ZOSANO PHARMA CORPORATION You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion and analysis contains forward-looking statements that 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."
Overview
Zosano Pharma Corporation is a clinical-stage biopharmaceutical company focused on providing rapid systemic administration of therapeutics and other bioactive molecules to patients using our proprietary transdermal microneedle system (the "System"). Our System is designed 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 drug, mounted on an adhesive 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 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 approved drugs with established safety and efficacy profiles could provide an increased benefit to patients, in 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 inthe United States that would streamline clinical development and potentially reduce the amount of clinical data we need to obtain prior to seeking FDA approval. We have no product sales to date, and we will not have product sales unless and until we receive approval from the FDA, or equivalent foreign regulatory bodies, to market and sell our product candidates. Accordingly, our success depends not only on the development, but also on our ability to finance the development of each of our product candidates. We will require substantial additional funding to complete development and seek regulatory approval for these products. In addition, our clinical and pre-commercial manufacturing activities have been curtailed following ourMarch 2022 workforce reduction.
M207 for Migraine
Our development efforts are currently focused on our product candidate, M207,
our proprietary formulation of zolmitriptan delivered utilizing our 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. M207 was
developed with the intent of providing faster onset of efficacy and sustained
freedom from migraine symptoms. M207 is designed to provide rapid absorption of
zolmitriptan into the bloodstream without dependence on the gastrointestinal
("GI") tract.
We submitted a 505(b)(2) New Drug Application ("NDA") for M207 to the U.S. Food
and Drug Administration (the "FDA") on December 20, 2019 , and on October 20,
2020 , we received a Complete Response Letter ("CRL") from the FDA with respect
to the NDA. The CRL cited inconsistent zolmitriptan exposure levels observed
across clinical pharmacology studies, which had been previously identified in
the FDA's discipline review letter that we received on September 29, 2020 .
Specifically, the CRL noted differences in zolmitriptan exposures observed
between subjects receiving different lots of M207 in our trials and inadequate
PK bridging between the lots that made interpretation of some safety data
unclear. The CRL referenced unexpected high plasma concentrations of
zolmitriptan observed in five study subjects enrolled in our PK studies. The FDA
recommended that we conduct a repeat bioequivalence study comparing lots
manufactured with the equipment used during development. The CRL noted that
additional product quality validation data, which were planned to be submitted
following approval, if received, were required to be submitted with the
application. In addition, the CRL mentioned that due to U.S. Government and/or
Agency-wide restrictions on travel, inspections of our contract manufacturing
and/or critical subcontractor facilities were not able to be conducted before
the FDA's goal date for completing its review of the original NDA, but that such
inspections would be required and would have to be conducted before the
application may be approved. In addition, a pre-approval inspection of our
Fremont, California facility by the FDA is expected. However, following a March
2022 workforce reduction, we would need to hire additional employees to support
any pre-approval inspection.
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OnJanuary 29, 2021 , we held a Type A meeting with theFDA Division of Neurology II (the "Division") regarding the requirements for resubmission of the M207 NDA and, inFebruary 2021 , we received the final meeting minutes from the FDA. The Type A meeting minutes were generally consistent with our expectations to conduct an additional PK study for inclusion in an NDA resubmission package. In a post-meeting comment, the FDA recommended a skin assessment on patients in the PK study to generate additional safety information, which was included in the proposed study protocol submitted to the FDA for review. After the receipt of FDA comments and recommendations to our proposed PK study protocol for M207, we made the recommended changes and established an agreement with a contract research organization to conduct the PK study required to support the resubmission of the M207 505(b)(2) NDA. OnOctober 4, 2021 , we announced that we had received preliminary top-line results from the PK study and had been granted a Type C written response-only meeting with the FDA regarding the resubmission of the M207 NDA. OnOctober 25, 2021 , we received full data tables from our PK study, which were consistent with the previously announced preliminary top-line results. OnOctober 27, 2021 , we submitted a briefing package to the FDA in advance of the Type C written-response-only meeting previously granted by the FDA to obtain feedback on our strategy for resubmitting the M207 505(b)(2) NDA. We received Type C written responses from the FDA with respect to our strategy for resubmitting the M207 505(b)(2) NDA, which, among other things, noted concerns regarding our approach for establishing a PK bridge to ZOMIG® nasal spray (NDA 21-450) (the "Listed Drug") through comparisons across multiple PK studies of M207, particularly Study CP-2019-002, which included PK outliers. OnJanuary 18, 2022 , we resubmitted our NDA to the FDA. In line with our previously disclosed resubmission strategy, the NDA was resubmitted under Section 505(b)(2) of the Food, Drug, and Cosmetic Act. The 505(b)(2) submission relies on theFDA's findings of safety and efficacy of the Listed Drug. The resubmitted NDA relied primarily on data from the recently completed Phase 1 PK study (CP 2021-001), along with previous PK studies evaluating M207 (CP-2018-002 and CP-2019-002), with the goal of establishing comparative bioavailability to the Listed Drug. OnFebruary 17, 2022 , we received a response letter from the FDA with regard to ourJanuary 18, 2022 NDA resubmission. The response letter stated that the FDA did not consider the resubmitted M207 NDA to be a complete response to the deficiencies identified in theFDA's October 20, 2020 CRL, and that the FDA will not begin substantive