutes | 10.4% | 26.8% | 0.0084 | |||
Pain freedom at 24 hours | 39.0% | 69.5% | 0.0001 | |||
Pain freedom at 48 hours | 39.0% | 64.6% | 0.0013 |
|
M207 505(b)(2) NDA.
Most Frequent Adverse Events (³4%labeling instructions for any treatment group)
Placebo | ZP-Zolmitriptan 1 mg | ZP-Zolmitriptan 1.9 mg | ZP-Zolmitriptan 3.8 mg | |||||
General disorders and administration site conditions | ||||||||
Application site erythema
| 10.8%
| 16.3%
| 19.5%
| 26.5%
| ||||
Application site bruise
| 3.6%
| 6.3%
| 13.8%
| 14.5%
| ||||
Application site pain
| 1.2%
| 2.5%
| 2.3%
| 9.6%
| ||||
Application site bleeding
| 0.0%
| 3.8%
| 5.7%
| 4.8%
| ||||
Dizziness
| 0.0%
| 1.3%
| 0.0%
| 4.8%
|
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 healthy volunteer subjects. We are continuing to evaluate our next steps in relation to the FDA’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 Long Term Safety Study
In November 2017, we announced the initiation of enrollment inNDA using our existing PK data comparing ZOMIG
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.
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•Favorable Safety Findings: In the LTSS, data from safety assessments showed that M207 was well-tolerated throughout the 12 months of repeated use. The most common adverse events were redness and swelling at the application site of which more than 95% were classified as mild. Moreover, 80% of these site reactions resolved within 48 hours.
The Migraine Research Foundation provides that, among women, who are disproportionately affected by migraine, 25% of migraine sufferers experience four or more severe attacks per month.social activities. Migraine attacks are estimated to lead to lost productivity costs as high as $36 billion annually in the United StatesStates.
America Symptoms and Treatment Study (the “2017 MAST Study”) showed that:
eight-hour driving restriction and is a DEA scheduled drug.
Dose
during the episodes inthe run-in period. Successfully screened subjects were then randomized into the treatment/dosing period in which they had 8 weeks to confirm and receive blinded treatment for a single migraine attack, termed “qualifying migraine,” in which the subject’s most bothersome symptom had to be present. During a qualifying migraine, subjects scored the severity of pain ona 4-point scale, the presence or absence of migraine-associated symptoms (phonophobia, photophobia, or nausea),starting pre-dose and then at several intervals over 48 hours post-dose.The co-primary endpoints for the trial were those defined in the October 2014 FDA Draft Guidance—“Migraine: Developing Drugs for Acute Treatment” as pain freedom and most bothersome symptom freedom at two hours. Safety was assessed by adverse events reported and other standard safety measures.
Five hundred and eighty nine
Primary endpoint | Placebo | 3.8mg M207 | p-value | |||
Pain freedom | 14.3% | 41.5% | 0.0001 | |||
Most bothersome symptom free | 42.9% | 68.3% | 0.0009 |
Primary endpoint | Placebo | 3.8mg M207 | p-value | ||||||||
Pain freedom at 2 hours | 14.3% | 41.5% | 0.0001 | ||||||||
Most bothersome symptom free at 2 hours | 42.9% | 68.3% | 0.0009 |
Pain Freedom | Placebo | 3.8mg M207 | p-value | ||||||||
Pain freedom at 45 minutes | 5.2% | 17.1% | 0.0175 | ||||||||
Pain freedom at 60 minutes | 10.4% | 26.8% | 0.0084 | ||||||||
Pain freedom at 24 hours | 39.0% | 69.5% | 0.0001 | ||||||||
Pain freedom at 48 hours | 39.0% | 64.6% | 0.0013 |
M207 was generally well-tolerated with no SAEs reported in the ZOTRIP trial. The most frequently reported adverse event was redness at the application site (18.3% of subjects) and all cases of redness resolved. Thirteen subjects (3.9%) reported pain at the application site; with application site pain reported as mild in all but three subjects. Additionally, five (1.5%) subjects across M207-treated groups reported dizziness versus zero subjects in the placebo group, and four (1.2%), subjects across M207-treated groups reported nausea whereas zero subjects in the placebo group reported this event.
Most Frequent Adverse Events (≥4% for any treatment group)
General disorders and administration site conditions | Placebo | ZP-Zolmitriptan 1 mg | ZP-Zolmitriptan 1.9 mg | ZP-Zolmitriptan 3.8 mg | ||||||||||
Application site erythema | 10.8% | 16.3% | 19.5% | 26.5% | ||||||||||
Application site bruise | 3.6% | 6.3% | 13.8% | 14.5% | ||||||||||
Application site pain | 1.2% | 2.5% | 2.3% | 9.6% | ||||||||||
Application site bleeding | —% | 3.8% | 5.7% | 4.8% | ||||||||||
Dizziness | —% | 1.3% | —% | 4.8% |
Pain Freedom at 2 Hours | Placebo | 3.8mg M207 | p-value* | |||
All Subjects | 14.3% | 41.5% | 0.0001 | |||
Morning Migraine | 15.9% | 44.4% | 0.0056 |
Pain Freedom at 2 Hours | Placebo | 3.8mg M207 | p-value | ||||||||
All Subjects | 14.3% | 41.5% | 0.0001 | ||||||||
Morning Migraine | 15.9% | 44.4% | 0.0056 |
Sustained Pain Freedom | Placebo | 3.8mg M207 | p-value* | ||||||||
2 – 24 Hours | 10.4% | 31.7% | 0.001 | ||||||||
2 – 48 Hours | 9.1% | 26.8% | 0.0035 |
Pain Relief | Placebo | 3.8mg M207 | p-value* | |||
1 Hour | 53.2% | 68.3% | < 0.05 | |||
2 Hours | 57.1% | 80.5% | < 0.05 |
Sustained Pain Relief | Placebo | 3.8mg M207 | p-value* | |||
2 – 24 Hours | 37.7% | 68.3% | < 0.0001 | |||
2 – 48 Hours | 32.5% | 63.4% | < 0.0001 |
Nausea Freedom | Placebo | 3.8mg M207 | p-value* | |||
2 Hours | 63.6% | 81.7% | < 0.05 |
|
Pain Relief Placebo 3.8mg M207 p-value* 1 Hour 53.2% 68.3% < 0.05 2 Hours 57.1% 80.5% < 0.05
Sustained Pain Relief | Placebo | 3.8mg M207 | p-value* | ||||||||
2 – 24 Hours | 37.7% | 68.3% | < 0.0001 | ||||||||
2 – 48 Hours | 32.5% | 63.4% | < 0.0001 |
Nausea Freedom | Placebo | 3.8mg M207 | p-value* | ||||||||
2 Hours | 63.6% | 81.7% | < 0.05 |
or placebo treatment at the various time points from 15 minutes to 48 hours (pain relief) or 30 minutes to 48 hours (pain freedom):
our LTSS with more than 150 evaluable subjects completing six months of treatment with M207. In February 2019, we announced the completion of the second phase of our LTSS with more than 50 evaluable subjects completing one year of treatment with M207.
Parameter | ZOTRIP (Single Dose) | Open-Label | |||||||||
Placebo | M207 3.8 mg | Long-Term | |||||||||
(n = 77) | (n = 82) | M207 3.8 mg | |||||||||
(5,617 migraine episodes*) | |||||||||||
Pain Freedom at 2 hours | 14 | % | 42 | % | 44 | % | |||||
Pain Relief at 2 hours | 57 | % | 81 | % | 81 | % | |||||
Sustained Pain Freedom 2-24 hour | 10 | % | 32 | % | 38 | % | |||||
Sustained Pain Freedom 2-48 hour | 9 | % | 27 | % | 35 | % | |||||
Sustained Pain Relief 2-24 hour | 38 | % | 68 | % | 70 | % | |||||
Sustained Pain Relief 2-48 hour | 33 | % | 63 | % | 65 | % |
Question | Proportion who answered “Yes” | ||||
Does your migraine medication work consistently, in the majority of your attacks? | 95% | ||||
Does the headache pain disappear within 2 hours? | 83% | ||||
Are you able to function normally within 2 hours? | 86% | ||||
Are you comfortable enough with your medication to be able to plan your daily activities? | 93% |
commercial value.
We are pursuing these programs internally and, in some cases, with certain strategic partners to further the potential clinical and commercial development of such product candidates.
Product Candidates
Companies marketing products or that have products in development to treat migraine thator cluster headache which may compete with our M207 or C213 product candidatecandidates include, but are not limited to, Teva Pharmaceutical Industries, Inc., GlaxoSmithKline, plc, Eli Lilly & Company, AstraZeneca, plc,Novartis, Allergan, Inc, Biohaven Pharmaceuticals, Alder Biopharmaceuticals,Lundbeck, Amgen, Inc.Merck & Co., Pfizer, Janssen Pharmaceutica, Endo International, Assertio, Upsher-Smith Laboratories, Satsuma Pharmaceuticals, Supernus Pharmaceutical, Currax Pharmaceuticals, Impel NeuroPharma, Axsome Therapeutics, electroCore, eNeura, Cefaly, Theranica, Amneal Pharmaceuticals and Promius Pharma, LLC.
generic manufacturers of acute and preventive therapies.
Drug Delivery Platforms
Research and Development
subsequent array forming, (2) the application of the drug formulation to the microneedle array and (3) the manufacturing of the reusable applicator.
We operate a current good manufacturing practices (“cGMP”) compliant manufacturing facility in Fremont, California, and believe we have adequate manufacturing capabilities and capacity to produce our ADAM technology for preclinical and Phase 1 and Phase 2 clinical trials of all of our product candidates, and pivotal Phase 3 trials of most of our product candidates. We continue to expand our manufacturing capabilities and have implemented automation of certain processes to further expand our capacity. We expect to produce GMP batches of M207 in the third quarter of 2018. We purchase various components or intermediates of our ADAM technology from third-party vendors, including the titanium foil and formed micro-arrays, active pharmaceutical ingredients and excipients, inner ring, adhesive backing, ring and backing assembly, outer ring and primary and secondary packing components. The majority of these components and intermediaries are available from multiple sources. We also outsource the manufacturing of our applicators.
The manufacturing process for our ADAM technology patch consists of two primary operations: (1) the formation of the microneedle array, involving etching of titanium foil andsubsequent pad-forming; and (2) application of the drug formulation to the microneedle array.
anchoring, patch application, delivery, manufacturing and packaging. In December 2017, we received a Notice of Allowance from the U.S. Patent and Trademark Office for our patent application directed to M207 titled “Method of Rapidly Achieving Therapeutic Concentrations of Triptans for Treatment of Migraines.” This newly-allowed patent application contains claims generated from formulation, preclinical and clinical studies, and highlights the unique aspects of our technologies and their applicability for the treatment of migraine. This application will issue on March 20, 2018, as U.S. Patent No. 9,918,932 and will expire on 2037. In late January 2018, a continuation application was filed from this parent application that will advance the protection for this technology.
87851807 for “QNOVIS”, Trademark App. No. 87855458 for “TIZOVIAL”, Trademark App. No. 87855469 for “QIXONTI”, and Trademark App. No. 87855481 for “AXILARIM”.
component, whether a new drug, biologic or device. In order toTo facilitatepre-market review of combination products, the FDA designates one of its centers to have primary jurisdiction for thepre-market review and regulation of the overall product based upon a determination by the FDA of the primary mode of action of the combination product. The determination of whether a product is a combination product, or two separate products is made by the FDA on acase-by-case basis. We have discussedIn the case of our product candidates, we believe the primary mode of action is attributable to the drug component of the product, which means that the FDA's Center for Drug Evaluation and Research has primary jurisdiction over the premarket development, strategyreview and approval of our M207 product candidate.
refusal to approve pending marketing applications, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions and/or criminal prosecution.
•completion of preclinical laboratory tests, animal studies, and formulation studies, all performed in accordance with the FDA’s Good Laboratory Practice (“GLP”)requirements and other applicable regulations;
•submission to the FDA of an investigational new drug applicationInvestigational New Drug Application (“IND”) for human clinical testing, which must become effective before human clinical trials in the U.S.United States may begin and mustbegin;
•performance of adequate and well-controlled human clinical trials, in accordance with good clinical practice (“GCP”) requirements, to establish the safety and efficacy of the drug for each proposed indication to the FDA’s satisfaction;
•submission to the FDA of an NDA;
•FDA acceptance and review of the NDA, which may require an FDA advisory committee review, if applicable;
•FDA review and approval of the NDA.
each successive clinical trial conducted during product development.
a serious suspected adverse reaction compared to that listed in the protocol or investigator brochure.
products, a company may file a Section 505(b)(2) NDA. Section 505(b)(2) permitsUnder federal law, the submission of most NDAs is subject to a substantial application user fee, and the manufacturer and/or sponsor under an approved NDA are also subject to annual program user fees.
The FDA may require that certain contraindications, warnings or precautions be included in the product labeling, or may condition the approval of an NDA on other changes to the proposed labeling, development of adequate controls and specifications, or a commitment to conduct post-marketing testing or clinical trials and surveillance programs to monitor the safety of approved products that have been commercialized. Further, the FDA may place conditions on approvals including the requirement for a Risk Evaluation and Mitigation Strategy (REMS) to assure the safe use of the drug. If the FDA requires a REMS, the sponsor of the NDA must submit a proposed REMS; the FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals may be withdrawn fornon-compliance with regulatory standards or if problems occur following the initial marketing of the product.
recommendations carefully when making decisions.
marketplace. The FDA may also require one or more Phase 4 post-market studies and surveillance to further assess and monitor the product’s safety and
Post-Approval Requirements
Oftentimes, even after a drug has been approvedmarketed products. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for sale,compliance with cGMP, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Changes to the FDAmanufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting requirements upon us and any third-party manufacturers that certain post-approval requirements be satisfied, includingwe may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the conductarea of additional clinical trials. If such post-approval conditions are not satisfied, theproduction and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.
commercial quantities, and future FDA inspections may identify compliance issues atstandards is not maintained or if problems occur after the facilitiesproduct reaches the market. Later discovery of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery ofpreviously unknown problems with a product, after approvalincluding adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:
market or product recalls;
A certification that the new product will not infringe the Reference Listed Drug’s listed patents or that such patents are invalid is called a Paragraph IV certification.
Coverage, Pricing and Reimbursement
Other Governmental Regulations, Healthcare Lawslevels, but we cannot guarantee that coverage or adequate reimbursement will be available.
expensive for us to seek coverage and reimbursement from third-party payors. Moreover, a payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis.
In addition, under the Pediatric Research Equity Act (“PREA”), an NDA or supplement to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA has indicated that our product candidate M207 is covered by the PREA, but the FDA may, on its own initiative or at the request of an applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements.
Although we currentlyresults. If these third-party payors do not have anyconsider our products to be cost-effective compared to other therapies, they may not cover our products or product candidates if approved as a benefit under their plans or, if they do, the level of reimbursement may not be sufficient to allow us to sell our products on the market, we may be subjecta profitable basis. Decreases in third-party reimbursement for our products once approved or a decision by a third-party payor to additional healthcare regulationnot cover our products could reduce or eliminate utilization of our products and enforcement by the federal governmenthave an adverse effect on our sales, results of operations, and by authorities in the states and foreign jurisdictions in which we conduct our business. Such laws include, without limitation,financial condition. In addition, state and federal anti-kickback, fraudhealthcare reform measures have been and abuse, false claims, privacy and security and physician sunshine laws and regulations, many of which may become more applicable to us if our product candidates are approved and we begin commercialization. If our operations are found towill be adopted in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and imprisonment,future, any of which could adversely affectlimit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our abilityproducts or product candidates once approved or additional pricing pressures.
biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;
Our present and future business has been and will continue to be subject to various other laws and regulations. Various laws, regulations and recommendations relating to safe working conditions, laboratory practices, the experimental use of animals, and the purchase, storage, movement, import and export and use and disposal of hazardous or potentially hazardous substances used in connection with our research work are or may be applicable to our activities. Certain agreements entered into by us involving exclusive license rights or acquisitions may be subject to national or supranational antitrust regulatory control, the effect of which cannot be predicted. The extent of government regulation, which might result from future legislation or administrative action, cannot accurately be predicted.
Employees
Special Stockholder Meeting, Reverse Split None of our employees are represented by labor unions. Our Code of Ethics provides for equal employment opportunity without discrimination or harassment on the basis of race, color, national origin, religion, sex, age, sexual orientation, disability, or any other status protected by law.
On January 23, 2018, we held a special meetingvariable pay including base salary, bonuses and stock-based compensation. Our annual bonuses are linked to overall company performance, as well as each individual’s contribution to the results achieved. The principal purposes of our equity incentive plans are to attract, retain and motivate employees and directors through the granting of stock-based compensation awards. The emphasis on overall company performance is intended to align the employee’s financial interests with the interests of stockholders. At the special meeting, the stockholders approved, among other things, an amendmentWe are committed to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 100,000,000 to 250,000,000 shares. A Certificate of Amendment to the Amended and Restated Certificate of Incorporation authorizing the authorized share increase was filed with the Secretary of State of the State of Delaware on January 24, 2018, and the authorized share increase became effective in accordance with the terms of the Certificate of Amendment upon filing with the Secretary of State of the State of Delaware.