review of the application until a complete response is received. Among other things, theFDA's response letter stated that our strategy for establishing a PK bridge to the Listed Drug by relying primarily on data from the Study CP-2021-001 was not acceptable, due in part to differences between the design of Study CP-2021-001, which compared the PK of M207 to two sequential doses of the Listed Drug, and the criteria for re-dosing set forth in the labeling instructions for the Listed Drug. TheFDA'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 theFDA's response letter. There is no guarantee that we will be able to adequately address the issues raised to theFDA's satisfaction. In addition, if the FDA does not allow us to resubmit our M207 NDA using our existing PK data comparing ZOMIG® nasal spray and patches produced on manufacturing equipment at ourFremont, California facility that also produced patches for our long-term safety study, then the approval pathway for M207 will likely take significantly longer than expected, cost significantly more than anticipated, and may not be successful. We have incurred and will incur additional costs and delays in our previously anticipated timeline for potential commercialization due to the additional PK study and theFDA's response to ourJanuary 18, 2022 NDA resubmission, and we may incur higher than anticipated additional costs should any additional studies or other requirements be required by the FDA. If FDA approval is ultimately received, we plan to manufacture a limited supply of commercial product at our facility inFremont, California , which is designed to comply with theFDA's current good manufacturing practices ("cGMP") regulations on a timeline yet to be determined. We will also rely on various Contract Manufacturing Organizations ("CMOs") to produce various components of our product, our applicator and final packaging of the finished product. If M207 is approved, we and our CMOs will be required to produce commercial supply of M207 in accordance with cGMP regulations. Should M207 be approved, we may consider expanding production through the use of CMOs for drug product as well as for production of the various components that comprise our patch, our applicator and the final packaging of the finished product. However, we will not be able to produce M207 drug product on our manufacturing equipment at our third-party CMOs without subsequent FDA approvals, which may require us to conduct additional clinical studies and incur significant time and cost. We do not anticipate realizing product revenues unless and until the FDA approves the M207 NDA and we begin commercializing M207, which events may never occur. 65
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Eversana Agreement
OnAugust 6, 2020 , we entered into a master services agreement (the "Eversana Agreement") withEversana Life Science Services, LLC ("Eversana") for the commercialization of M207 inthe United States , if approved by the FDA. Under the terms of the Eversana Agreement, we maintain ownership of the M207 NDA as well as all legal, regulatory and manufacturing responsibilities for M207. Eversana receives an exclusive right to conduct agreed commercialization activities and will utilize its internal sales organization along with its other commercial capabilities for market access, marketing, distribution and patient support services for M207. Eversana will receive reimbursement of certain commercialization costs pursuant to a commercialization budget originally estimated at approximately$250.0 million and a low double digit to mid-teen percentage of product profits if and when our net sales of M207 surpass certain costs incurred by the parties pursuant to the commercialization budget. The term of the Eversana Agreement is five years following the date, if any, that the FDA approves the M207 NDA. We may terminate the Eversana Agreement if Eversana fails to provide pre-commercial or commercial plans and budgets by specified dates, if we decide to discontinue development or commercialization efforts for M207 inthe United States (subject to a termination payment if such termination occurs within a specified time period), or upon a change of control. Either party could terminate the Eversana Agreement if FDA approval was not received byJuly 31, 2021 , if net profits are not realized within a specified time period following commercial launch, for material breach of the Eversana Agreement by the other party that is not cured within a defined time period, for insolvency of the other party, if M207 is subject to a safety recall inthe United States or if M207 is not commercially launched within a specified time period after FDA approval of the NDA (other than by reason of the terminating party's failure to perform its obligations under the Eversana Agreement). In addition, under the Eversana Agreement, following FDA approval of the M207 NDA, Eversana agreed to provide a revolving credit facility of up to$5.0 million (the "Credit Facility") to 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 be able to prepay any amounts borrowed under the Credit Facility at any time without penalty or premium. The Credit Facility will be secured by substantially all of our assets, subject to prior liens and security interests. OnSeptember 28, 2021 , we entered into Amendment No. 1, effective as ofSeptember 29, 2021 (the "Eversana Amendment"), to the Eversana Agreement, which modified the provision in the Eversana Agreement that provided for termination by either party of the Eversana Agreement if FDA approval was not received byJuly 31, 2021 toDecember 31, 2021 , with written notice within sixty days of such date. In addition, the Eversana Amendment provides that if the NDA is approved, the deferral mechanism, payment terms and loan terms in the Eversana Agreement will be adjusted as mutually agreed by both parties. Neither party exercised its right to terminate the Eversana Agreement due to FDA approval not being received byDecember 31, 2021 . We currently have no internal sales, marketing or distribution capabilities and we plan to rely on Eversana and other third parties for the commercialization of M207, if approved.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our audited financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles ("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported results of operations during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the accounting policies discussed below are those that are most critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
Stock-Based Compensation
We have equity incentive plans under which various types of equity-based awards
including, but not limited to, non-qualified stock options and restricted stock
awards, may be granted to employees, non-employee directors, and non-employee
consultants. Our equity incentive plans also allow incentive stock options to be
awarded to employees and, beginning in 2021, we have granted options and
restricted stock awards to certain employees which vest based on the achievement
of certain
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metrics. We have also awarded inducement grants to purchase common stock to new employees outside the existing equity incentive plans in accordance with Nasdaq listing rule 5635(c)(4). We account for stock-based compensation based on the fair value of the stock-based awards on the date of grant. The fair value of employee stock option grants is estimated on the date of grant using the Black-Scholes option pricing model and is recognized as expense on a straight-line basis over the grantee's requisite service period. The fair value of awards which vest based on the achievement of certain metrics is recognized over the expected service period only when the achievement of the metrics is considered probable. Due to the lack of historical exercise data to provide a reasonable basis upon which to estimate an expected term, we have opted to use the simplified method, which is the use of the midpoint of the vesting term and the contractual term of the award to estimate the expected term. We recognize the impact of stock option forfeitures on stock-based compensation expense in the period the award is forfeited.
Financial Operations Overview
General
As ofDecember 31, 2021 , we had an accumulated deficit of approximately$362.1 million . We have incurred significant losses and expect to incur significant losses in the foreseeable future. We will require additional capital to undertake our planned research and development activities, pre-commercialization activities, and to meet our operating requirements in and beyond 2022. We have retainedSierraConstellation Partners, LLC , as an independent financial advisor to assist in exploring financial and strategic alternatives to maximize value, which may include, but not be limited to, asset or equity sales, joint venture and partnership opportunities, and restructuring, amendment or refinancing of existing liabilities. Any potential equity sales will be dependent upon and potentially restricted by available authorized shares. We are also evaluating various alternatives to improve our liquidity, including but not limited to, further reductions of operating and capital expenditures and other contractual obligations. InMarch 2022 , we implemented a workforce reduction impacting approximately 31% of our employees as part of an expense reduction plan. We expect to incur severance costs related to the workforce reduction of approximately$0.1 million in the first quarter of 2022. However, there can be no assurances that we will 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. If we are not successful in obtaining additional capital, we may be required to further reduce our operating expenses and suspend, delay or reduce the scope of our M207 development program, out-license intellectual property rights to our transdermal delivery technology, or a combination of the above, which may have a material adverse effect on our business, results of operations, financial condition and/or our ability to fund our scheduled obligations on a timely basis or at all. We expect our pre-commercialization expenses related to our M207 product candidate will increase if we continue to advance this program towards regulatory approval and, if approved, commercialization. We are evaluating next steps in relation to theFDA's response letter as part of our financial and strategic planning; however, current available resources will not enable continued pursuit of FDA approval in the event an additional study is required to continue to pursue FDA approval of M207. Because of the numerous risks and uncertainties associated with our technology and drug development, we cannot forecast with any degree of certainty the timing or amount of expenses incurred or when, or if, we will be able to achieve profitability. We do not anticipate realizing product revenues unless and until the FDA approves our M207 NDA and we begin commercializing M207, which may never occur. We are actively seeking opportunities to evaluate collaborations with strategic partners to further the clinical and commercial development of our technology. We cannot forecast with any degree of certainty if we will receive additional capital or collaboration revenue in the future, as a result of any partnership that we might pursue for M207 or any other potential future use of our technology or how such arrangements would affect our development plans or capital requirements. As a result of these uncertainties, we are unable to determine the duration and completion of costs of our research and development projects or if, when and to what extent we will generate revenue from their commercialization and sale. Additionally, a future collaborative partner may only be interested in applying our technology in the development and advancement of their own product candidates. The process of conducting the necessary clinical trials to obtain regulatory approval is costly and time consuming. We consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and clinical program may be affected by a variety of factors, including, but not limited to: the quality of the product candidate, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. In situations in which third parties have control over the clinical development of a product candidate, the estimated completion dates are largely under the control of such third parties and not under our control. 67
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Service revenue
Service revenue is related to feasibility studies in which we provide research and development services to customers to determine the feasibility of using our System in connection with the customers' pharmaceutical agents. In the years endedDecember 31, 2021 and 2020, we recognized revenue on agreements with three and two pharmaceutical companies, respectively, for such studies. Subsequent to the successful completion of all of our development responsibilities, one such agreement, withMitsubishi Tanabe Pharma Corporation , ended in 2021 asMitsubishi Tanabe Pharma Corporation determined that they would not continue with the in vivo portion of the study. We expect service revenue to fluctuate based on the volume and activity of feasibility studies.