The 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, following the special stockholder meeting, the board of directors approved a1-for-20 reverse stock split of the common stock and the filing of a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company to effectuate the reverse stock split. A Certificate of Amendment to the Amended and Restated Certificate of Incorporation authorizing the reverse stock split was filed with the Secretary of State of the State of Delaware on January 24, 2018, and the reverse stock split became effective in accordance with the terms of the Certificate of Amendment at 5:00 p.m. Eastern Time on January 25, 2018, which we refer to as the Effective Time.
At the Effective Time, every twenty shares of common stock issued and outstanding was automatically combined into one share of issued and outstanding common stock, without any change in the par value per share. 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. In addition, a proportionate adjustment will be made to the per share exercise price and the number of shares issuable upon the exercise of the Company’s outstanding equity awards,providing comprehensive benefit options and warrantsit is our intention to purchase sharesoffer benefits that will allow our employees and their families to live healthier and more secure lives. We provide our full-time employees and their families with access to health programs and services for mental health, elder care and various personal support services through our Employee Assistance Program. Our health and welfare benefits are supplemented with specific programs to manage or improve common health conditions, a variety of common stockvoluntary benefits and the number of shares reserved for issuance pursuant to the Company’s equity incentive compensation plans.
paid time away from work programs.
name to ZP Opco, Inc. ZP Group LLC, a former subsidiary that was originally formed as a joint venture with Asahi Kasei Pharmaceuticals USA (Asahi), ceased operations in December 2013 and was dissolved on December 30, 2016. On November 1, 2017, ZP Opco, Inc. merged with and into Zosano Pharma Corporation, with Zosano Pharma Corporation as the surviving corporation of the merger.
global business and economic environment as a result. concern if we are unable to do so. We will also be forced to delay, reduce or terminate our product development, other operations or commercialization effort. 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. 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 objectives.or(“SEC”), including our financial statements and the SEC.related notes thereto. Any of the following risks could have a material adverse effect on our business, operating results, financial condition and prospects and cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. You should also refer toAny of the other information contained in this Annual Report on Form10-K,following risks and uncertainties are, and will be, exacerbated by COVID-19 pandemic, including our audited consolidated financial statementsany strains or variants of the virus, and any worsening of the related notes thereto.The audit report contained inAnnual Report on Form10-K for the year ended December 31, 2017 contains an explanatory paragraph to the effect that there is doubt about our abilityoperations, and we will not be able to continue as a going concern.2017,2021, we had an accumulated deficit of $225.9$362.1 million and approximately $11.0 million in cash and cash equivalents as well as negative cash flows from operating activities. We will continuedo not have sufficient cash and cash equivalents to require substantial funds to continue research and development, including clinical trialsfund our anticipated level of our lead product candidate, M207. As noted above, we expect to finance our cash needs through a combinationoperations as they become due during the twelve months following the date of equity offerings, debt financing and license and collaboration agreements. filing of this Annual Report on Form 10-K. such additional funds will be obtained for our ongoing operations andor that the Companywe will succeed in itour future operations. SubstantialIn addition, 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 obtain additional funding through equity offerings is limited. Also, the Series F Warrants issued in connection with our February 2022 public offering 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. Additionally, our audited financial statements included in this Annual Report on Form 10-K include an explanatory paragraph regarding substantial doubt exists about the Company’sour ability to continue as a going concern. Our audited consolidated financial statements include a “going concern” disclosure thatconcern which may discourage some third parties from contracting with us and some investors from purchasing our stock or providing alternative capital financing, which could adversely affect our business, financial condition, cash flows, results of operations and prospects. IfAdditionally, the results of our long term safety study do not support regulatory approval and/or market acceptance of M207, it could materiallyCOVID-19 pandemic has caused volatility in the global financial markets and threatened a slowdown in the global economy, which may adversely affect our business,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 COVID-19, including any strains or variants of the virus, may also limit our ability to obtain financing for our operations. The uncertainty regarding our ability to obtain additional capital or meet future liquidity requirements raises substantial doubt about our ability to continue as a going concern.conditionadvisor to assist in exploring financial and resultsstrategic 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 operationexisting liabilities. Any potential equity sales will be dependent upon and prospects.yeartwelve months ended December 31, 20172021, we incurred a net loss of $29.1 million. As$29.9 million and, as of December 31, 2017,2021, we had an accumulated deficit of $225.9$362.1 million. We expect to continue to incur additional significant operating losses and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future asif we continue the development of our product candidate, M207.M207, or any other product candidates. These expenditures will be incurred for manufacturing, development, clinical trials, regulatory compliance infrastructure, and manufacturing.infrastructure. Even if we succeed in developing, obtaining regulatory approval for and commercializing M207 or one of ourany other product candidates that we develop, because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict that we will ever be able to manufacture, distribute and sell any of our products profitably, and
However, adequate and additional funding may not be available to us on acceptable terms or at all. In addition, 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 obtain additional funding through equity offerings is limited. To the extent that we raise additional capital through the sale of equity or convertible debt securities, such as our March 2017 public offering in which we sold 977,500 million shares of our common stock for aggregate gross proceeds of $29.3 million or under our equity line of credit with Lincoln Park Capital Fund, LLC pursuant to which we may sell up to $35 million of our common stock (subject to certain conditions and limitations) to Lincoln Park, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends on our common stock.
The amount and timing of our future financing requirements will depend on many factors, including:
In June 2014, we entered into a loan and security agreement with Hercules Capital, Inc. which provided us $4.0 millionrequest payment in debt financing. In June 2015, we entered into a first amendment to the loan and security agreement with Hercules to increase the aggregate principal amountfull of the loan to $15.0 million (“Hercules Term Loan”). The first amendment to the loan and security agreement with Hercules provides that the $15.0 million principal balance would 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%. As of July 1, 2016, we are required to make month installment payments on the principal and interest of the Hercules Term Loan and, if we cannot meet the principal payment requirements under the first amendment to the loan and security agreement, we could be in default. On June 7, 2017, the Company paid a $100,000 legacy end of term charge and in addition, we are obligated 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. build-to-suit obligation.
We also agreed to covenants in connection with the Hercules loanTrinity build-to-suit arrangement that may limit our ability to take some actions without the consent of Hercules,Trinity, as applicable. In particular, without Hercules’Trinity’s consent under the terms of the loan facility or the secured note, as applicable,build-to-suit arrangement, we are restricted in our ability to:
incur indebtedness;
•create liens on our property;
make payments on any subordinated debt, while the Hercules loan remains outstanding;
make investments in•sell, transfer, or loans to others;
acquire assets other than in the ordinary course;
otherwise dispose of the collateral that secures the Hercules loan;
•transfer or sell any assets;
•engage in anya transaction that would constitute a50% or more in change of control; and
change our corporate name, legal form or jurisdiction.
Our indebtedness to HerculesTrinity may limit our ability to finance future operations or capital needs or to engage in, expand or pursue our business activities. It may also prevent us from engaging in activities that could be beneficial to our business and our stockholders unless we repay the outstanding debt,obligation, which may not be desirable or possible.
•continuing to conduct clinical development of our product candidates;
•obtaining required regulatory approvals;
•formulating and manufacturing products;product; and
•conducting marketing and sales and marketing activities.
System may offer advantages.
•we may be unable to obtain additional funding to develop our product candidates;
•we may experience delays in regulatory review and approval of our product candidates in clinical development;
•the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA for marketing approval;
•the FDA may disagree with the number, design, size, conduct or implementation of our clinical trials;
•the FDA may not find the data from preclinical studies and clinical trials sufficient to demonstrate that clinical and other benefits outweigh its safety risks;
•the FDA may disagree with our interpretation of data from our preclinical studies and clinical trials or may require that we conduct additional studies or trials;
•we may be required to undertake additional clinical trials of M207 before we receive approval of the NDA;
•we may be unable to obtain and maintain regulatory approval of our product candidates in the United States and foreign jurisdictions;
•potential side effects of our product candidates could delay or prevent commercialization, limit the indications for any approved product candidates,candidate, require the establishment of a risk evaluation and mitigation strategy or REMS,(“REMS”), or cause an approved product candidate to be taken off the market;
•the FDA may identify deficiencies in our manufacturing processes or facilities or those of our third-party manufacturers;
•the FDA may change its approval policies or adopt new regulations;
•we may need towill depend on third-party manufacturers to supply or manufacture components of our products;
•we depend on contract research organizationsCROs to conduct our clinical trials;
•we may not be able to demonstrate that any of our product candidates are safe and effective as a treatmenttreatments for their respectiveintended indications to the satisfaction of the United States Food and Drug Administration, or FDA or other similar regulatory bodies;
•we may be unable to establish or maintain collaborations, licensing or other arrangements;
•the market may not accept our product candidates;
•we may be unable to establish and maintain an effective sales and marketing infrastructure, either through the creation of a commercial infrastructureinfrastructure;
•we may experience competition from existing products or new products that may emerge; and
•we and our licensors may be unable to successfully obtain, maintain, defend and enforce intellectual property rights important to protect our products.
After receiving positive
requirements that have already been provided to us,provide more data than we currently anticipate before approving M207, if ever, which would further delay the regulatory approval process and require additional clinical work.
or preclinical work; for example, in the CRL, the FDA recommended that we conduct a repeat bioequivalence study comparing lots manufactured with the equipment used during development.
candidates.
•changes in government regulation, administrative action or changes in FDA policy with respect to clinical trials that change the requirements for approval;
•delays in obtaining authorization from regulators and required Institutional Review Board (“IRB”) approval at each site to commence a trial;
•determination of dosing issues;
•lack of effectiveness during clinical trials;
•slower than expected rates of patient recruitment and enrollment;
•inability to monitor patients adequately during or after treatment; and
•inability or unwillingness of medical investigators to follow our clinical protocols.
•be delayed in obtaining marketing approval for our product candidates;
•not obtain marketing approval at all;
•obtain approval for indications or patient populations that are not as broad as intended or desired;
•be subject to additional post-marketing testing requirements; or
•have our product candidate(s)candidates removed from the market after obtaining marketing approval.
Even if our clinical trials are completed as planned,M207 or any other product candidates we may develop.
demonstrate the efficacy and safety of a product candidate. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced.advanced or completed. While members of our management team have experience in designing clinical trials, we have limited experience in designing clinical trials and we may be unable to design and execute a clinical trial to support regulatory approval. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. If our product candidates are found to be unsafe or lack efficacy, we will not be able to obtain regulatory approval for them and our business would be harmed.
There is no guarantee that data from these clinical trials will be accepted by regulators approving our product candidates for commercial sale. In the case The acceptance of the United States, although the FDA may acceptstudy data from clinical trials conducted outside the United States acceptance of this data isor another jurisdiction by the FDA or comparable foreign regulatory authority may be subject to certain conditions imposedor may not be accepted at all. In cases where data from foreign clinical trials are intended to serve as the sole basis for marketing approval in the United States, the FDA will generally not approve the application on the basis of foreign data alone unless (i) the data are applicable to the U.S. population and U.S. medical practice; (ii) the trials were performed by clinical investigators of recognized competence and pursuant to GCP regulations; and (iii) the data may be considered valid without the need for an on-site inspection by the FDA. For example,FDA, or if the clinical trial mustFDA considers such inspection to be well designednecessary, the FDA is able to validate the data through an on-site inspection or other appropriate means. In addition, even where the foreign study data are not intended to serve as the sole basis for approval, the FDA will not accept the data as support for an application for marketing approval unless the study is well-designed and conducted and performed by qualified investigatorswell-conducted in accordance with ethical principles. The trial population must also adequately represent the United States population,GCP requirements and the FDA is able to validate the data must be applicable tofrom the United States population and United States medical practice in ways that the FDA deems clinically meaningful. Generally, the patient population for any clinical trials conducted outside of the United States must be representative of the population for whom we intend to label the product in the United States.study through an onsite inspection if deemed necessary. Many foreign regulatory authorities have similar approval requirements. In addition, while these clinicalsuch foreign trials arewould be subject to the applicable local laws FDA acceptance of the data will be dependent upon its determination thatforeign jurisdictions where the trials also complied with all applicable U.S. laws and regulations.are conducted. There can be no assurance that the FDA or any comparable foreign regulatory authority will accept data from trials conducted outside of the United States.States or the applicable jurisdiction. If the FDA or any comparable foreign regulatory authority does not accept thesuch data, from our clinical trials, it would likely result in the need for additional clinical trials, which wouldcould be both costly and time-consuming, and likely to delaywhich may result in current or permanently halt our development of afuture product candidate. Similar regulations and risks apply to other jurisdictions as well.
candidates that we may develop not receiving approval for commercialization in the applicable jurisdiction.
•foreign regulatory requirements that could restrict or limit our ability to conduct our clinical trials;
•administrative burdens of conducting clinical trials under multiple foreign regulatory schema;
•foreign exchange fluctuations; and
•diminished protection of intellectual property in some countries.
our other product candidates or any product candidate we acquire or develop in the future. We will need FDA approval to commercialize our product candidates in the United States. In order to obtain FDA approval of any product candidate, we expect that we will have to submit to the FDA an NDA demonstrating that the product candidate is safe for humans and effective for its intended indication and indicated use. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials. Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing. We cannot predict whether our product candidates will ultimately be considered safe for humans and effective for indicated uses by the FDA. The FDA has substantial discretion in
the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during its regulatory review. Delays in obtaining regulatory approvals may:
•delay commercialization of, and our ability to derive product revenues from, our products;
•impose costly procedures on us; and
•diminish any competitive advantages that we may otherwise enjoy.
Theauthorities approve our product candidates, the manufacturing processes, post-approval clinical data, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and promotional activitiesrecordkeeping for our product candidates will be subject to continual requirements ofextensive and review by the FDA and otherongoing regulatory authorities.requirements. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, current good manufacturing practices, or cGMPpractice (“cGMP”) requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. The regulatory approvals for our product candidates may beIn addition, manufacturers of drug products and their facilities are subject to limitations oncontinual review and periodic, unannounced inspections by the indicated usesFDA and other regulatory authorities for which the products may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testingcompliance with cGMP regulations and surveillance to monitor the safety or efficacy of the product candidates. The FDA closely regulates the post-approval marketing and promotion of drugs and drug delivery devices to ensure they are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regardingoff-label use and, if we do not market our product candidates for their approved indications, we may be subject to enforcement action foroff-label marketing.
The FDA has the authority to require a Risk Evaluation and Mitigation Strategy (“REMS,”) as part of an NDA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug, such as limiting prescribing authorization to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certainsafe-use criteria or requiring patient testing, monitoring and/or enrollment in a registry.
standards.
patients in a manner that is inconsistent with the approved label. If we are found to have promoted suchoff-label uses, we may become subject to significant liability and government fines. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion ofoff-label uses, and a company that is found to have improperly
restrictions on such product candidate, or manufacturing processes;
•restrictions on the labeling or marketing of a product;
•restrictions on product distribution or use;
•requirements to conduct post-marketing clinical trials;
•warning or untitled letters;
•withdrawal of the products from the market;
•refusal to approve pending applications or supplements to approved applications that we submit;
•recall of products;
•fines, restitution or disgorgement of profits or revenue;
•suspension or withdrawal of marketing approvals;
•refusal to permit the import or export of our products;
•product seizure; or
•injunctions or the imposition of civil or criminal penalties.
We may not be able to complete the clinical trials required for our product candidates.
We may not be able to complete the clinical trials required for our product candidates in a timely manner, or at all, and ultimately obtain regulatory approval for any of our product candidates. If we are unable to complete clinical trials of and obtain regulatory approval for our product candidates, our business will be significantly affected.
Our long-term growth will be limited unless we successfully develop a pipeline of additional product candidates.
If serious adverse or inappropriate side effects are identified during the clinical trials of our
any approved label or market acceptance, or result in significant negative consequences following market approval, if any.
If any These could be attributed to the active ingredient or class of drug or to our unique formulation of our product candidates, or other potentially harmful characteristics. Such characteristics could cause us, our IRBs, clinical trial sites, the FDA or other regulatory authorities to interrupt, delay or halt clinical trials, including the imposition of clinical holds, and could result in a more restrictive label or delay, denial or withdrawal of regulatory approval, which may harm our business, financial condition and prospects significantly.
regulatory authorities may imposeeffects caused by such product, a clinical hold whichnumber of potentially significant negative consequences could result, in substantial delays and adversely impact our ability to continue development of the product candidate;
•regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;
•we may be required to change the way the product candidate is administered, conduct additional clinical trials or change the labeling of the product;
•we may be required to implement a risk minimization action plan,REMS, which could result in substantial cost increases and have a negative impact on our ability to commercialize the product candidate;
•we may be required to limit the patients who can receive the product candidate;
•we may be subject to limitations on how we promote the product candidate;
•sales of the product candidate may decrease significantly;
•regulatory authorities may require us to take our approved product candidate off the market;
•we may be subject to litigation or product liability claims; and
Currently, weproduct.
candidates. Our internal manufacturing operationsCMOs may encounter difficulties involving, among other things, material supplies, production yields, regulatory compliance, quality control and quality assurance, and shortages of qualified personnel. The manufacturing facilities in which M207, or our other product candidates, are made could be adversely affected by equipment failures, labor shortages, natural disasters, power failures and numerous other factors. We may incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. Regulatory approval and/or the potential commercialization of M207 or our other product candidates could be impeded, delayed, limited or denied if the FDA does not maintainauthorize the approval of our manufacturing processes and facilities.
facilities in which such product candidates are made.
submissions with respect thereto. In addition, supplies of M207 or our other product candidates that have been produced and are stored for later use, may degrade, become contaminated or suffer other quality defects (including in connection with any shipment thereof), which may cause the affected drug product to no longer be suitable for its intended use in clinical trials or other development activities. If the defective drug product cannot be replaced in a timely fashion, we may incur significant delays in our development programs that could adversely affect the value of such product candidate.
If we instead decide to contract with third parties to support commercial scale manufacture of our product candidates and we are unable to arrange for such a third-party manufacturing source for any of our product candidates, or fail to do so on commercially reasonable terms, we may not be able to successfully produce, develop and market one or more of our product candidates, or we may be delayed in doing so.
Even if we receive regulatory approval for any product candidate, we still may not be able to successfully commercialize it and the revenue that we generate from its sales, if any, may be limited.
•demonstration of clinical safety and efficacy of our products generally;
•relative convenience and ease of administration;
•prevalence and severity of any adverse effects;
•willingness of physicians to prescribe our product and of the target patient population to try new therapies and routes of administration;
•efficacy and safety of our products compared to competing products;
•introduction of any new products, including generics, that may in the future become available to treat indications for which our products may be approved;
•new procedures or methods of treatment that may reduce the incidences of any of the indications in which our products may show utility;
•pricing and cost-effectiveness;
•effectiveness of our or any future collaborators’ sales and marketing strategies;
•limitations or warnings contained inFDA-approved labeling; and
•our ability to obtain and maintain sufficient third-party coverage or adequate reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payers.
commercial promotion, distribution, prescription or dispensing of our product candidates. Moreover, approvals may be withdrawn fornon-compliance with regulatory standards or if problems occur following the initial marketing of a product candidates.candidate. Any of the foregoing scenarios could materially harm the commercial success of our product candidates.
We may expend our limited resources
We rely on third-party manufacturerssuch CMOs, the CMOs may not perform as agreed or the CMOs may terminate their agreements with us. If any of the foregoing circumstances occur, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, maintain or obtain, as applicable, regulatory approval for various components of our microneedle patch system, including API raw materials used in manufacturing, and capital equipment. Reliance on third party manufacturers entails additional risks, including reliance onor market M207 or any other product candidate. In the third party for regulatory compliance and quality assurance. In addition, third party manufacturersevent that we seek such alternative sources, we may not be able to complyenter into replacement arrangements without delays or additional expenditures. We cannot estimate these delays or costs with cGMP,certainty but, if they were to occur, they could cause a delay in our development and commercialization efforts.
Any failure or refusal to supply the components for our product candidates or any other product candidates that we may develop could delay, prevent or impair our clinical development or commercialization efforts. If our contract manufacturers were to fail to fill our purchase orders,capital investment, including the development or commercialization of the affected product candidates could be delayed, which could have an adverse effect on our business. Any changeadvanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in our manufacturers could be costly because the commercial termsproduction. These problems include difficulties with production costs and yields, quality control,
including stability of the product, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly-enforced federal, state and foreign regulations. We cannot assure you that any issues relating to the manufacture of M207 will not occur in the future. Additionally, we or our CMOs may experience manufacturing difficulties due to resource constraints or as a result of labor disputes. If our CMOs were to encounter difficulties, or otherwise fail to comply with their contractual obligations, our ability to commercialize M207 in the United States would be jeopardized. Any delay or interruption in our ability to meet commercial demand for M207 will result in the loss of potential revenue and could adversely affect our ability to gain market acceptance for these products.
candidates, if approved. For example, in August 2020, we entered into a commercialization agreement with Eversana for the commercialization of M207, if approved by the FDA. See the risk factor titled “We have no experience selling, marketing or distributing approved product candidates and have no internal capabilities
We may form strategic partnerships and collaborations in the future, and we may not realize the benefits of such alliances.
•a collaboration partner may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical results, manufacturing issues, a change in business strategy, a change of control or other reasons;
•a collaboration partner may shift its priorities and resources away from our product candidatescandidate due to a change in business strategy, or a merger, acquisition, sale or downsizing;
•a collaboration partner may not devote sufficient resources towards, or cease development in, therapeutic areas which are the subject of our strategic collaboration;
•a collaboration partner may change the success criteria for a product candidate thereby delaying or ceasing development of such candidate;
•a collaboration partner could develop a product candidate that competes, either directly or indirectly, with our product candidate;
•a significant delay in initiation of certain development activities by a collaboration partner will also delay payment of milestones tied to such activities, thereby impacting our ability to fund our own activities;
•a collaboration partner with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unable to meet demand requirements;
•a dispute may arise between us and a collaboration partner concerning the research, development or commercialization of a product candidate resulting in a delay in milestones, royalty payments or termination of an alliance and possibly resulting in costly litigation or arbitration which may divert management attention and resources;
•a collaboration partner may use our products or technology in such a way as to invite litigation from a third party; and
•a collaboration partner may exercise a contractual right to terminate a strategic alliance, making us ineligible to receive milestone or royalty payments under such agreement.
so, and will rely on Eversana and other third parties for the commercialization of M207, and we and they may not be able to effectively market, sell and distribute M207, if approved.
into and maintain collaborative relationships to provide such capabilities, on the collaborators’ strategic interest in the product candidates under development and on such collaborators’ ability to successfully market and sell any such product candidates. There can be no assurance that we willnot be able to establish or maintain such collaborative arrangements, or if we are able to do so, that our collaborators will have effective sales forces. To the extent that we decide not to, or are unable to, enter into collaborative arrangements with respect to the sales and marketing of our product candidates, significant capital expenditures, management resources and time will be required to establish and develop anin-house marketing and sales force with the needed technical expertise. There can also be no assurance that we will be able to establish or maintain relationships with third-party collaborators or developin-house sales and distribution capabilities. To the extent that we depend on third parties for marketing and distribution, any revenues we receive will depend upon the efforts of such third parties, andeffectively market M207. Further, there can be no assurance that such effortsthe capabilities of Eversana will be successful.effective in marketing and selling M207, or that their personnel will be more effective than an internally developed sales organization. In addition, thereunder the amended master services agreement, either party could terminate our agreement, including the obligation to provide a revolving credit facility, because we did not receive FDA approval of the NDA by December 31, 2021. However, neither party exercised its right to terminate the agreement due to not receiving FDA approval by December 31, 2021. Eversana can also be no assuranceterminate the agreement under certain additional circumstances, including if net profits are not realized within a specified time period following commercial launch, for material breach of the agreement by us that we will be ableis not cured within a defined time period, for our insolvency, if M207 is subject to market and sell our productsa safety recall in the United States or overseas.
if M207 is not commercially launched within a specified time period after FDA approval of the NDA. Also, in connection with the amendment of the master services agreement in September 2021, we and Eversana agreed that if the NDA is approved, the deferral mechanism, payment terms and loan terms in the master services agreement will be adjusted as mutually agreed by both parties. There is no guarantee that we and Eversana will reach an agreement on the deferral mechanism, payment terms and loan terms. If we and Eversana fail to hire, train, retain and manage qualified sales personnel, market our product successfully or on a cost-effective basis or otherwise terminate our relationship, our ability to generate revenue will be limited and we will need to identify and retain an alternative organization, or develop our own sales and marketing capability. In such an event, we would have to invest significant amounts of financial and management resources to develop internal sales, distribution and marketing capabilities. This could involve significant delays and costs, including the diversion of our management’s attention from other activities. We may also need to retain additional consultants or external service providers to assist us in sales, marketing and distribution functions, and may be unsuccessful in retaining such services on acceptable financial terms or at all.
•developing drugs;
•undertaking preclinical testing and human clinical trials;
•obtaining FDA and other regulatory approvals of drugs;
•formulating and manufacturing drugs; and
•launching, marketing and selling drugs.
generic manufacturers of acute and preventive therapies.
and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures or other collaborations, and therefore, we may not be able to hire or retain qualified personnel to run all facets of our business.
Our ability to generate revenues from the sale of our product candidates will be diminished if we are unable to obtain third party coverage and adequate levels of reimbursement for any approved product candidate.
Our ability to commercialize any product candidate for which we receive regulatory approval, alone or with collaborators, will depend in part on the extent to which coverage and reimbursement for the product candidate will be available from:
government and health administration authorities;
private health maintenance organizations and health insurers; and
other healthcare payers.
Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. In the United States, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (“ACA”), is significantly changing the way healthcare is financed by both governmental and private insurers. While we cannot predict what impact on federal reimbursement policies this law or any amendment to it will continue to have in general or specifically on any product that we may commercialize, the ACA or any such amendment may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of new products. In addition, although the United States Supreme Court has upheld the constitutionality of most of the ACA, several states have not implemented certain sections of the ACA, including 19 that have rejected the expansion of Medicaid eligibility for low income citizens, and some members of the U.S. Congress are still working to repeal the ACA. More recently, President Trump and the Republican majorities in both houses of the U.S. Congress have been seeking to repeal or replace all or portions of the ACA but to date they have been unable to agree on any such legislation. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, thetax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Congress may consider other legislation to repeal or replace elements of the ACA in the future. We cannot predict what legislation, if any, to repeal or replace the ACA will become law, or what impact any such legislation may have on our product candidates. Additionally, healthcare payers, including Medicare, are challenging the prices charged for medical products and services. Government and other healthcare payers increasingly attempt to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs. Even if one of our product candidates is approved by the FDA, insurance coverage may not be available, and reimbursement levels may be inadequate, to cover the product candidate. If government and other healthcare payers do not provide adequate coverage and reimbursement levels for one of our product candidates, once approved, market acceptance of the product could be reduced.
We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability and may have to limit development of a product candidate or commercialization of an approved product.
•withdrawal of clinical trial participants;
•termination of clinical trial sites or entire trial programs;
•costs of related litigation;
•substantial monetary awards to patients or other claimants;
•decreased demand for an approved product and loss of revenue;
•impairment of our business reputation;
•the inability to commercialize an approved product candidate.
Additionally, the agreement under which we currently license intellectual property is complex, and certain provisions may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, increase what we believe to be our financial or other obligations under the relevant agreement, or decrease the third-party’s financial or other obligations under the relevant agreement, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
TheBearing the costs and other requirements associated with prosecution of pending patent applications and maintenance of issued patents are material to us. Bearing these costs and complying with these requirements are essential to procurement and maintenance of patents integral to our product candidates.
candidates, and our patent protection could be reduced or eliminated for non-compliance for these requirements.
third-parties.
•obtain licenses, which may not be available on commercially reasonable terms, if at all;
•abandon an infringing product;
•redesign our product candidates or processes to avoid infringement;
•stop using the subject matter claimed in the patents held by others;
•pay damages; or
•defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources.
We intend to pursue FDA approval for M207 and potential future product candidates under Section 505(b)(2) regulatory approval filings withof the FDA for our product candidates where applicable.FDCA. Such filingssubmissions involve significant costs, and we may also encounter difficulties or delays in obtaining regulatory approval for ourM207 or any other product candidates under Section 505(b)(2).
We may become involved in costly and time-consuming lawsuits with uncertain outcomes to protect or enforce our patents.
The USPTO is currently developingimplementing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, did not
•Others may be able to make compounds that are the same as or similar to our product candidates, which are aimed initially at the generic market and are not covered by the claims of the patents that we own or have exclusively licensed;
•We or any of our licensors or strategic partners might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed;
•Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;
•It is possible that our pending patent applications will not lead to issued patents;
•Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;
•Our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.
•the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;
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•the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA,(“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respectprogram. Similar to safeguarding the privacy, security and transmissionfederal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of individually identifiable health information;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respectstatute or specific intent to safeguarding the privacy, security and transmission of individually identifiable health information;
•the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;
federal law requires applicable manufacturers of covered drugs to report payments and other transfers of value to physicians and teaching hospitals;
•the federal transparency requirements under the ACA requirePhysician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Department of Health and Human Servicesgovernment information related to physician payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and other transfers of valuechiropractors), certain non-physician practitioners (physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, anesthesiologist assistants and physiciancertified nurse midwives), and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests;interests held by the physicians described above and
•analogous state laws and regulations, such as state anti-kickback and false claims laws and analogousnon-U.S. fraud and abuse laws and regulations, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed bynon-governmental third-party payers, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.
State andnon-U.S. laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
The implementation of the reporting Defending against any such actions can be costly, time-consuming and disclosure obligations of the Physician Payments Sunshine Act/Open Payments provisions of the Patient Protectionmay require significant financial and Affordable Care Actpersonnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.
An ACA provision, generally referredbusiness, results of operations, and financial condition.
The final rule implementing the Physician Payments Sunshine Act is complex, ambiguous, and broad in scope. When and if M207 and any other product candidates we develop in the future are approved, we will within a defined time period becometransfers to non-EEA entities subject to the reportingGDPR. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the SCCs cannot be used, and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and disclosure provisionsamong countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of the Physician Payments Sunshine Act. Accordingly,our relevant systems and operations, and could adversely affect our financial results.
lower the price we will charge for our U.S. product candidates, if approved, our profit
margins will decrease, which will adversely affect our ability to invest in and grow our business. With the global pressure on healthcare costs, payers are attempting to contain costs by, for example, limiting coverage of, and the level of reimbursement for, new therapies. Any limitations on, decreases in or elimination of payments by third-party payers may have an adverse effect on our financial condition, business, prospects and/or results of operations.As noted above,ACA. Prior to the Supreme Court's decision, President Biden issued an executive order to initiate a special enrollment period for purposes of obtaining health insurance coverage through the ACA marketplace from February 15, 2021 through August 15, 2021. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create
If any of our product candidates become subject to recall it could harm our reputation, business(if and financial results.
The FDAwhen approved) and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design, manufacture or labeling. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the product would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a product is found. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our product candidates would divert managerial and financial resources and have an adverse effect onaccordingly, our financial condition
and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our product candidates in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, we could be required to report those actions as recalls. A recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
Governments outside the United States may impose strict price controls, which may adversely affect our revenue, if any.
We may enter into or seek to enter into business partnerships, combinations and/or acquisitions which may be difficult to integrate, disrupt our business, divert management attention or dilute stockholder value.
We may enter into business partnerships, combinations and/or acquisitions. We have limited experience in making acquisitions, which are typically accompanied by a number of risks, including:
the difficulty of integrating the operations and personnel of the acquired companies;
the potential disruption of our ongoing business and distraction of management;
potential unknown liabilities and expenses;
the failure to achieve the expected benefits of the combination or acquisition;
the maintenance of acceptable standards, controls, procedures and policies; and
the impairment of relationships with employees as a result of any integration of new management and other personnel.
If we are not successful in completing acquisitions that we may pursue in the future, we would be required to reevaluate our business strategy and we may have incurred substantial expenses and devoted significant management time and resources in seeking to complete the acquisitions. In addition, we could use substantial portions of our available cash as all or a portion of the purchase price, or we could issue additional securities as consideration for these acquisitions, which could cause our stockholders to suffer significant dilution.
We rely on key executive officers and qualified personnel and their knowledge of our business and technical expertise would be difficult to replace.
business.
We
qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is intense, and we cannot be certain that our search for such personnel will be successful. In March 2022, we reduced our workforce by approximately 31%. This workforce reduction may make it more difficult to hire any additional employees in the future. Attracting and retaining qualified personnel will be critical to our success.
Our success will depend upon business, divert management attention or dilute stockholder value.
Our businessoperations and operations would suffer in the event of computer system failures or security breaches.
Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, fire, terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development and manufacturing programs. For example, the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and development of our product candidates could be delayed.
financial condition.
The stock market in general and the market for biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. We do not, for example, have any explanationexplanations for the volatility in our stock price or the heavy volume of trading (on some days exceeding six times the number of shares currently outstanding) that has occurred in our common stock in February and March of 2018.2019. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:
•announcements relating to development, regulatory approvals or commercialization of our product candidates or those of competitors;
•results of clinical trials of our product candidates or those of our competitors;
•announcements by us or our competitors of significant strategic partnerships or collaborations or terminations of such arrangements;
•actual or anticipated variations in our operating results;
•changes in financial estimates by us or by any securities analysts who might cover our stock;
•conditions or trends in our industry;
•changes in laws or other regulatory actions affecting us or our industry;
•stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the biopharmaceutical industry;
•announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
•capital commitments;
•investors’ general perception of our company and our business;
•disputes concerning our intellectual property or other proprietary rights;
•recruitment or departure of key personnel; and
•sales of our common stock, including sales by our directors and officers or specific stockholders.