Cost of service revenue
Cost of service revenue consists of personnel and material costs associated with feasibility studies. In 2021 and 2020, we incurred costs related to three and two such studies, respectively. We expect cost of service revenue to fluctuate based on the volume and activity of feasibility studies.
Research and development expenses
Research and development expenses consist primarily of:
•Salaries and related expenses for personnel in research and development functions, including stock-based compensation;
•Expenses related to the production of our System, including the purchase of active pharmaceutical ingredients and raw materials as well as fees paid to contract manufacturing organizations;
•Expenses related to the performance of drug formulation and clinical trials and studies, including fees paid to CROs, clinical consultants, clinical trial sites and vendors, including Institutional Review Boards, in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis; and
•Allocation of certain shared costs, such as facilities-related costs.
In the year ended
General and administrative expenses
General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services and other general operating expenses not otherwise included in research and development.
Other income and expense
Interest income. Interest income consists primarily of interest, amortization of purchase premiums and accretion of purchase discounts, if any, related to our investments in marketable securities.
Interest expense. Interest expense consists primarily of interest costs and associated amortization of debt discounts and issuance costs, if any, related to debt financing.
Other income (expense). Other income (expense), net consists of miscellaneous
income and expenses that are not included in other categories of the statement
of operations.
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Results of Operations
Comparison of the year ended
Year Ended December 31, Change
2021 2020 Amount %
(In thousands)
Service revenue $ 785 $ 224 $ 561 250 %
Operating expenses:
Cost of service revenue $ 796 $ 171
Research and development $ 20,974 $ 21,622
General and administrative $ 10,547 $ 11,189 Other income (expense):
Interest income $ 3 $ 18
Interest expense $ (189) $ (719)
Other income (expense), net $ 1,793 $ 90 $ 1,703 * * Not meaningful. Service revenue
In 2021 and 2020, service revenue related to agreements with three and two pharmaceutical companies, respectively, for feasibility studies. We expect service revenue to fluctuate based on the volume and activity of feasibility studies.
Cost of service revenue In 2021 and 2020, cost of service revenue related to three and two feasibility studies, respectively. We expect cost of service revenue to fluctuate in 2022 based on the volume and activity of feasibility studies.
Research and development expenses
Research and development expenses decreased approximately$0.6 million , or 3%, for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . The decrease was primarily due to$1.4 million of lower full-time and temporary employee costs due to decreased headcount and employee expenses classified as cost of service revenue and$0.4 million of lower clinical supplies and materials, offset by$0.8 million of clinical trial costs associated with our 2021 PK study and$0.4 million of additional depreciation related to assets placed into service at our CMOs.