In
business, financial condition, results of operations or stock price. See Item 3. “Legal Proceedings” for additional information regarding the class actions.
If, for any reason, Nasdaq should delist the Company’sour securities from trading on its exchange (including if the Company fails to comply with the Minimum Bid Requirement in the future) and the Company iswe are unable to obtain listing on another reputable national securities exchange, a reduction in some or all of the following may occur, each of which could materially adversely affect our stockholders:
•the market price of our common stock;
•our ability to obtain financing for the continuation of our operations;
•the number of institutional and general investors that will consider investing in our common stock;
•the number of market makers in our common stock;
•the availability of information concerning the trading prices and volume of our common stock; and
•the number of broker-dealers willing to execute trades in shares of our common stock.
or are perceived by the public market as intending to sell substantial amounts of our common stock, the trading price of our common stock could decline significantly. As of March 1, 2018 we had 1,973,039 shares of common stock outstanding. Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur may reduce the prevailing market price of our common stock and make it more difficult for you to sell your common stock at a time and price that you deem appropriate. In addition, certain holders of our common stock and warrants to purchase our common stock are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended (“Securities Act”). RegistrationAs long as the registration statements covering the resale of thesesuch shares under the Securities Act would resultremain in theeffect, such shares becomingshall be freely tradable without restriction under the Securities Act, except for shares held by affiliates, as defined in Rule 144 under the Securities Act. Any sales of securities by existing stockholders could have a material adverse effect on the market price of our common stock.We have only beenSecurities Exchange Act of 1934, as amended (“Exchange Act”) and the other rules and regulations of the SEC since January 2015. We are working with our legal, independent accounting, and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public reporting company. These areas include corporate governance, corporate control, disclosure controls and procedures, and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas.SEC. Compliance with the various reporting and other requirements applicable to public reporting companies will require considerable time, attention of management, and financial resources.
Any changes we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.
We do not currently intend to pay cash dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock, and we currently intend to retain future earnings, if any, to fund the development and growth of our business. Additionally, our existing debt agreements contain covenants that restrict our ability to pay dividends. Therefore, we do not expect to declare or pay any dividends on our common stock for the foreseeable future. As a result, your ability to receive a return on an investment in our common stock will depend on any future appreciation in the market value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which you purchased it.
Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
Our directors, executive officers, and the holders of more than 10% of our common stock together with their affiliates beneficially own a significant number of shares of our common stock. These stockholders, acting together, may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.
Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions in Delaware law, might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:
providing for three classes of directors with the term of office of one class expiring each year, commonly referred to as a staggered board;
authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;
limiting the liability of, and providing indemnification to, our directors;
limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;
requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;
controlling the procedures for the conduct and scheduling of board and stockholder meetings;
limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our board of directors then in office; and
providing that directors may be removed by stockholders only for cause.
These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their common stock in an acquisition.
We are an “emerging growth company,” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies, including:
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not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
reduced disclosure obligations regarding executive compensation; and
not being required to hold anon-binding advisory vote on executive compensation or obtain stockholder approval of any golden parachute payments not previously approved.
We cannot predict whether investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held bynon-affiliates exceeds $700 million as of the end of the second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenue of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion innon-convertible debt in a three-year period or (iv) December 31, 2019, the end of the fiscal year following the fifth anniversary of the first sale of our common equity securities pursuant to an effective registration statement filed under the Securities Act.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
PART II
High | Low | |||||||
2017 | ||||||||
First quarter | $ | 70.80 | $ | 15.60 | ||||
Second quarter | $ | 38.60 | $ | 24.00 | ||||
Third quarter | $ | 28.20 | $ | 15.20 | ||||
Fourth quarter | $ | 25.80 | $ | 10.00 | ||||
High | Low | |||||||
2016 | ||||||||
First quarter | $ | 56.60 | $ | 39.00 | ||||
Second quarter | $ | 49.80 | $ | 20.60 | ||||
Third quarter | $ | 40.00 | $ | 13.20 | ||||
Fourth quarter | $ | 23.40 | $ | 9.00 |
“ZSAN”.
stock based on information furnished by Computershare Trust Company, NA, the transfer agent for our securities. The number of beneficial stockholders is substantially greater than the number of holders of record as a large portion of our common stock is held through brokerage firms.
the information required by this Item.
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 | ||||||
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Total operating expenses | 28,370 | 28,633 | ||||||
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Loss from operations | (28,370 | ) | (28,633 | ) | ||||
Other income (expense): | ||||||||
Interest expense, net | (742 | ) | (1,192 | ) | ||||
Other income (expense), net | 7 | (7 | ) | |||||
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Net loss | $ | (29,105 | ) | $ | (29,832 | ) | ||
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Net loss per common share — basic and diluted | $ | (16.82 | ) | $ | (43.36 | ) | ||
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Weighted-average common shares outstanding — basic and diluted | 1,730 | 688 | ||||||
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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 |
Migraine 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.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.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.markets where there is a need for more effective therapies.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 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.
commercialization of M207, if approved.
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.
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).
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.
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 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.
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 | |||||||||
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Total research and development expenses | $ | 20,188 | $ | 20,457 | $ | 182,034 | ||||||
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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.
feasibility studies.
administrative expenses
Other Income and Expense
our investments in marketable securities.
financing.
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 | * |
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.
Year Ended December 31, | Change | |||||||||||||||
2017 | 2016 | Amount | % | |||||||||||||
(In thousands) | ||||||||||||||||
General and administrative | $ | 8,182 | $ | 8,176 | $ | 6 | 0% |
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.
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.
and beyond do not expire.
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.
the CARES Act or CAA will have a material impact on our financial statements.
As
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) |
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.
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
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 | ||||||
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Net (decrease) in cash and cash equivalents | $ | (3,352 | ) | $ | 8,357 | |||
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our operations.
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 |
Investingpre-commercialization activities.
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.
was recorded as a gain in other income (expense), net in our statement of operations in the second quarter of 2021.
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 | - | |||||||||||||||
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Total contractual obligations | $ | 19,151 | $ | 8,505 | $ | 3,561 | $ | 7,085 | $ | - | ||||||||||
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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 |
| ||
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.
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We have an
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.
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.
Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
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 |
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 |
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 |
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 |
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 |
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 |
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 | $ | — | $ | — |
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 |
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 |
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 |
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 |
Operating leases | |||||
Weighted-average remaining lease term (in years) | 2.64 | ||||
Weighted average discount rate | 11 | % |
None.
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 |
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 |
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 |
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 |
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 |
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 |
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 |
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 | —% | —% |
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 | — | % | — | % |
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 | $ | — | $ | — |
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 |
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.
Thisaudit committee.
reporting.
None.
PARTItem 9B. OTHER INFORMATION
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:
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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.
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.
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.
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.
Kenneth R. Greathouse has served as a memberPART III
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.
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.
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.
Summary Compensation Table
The following table sets forth information regarding compensation earned by our Chief Executive Officer and our two most highly compensated executive officers other than our Chief Executive Officer who served as executive officers as of December 31, 2017. We refer to these individuals as our named executive officers.
Year | Salary | Bonus (1) | Stock Awards (5) | Fair Value of Option Awards (4) | Other | Total | ||||||||||||||||||||||
John P. Walker | 2017 | 141,923 | - | 82,200 | (6) | 220,710 | (7) | 76,290 | (10) | 521,123 | ||||||||||||||||||
President and Chief Executive Officer(2) | 2016 | - | - | 19,999 | (8) | 26,868 | (9) | 39,516 | (11) | 86,383 | ||||||||||||||||||
Georgia Erbez | 2017 | 350,000 | - | - | - | - | . | 350,000 | ||||||||||||||||||||
Chief Business Officer and Chief Financial Officer(3) | 2016 | 110,160 | 41,300 | - | 143,161 | 99,536 | (12) | 394,157 | ||||||||||||||||||||
Donald Kellerman | 2017 | 331,200 | - | - | - | - | 331,200 | |||||||||||||||||||||
Vice President Clinical Development and Medical Affairs | 2016 | 297,083 | 90,000 | - | 98,742 | - | 485,825 | |||||||||||||||||||||
Konstantinos Alataris | 2017 | 165,998 | - | - | - | 296,185 | (14) | 462,183 | ||||||||||||||||||||
President and Chief Executive Officer (13) | 2016 | 449,148 | 191,250 | - | 385,808 | - | 1,026,206 |
(1) The amounts reported in this column for 2016 represent cash bonuses awarded in respect to 2016 and paid in March 2017. 2016 bonus amounts were determined pursuant to applicable employment agreements and based on achievement of individual and company performance goals and other factors deemed relevant by our compensation committee and board of directors. The amount of 2017 bonuses has not been determined as of the date of this Annual Report on Form10-K. It is expected that the amount of these bonuses will be determined in the first quarter of 2018.
(2) Mr. Walker served as a consultant as Interim Chief Executive Officer from May 9, 2017 until August 9, 2017. On August 9,2017, he became an employee of the Company, in the role of President and Chief Executive Officer.
(3) Ms. Erbez joined the Company as Chief Business Officer on September 7, 2016.
(4) Represents the aggregate grant date fair value of option awards granted in fiscal year 2016 and 2017 and in accordance with ASC718,Compensation-Stock Compensation. (See Note 9 Stock-Based Compensation)
(5) Represents the aggregate grant date fair value of stock awards granted in fiscal year 2016 and 2017 and in accordance with ASC718,Compensation-Stock Compensation. (See Note 9 Stock-Based Compensation)
(6) Represents restricted shares of the Company’s common stock awarded to Mr. Walker on May 18, 2017 for his services as Interim Chief Executive Officer.
(7) Represents the fair value of option awards granted for fiscal year 2017 to Mr. Walker for his services as our President and Chief Executive Officer.
(8) Represented restricted shares of the Company’s common stock awarded to Mr. Walker on May 04, 2016 for his services as anon-employee director.
(9) Represents the fair value of option awards granted for fiscal year 2016 to Mr. Walker for his services asnon-employee director.
(10) Represents $36,290 in fees paid to Mr. Walker in cash for his services as anon-employee director from January 1, 2017 through May 8, 2017, and $40,000 in consulting fees, respectively.
(11) Represents fees paid to Mr. Walker in cash for his services as anon-employee director during 2016.
(12) Represents consulting fees paid.
(13) Dr. Alataris’ employment with the Company terminated on May 8, 2017. He was succeeded as our President and Chief Executive Officer by Mr. Walker.
(14) Represents severance and vacation payout.
Narrative Disclosure to Summary Compensation Table
We review compensation annually for all of our employees, including our executives. In setting executive base salaries and bonuses and granting equity incentive awards, we consider compensation for comparable positions in the market, the historical compensation levels of our executives, individual performance as compared to our expectations and objectives, our desire to motivate our employees to achieve short- and long- term results that are in the best interests of our stockholders, and a long-term commitment to our company. We do not target a specific competitive position or a specific mix of compensation among base salary, bonus or long-term incentives.
Our board of directors has historically determined our executives’ compensation. Our compensation committee typically has reviewed and discussed management’s proposed compensation with the Chief Executive Officer for all executives other than our Chief Executive Officer. Based on those discussions and its discretion, the compensation committee then has recommended the compensation for each executive officer. Our board of directors, without members of management present, has discussed the compensation committee’s recommendations and ultimately approved the compensation of our executive officers. Effective upon the closing of our initial public offering in January 2015, our compensation committee is responsible for approving the compensation and benefits of our executive officers.
We have a formal employment agreement with John P. Walker, our President and Chief Executive Officer. We also have executed employment offer letters with Georgia Erbez, our Chief Business Officer and Chief Financial Officer, and with Donald Kellerman, our Vice President, Clinical Development. We had a formal employment agreement with Konstantinos Alataris, our former Chief Executive Officer, until Dr. Alataris’s employment terminated with the Company on May 8, 2017.
Mr. Walker’s employment agreement provides for an initial base salary of $360,000, subject to increase from time to time. Mr. Walker is eligible for a bonus in an amount determined by the board of directors in its discretion based on his performance and the performance of the Company against certain goals to be established annually. Ms. Erbez’s employment letter agreement provides for an initial base salary of $350,000, subject to increase from time to time. Ms. Erbez joined the Company on September 7, 2016. Ms. Erbez employment letter agreement provides for a target annual bonus of 40% of her annual base salary, to be determined by the board of directors in its discretion after consideration of a proposal from the CEO based on company performance against goals established annually by the compensation committee, as well as the Company’s then prevailing cash position. Mr. Kellerman’s employment offer letter agreement provides for an initial base salary of $265,000. At the end of 2017, Dr. Kellerman’s annual base salary was $331,200. Dr. Kellerman’s employment offer letter provides for a targeted bonus of 30% of his annual base salary, to be awarded and paid in accordance with the terms of the Company’s bonus program adopted by our Compensation Committee in February 2015 and based on achievement of company performance and individual goals and other factors deemed relevant by our Compensation Committee.
On January 25, 2018, we effected a1-for-20 reverse stock split of our outstanding common stock. At the effective time, a proportionate adjustment was made to the per share exercise price and the number of shares issuable upon the exercise of our outstanding equity awards, options and warrants to purchase shares of our common stock.
Outstanding Equity Awards atYear-End
The following table sets forth information regarding outstanding stock options held by our named executive officers as of December 31, 2017. The number of options and exercise prices reported below have been retroactively adjusted to give effect to the1-for-20 reverse stock split effected on January 25, 2018.
Number of Securities Underlying Unexercised Options (#) exercisable | Number of Securities Underlying Unexercised Options (#) unexercisable | Option Exercise Price ($) | Option Expiration Date | Option Grant Date | ||||||||||||||||
John P. Walker | - | 15,000 | (1) | $ | 19.80 | 8/9/2027 | 8/9/2017 | |||||||||||||
1,500 | - | (2) | $ | 11.40 | 11/2/2026 | 11/2/2016 | ||||||||||||||
340 | - | (2) | $ | 42.20 | 5/4/2026 | 5/4/2016 | ||||||||||||||
Georgia Erbez | 3,937 | 8,663 | (3) | $ | 15.40 | 9/7/2026 | 9/7/2016 | |||||||||||||
Donald Kellerman | 2,437 | 6,563 | (3) | $ | 11.40 | 11/2/2026 | 11/2/2016 | |||||||||||||
749 | - | (4) | $ | 51.40 | 3/29/2026 | 3/29/2016 | ||||||||||||||
262 | 338 | (1) | $ | 51.40 | 3/29/2026 | 3/29/2016 | ||||||||||||||
750 | 750 | (1) | $ | 45.20 | 12/15/2025 | 12/15/2015 | ||||||||||||||
Konstantinos Alataris(5) | - | - | $ | - | - | - |
(1) This option became exercisable for 25% of the underlying shares on the first anniversary of the grant date, and thereafter becomes exercisable for the remaining underlying shares in equal monthly installments over three years, resulting in the option being exercisable for 100% of the underlying shares on the fourth anniversary of the grant date.
(2) This option becomes exercisable on the corresponding day of each monthly anniversary for which this Option is exercisable so that the Option was vested on the first anniversary of the vesting start date.
(3) This option becomes exercisable on the first anniversary of the date of vesting start date for 25% of the total number of option shares and becomes exercisable on the corresponding day of each month thereafter for an additional 1/48th of the total number of option shares, so that the stock option is fully vested on the fourth anniversary of the vesting start date; provided, however, that 25% of the total option shares (in addition to any then-vested option shares) shall vest if the holder is terminated without cause or resigns for good reason (as these terms are defined in the holder’s employment agreement); provided, further, that 100% of any then unvested option shares shall vest if the holder is terminated without cause or resigns for good reason within one year after a change in control (as defined in the holder’s employment agreement).
(4) This option became exercisable on April 10, 2017 the corresponding day that each pivotal milestone, grant tranche, was declared achieved by Compensation Committee.
(5) Dr. Alataris’s employment with the Company terminated on May 8, 2017. His unvested options were forfeited as of the date of his resignation, and any vested options expired three months following his resignation.
Severance and Change in Control Arrangements
Pursuant to the terms of Mr. Walker’s employment agreement, if the Company terminates Mr. Walker other than for cause of if Mr. Walker terminates his employment for good reason, he will be entitled to receive (i) continued salary for twelve months, (ii) a bonus equal to the amount of the annual bonus awarded to him in respect of the year prior to termination, and (iii) the vesting schedule for any stock options outstanding on the date of termination will automatically accelerate so that 25% of any then unvested option shares shall immediately vest and become exercisable upon such termination. If during theone-year period following a change in control of the Company, either we terminate Mr. Walker’s employment without cause or Mr. Walker resigns for good reason, he will be entitled to receive (i) continued salary for 24 month and a lump sum cash amount equal to 229.56% multiplied by the total cost of the projected premiums for group medical, dental and vision insurance for a period of twenty-four months covering the period from and after the date of termination, (ii) a bonus equal to the amount of the annual bonus awarded to him in respect of the year prior to termination,
and (iii) his then outstanding equity awards that were granted after the effective date of the Employment Agreement and that are subject to time based vesting will accelerate vesting in full.
Pursuant to the terms of Ms. Erbez’s employment agreement, if the Company terminates Ms. Erbez other than for cause, or in the event of her resignation for good reason, then, for thesix-month period following such termination of her employment, the Company will continue to pay Ms. Erbez her base salary and provide her with group medical, dental and vision insurance. In addition, the vesting schedule for any outstanding stock options held by Ms. Erbez on the date of termination will automatically accelerate so that 25% of any then unvested option shares will immediately become exercisable upon such termination. If, during theone-year period following a change in control of our Company, either we terminate Ms. Erbez’s employment without cause or Ms. Erbez resigns for good reason, then she shall be entitled to receive a lump sum severance payment equal to twelve months of her base salary and a lump sum payment equal to the total cost of projected premiums for group medical, dental and vision insurance for a period of twelve months. In such event, the vesting schedule for any outstanding stock options held by Ms. Erbez will automatically accelerate so that 100% of the total option shares will immediately become exercisable upon such termination.
Dr. Alataris, our former Chief Executive Officer, resigned from the Company on May 8, 2017. Pursuant to the terms of Dr. Alataris’s separation agreement. Dr. Alataris received continuation of his base salary as of the date of termination and COBRA continuation coverage for thesix-month period following his resignation. In addition, any vested options held by Dr. Alataris remained exercisable for a period of three months following his resignation.
Director Compensation
Each of our independent directors receives compensation as follows:
for serving as a member of our board of directors, an annual cash retainer of $35,000 and an annual grant of anon-statutory stock option to purchase a number of shares of our common stock equal to approximately 0.0555% of our then outstanding common stock on a fully-diluted basis (at a per share exercise price equal to fair market value on the date of grant) vesting in equal monthly installments over a period of one year; and
for serving as the chairperson of the audit committee of the board of directors, an annual cash retainer of $10,000; for serving as the chairperson of the compensation committee of the board of directors, an annual cash retainer of $7,000; and for serving as the chairperson of the nominating and corporate governance committee of the board of directors, an annual cash retainer of $7,000.
The cash fees described above are paid in monthly installments, in arrears.Non-employee directors are also reimbursed upon request for travel and otherout-of-pocket expenses incurred in connection with their attendance at meetings of the board and of committees on which they serve.
The following table sets forth information regarding compensation awarded to, earned by or paid to each of ournon-employee directors during 2017. For information concerning the compensation paid to Mr. Walker, see “Summary Compensation Table” above.
Fees Earned or Paid in Cash | Option Awards (1) | Total | ||||||||||
Kenneth R. Greathouse (2) | $ | 8,562 | $ | 37,494 | $ | 46,056 | ||||||
Joseph “Jay” P. Hagan | 45,000 | - | 45,000 | |||||||||
Bruce D. Steel(3) | - | - | - | |||||||||
Troy Wilson, Ph.D., J.D. | 42,000 | - | 42,000 | |||||||||
Kleanthis G. Xanthopoulos, Ph.D. | 42,000 | - | 42,000 |
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Our nonemployee directors listed in the table above held outstanding stock awards and options, as follows:
Number of Shares Outstanding in Restricted Stock Awards | Number of Shares Subject to Outstanding Options | |||||||
Kenneth R. Greathouse | 3,000 | |||||||
Joseph “Jay” P. Hagan | - | 2,400 | ||||||
Bruce D. Steel(1) | - | - | ||||||
Troy Wilson, Ph.D., J.D. | 150 | 2,415 | ||||||
Kleanthis G. Xanthopoulos, Ph.D. | 300 | 2,415 |
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Compensation Committee Interlocks and Insider Participation
None of our executive officers serves, or in the past has served, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our board of directors or our compensation committee. None of the members of our compensation committee is an officer or employee of our company, nor has any of them ever been an officer or employee of our company.
Securities Authorized for Issuance under Equity Compensation Plans
We have two compensation plans under which equity securities are currently authorized for issuance: our Amended and Restated 2014 Equity and Incentive Plan and our 2012 Stock Incentive Plan. In connection with the consummation of our initial public offering of common stock in January 2015, our board of directors terminated the 2012 Stock Incentive Plan effective as of January��27, 2015 and no further awards may be issued under the 2012 Incentive Plan, except that the awards outstanding under the 2012 Stock Incentive Plan at the time of its termination continue to be governed by the terms of the 2012 Stock Incentive Plan. Our 2014 Equity and Incentive Plan was approved by our stockholders in July 2014 and our 2012 Stock Incentive Plan was approved by our stockholders in April 2012. The following table provides information regarding the securities authorized for issuance as of December 31, 2017 under our equity compensation plans.
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plans approved by security holders | 99,029 | $ | 25.33 | 29,571 | ||||||||
Equity compensation plans not approved by security holders | 19,350 | (1) | $ | 19.12 | - | |||||||
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Total | 118,379 | 29,571 | ||||||||||
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(1) Represents 12,600 shares granted as an inducement grant to our Chief Business Officer and Chief Financial Officer and 6,750 shares granted to other employees as inducement material to their acceptance of employment, in accordance with the inducement grant exception under Nasdaq Rule 5635(c)(4). The inducement grants were granted outside of the equity compensation plans approved by security holders and 15,100 shares granted as inducement grants were registered with the Registration Statement filed on FormS-8 on June 5, 2017.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to beneficial ownership of our common stock, as of February 16, 2018 by:
each person or entity, or group of affiliated persons or entities, known by us to beneficially own more than 5% of our common stock;
each of our directors;
each of our named executive officers; and
all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of February 16, 2018 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name. Except as otherwise indicated, the address of each of the persons in this table is c/o Zosano Pharma Corporation, 34790 Ardentech Court, Fremont, California, 94555.
Each stockholder’s percentage ownership is determined in accordance with Rule13d-3 under the Exchange Act and is based on 1,973,039 shares of our common stock outstanding as of February 16, 2018.
Name of Beneficial Owner (1) | Total Shares Beneficially Owned | Percentage | ||||||||
5%+ Stockholders | ||||||||||
Amzak Capital Management, LLC and affiliates (2) | 263,491 | 13.35 | % | |||||||
980 North Federal Highway; Suite 315 | ||||||||||
Boca Raton, FL 33432 | ||||||||||
BMV Direct SOTRS LP(3) | 122,121 | 6.19 | % | |||||||
17190 Bernardo Center Drive | ||||||||||
San Diego, CA 92128 | ||||||||||
Atlantic Trust Group, LLC(4) | 103,132 | 5.23 | % | |||||||
Directors and Named Executive Officers: | ||||||||||
John P. Walker(5) | 14,036 | * | ||||||||
Georgia Erbez(6) | 13,161 | * | ||||||||
Donald Kellerman, Ph.D.(7) | 6,703 | * | ||||||||
Kenneth Greathouse (8) | 10,000 | * | ||||||||
Joseph “Jay” P. Hagan(9) | 1,991 | * | ||||||||
Troy Wilson, Ph.D., J.D.(10) | 2,476 | * | ||||||||
Kleanthis Xanthopoulos, Ph.D.(11) | 4,307 | |||||||||
Konstantinos Alataris(12) (13) | 19,107 | |||||||||
Current Directors and Executive Officers as a Group (8 persons) (14) | 58,323 | 2.91 | % |
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(1) Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respects to securities.
(2) Based on information disclosed in the Schedule 13G/A filed with the SEC on March 28, 2017. Includes 257,590 shares of common stock outstanding owned by the Amzak Capital Management, LLC and 5,901 shares of common stock owned by Michael D. Kazma. In addition to these shares, Amzak Capital Management, LLC owns 63,750 shares subject to warrants. These warrants provide the holder may not exercise them to the extent doing so would result in it owning in excess of 9.99% of the outstanding shares of common stock of Zosano. Given the current ownership percentage exceeds the limitation, Amzak Capital Management is prevented from exercising said warrants. Michael D. Kazma and Gerry Kazma may be deemed to share voting and investment power with respect to the securities held by Amzak. The address of the principal business office of each reporting person is 980 N. Federal Highway, Suite 315, Boca Raton, FL 33432.
(3) Based on the information disclosed in the Schedule 13G filed by BioMed Realty Trust, Inc., with the SEC on January 19, 2016, BMV Direct SO LP holds 27,272 shares of common stock and BMV Direct SOTRS LP holds 94,849 shares of common stock. The sole general partner of BMV Direct SOTRS LP is BioMed Realty Holding, Inc. the sole stockholder of BioMed Realty Holdings, Inc. and the sole general partner of BMV Direct SO LP is BioMed Realty, L.P. The sole general partner of BioMed Realty, L.P. is BioMed Realty Trust, Inc. BioMed Realty Trust, Inc. has sole voting and dispositive power with respect to the shares directly held by BMV Direct SOTRS LP and BMV Direct SO LP Bruce D. Steel is a limited partner with a variable economic interest in each of BMV Direct SOTRS LP and BMV Direct SP LP. Mr. Steel disclaims beneficial ownership in the shares directly held by each of BMV Direct SOTRS LP and BMV Direct LP except to the extent of his pecuniary interest therin. The address of the principal business office of each reporting person is 17190 Bernardo Center Drive, San Diego, California 92128.
(4) Based on the information disclosed in the Schedule 13G/A filed by Atlantic Trust Group, LLC with the SEC on February 13, 2018, Atlantic Trust Group, LLC has sole power to vote or to direct the vote, and to dispose or to direct the disposition of 103,132 shares of common stock. The address of the principal business office of the reporting person is 3290 Northside Parkway, 7th Floor, Atlanta, GA 30327.
(5) Consists of: (i) 9,011 shares of common stock; (ii) 3,185 shares of common stock issuable upon exercise of outstanding warrant exercisable within the60-day period following February 16, 2018, and (iii) 1,840 shares of common stock issuable upon exercise of outstanding options exercisable within the60-day period following February 16, 2018.
(6) Consists of: (i) 5,787 shares of common stock, (ii) 2,387 shares of common stock issuable upon exercise of outstanding warrants exercisable within60-day period following February 16, 2018 and (iii) 4,987 shares of common stock issuable upon exercise of outstanding options exercisable within the60-day period following February 16, 2018.
(7) Consists of : (i) 796 shares of common stock; (ii) 796 shares of common stock issuable upon exercise of outstanding warrants exercisable within the60-day period following January 22, 2018 and (iii) 5,111 shares of common stock issuable upon exercise of outstanding options exercisable within the60-day period following February 16, 2018.
(8) Consists of 10,000 shares of common stock.
(9) Consists of 1,991 shares of common stock issuable upon exercise of outstanding options exercisable within the60-day period following February 16, 2018.
(10) Consists of : (i) 150 shares of common stock and (ii) 2,326 shares of common stock issuable upon exercise of outstanding options exercisable within the60-day period following February 16, 2018.
(11) Consists of: (i) 1,096 shares of common stock, and (ii) 796 shares of common stock issuable upon exercise of outstanding warrants exercisable within the60-day period following February 16, 2018 and (ii) 2,415 shares of common stock issuable upon exercise of outstanding options exercisable within the60-day period following February 16, 2018. A portion of the securities reported for Dr. Xanthopoulos are held by the Xanthopoulos Family Trust, for which Dr. Xanthopoulos may be deemed to exercise voting and investment control.
(12) Dr. Alataris’s employment with the Company terminated on May 8, 2017. He was succeeded as our President and Chief Executive Officer by Mr. Walker.
(13) Consists of: (i) 12,738 shares of common stock held by The Alataris Family Trust and (ii) 6,369 shares of common stock issuable upon exercise of outstanding warrants exercisable within the60-day period following February 16, 2018. Dr. Alataris, the trustee of The Alataris Family Trust, may be deemed to have investment discretion and voting power over the securities held by The Alataris Family Trust.
(14) Consists of: (i) 27,078 shares of common stock, (ii) 7,402 shares of common stock issuable upon exercise of outstanding warrants exercisable within the60-day period following February 16, 2018 and (iii) 23,843 shares of common stock issuable upon exercise of outstanding options exercisable within the60-day period following February 16, 2018.
Related Person Transactions
Since January 1, 2016, we have engaged in the following transactions with our directors, executive officers, holders of more than 5% of our voting securities, and affiliates or immediate family members of our directors, executive officers, and holders of more than 5% of our voting securities. We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties.
Real Property Lease with BMR
We have an operating leasewith BMR-34790 Ardentech Court LP, which is an affiliate of BMV Direct SOTRS LP and BMV Direct SO LP, for a 55,000 square foot facility in Fremont, California, where we operate our manufacturing operations and house our engineering, research and development and administrative employees. For the years ended December 31, 2017 and 2016, we recorded rent expensefor BMR-34790 Ardentech Court LP in the amount of approximately $1.2 million and $0.6 million, respectively. In June 2017, we further amended the lease to extend the term through August 31, 2024, with an option to further extend the term an additional 60 months, subject to certain terms and conditions. We agreed to pay a monthly base rent of $136,191 for the period commencing September 1, 2017 and ending on August 31, 2018, with an increase on September 1, 2018 and annual increases on September 1st of each subsequent year until the lease year beginning September 1, 2023. The June 2017 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).
Interests of Directors in our Financial Relationships
Bruce D. Steel, who served as director of the Company until December 13, 2017, may be deemed to have an indirect material interest in our financial relationships with certain of our stockholders based on his association with such stockholders. Mr. Steel is a limited partner with a variable economic interest in each of BMV Direct SOTRS LP and BMV Direct SO LP, which entitles him to a percentage of certain distributions of these entities. Mr. Steel does not have voting or dispositive control of either of these entities. Mr. Steel disclaims beneficial ownership in our securities directly held by these entities except to the extent of his pecuniary interest therein.
Private Investment in Public Equity (PIPE)
In August 2016, the Company entered into a securities purchase agreement, or Purchase Agreement, between the Company and certain purchasers, 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 for aggregate gross proceeds of $7.5 million. Costs related to the offering were $0.9 million. Pursuant to the Purchase Agreement, the Company sold 239,997 common shares at $26.40 per common share, the closing price per share on August 15, 2016, for gross proceeds of $6.3 million. Additionally, 480,000 warrants were sold, at a price of $2.50 per warrant, for gross proceeds of $1.2 million. Each warrant grants the holder the right to purchase one share of our common stock. The Company granted 239,997 Series A
warrants and 239,997 Series B warrants. The Series A warrants are no longer exercisable as of August 2017. The Series B warrants have a per share exercise price of $31.00 and will expire five years from the date of issuance, August 19, 2016. Certain of our directors and executive officers purchased an aggregate of 13,771 shares of common stock and an aggregate of 27,544 warrants in this offering at the same price as the other investors.
Name | Common Stock Purchased in Private Placement | Warrants Purchased in Private Placement | Aggregate Purchase Price | |||||||||
The Alataris Family Trust | 6,369 | 12,738 | $ | 200,001 | ||||||||
John Walker | 3,185 | 6,370 | 100,009 | |||||||||
Georgia Erbez | 2,387 | 4,774 | 74,968 | |||||||||
Donald J. Kellerman | 796 | 1,592 | 24,994 | |||||||||
Hayley Lewis | 238 | 476 | 7,497 | |||||||||
Kleanthis G. Xanthopoulos, Ph.D. | 796 | 1,592 | 24,994 |
Pursuant to the Purchase Agreement, we agreed to register the resale of the shares of the common stock that we issued and any common stock issuable upon the exercise of the warrants that we issued in the private placement. In connection with the PIPE transaction, we filed a registration statement,Form S-3, with the U.S. Securities and Exchange Commission, or SEC, registering the resale of these shares of common stock and shares of common stock issuable upon exercise of the warrants. The registration statement was declared effective by the SEC on September 23, 2016.
Indemnification of Officers and Directors
Our amended and restated certificate of incorporation and our amended and restated bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, we have entered into indemnification agreements with each of our directors that are broader in scope than the specific indemnification provisions contained in the Delaware General Corporation Law.
Policies and Procedures for Related Person Transactions
Pursuant to the charter of our audit committee, our audit committee is responsible for reviewing and approving in advance any related person transactions. For the purposes of this policy, a “related person transaction” is any transaction between us or our subsidiary and any (a) of our directors or executive officers, (b) nominee for election as a director, (c) person known to us to own more than five percent of any class of our voting securities, or (d) member of the immediate family of any such person, if the nature of such transaction is such that it would be required to be disclosed under Item 404 ofRegulation S-K (or any similar successor provision).
In determining whether to approve a related person transaction, the audit committee will take into account, among other factors it deems appropriate, whether the related person transaction is on terms no less favorable than terms generally available to an unaffiliated third person under the same or similar circumstances and the extent of the related person’s interest in the transaction.