General and administrative expenses
General and administrative expenses decreased approximately$0.6 million , or 6%, for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . The decrease was primarily due to a decrease of$0.5 million in market research activities and other professional service fees and$0.3 million in lower employee and consulting costs, offset by an increase of$0.2 million in insurance costs. Other income and expense Interest income. For the years endedDecember 31, 2021 and 2020, interest income resulted primarily from interest recognized related to our cash and cash equivalents. The decrease for the year endedDecember 31, 2021 as compared to the same period in 2020 resulted primarily from lower interest rates. Interest expense. For the years endedDecember 31, 2021 and 2020, interest expense consisted primarily of interest and amortization of debt discount. The decrease in interest expense resulted from lower outstanding balances on our build-to-suit obligation with Trinity Funding 1, LLC (successor toTrinity Capital Fund III, L.P. ) ("Trinity") and increased capitalization of a portion of interest paid to Trinity as construction-in-progress. Other income (expense). Other income (expense), net consists of miscellaneous income and expenses that are not included in other categories of the statement of operations. For the year endedDecember 31, 2021 , other income (expense), net consisted primarily of a gain on the forgiveness of our Paycheck Protection Program loan. 69
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Income Taxes
As ofDecember 31, 2021 , we had deferred tax assets of$39.4 million and deferred tax liabilities of$0.9 million . The deferred tax assets primarily consisted of federal and state tax net operating losses and research and development tax credit carryforwards. Due to uncertainties surrounding our ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset our net deferred tax assets. As ofDecember 31, 2021 , we had federal net operating loss carryforwards of approximately$137.1 million and state net operating loss carryforwards of approximately$42.4 million . As ofDecember 31, 2020 , we had federal net operating loss carryforwards of approximately$106.5 million and state net operating loss carryforwards of approximately$25.8 million . If not utilized, certain federal net operating loss carryforwards incurred beforeJanuary 1, 2018 , will expire beginning in 2026, and state net operating loss carryforwards will expire beginning in 2028. The federal net operating losses incurred in 2018 and beyond do not expire. As ofDecember 31, 2021 , we had federal and state research and development credit carryforwards of approximately$1.0 million and$6.3 million , respectively. As ofDecember 31, 2020 , we had federal and state research and development credit carryforwards of approximately$0.5 million and$6.0 million , respectively. If not utilized, the federal tax credits will begin to expire in 2040 and state tax credits currently do not expire. Utilization of net operating loss carryforwards and research and development credit carryforwards may also be subject to an annual limitation due to the ownership change limitations. These annual limitations may result in the expiration of the net operating loss carryforwards and research and development credit carryforwards before utilization. We have performed an analysis under Internal Revenue Code Sections 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 were derecognized due to the annual limitation. 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 ourFebruary 2022 offering. If this is the case, additional portions of the net operating loss carryforwards and research and development credit carryforwards will be derecognized. OnMarch 27, 2020 andDecember 27, 2020 ,the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and the Consolidated Appropriation Act ("CAA"), respectively, as a result of the COVID-19 pandemic, which contain, among other things, numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. We have evaluated the current legislation and at this time, do not anticipate that the tax provisions in the CARES Act or CAA will have a material impact on our financial statements.
Liquidity and Capital Resources
Our liquidity and capital resources are summarized as follows:
Year Ended December 31,
2021 2020
(In thousands)
Cash and cash equivalents $ 11,043 $ 35,263
Working capital* $ 476 $ 21,205
Accumulated deficit $ (362,115) $ (332,190)
* We define working capital as current assets less current liabilities. See our
consolidated financial statements and the related notes included elsewhere in
this Annual Report on Form 10-K for further details regarding our current assets
and current liabilities.
Our cash and cash equivalents totaled $11.0 million as of December 31, 2021
compared to $35.3 million as of December 31, 2020 . The decrease in cash and cash
equivalents and working capital as of December 31, 2021 compared to December 31,
2020 was primarily the result of our loss from operations, investments made in
property and equipment and our payments to Trinity, offset primarily by cash
received from the sale of shares of our common stock through our at-the-market
offering programs and warrant exercises.
On March 11, 2022 , we entered into a Second Amendment to Lease Documents (the
"Second Amendment") with Trinity. The Second Amendment, among other things,
provided for an upfront payment of $2.0 million in remaining rent to Trinity and
modified the rent and purchase price payments due to Trinity to $215,441 per
month from April 1, 2022 to December 1, 2022 (inclusive of the amounts required
to exercise the option to purchase the leased equipment) and establishes a
minimum cash covenant equal to three times the remaining aggregate amount of
rent due.