Director Independence
Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that each of Kenneth Greathouse, Jay Hagan, Troy Wilson and Kleanthis Xanthopoulos is an “independent director” as defined under Rule 5605(a)(2) of the Nasdaq Listing Rules and Rule10A-3 under the Exchange Act, and that each of Bruce Steel, while he was serving as our director, and John Walker, our President and CEO, was not an “independent director.” In making this determination, our board of directors considered the relationships that eachnon-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining the independence of such directors, including the beneficial ownership of our capital stock by eachnon-employee director.
Board Committees
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Each of these committees, which are the only standing committees of our board of directors, operates under a charter that has been approved by our board of directors.
Audit Committee. Reference is made to the disclosure set forth under the caption “Audit Committee” under Item 10 of Part III of this report, which disclosure is incorporated herein by reference.
Compensation Committee. Our compensation committee is comprised entirely of independent directors. The current members of our compensation committee are Mr. Greathouse, Dr. Wilson and Dr. Xanthopoulos, and each of whom is an independent director. The compensation committee:
approves the compensation and benefits of our executive officers;
reviews and makes recommendations to the board of directors regarding benefit plans and programs for employee compensation; and
administers our equity compensation plans.
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee is comprised entirely of independent directors. The current members of our nominating and corporate governance committee are Mr. Hagan, Dr. Wilson and Dr. Xanthopoulos. The nominating and corporate governance committee:
identifies individuals qualified to become board members;
recommends to the board of directors nominations of persons to be elected to the board; and
advises the board regarding appropriate corporate governance policies and assists the board in achieving them.
The following table represents aggregate fees billed to us for the years ended December 31, 2017, and 2016, by Marcum LLP, our independent registered public accounting firm:
2017 | 2016 | |||||||
Audit fees(1) | $ | 200,518 | $ | 128,130 | ||||
Audit-related fees (2) | - | - | ||||||
Tax fees(3) | - | - | ||||||
All other fees (4) | - | - | ||||||
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Total fees | $ | 200,518 | $ | 128,130 | ||||
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Pre-Approval Policies and Procedures
Our Audit Committee’spre-approval policies or procedures do not allow our management to engage Marcum LLP to provide any audit, review or attestation services or any permittednon-audit services without specific Audit Committeepre-approval of the engagement for those services. All of the services provided by Marcum LLP during 2017 and 2016 werepre-approved.
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EXHIBIT INDEX
Exhibit
| Description | |||||||
3.1 | ||||||||
3.2 | ||||||||
3.3 | ||||||||
3.4 | ||||||||
4.1 | ||||||||
4.4 | ||||||||
4.6 | ||||||||
10.1 |
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10.21 | ||||||||
10.22 | Form of Securities Purchase Agreement, dated as of | |||||||
10.24 | ||||||||
10.25 | ||||||||
10.26 | ||||||||
10.27 | ||||||||
10.28 | ||||||||
10.29# | ||||||||
10.30# | ||||||||
10.31# | ||||||||
10.32# | ||||||||
10.34# | ||||||||
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31.2* | ||||||||
32.1† | ||||||||
101.INS* | Inline XBRL Instance Document | |||||||
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||||
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
104* | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* | Filed herewith. |
+ | Confidential treatment has been granted as to certain portions of this exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission. |
++ | Certain portions of this exhibit have been redacted pursuant to Item 601(b)(10) of Regulation S-K. A copy of the omitted portions will be furnished supplementally to the Securities and Exchange Commission upon request. |
# | Management contract or compensatory plan or arrangement. |
† | The certifications attached as Exhibit 32.1 accompany this Annual Report on Form10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
None.
Item 16. FORM 10-K SUMMARY
ZOSANO PHARMA CORPORATION | |||||||||||
| By: | /s/ Steven Lo | |||||||||
Steven Lo | |||||||||||
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Chief Executive Officer | |||||||||||
| Date: | March |
Signature | Title | Date | ||||||||||||
/s/
| Chief Executive Officer (Principal Executive Officer) | March | ||||||||||||
Steven Lo | ||||||||||||||
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Financial Statements
December 31, 2017 and 2016
Contents
| Chief Financial Officer (Principal Financial Officer and Principal Accounting | March 17, 2022 | ||||||||||||||
| Christine Matthews | |||||||||||||||
| Director | March 17, 2022 | ||||||||||||||
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| Director | March 17, 2022 | ||||||||||||||
Linda S. Grais | ||||||||||||||||
/s/ Kenneth R. Greathouse | Director | March 17, 2022 | ||||||||||||||
Kenneth R. Greathouse | ||||||||||||||||
/s/ Joseph P. Hagan | Director | March 17, 2022 | ||||||||||||||
Joseph P. Hagan | ||||||||||||||||
/s/ Kathy McGee | Director | March 17, 2022 | ||||||||||||||
Kathy McGee | ||||||||||||||||
/s/ Elaine Yang | Director | March 17, 2022 | ||||||||||||||
Elaine Yang |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Zosano Pharma Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Zosano Pharma Corporation (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2017, 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, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has negative cash flows from operations, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated 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 independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the 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 audits 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.
Marcum LLP
/s/ Marcum LLP
We have served as the Company’s auditor since 2012.
Los Angeles, CA
March 12, 2018
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
December 31, 2017 | December 31, 2016 | |||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 11,651 | $ | 15,003 | ||||||||
Prepaid expenses and other current assets | 1,742 | 273 | ||||||||||
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Total current assets | 13,393 | 15,276 | ||||||||||
Restricted cash | 35 | 35 | ||||||||||
Property and equipment, net | 4,152 | 5,455 | ||||||||||
Other long-term assets | 420 | 140 | ||||||||||
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Total assets | $ | 18,000 | $ | 20,906 | ||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 1,511 | $ | 1,445 | ||||||||
Accrued compensation | 1,571 | 1,377 | ||||||||||
Secured promissory note (including accrued interest), net of issuance costs, current portion | 6,687 | 5,992 | ||||||||||
Other accrued liabilities | 688 | 1,005 | ||||||||||
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Total current liabilities | 10,457 | 9,819 | ||||||||||
Deferred rent | 495 | 52 | ||||||||||
Secured promissory note (including accrued interest), net of issuance costs | - | 6,550 | ||||||||||
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Total liabilities | 10,952 | 16,421 | ||||||||||
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Commitments and contingencies (note 8) | ||||||||||||
Stockholders’ equity: | ||||||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares and none authorized; none issued and outstanding as of December 31, 2017 and 2016, respectively | - | - | ||||||||||
Common stock, $0.0001 par value; 250,000,000 shares authorized as of December 31, 2017 and 2016; 1,973,039 and 840,799 shares issued and outstanding as of December 31, 2017 and 2016, respectively | - | - | ||||||||||
Additionalpaid-in capital | 232,922 | 201,254 | ||||||||||
Accumulated deficit | (225,874 | ) | (196,769 | ) | ||||||||
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Stockholders’ equity | 7,048 | 4,485 | ||||||||||
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Total liabilities and stockholders’ equity | $ | 18,000 | $ | 20,906 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31, | ||||||||||||
2017 | 2016 | |||||||||||
Revenue | $ | - | $ | - | ||||||||
Operating expenses: | ||||||||||||
Research and development | 20,188 | 20,457 | ||||||||||
General and administrative | 8,182 | 8,176 | ||||||||||
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Total operating expenses | 28,370 | 28,633 | ||||||||||
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Loss from operations | (28,370 | ) | (28,633 | ) | ||||||||
Other income (expense): | ||||||||||||
Interest expense, net | (742 | ) | (1,192 | ) | ||||||||
Other income (expense), net | 7 | (7 | ) | |||||||||
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Loss before provision for income taxes | (29,105 | ) | (29,832 | ) | ||||||||
Provision for income taxes | - | - | ||||||||||
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Net loss | $ | (29,105 | ) | $ | (29,832 | ) | ||||||
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Net loss per common share – basic and diluted | $ | (16.82 | ) | $ | (43.36 | ) | ||||||
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Weighted-average common shares outstanding – basic and diluted | 1,730 | 688 | ||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2015 | 598 | $ | - | $ | 193,439 | $ | (166,891 | ) | $ | (46 | ) | $ | 26,502 | |||||||||||||||||||||||||||||||
Issuance of common stock in connection with PIPE offering in August 2016, net of issuance costs | 240 | - | 6,643 | - | - | 6,643 | ||||||||||||||||||||||||||||||||||||||
Redemption of common stock upon cashless exercise of stock options | (5 | ) | - | (1 | ) | - | - | (1 | ) | |||||||||||||||||||||||||||||||||||
Issuance of common stock upon the exercise of stock options | 7 | - | 5 | - | - | 5 | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 1,168 | - | - | 1,168 | ||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (29,878 | ) | 46 | (29,832 | ) | ||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2016 | 840 | - | 201,254 | (196,769 | ) | - | 4,485 | |||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with public offering | 978 | - | 26,623 | - | - | 26,623 | ||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with exercise of warrants | 136 | - | 4,041 | - | - | 4,041 | ||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with equity line of credit | 12 | - | 174 | - | - | 174 | ||||||||||||||||||||||||||||||||||||||
Issuance and release of restricted stock to certain board members as remuneration | 2 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the exercise of stock options | 5 | - | 139 | - | - | 139 | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 692 | - | - | 692 | ||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (29,105 | ) | - | (29,105 | ) | ||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2017 | 1,973 | $ | - | $ | 232,923 | $ | (225,874 | ) | $ | - | $ | 7,049 | ||||||||||||||||||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31, | ||||||||||||
2017 | 2016 | |||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (29,105 | ) | $ | (29,832 | ) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 2,553 | 2,543 | ||||||||||
Stock based compensation | 692 | 1,168 | ||||||||||
Loss (gain) on disposal of property and equipment | 62 | (51 | ) | |||||||||
Loss on sale of Zosano Inc. | - | (57 | ) | |||||||||
Amortization of debt discount/accretion of premium | (20 | ) | (31 | ) | ||||||||
Accretion of interest | 72 | 259 | ||||||||||
Deferred rent | 443 | 6 | ||||||||||
Change in operating assets and liabilities: | ||||||||||||
Interest receivable | 5 | 101 | ||||||||||
Prepaid expenses and other assets | (1,563 | ) | (36 | ) | ||||||||
Accounts payable | (34 | ) | 172 | |||||||||
Accrued compensation and other accrued liabilities | (224 | ) | 72 | |||||||||
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Net cash used in operating activities | (27,119 | ) | (25,686 | ) | ||||||||
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Cash flows from investing activities: | ||||||||||||
Purchase of property and equipment | (1,244 | ) | 287 | ) | ||||||||
Proceeds from sales of property and equipment | 22 | 63 | ||||||||||
Purchase of marketable securities | (8,280 | ) | - | |||||||||
Proceeds from maturities of investments in marketable securities | 8,274 | 30,208 | ||||||||||
Proceeds from the sale of Zosano Inc. | - | 225 | ||||||||||
Increase in other investment | - | 63 | ||||||||||
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Net cash (used in) provided by investing activities | (1,228 | ) | 30,272 | |||||||||
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Cash flows from financing activities: | ||||||||||||
Proceeds from public offering of securities, net of underwriting commissions, discounts and other offering costs | 26,623 | - | ||||||||||
Proceeds from exercise of warrants and issuance of common stock | 4,041 | - | ||||||||||
Proceeds from issuance of securities in private investment in public equity (PIPE), net | - | 6,642 | ||||||||||
Payment of loan principal | (5,808 | ) | (2,876 | ) | ||||||||
Proceeds from exercise of stock options and issuance of common stock | 139 | 5 | ||||||||||
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Net cash provided by financing activities | 24,995 | 3,771 | ||||||||||
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Net (decrease) increase in cash and cash equivalents | (3,352 | ) | 8,357 | |||||||||
Cash and cash equivalents at beginning of year | 15,003 | 6,646 | ||||||||||
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Cash and cash equivalents at end of year | $ | 11,651 | $ | 15,003 | ||||||||
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Supplemental cash flow information: | ||||||||||||
Interest paid | $ | 865 | $ | 1,166 | ||||||||
Income taxes paid | $ | 2 | $ | 2 | ||||||||
Non-cash investing activities: | ||||||||||||
Acquisition of property and equipment under accounts payable | $ | 144 | $ | 64 | ||||||||
Issuance of common stock in connection with equity line of credit | $ | 174 | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017 and 2016
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The Company
Zosano Pharma Corporation (the “Company” or “We”) is a clinical stage biopharmaceutical company focused on providing rapid systemic administration of therapeutics 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, which is our proprietary formulation of zolmitriptan delivered via our ADAM technology, as an acute treatment for migraine. We are focused on developing products where rapid administration of established molecules with known safety and efficacy profiles provides an increased benefit to patients, for 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 that would streamline clinical development and accelerate the path towards commercialization.
As of December 31, 2016, the Company had one wholly owned subsidiary, ZP Opco, Inc. (“Opco”) through which the Company conducted its primary research and development activities. On November 1, 2017, ZP Opco. Inc. merged with and into Zosano Pharma Corporation, with Zosano Pharma Corporation as the surviving corporation of the merger. ZP Group LLC, a former subsidiary that was originally formed as a joint venture with Asahi Kasei Pharmaceuticals USA (Asahi), ceased operations in December 2013 and was dissolved on December 30, 2016.
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Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of the accompanying consolidated 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 consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
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. As a result of the reverse stock split, the number of the Company’s outstanding shares of common stock as of January 25, 2018 decreased from 39,460,931(pre-split) shares to 1,973,039 (post-split) shares. Unless otherwise noted, all share and per share
information included in these financial statements have 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.
Liquidity and Substantial Doubt in Going Concern
As of December 31, 2017, the Company has an accumulated deficit of $225.9 million as well as negative cash flows from operating activities. Presently, the Company does not have sufficient cash resources to meet its obligations as they become due within a year from issuance of these financial statements. The Company will continue to require substantial funds to continue research and development, including clinical trials of its product candidate. Management plans to meet its operating cash flow requirements include financing activities such as public or private offerings of its common stock, and/or preferred stock offerings, issuances of debt and convertible debt instruments and collaborative or other arrangements with corporate sources.
These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. There are no assurances that such additional funding will be achieved and that the Company will succeed in its future operations. The Company’s inability to obtain required funding in the 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 and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and the Company may have to cease operations.
Segment Reporting
The Company operates in one reportable segment to develop human pharmaceutical products. Management uses one measurement of profitability and does not segregate its business for internal reporting. All long-lived assets are maintained in the United States.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
The Company entered into a pledge and security agreement with a bank whereby $35,000 was held as a security for corporate purchasing cards. The balance is classified as restricted cash as of December 31, 2017 and 2016, respectively.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents and short-term investments. The Company invests its excess cash in money market funds, U.S. government agency bonds, corporate notes, certificates of deposit 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. Additionally, no single issuer in the portfolio shall exceed 5% of the total issue size outstanding 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 and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, which range from three to five years for computer equipment and software, and nine years for manufacturing, laboratory, and office equipment. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the respective assets.
Impairment of Long-Lived Assets
The Company identifies and records impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carrying amount of an asset likely is not recoverable. Recoverability is measured by comparing the fair value to the related asset’s carrying value. If an asset is considered impaired, the asset is written down to fair value, which is determined based either on discounted cash flows or appraised value, depending on the nature of the asset. An impairment charge of $70,000 primarily from its laboratory equipment was recorded for the year ended December 31, 2017 and no impairment charge was recorded for 2016.
Long-Term Investment
In October 2013, the Company entered into a stock purchase agreement with Zosano, Inc. (the Shell Corporation), a Delaware corporation, pursuant to which the Company acquired 10,016,973 shares of the Shell Corporation’s common stock, $0.0001 par value, for an aggregate cash purchase price of $0.4 million. Immediately following the closing of the acquisition, 10,027,000 shares of the Shell Corporation’s common stock were issued and outstanding, approximately 99.9% of which were held by the Company.
The Company accounted for its investment in the Shell Corporation using the cost method of accounting and classified it as other long-term assets in its consolidated balance sheet. In November 2016, the Company sold its interest in Zosano, Inc. for an aggregate cash selling price of $225,000 and recorded a realized loss of approximately $57,000 in its consolidated income statement under the caption Other expense, net.
Debt Issuance Costs
Deferred issuance costs related to the Company’s debt are presented as a direct deduction from the carrying amount of the debt.
Deferred Offering Costs
Deferred offering 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 deferred until the completion of the applicable offering, at which time such costs are reclassified to additionalpaid-in-capital as a reduction of the proceeds.
Deferred Rent
Rent expense is recognized on a straight-line basis over thenon-cancelable term of the Company’s operating lease and, accordingly, the Company records the difference between cash rent payments and the recognition of rent expense as a deferred rent. The Company also records lessor-funded lease incentives, such as reimbursable leasehold improvements, as a deferred rent, which is amortized as a reduction of rent expense over thenon-cancelable term of its operating lease.
Research and Development Expenses
Research and development costs are charged to expense as incurred and consist of costs related to furthering the Company’s research and development efforts and designing and manufacturing the Company’s intracutaneous applicator for the Company’s 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.
For the year ended December 31, 2017, the Company incurred research and development costs of approximately $10.4 million in connection with the Company’s research and development efforts and approximately $9.8 million in the manufacturing of the Company’s intracutaneous delivery system for development of the Company’s product candidate. For the year ended December 31, 2016, the Company incurred research and development costs of approximately $11.9 million in connection with the Company’s research and development efforts and approximately $8.6 million in the manufacturing of the Company’s intracutaneous delivery system for development of the Company’s product candidate.
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 determines 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 accounts for its stock-based compensation, at fair value in accordance with ASC 718, Compensation — Stock Compensation. The fair value of employee stock option grants is estimated on the date of grant using the Black-Scholes option pricing model, and are recognized as expense on a straight- line basis over the employee’s requisite service period (generally the vesting period), net of estimated forfeitures.
The Company records the expense attributed tonon-employee services paid with stock-based awards based on the estimated fair value of the awards determined using the Black-Scholes option pricing model at the measurement date in accordance with ASC 505-50, Equity-Based Payments to Non-Employees.
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 bases. 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 ismore-likely-than-not, based on the technical merits of the position, that it will be sustained upon examination. Interest and penalties related to unrecognized tax benefit, if any, will be included within the provision for income tax.
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 andif-converted methods. For purposes of the diluted net loss per share calculation, convertible promissory notes, common stock warrants and stock options 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, | ||||||||
2017 | 2016 | |||||||
(in shares) | ||||||||
Warrants to purchase common stock | 199,524 | 483,619 | ||||||
Options to purchase common stock | 118,379 | 125,756 | ||||||
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317,903 | 609,375 | |||||||
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Recently Adopted and Issued Accounting Pronouncements
In January 2017, the Company adopted ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). ASU 2015-17 requires deferred tax assets and liabilities to be classified as noncurrent in the consolidated balance sheet. A reporting entity should apply the amendment
prospectively or retrospectively. The adoption of ASU 2015-17 did not have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,Leases. Under the new guidance, lessees will be required to recognize substantially all leases on the balance sheet as a right-of-use asset and recognize a corresponding lease liability. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of this accounting standard on our financial position, results of operations or cash flows.
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The following is a summary of the Company’s cash and cash equivalents:
December 31, 2017 | ||||||||||||||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Cash in bank | $ | 4,587 | $ | - | $ | - | $ | 4,587 | ||||||||||||||||||||
Money market funds | 6,414 | - | - | 6,414 | ||||||||||||||||||||||||
Certificates of deposit (restricted) | 35 | - | - | 35 | ||||||||||||||||||||||||
U.S. government agency bonds | 650 | - | - | 650 | ||||||||||||||||||||||||
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$ | 11,686 | $ | - | $ | - | $ | 11,686 | |||||||||||||||||||||
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Classified as: | ||||||||||||||||||||||||||||
Cash and cash equivalent | $ | 11,651 | ||||||||||||||||||||||||||
Restricted cash | 35 | |||||||||||||||||||||||||||
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$ | 11,686 | |||||||||||||||||||||||||||
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December 31, 2016 | ||||||||||||||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Cash in bank | $ | 3,342 | $ | - | $ | - | $ | 3,342 | ||||||||||||||||||||
Money market funds | 11,661 | - | - | 11,661 | ||||||||||||||||||||||||
Certificates of deposit (restricted) | 35 | - | - | 35 | ||||||||||||||||||||||||
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$ | 15,038 | $ | - | $ | - | $ | 15,038 | |||||||||||||||||||||
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Classified as: | ||||||||||||||||||||||||||||
Cash and cash equivalent | $ | 15,003 | ||||||||||||||||||||||||||
Restricted cash | 35 | |||||||||||||||||||||||||||
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$ | 15,038 | |||||||||||||||||||||||||||
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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, accounts payable, and accrued liabilities, approximate fair value due to their relatively short maturities. The carrying value of the Company’s short-term notes payable 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 notes payable approximates fair value because the interest rates approximate market rates that the Company could obtain for debt with similar terms and maturities.
The following tables set forth the fair value of the Company’s financial instruments as of December 31, 2017 and 2016:
December 31, 2017 | ||||||||||||||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||||
Money market funds | $ | 6,414 | $ | - | $ | - | $ | 6,414 | ||||||||||||||||||||
U.S. government agency bonds | - | 650 | - | 650 | ||||||||||||||||||||||||
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Total financial assets | $ | 6,414 | $ | 650 | $ | - | $ | 7,064 | ||||||||||||||||||||
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December 31, 2016 | ||||||||||||||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||||
Money market funds | $ | 11,661 | $ | - | $ | - | $ | 11,661 | ||||||||||||||||||||
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Total financial assets | $ | 11,661 | $ | - | $ | - | $ | 11,661 | ||||||||||||||||||||
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There were no transfers between levels within the fair value hierarchy during the periods presented.
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The following summarizes the Company’s property and equipment as of December 31, 2017 and 2016 (in thousands):
2017 | 2016 | |||||||||||
(in thousands) | ||||||||||||
Laboratory and office equipment | $ | 1,159 | $ | 1,127 | ||||||||
Manufacturing equipment | 10,387 | 10,857 | ||||||||||
Computer equipment and software | 209 | 314 | ||||||||||
Leasehold improvements | 15,660 | 15,694 | ||||||||||
Construction in progress | 2,351 | 1,961 | ||||||||||
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29,766 | 29,953 | |||||||||||
Less: accumulated depreciation | (25,614 | ) | (24,498 | ) | ||||||||
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$ | 4,152 | $ | 5,455 | |||||||||
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Depreciation and amortization expense was approximately $2.6 million and $2.5 million for the years ended December 31, 2017 and 2016, respectively.
The Company assesses the impairment of long-lived assets, primarily property and equipment, whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When such events occur, management determines whether there has been an impairment in the
value by comparing the asset’s carrying value with its fair value, as measured by the anticipated undiscounted net cash flows of the asset. If an impairment in value exists, the asset is written down to its estimated fair value. The Company has recognized impairment losses of $70,000 primarily from its laboratory equipment through December 31, 2017 as the assets have no current or future utility to the Company.
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Senior Secured Term Loan with Hercules
In June 2014, the Company entered into a loan and security agreement with Hercules Capital, Inc. (“Hercules”), which provided the Company $4.0 million in debt financing. In June 2015, the Company 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 (Hercules Term Loan). Upon the execution of the first amendment to the loan and security agreement, the Company 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% as of December 31, 2017 and 2016. On June 1, 2017, the Company paid a $100,000 legacy end of term charge and is required to pay a $351,135 end of term charge on the earlier of loan maturity or at the date the Company prepays the Hercules Term Loan. The Company 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 the Company’s tangible and intangible properties and assets, including intellectual properties.
In connection with the first amendment to the loan and security agreement with Hercules, the Company issued Hercules a warrant to purchase 2,035 shares of the Company’s common stock at an exercise price of $147.40 per share. The warrant was recorded at fair value on the date of issuance and treated as a debt discount which is amortized to interest expense over the term of the loan using the effective interest method. (See Note 7 for a discussion of warrants to purchase common stock.)
In addition, the Company incurred legal and closing costs totaling $0.1 million, including an $85,000 upfront loan origination fee paid to Hercules and $32,000 of legal costs, in connection with the first amendment to the loan and security agreement with Hercules. These debt issuance costs have been recorded as a direct deduction from the related debt liability. The following is a summary of the Company’s long-term debt, net of unamortized debt discount and issuance costs, as of December 31, 2017 and 2016 (in thousands):
December 31, | December 31, | |||||||||||
2017 | 2016 | |||||||||||
Principal amount | $ | 6,316 | $ | 12,122 | ||||||||
Less: unamortized debt issuance costs | (10 | ) | (41 | ) | ||||||||
unamortized fair value of free standing warrant | (18 | ) | (75 | ) | ||||||||
Plus: unamortized fair value debt premium | 35 | 143 | ||||||||||
accrued terminal interest | 320 | 310 | ||||||||||
accrued interest | 44 | 83 | ||||||||||
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Secured promissory note, net of unamortized debt issuance cost and premium | $ | 6,687 | $ | 12,542 | ||||||||
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Secured promissory note, current portion | 6,687 | 5,992 | ||||||||||
Secured promissory note, long-term portion | - | 6,550 | ||||||||||
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Secured promissory note, net of unamortized debt issuance cost and premium | $ | 6,687 | $ | 12,542 | ||||||||
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As of December 31, 2017, future minimum payments on the Company’s current debt, including payment of principal and interest ending December 31, 2018 are as follows:
Principal | Interest | End of Term Fees | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||
2018 | $ | 6,316 | $ | 280 | $ | 351 | ||||||||||||||
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$ | 6,316 | $ | 280 | $ | 351 | |||||||||||||||
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On January 24, 2018, after receiving board and stockholder approval, the Company amended its certificate of incorporation to increase the number of shares of common stock authorized for issuance to 250,000,000.
Public Offering-March 2017
On March 22, 2017, the Company completed a registered public offering of 977,500 shares of common stock at a price of $30.00 per share, which included the exercise in full by the underwriters of their over-allotment option to purchase up to 127,500 additional shares of common stock. The total proceeds from the offering were $26.6 million, net of underwriter’s discounts and commissions and offering expenses.
Private Investment in Public Equity (“PIPE”) – August 2016
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 for aggregate gross proceeds of $7.5 million. Costs related to the offering were $0.9 million. Pursuant to the Purchase Agreement, the Company sold 239,997 common shares at $26.40 per common share, the closing price per share on August 15, 2016, for gross proceeds of $6.3 million. Additionally, 480,000 warrants were sold, at a price of $2.50 per warrant, for gross proceeds of $1.2 million. Each warrant grants the holder the right to purchase one share of the Company’s common stock. The Company granted
239,997 Series A Warrants and 239,997 Series B Warrants. Series A Warrants and Series B Warrants have a per share exercise price of $29.00 and $31.00, respectively, and will expire one year and one week and five years, respectively, from the date of issuance, August 19, 2016. Certain of our directors and executive officers purchased an aggregate of 13,771 shares of common stock and an aggregate of 27,542 warrants in this offering at the same price as the other investors.
In connection with the PIPE transaction, the Company filed a registration statement,Form S-3, with the U.S. Securities and Exchange Commission, or SEC, registering for resale the shares of common stock and shares of common stock issuable upon exercise of the warrants. The registration statement was declared effective by the SEC on September 23, 2016.
Equity Line of Credit
On October 20, 2017, the Company entered into a purchase agreement and a registration rights agreement with an accredited investor, Lincoln Park Capital Fund, LLC (“Lincoln Park”), providing for the purchase of up to $35.0 million worth of the Company’s common stock over the term of the purchase agreement (the “Equity Line of Credit).
Under the terms and subject to the conditions of the Equity Line of Credit, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase, up to $35.0 million worth of shares of the Company’s common stock. The Company’s board of directors reserved 392,104 shares for issuance pursuant to the Equity Line of Credit (inclusive of commitment shares). On October 20, 2017, the Company issued 11,375 shares of its common stock, as initial commitment shares, to Lincoln Park with a fair value of $15.30 which was recorded as deferred financing costs and is included within other current assets in the accompanying balance sheet as of December 31, 2017. The deferred financing costs will be amortized as interest expenseover the term of the Equity Line of Credit as there is no guaranty that additional shares will be sold under the Equity Line of Credit. Additionally, the Company will issue, pro rata, up to an additional 11,375 shares of its common stock as additional commitment shares to Lincoln Park in connection with any additional purchases. Such future sales of common stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s option, overthe 30-month period commencing on November 21, 2017, the date that a registration statement (filed pursuant to the terms of the registration rights agreement) was declared effective by the SEC, and the other conditions of the Equity Line of Credit are satisfied.
Hercules Warrants
In connection with the Company’s entry into the loan and security agreement with Hercules in June 2014, the Company issued Hercules a warrant to purchase $280,000 worth of the Company’s stock. The warrant was initially recorded on the Company’s consolidated balance sheet at fair value on the date of issuance and treated as a debt discount that is amortized to interest expense over the debt repayment period using the effective interest method. As a result of the pricing of the Company’s initial public offering (“IPO”) on January 27, 2015, and pursuant to the agreement the exercise price was fixed at $176.80 per share, resulting in the warrant being exercisable for 1,583 shares (warrant amount of $280,000 divided by $176.80 per share) of the Company’s common stock. Accordingly, management concluded that the requirements for equity classification had been met and effected a reclassification of the warrant liability of $0.3 million to equity. The warrant is exercisable at any time, in whole or in part, until five years from the date of the Company’s IPO.
In connection with the Company’s entry into the first amendment to loan and security agreement with Hercules in June 2015, the Company issued Hercules a warrant to purchase 2,035 shares of the Company’s common stock at an exercise price of $147.40 per share. Hercules can exercise its purchase right under the warrant, in whole or in part, at any time until June 23, 2020. The warrant was recorded at fair value on the date of issuance and treated as a debt discount that is being amortized to interest expense over the term of the loan using the effective interest method. The Company classified the warrant to equity and recorded the fair value of the warrant of $212,000 to additionalpaid-in capital. The warrant fair value was determined by using the Black-
Scholes option valuation model with the following assumptions: expected term of 5.00 years; volatility of 89%; risk free interest rate of 1.73% and no dividend yield.
Below is a table summarizing the warrants issued and outstanding for each of the periods presented:
Warrants Outstanding as of As of December 31, 2016 | Warrants Exercised | Warrants Expired | Warrants Outstanding As of December 31, 2017 | Exercise Price | Expiration Date | |||||||||||||||||||||||||||||||
PIPE Financing - Series A | 239,997 | 92,210 | 147,787 | - | $ | 29.00 | 8/26/2017 | |||||||||||||||||||||||||||||
PIPE Financing - Series B | 239,997 | 44,091 | - | 195,906 | $ | 31.00 | 8/19/2021 | |||||||||||||||||||||||||||||
Hercules - June 2014 | 1,583 | - | - | 1,583 | $ | 176.80 | 1/27/2020 | |||||||||||||||||||||||||||||
Hercules - June 2015 | 2,035 | - | - | 2,035 | $ | 147.40 | 6/23/2020 | |||||||||||||||||||||||||||||
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Total | 483,612 | 136,301 | 147,787 | 199,524 | ||||||||||||||||||||||||||||||||
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As of December 31, 2017, the Company had 199,524 warrants outstanding classified as equity warrants. Each warrant grants the holder the right to purchase one 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. During the year ended December 31, 2017, warrants were exercised to purchase 136,301 shares of common stock for proceeds of approximately $4.0 million.
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The Company has an operating lease withBMR-34790 Ardentech Court LP, an affiliate of BMR Holdings, for its office, research and development, and manufacturing facilities in Fremont, California. On June 6, 2017, the Company entered into the seventh amendment to the existing lease (“Seventh Amendment”), effective as of May 30, 2017.
Under the Seventh Amendment, the Company extended the term of the lease for the Company’s headquarters in Fremont, California through August 31, 2024, with an option to further extend the lease for an additional 65 months, subject to certain terms and conditions. The Company has agreed to pay a monthly base rent of $136,191 for the period commencing September 1, 2017, 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). The Company will incur additional expense of approximately $0.4 million under the lease in connection with roof repairs that will be treated as additional rent and paid over the term of the lease.
The Company records rent expense under the lease on a straight-line basis over the term of the lease. The difference between the actual lease payments and the expense recognized under the lease, along with the unamortized tenant improvement allowances, resulted in a net deferred rent liability of approximately $494,000 and $52,000 as of December 31, 2017 and 2016, respectively.
For the years ended December 31, 2017 and 2016, rent expense under operating leases was $1.2 million and $0.6 million, respectively.
As of December 31, 2017, future minimum payments undernon-cancelable operating leases for each year ending December 31 are as follows (in thousands):
2018 | $ | 1,558 | ||
2019 | 1,754 | |||
2020 | 1,807 | |||
2021 | 1,861 | |||
2022 | 1,914 | |||
2023 and thereafter | 3,310 | |||
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$ | 12,204 | |||
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Contractual Commitments
Pursuant to the terms of Mr. Walker’s, the Company’s President and Chief Executive Officer employment agreement, if the Company terminates Mr. Walker other than for cause or if Mr. Walker terminates his employment for good reason, he will be entitled to receive (i) continued salary for twelve months, (ii) a bonus equal to the amount of the annual bonus awarded to him in respect of the year prior to termination, and (iii) the vesting schedule for any stock options outstanding on the date of termination will automatically accelerate so that 25% of any then unvested option shares shall immediately vest and become exercisable upon such termination. If during theone-year period following a change in control of the Company, either we terminate Mr. Walker’s employment without cause or Mr. Walker resigns for good reason, he will be entitled to receive (i) continued salary for 24 month and a lump sum cash amount equal to 229.56% multiplied by the total cost of the projected premiums for group medical, dental and vision insurance for a period of twenty-four months covering the period from and after the date of termination, (ii) a bonus equal to the amount of the annual bonus awarded to him in respect of the year prior to termination, and (iii) his then outstanding equity awards that were granted after the effective date of the Employment Agreement and that are subject to time based vesting will accelerate vesting in full.