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OnFebruary 8, 2022 , we entered into an underwriting agreement (the "Underwriting Agreement") withMaxim Group LLC ("Maxim") related to the public offering by us of 51,250,000 units ("Units"), each consisting of one share of our common stock and one Series F Common Stock Purchase Warrant ("Series F Warrant") to purchase one share of our common stock, at a public offering price of$0.30 per Unit. We also granted Maxim an option for a period of 30 days to purchase up to an additional 7,687,500 shares of common stock and/or additional Series F Warrants to purchase up to 7,687,500 shares of common stock. Maxim partially exercised the option and purchased the additional Series F Warrants to purchase up to 7,687,500 shares of common stock. The option to purchase additional shares expired unexercised. The net proceeds from the offering were approximately$14.1 million after deducting the underwriting discounts and commissions and offering expenses payable by us. The Series F Warrants are immediately exercisable and have an exercise price per share equal to$0.30 . The Series F Warrants will remain exercisable until their expiration on the fifth anniversary of the issuance date. Subject to certain exceptions, the Series F Warrants contain a full-ratchet anti-dilution exercise price adjustment upon the issuance of any common stock, securities convertible into common stock or certain other issuances at a price below the then-existing exercise price of the Series F Warrants. The offering was made pursuant to an effective shelf registration statement and a prospectus supplement and accompanying prospectus filed with theSEC . Presently, we do not have sufficient cash and cash equivalents to enable us to fund our anticipated level of operations and meet our obligations as they become due during the twelve months following the date of filing of this Annual Report on Form 10-K, and we will need to obtain additional capital resources through equity offerings, debt financings, a license or collaboration agreement, or through a combination of such sources of capital. The aforementioned factors raise substantial doubt about our ability to continue as a going concern. We have retainedSierraConstellation Partners, LLC , as an independent financial advisor to assist in exploring financial and strategic alternatives to maximize value, which may include, but not be limited to, asset or equity sales, joint venture and partnership opportunities, and restructuring, amendment or refinancing of existing liabilities. Any potential equity sales will be dependent upon and potentially limited by available authorized shares. We are also evaluating various alternatives to improve our liquidity, including but not limited to, further reductions of operating and capital expenditures and other contractual obligations. InMarch 2022 , we implemented a workforce reduction impacting approximately 31% of our employees as part of an expense reduction plan. However, there can be no assurances that we will be able to successfully raise capital, improve our financial position and liquidity, restructure our obligations, enter into any asset or equity sale, joint venture or partnership opportunity and/or otherwise achieve any of these objectives. In 2020 and 2021, we filed shelf registration statements on Form S-3 with theSEC to provide us with the ability to issue common stock and other securities as described in the registration statements. We currently have approximately$120.6 million available on the two outstanding shelf registration statements. Utilization of the shelf registration statements is subject to and potentially limited by available authorized shares. However, our ability to complete the sale of equity securities and access the market as a source of liquidity is dependent on investor demand, market conditions and other factors. Therefore, we can provide no assurance that any such offering will be on terms favorable to us or our stockholders, or that such offering will be successful at all. 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. 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. We expect to incur additional losses in the future and will require additional financing to develop our M207 product candidate, conduct pre-commercialization manufacturing activities and fund our operations. 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 our technologies, clinical product candidates, or programs, if any, that we would prefer to develop and commercialize ourselves.
We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:
•the timing of and costs involved in obtaining regulatory approvals;
•the scope, progress, expansion and costs of manufacturing our product candidates;
•the scope, progress, expansion, costs and results of any clinical trials;
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•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 economic and global financial market uncertainty resulting from the COVID-19 pandemic;
•the resources we devote to marketing and commercializing our product candidates, if approved; and
•the costs associated with being a public company.
The COVID-19 pandemic has caused volatility in the global financial markets and threatened a slowdown in the global economy, which may adversely affect our ability to raise additional capital on attractive terms or at all. A recession, depression or other sustained adverse market event resulting from the spread of COVID-19 may also limit our ability to obtain financing for our operations.
Cash Flows
Year Ended December 31,
2021 2020
(In thousands)
Net cash provided by (used in):
Operating activities $ (27,590) $ (31,718)
Investing activities (5,423) (8,487)
Financing activities 8,793 69,152
(Decrease) increase in cash, cash equivalents, and restricted cash $
(24,220)$ 28,947 Operating Cash Flow: Net cash used in both 2021 and 2020 was primarily related to personnel, manufacturing, facility and technology transfer and development costs in conjunction with services performed by our contract manufacturers, clinical development and trial costs, other pre-commercial activities and other administrative expenses incurred in the course of our continuing operations. The changes in net cash used in operating activities were primarily related to our net loss, working capital fluctuations and changes in our non-cash expenses, all of which are highly variable. Net cash used in operating activities for the year endedDecember 31, 2021 of$27.6 million was primarily due to our net loss of$29.9 million , adjusted for non-cash items of$3.3 million , consisting primarily of$1.9 million of stock-based compensation,$1.8 million of depreciation and amortization and$1.2 million of change in operating lease right-of-use assets, offset by$1.6 million of a gain on forgiveness of our Paycheck Protection Program loan. Additionally, we used cash of$1.4 million for changes in operating lease liabilities. These cash outflows were offset by a$0.6 million increase in our accounts payable. Net cash used in operating activities for 2020 of$31.7 million was primarily due to our net loss of$33.4 million adjusted for non-cash stock-based compensation of$1.6 million , depreciation and amortization of$1.4 million and a decrease in our accounts payable of$1.5 million .
Investing Cash Flow: Net cash used in investing activities of
Financing Cash Flow: Net cash provided by financing activities of$8.8 million for the year endedDecember 31, 2021 was primarily due to the proceeds from the issuance of common stock under our 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 of$69.2 million for 2020 was primarily due to the proceeds from the issuance of common stock and warrants, net of commissions and discounts, of$38.7 million in connection with our offerings in 2020, and$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. 72
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At-the-Market Offering Programs
At-the-Market Offering Program - 2021
OnJune 28, 2021 , we entered into a Controlled Equity Offering Sales Agreement withCantor Fitzgerald & Co. andH.C. Wainwright & Co., LLC (together, the "Sales Agents") to establish an at-the-market offering program (the "2021 ATM"), under which we may sell from time to time, at our option, up to an aggregate of$30.0 million of shares of our common stock. Shares sold under the 2021 ATM are issued pursuant to an effective shelf registration statement and a prospectus supplement datedJune 28, 2021 . We are required to pay the Sales Agents a commission of 3% of the gross proceeds from the sale of shares and have also agreed to provide the Sales Agents with customary indemnification rights. During the year endedDecember 31, 2021 , we issued and sold 6,869,022 shares of our common stock at an average price of$0.72 per share under the 2021 ATM for aggregate net proceeds of$4.6 million after deducting commissions and offering expenses payable by us. As ofDecember 31, 2021 , we have up to approximately$25.0 million available to be offered and sold under the 2021 ATM. We have issued or reserved substantially all of our available shares of authorized common stock under our certificate of incorporation, and as a result, our ability to sell and issue shares under the 2021 ATM is limited.
At-the-Market Offering Program - 2020
OnJune 8, 2020 , we entered into a sales agreement withBTIG, LLC ("BTIG") as sales agent to establish an at-the-market offering program (the "2020 ATM"), under which we were permitted to offer and sell, from time to time, shares of common stock having a maximum aggregate offering price of up to$20.0 million . We were required to pay BTIG a commission of 3% of the gross proceeds from the sale of shares and also agreed to provide BTIG with customary indemnification rights. During the year endedDecember 31, 2021 , we issued and sold 6,931,607 shares of our common stock at an average price of$0.84 per share under the 2020 ATM for aggregate net proceeds of$5.5 million after deducting commissions and offering expenses payable by us. During the year endedDecember 31, 2020 , we issued and sold 13,237,026 shares of our common stock at an average price of$1.07 per share under the 2020 ATM with aggregate net proceeds of approximately$13.5 million after deducting commission and offering expenses. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement datedJune 8, 2020 . No shares remain available for sale under the 2020 ATM.
At-the-Market Offering Program - 2019
OnAugust 19, 2019 , we entered into a sales agreement with BTIG, as sales agent, to establish an at-the-market offering program (the "2019 ATM"), under which we were permitted to offer and sell, from time to time, shares of common stock having a maximum aggregate offering price of up to$15.0 million . We were required to pay BTIG a commission of 3% of the gross proceeds from the sale of shares and also agreed to provide BTIG with customary indemnification rights. During the year endedDecember 31, 2020 , we issued and sold 2,151,346 shares of our common stock at an average price of$1.30 per share under the 2019 ATM. The aggregate net proceeds were approximately$2.7 million after BTIG's commissions and other offering expenses. The shares were sold pursuant to an effective registration statement and a prospectus supplement datedAugust 19, 2019 . OnMarch 4, 2020 , we delivered notice of termination of the sales agreement to BTIG. We did not incur any termination penalties as a result of our termination of the sales agreement. Offerings Offering -September 2020 OnAugust 31, 2020 , we entered into an underwriting agreement with BTIG, pursuant to which we issued and sold 15,937,130 shares of its common stock to BTIG at a price of$1.304 per share. The offering closed onSeptember 3, 2020 . We received net proceeds of approximately$20.3 million after deducting expenses payable by us in connection with the offering. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement datedAugust 31, 2020 .