Ms. Erbez’s the Company’s Chief Business Officer and Chief Financial Officer employment letter agreement provides for an initial base salary of $350,000, subject to increase from time to time. Ms. Erbez joined the Company on September 7, 2016. Ms. Erbez employment letter agreement provides for a target annual bonus of 40% of her annual base salary, to be determined by the board of directors in its discretion after consideration of a proposal from the CEO based on company performance against goals established annually by the compensation committee, as well as the Company’s then prevailing cash position. Pursuant to the terms of Ms. Erbez’s employment agreement, if the Company terminates Ms. Erbez other than for cause, or in the event of her resignation for good reason, then, for the six month period following such termination of her employment, the Company will continue to pay Ms. Erbez her base salary and provide her with group medical, dental and vision insurance. In addition, the vesting schedule for any outstanding stock options held by Ms. Erbez on the date of termination will automatically accelerate so that 25% of any then unvested option shares will immediately become exercisable upon such termination. If, during theone-year period following a change in control of our Company, either we terminate Ms. Erbez’s employment without cause or Ms. Erbez resigns for good reason, then she shall be entitled to receive a lump sum severance payment equal to twelve months of her base salary and a lump sum payment equal to the total cost of projected premiums for group medical, dental and vision insurance for a period of twelve months. In such event, the vesting schedule for any outstanding stock options held by Ms. Erbez will automatically accelerate so that 100% of the total option shares will immediately become exercisable upon such termination.
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, 2017.
Legal Proceedings
We are not party to any material pending legal proceedings. However, we may from time to time become involved in litigation relating to claims arising in the ordinary course of our business.
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The 2012 Stock Incentive Plan
The 2012 Stock Incentive Plan (the 2012 Plan) provides for the granting of stock options and restricted stock awards to employees, directors and consultants of the Company. Options granted under the 2012 Plan may be either incentive stock options or nonqualified stock options. 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 2012 Plan may be granted for periods of up to ten years. Employee options granted by the Company generally vest over four years. Restricted stock awards granted to employees, directors and consultants can be subject to the same vesting conditions as determined by our board of directors. 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 may be issued under the 2012 Plan, provided however that the awards outstanding under the 2012 Plan at January 27, 2015 continue to be governed by the terms of the 2012 Plan.
The 2014 Equity and Incentive Plan
The 2014 Equity and Incentive Plan (the 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, restricted stock units, 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. As of December 31, 2017, the Company had reserved 122,950 shares of our common stock for issuance under our 2014 Plan, subject to automatic annual increases as set forth in the plan. 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. Restricted stock awards granted to employees, directors and consultants can be subject to the same vesting conditions and the right of repurchase by the Company on unvested shares as determined by our board of directors. As of December 31, 2017, the Company had 29,571 shares available for grant under the 2014 Plan.
The following table summarizes option and award activity, excluding inducement grants, for the fiscal years ended December 31, 2016 and 2017:
Shares Available for Grant | Outstanding Number of Shares | Weighted- Average Exercise Price per Share | Weighted- Average Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | ||||||||||||||||
Balance at December 31, 2015 | 42,932 | 48,631 | $ | 47.09 | 3.14 | |||||||||||||||
Options granted | (51,487) | 51,487 | $ | 33.40 | ||||||||||||||||
Options exercised | - | (7,293) | $ | 30.64 | ||||||||||||||||
Restricted stock award granted | (473) | - | $ | - | ||||||||||||||||
Options cancelled/forfeited | 13,168 | (13,168) | $ | 54.56 | ||||||||||||||||
Shares expired under 2012 Plan | (1,314) | - | $ | - | ||||||||||||||||
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Balance at December 31, 2016 | 2,826 | 79,657 | $ | 38.51 | 5.62 | |||||||||||||||
Additional shares reserved | 52,950 | - | $ | - | ||||||||||||||||
Options granted | (55,210) | 55,210 | $ | 14.26 | ||||||||||||||||
Options exercised | - | (4,926) | $ | 27.94 | ||||||||||||||||
Options cancelled/forfeited/expired | 30,912 | (30,912) | $ | 39.10 | ||||||||||||||||
Restricted stock award granted | (3,000) | - | $ | - | ||||||||||||||||
Restricted stock award forfeited | 1,334 | - | $ | - | ||||||||||||||||
Shares expired under 2012 Plan | (241) | - | $ | - | ||||||||||||||||
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Balance at December 31, 2017 | 29,571 | 99,029 | $ | 25.33 | 8.46 | |||||||||||||||
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Exercisable at December 31, 2017 | 35,999 | $ | 34.83 | 7.27 | $ | - | ||||||||||||||
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Vested or expected to vest at December 31, 2017 |
| 93,214 | $ | 25.82 | 8.42 | $ | - | |||||||||||||
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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 forin-the-money options at December 31, 2017.
Inducement Grants
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). 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. The following table summarizes the Company’s inducement grant stock option activities:
Shares Available for Grant | Outstanding Number of Shares | Weighted- Average Exercise Price per Share | Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | ||||||||||||||||
Balance at December 31, 2015 | - | - | $ | - | - | |||||||||||||||
Options granted | 12,600 | 12,600 | $ | 15.40 | ||||||||||||||||
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Balance at December 31, 2016 | 12,600 | 12,600 | $ | 15.40 | 9.68 | |||||||||||||||
Options granted | 6,750 | 6,750 | $ | 26.06 | ||||||||||||||||
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Balance at December 31, 2017 | 19,350 | 19,350 | $ | 19.12 | 8.91 | |||||||||||||||
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Exercisable at December 31, 2017 | 3,937 | $ | 15.04 | 8.68 | $ | - | ||||||||||||||
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Vested or expected to vest at December 31, 2017 |
| 18,030 | $ | 19.04 | 8.91 | $ | - | |||||||||||||
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The following summarizes the composition of stock options outstanding and exercisable within the approved stock options plans, which excludes inducement grants, as of December 31, 2017:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted- | ||||||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||||||
Remaining | Average | Average | ||||||||||||||||||
Number of | Contractual | Exercise | Number of | Exercise | ||||||||||||||||
Exercise Price | Shares | Life (in years) | Price | Shares | Price | |||||||||||||||
$11.40 - $11.40 | 28,000 | 8.84 | $ | 11.40 | 10,863 | $ | 11.40 | |||||||||||||
$11.80 - $17.00 | 29,230 | 9.29 | $ | 15.72 | 4,800 | $ | 17.00 | |||||||||||||
$19.80 - $28.00 | 23,023 | 7.93 | $ | 22.09 | 7,226 | $ | 26.72 | |||||||||||||
$40.80 - $182.60 | 17,376 | 7.27 | $ | 55.31 | 12,206 | $ | 56.32 | |||||||||||||
$185.80 - $185.80 | 1,400 | 7.39 | $ | 185.80 | 904 | $ | 185.80 |
The weighted-average grant-date fair value of options and awards granted within the approved stock options plans during the years ended December 31, 2017 and 2016 were $17.43 and $33.40, respectively. The total fair value of options and awards that vested during the years ended December 31, 2017 and 2016 were $0.4 million and $0.5 million, respectively.
Stock-Based Compensation Expense
Total stock-based compensation expense recognized was as follows:
Year Ended December 31, | ||||||||||||
2017 | 2016 | |||||||||||
(in thousands) | ||||||||||||
Research and development | $ | 166 | $ | 227 | ||||||||
Manufacturing | 100 | 226 | ||||||||||
General and administrative | 426 | 715 | ||||||||||
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$ | 692 | $ | 1,168 | |||||||||
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At December 31, 2017 and 2016, the Company had $1.1 million and $2.6 million, respectively, of total unrecognized stock-based compensation, net of estimated forfeitures, related to outstanding stock options that will be recognized over a weighted-average period of 3.40 years.
The Company’s stock-based compensation expense for stock options is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes option pricing model and is recognized as expense over the requisite service period. The Black-Scholes option pricing model requires various highly judgmental assumptions including expected volatility and expected term. The expected volatility is based on the historical stock volatilities of several of the Company’s publicly listed peers over a period equal to the expected terms of the options as the Company does not have sufficient trading history to use the volatility of its own common stock. To estimate the 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. If any of the assumptions used in the Black-Scholes option pricing model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, the Company estimates the forfeiture rate based on historical experience and its expectations regarding futurepre-vesting termination behavior of employees. To the extent that the actual forfeiture rate is different from this estimate, stock-based compensation expense is adjusted accordingly.
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, | ||||
2017 | 2016 | |||
Dividend yield | 0% | 0% | ||
Risk-free interest rate | 1.90% – 2.25% | 1.06% – 2.20% | ||
Expected volatility | 89% | 89% | ||
Expected term (years) | 6.08 | 6.08 | ||
Estimated forfeiture % rate | 6.50% | 6.50% |
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In January 2016, the Company terminated the employment of its Chief Executive Officer, Vikram Lamba. Pursuant to the terms of his employment agreement, the Company was obligated to Mr. Lamba for certain severance payments, continuation of benefits, and acceleration of vesting of the remaining outstanding unvested stock options. In the first fiscal quarter of 2016, the Company had recorded a liability and an expense of $0.4 million for postemployment severance and benefits and a stock-based compensation expense of approximately $16,000 related to the acceleration of vesting of Mr. Lamba’s stock options. For the year ended December 31, 2016, the Company had paid $0.4 million of the postemployment severance and benefits.
In March 2016, the Company consolidated its operations with the primary focus on continued development of M207, our product candidate (previously known asZP-Triptan). In accordance with ASC 420, Exit or Disposal Cost Obligations, the aggregate restructuring charges of approximately $0.5 million representone-time termination benefits, comprised principally of severance, benefit continuation costs and outplacement services. In the first fiscal quarter of 2016, the Company had recorded $0.5 million as a liability and an expense and a stock-based compensation expense of approximately $5,000 on the acceleration of vesting of certain stock options related to the elimination of certain senior positions in connection with the workforce reduction. For the year ended December 31, 2016, the Company paid approximately $0.5 million.
In May 2017, the President and Chief Executive Officer of the Company, Konstantinos Alataris, resigned. Pursuant to the terms of his separation agreement, the Company paid Dr. Alataris for certain severance payments and continuation of benefits. In addition, any vested options held by Dr. Alataris remained exercisable for three months following his resignation. In the second fiscal quarter of 2017, the Company recorded a liability and an expense of $0.3 million for Dr. Alataris’s postemployment severance and benefits. For the year ended December 31, 2017, the Company had paid $0.3 million of the postemployment severance and benefits.
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The Company has incurred cumulative net operating losses since inception and, consequently, has not recorded any income tax expense for the years ended December 31, 2017 and 2016 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, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Federal statutory tax rate | (34.00 | ) | % | (34.00 | ) | % | ||||||||||
State statutory tax rate | (5.83 | ) | % | (5.83 | ) | % | ||||||||||
Change in effective tax rate | 18.17 | % | - | % | ||||||||||||
Derecognition due to Section 382 and 383 | 30.19 | % | 231.11 | % | ||||||||||||
Stock-based compensation | 1.11 | % | 1.00 | % | ||||||||||||
Permanent items | (2.51 | ) | % | (3.17 | ) | % | ||||||||||
Change in valuation allowance | (7.13 | ) | % | (189.11 | ) | % | ||||||||||
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- | % | - | % | |||||||||||||
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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. As of December 31, 2017 and 2016, the Company had net deferred tax assets of $16.9 million and $18.9 million, respectively. 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 decreased by approximately $2.0 million and $56.9 million during the year ended December 31, 2017 and 2016, respectively.
Significant components of the Company’s net deferred tax assets and liabilities are as follows:
Year Ended December 31, | ||||||||||||
2017 | 2016 | |||||||||||
(in thousands) | ||||||||||||
Net operating loss carryforwards | $ | 12,226 | $ | 14,034 | ||||||||
Research and development credits | 3,245 | 2,617 | ||||||||||
Depreciation and amortization | 640 | 345 | ||||||||||
Accruals | 507 | 658 | ||||||||||
Deferred rent | 113 | 1,066 | ||||||||||
Capital loss carryforward | 23 | 33 | ||||||||||
Stock-based compensation | 98 | 190 | ||||||||||
Other | 1 | 2 | ||||||||||
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Net deferred tax assets | 16,853 | 18,945 | ||||||||||
Valuation allowance | (16,853 | ) | (18,945 | ) | ||||||||
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$ | - | $ | - | |||||||||
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As of December 31, 2017, the Company had federal net operating loss carryforwards of approximately $43.8 million and state net operating loss carryforwards of approximately $43.5 million. As of December 31, 2016, the Company had federal net operating loss carryforwards of approximately $35.2 million and state net operating loss carryforwards of approximately $35.5 million. If not utilized, the federal net operating loss carryforwards will expire from 2027 through 2038, and state net operating loss carryforwards will expire from 2018 through 2038.
If the Company experiences a greater than 50 percentage point aggregate change in ownership over a three-year period (a Section 382 ownership change), utilization of itspre-change NOL carryforwards are 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-termtax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. As of December 31, 2017, the Company determined that ownership changes occurred on February 26, 2014, November 30, 2015 and March 22, 2017. As a result of the ownership changes, approximately $185.4 million and $176.6 million of the NOLs will expire unutilized for federal and California purposes, respectively. As of December 31, 2017, the Company has derecognized NOL related DTAs in the tax affected amounts of $38.9 million and $12.3 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 future changes in its stock ownership.
As of December 31, 2017, the Company had federal and state research and development credit carryforwards of approximately $0.4 million and $4.6 million, respectively. As of December 31, 2016, the Company had federal and state research and development credit carryforwards of approximately $0.5 million and $4.2 million, respectively. If not utilized, the federal tax credits will begin to expire in 2026 and state tax credits currently 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 $4.5 million of gross
federal R&D credit-related DTAs due to the Section 383 limitation as of December 31, 2017. The Company has not derecognized any of the California R&D credit-related DTAs because the credit do not expire.
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for aone-time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017 as well as prospective changes beginning in 2018, including changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. Specifically, the 2017 Tax Act limits the amount the Company is able to deduct for net operating loss carryforwards generated in taxable years beginning after December 31, 2017 to 80% of taxable income however these net operating loss carryforwards can be carried forward indefinitely, repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.
The changes to existing U.S. tax laws as a result of the 2017 Tax Act, which we believe have the most significant impact on the Company’s federal income taxes are as follows:
Reduction of the U.S. Corporate Income Tax Rate
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a $5.3 million decrease in net deferred tax assets and a corresponding $5.3 million decrease in the valuation allowance as of December 31, 2017.
Acceleration of Depreciation
The Company recognized a provisional reduction to net deferred tax assets and a corresponding reduction in valuation allowance of $0.4 million attributable to the accelerated depreciation for certain assets placed into service after September 27, 2017.
The Company files income tax returns in the U.S. federal and California state jurisdictions. The Company is subject to U.S. federal and state income tax examinations by authorities for all tax years due to the accumulated net operating losses that are being carried forward for tax purposes.
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 will not be recognized if it has less than a 50% likelihood of being sustained.
The Company had approximately $1.0 million of unrecognized tax benefits as of December 31, 2017 and approximately $0.9 million of unrecognized tax benefits as of December 31, 2016. As the Company has a full valuation allowance on its deferred tax assets, the unrecognized tax benefits will 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, | ||||||||||||
2017 | 2016 | |||||||||||
(in thousands) | ||||||||||||
Balance at the beginning of year | $ | 943 | $ | 1,582 | ||||||||
(Decrease) increase related to prior year tax positions | - | (4 | ) | |||||||||
(Decrease) increase related to current year tax positions | 63 | (635 | ) | |||||||||
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Balance at the end of year | $ | 1,006 | $ | 943 | ||||||||
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Interest and penalty related to unrecognized tax benefits would be included as income tax expense in the Company’s consolidated statements of operations. As of December 31, 2017 and 2016, the Company had not recognized anytax-related penalties or interest in its consolidated financial statements.
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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 is responsible for administrative costs of the 401(k) Plan. The Company may, at its discretion, make matching contributions to the 401(k) Plan. No employer contributions have been made to date.
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On November 28, 2017, we received a deficiency letter from the Listing Qualifications Department of the Nasdaq Stock Market notifying us that, for the preceding 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2).
On February 9, 2018, we received a letter from the Director of Nasdaq Listing Qualifications notifying us that we have regained compliance with the requirement of the Nasdaq Stock Market to maintain a minimum bid price of $1.00 per share. The letter noted that, as of the close of trading on February 8, 2018, the Company evidenced a closing bid price of its common stock that was greater than or equal to the $1.00 minimum requirement for at least ten consecutive trading days. Accordingly, the Company has regained compliance with Nasdaq Listing Rule 5550(a)(2) and Nasdaq considers the matter closed.
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 and a 1-for-20 reverse stock split (see Note 2).
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