Registered Direct Offering -
OnMarch 4, 2020 , we entered into a securities purchase agreement with certain institutional investors for the issuance and sale in a registered direct offering of (i) 11,903,506 shares of our common stock and (ii) Series E Warrants to purchase up to a total of 11,903,506 shares of common stock at an offering price of$0.9275 per share and accompanying warrant. The Series E Warrants have an exercise price of$0.8025 per share, were immediately exercisable and expire five years from the date of issuance. The aggregate net proceeds from the offering were approximately$10.2 million , after deducting the placement agent fees and other offering expenses. During the year endedDecember 31, 2021 , Series E Warrants to purchase 4,078,667 shares of common stock were exercised at an exercise price of$0.8025 per share for aggregate proceeds of approximately$3.3 million . During the year endedDecember 31, 2020 , Series E Warrants to purchase 7,194,004 shares of common stock were exercised at an exercise price of$0.8025 per share for aggregate proceeds of approximately$5.8 million . The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement datedMarch 4, 2020 . As of the date of this Annual Report on Form 10-K, we have Series E Warrants to purchase 630,835 shares of common stock outstanding. 73
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Public Offering -
OnFebruary 14, 2020 , we closed an underwritten offering for the issuance and sale of (i) 10,146,154 Class A Units, each consisting of one share of common stock and one Series C Warrant to purchase one share of common stock, at a public offering price of$0.65 per Class A Unit, and (ii) 2,161,539 ClassB Units , each consisting of one Series D Pre-Funded Warrant to purchase one share of common stock and one Series C Warrant to purchase one share of common stock, at a public offering price of$0.6499 per ClassB Unit . The Series C Warrants have an exercise price of$0.65 per share, were immediately exercisable and expire five years from the date of issuance. The Series D Pre-Funded Warrants had an exercise price of$0.0001 per share and were fully exercised in connection with the closing of the offering. We granted the underwriter a 30-day option to purchase up to an additional 1,846,153 shares of common stock and/or additional Series C Warrants to purchase up to 1,846,153 shares of common stock. The underwriter fully exercised its option to purchase the shares and the Series C Warrants. The aggregate net proceeds from the offering were$8.3 million after deducting underwriting discounts and commissions and other offering expenses. During the year endedDecember 31, 2021 , Series C Warrants to purchase 145,000 shares of common stock were exercised at an exercise price of$0.65 per share for aggregate proceeds of approximately$0.1 million . During the year endedDecember 31, 2020 , Series C Warrants to purchase 13,986,146 shares of common stock were exercised at an exercise price of$0.65 per share for aggregate proceeds of approximately$9.1 million . The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement datedFebruary 12, 2020 . As of the date of this Annual Report on Form 10-K, we have Series C Warrants to purchase 22,700 shares of common stock outstanding.
PPP Loan
OnApril 21, 2020 , we executed a promissory note (the "PPP Note") evidencing an unsecured loan in the amount of$1.6 million under the Paycheck Protection Program (the "PPP Loan"). The Paycheck Protection Program ("PPP") was established under the CARES Act and is administered by theU.S. Small Business Administration ("SBA"). Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. OnJune 10, 2021 , we were notified by our lender,Silicon Valley Bank , that our PPP Loan, in the amount of$1,610,000 in principal and$18,515 in accrued interest, was forgiven in its entirety by the SBA. The forgiveness of the PPP Loan and accrued interest was recorded as a gain in other income (expense), net in our statement of operations in the second quarter of 2021.
Material Cash Requirements from Known Contractual and Other Obligations
The following table summarizes our material cash requirements from known
contractual and other obligations as of
Contract
Operating Lease Build-to-suit Manufacturing
Obligations (1) Obligation (2) Commitments (3) Total
2022 $ 2,042 $ 4,030 $ 1,429 $ 7,501
2023 2,017 1,098 - 3,115
2024 1,371 - 1,914 3,285
Total $ 5,430 $ 5,128 $ 3,343 $ 13,901
(1) Operating leases
Our operating lease obligations primarily consist of a lease with BMR-34790
Ardentech Court LP , an affiliate of BMR Holdings , for our office, research and
development, and manufacturing facilities in Fremont, California . In addition to
the minimum rental commitments, our leases may require us to pay additional
amounts for taxes, insurance, maintenance and other operating expenses. See Note
6. Leases, of the Notes to Financial Statements included in Item 8 of this
Annual Report on Form 10-K for additional information.
(2) Build-to-suit obligation
The build-to-suit obligation consists of principal and interest payments and purchase option fees related to our build-to-suit obligation with Trinity and does not take into account the modified payment schedule under the Second Amendment described above. See Note 7. Debt Financing and Note 13. Subsequent Events of the Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
(3) Contract manufacturing commitments
Our contract manufacturing commitments consist of non-cancelable commitments
with our contract manufacturing organizations for the construction of dedicated
manufacturing space and technology transfer fees.
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Additionally, 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 circumstances for the cost to remove our equipment and restore the CMO's facility. We may also elect to terminate the contracts for convenience, which would result in cancellation fees in the amount of 50% of the annual fee due in the year that the contract is terminated, and costs to remove our equipment and restore the CMO's facility. We also have additional agreements with CMOs to provide services related to the manufacture and assembly of component parts of M207. Under these agreements, we may be required to pay up to an aggregate of$7.4 million in various fees and minimum purchase requirements; however, significant portions of these payments may not be required if the FDA does not approve M207.
See Note 10. Commitments and Contingencies, of the Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Recently Issued Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies, of the Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of Recent Accounting Pronouncements.
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