10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2022

OR

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

For the transition period from to

Commission File Number 001-40353

 

IMPEL PHARMACEUTICALS INC.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

26-3058238

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

201 Elliott Avenue West, Suite 260

Seattle, WA 98119

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (206) 568-1466

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

IMPL

The Nasdaq Stock Market

 

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

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

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

 

Large accelerated filer

 

 

 

Accelerated filer

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO ☒

The number of shares of Registrant’s Common Stock outstanding as of May 10, 2022 was 23,175,242.

 

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical facts, including statements concerning our business strategy and plans, future operating results and financial position, as well as our objectives and expectations for our future operations, are forward-looking statements.

 

In some cases, you can identify forward-looking statements by such terminology as “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes, although not all forward-looking statements contain these words. Forward-looking statements include, but are not limited to, statements about:

our ability to successfully execute our commercialization strategy for Trudhesa;
our ability to obtain and maintain regulatory approval of our product candidates, and any related restrictions, limitations or warnings in the label of any approved product;
the timing or likelihood of regulatory filings and approvals;
the size and growth potential of the market for Trudhesa and the markets for our other product candidates, if approved for commercial use, and our ability to serve those markets;
the success, cost and timing of our development activities, preclinical studies and clinical trials;
the number, size and design of clinical trials that regulatory authorities may require to obtain marketing approval;
our plans relating to the future development and manufacturing of our product candidates, including plans for future development of our POD devices and plans to address additional indications for which we may pursue regulatory approval;
future agreements with third parties in connection with preclinical and clinical development as well as the manufacture and commercialization of our product candidates, if approved for commercial use;
our ability to attract customers for any approved products;
the effect of litigation, complaints or adverse publicity on our business;
our ability to expand our sales force to address effectively the new indications, geographies and types of organizations we intend to target;
our ability to forecast and maintain an adequate rate of revenue growth and appropriately plan our expenses;
our liquidity and working capital requirements;
our ability to attract and retain qualified employees and key personnel;
our ability to protect and enhance our brand and intellectual property;
the costs related to defending intellectual property infringement and other claims;
privacy, data security, and data protection laws, actual or perceived privacy or data breaches or other data security incidents, or the loss of data;
future regulatory, judicial, and legislative changes in our industry;
future arrangements with, or investments in, other entities or associations, products, services or technologies;
our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; and the increased expenses and administrative workload associated with being a public company.

 

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, and financial needs. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We disclaim any intention or obligation to publicly update or revise any forward-looking statements for any reason or to conform such statements to actual results or revised expectations, except as required by law.

 


 

Table of Contents

 

 

 

 

Page

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

3

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

4

 

 

Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

5

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to the Condensed Consolidated Financial Statements

7

Item 2.

 

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

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

 

Controls and Procedures

31

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

32

Item 1A.

 

Risk Factors

32

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 3.

 

Defaults Upon Senior Securities

69

Item 4.

 

Mine Safety Disclosures

69

Item 5.

 

Other Information

69

Item 6.

 

Exhibits

70

EXHIBIT INDEX

70

SIGNATURES

72

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Impel” and the “Company” refer to Impel Pharmaceuticals Inc. and its consolidated subsidiary. Impel, Impel Pharmaceuticals Inc., the Impel logo and other trade names, trademarks or service marks of Impel are the property of Impel Pharmaceuticals Inc. This report contains references to our trademarks and to trademarks belonging to other entities. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 


 

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

IMPEL PHARMACEUTICALS INC.

Condensed Consolidated Balance Sheet

(In thousands, except share and per share data)

(Unaudited)

 

 

March 31,
2022

 

 

December 31,
2021

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

129,837

 

 

$

88,212

 

Trade receivables, net

 

 

3,886

 

 

 

1,352

 

Inventory

 

 

5,496

 

 

 

2,824

 

Prepaid expenses and other current assets

 

 

2,965

 

 

 

2,188

 

Total current assets

 

 

142,184

 

 

 

94,576

 

Property and equipment, net

 

 

2,847

 

 

 

3,149

 

Operating lease right-of-use assets

 

 

2,581

 

 

 

 

Other assets

 

 

187

 

 

 

187

 

Total assets

 

$

147,799

 

 

$

97,912

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

8,995

 

 

$

6,367

 

Accrued liabilities

 

 

11,967

 

 

 

8,950

 

Current portion of deferred royalty obligation

 

 

1,569

 

 

 

 

Current portion of operating lease liability

 

 

999

 

 

 

 

Common stock warrant liability

 

 

450

 

 

 

637

 

Total current liabilities

 

 

23,980

 

 

 

15,954

 

Operating lease liability, net of current portion

 

 

1,594

 

 

 

 

Derivative liability

 

 

405

 

 

 

 

Deferred royalty obligation, net of current portion

 

 

47,232

 

 

 

 

Long-term debt

 

 

47,106

 

 

 

29,450

 

Total liabilities

 

 

120,317

 

 

 

45,404

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized: none issued

 

 

 

 

 

 

Common stock, $0.001 par value; 300,000,000 shares authorized; 23,173,297 and 23,037,298 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

 

 

23

 

 

 

23

 

Additional paid-in capital

 

 

269,227

 

 

 

267,283

 

Accumulated deficit

 

 

(241,768

)

 

 

(214,798

)

Total stockholders’ equity

 

 

27,482

 

 

 

52,508

 

Total liabilities and stockholders’ equity

 

$

147,799

 

 

$

97,912

 

 

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

3


 

IMPEL PHARMACEUTICALS INC.

Condensed Consolidated Statement of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(Unaudited)

 

 

Three Months Ended
March 31,

 

 

 

2022

 

 

2021

 

Product revenue, net

 

$

1,759

 

 

$

 

Cost of goods sold

 

 

1,033

 

 

 

 

    Gross profit

 

 

726

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

3,650

 

 

 

4,346

 

Selling, general and administrative

 

 

19,799

 

 

 

5,523

 

Total operating expenses

 

 

23,449

 

 

 

9,869

 

Loss from operations

 

 

(22,723

)

 

 

(9,869

)

Other income (expense), net :

 

 

 

 

 

 

Interest income (expense), net

 

 

(4,427

)

 

 

(298

)

Other income (expense), net

 

 

180

 

 

 

(1,124

)

Total other income (expense), net

 

 

(4,247

)

 

 

(1,422

)

Loss before income taxes

 

 

(26,970

)

 

 

(11,291

)

Provision (benefit) for income taxes

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(26,970

)

 

$

(11,291

)

Accretion on redeemable convertible preferred stock

 

 

 

 

 

129

 

Net loss attributable to common stockholders

 

$

(26,970

)

 

$

(11,420

)

Net loss per share attributable to common stockholders, basic and diluted

 

$

(1.17

)

 

$

(15.09

)

Weighted-average shares used in computing net loss per share attributable to common
   stockholders, basic and diluted

 

 

23,143,773

 

 

 

756,986

 

 

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

4


 

IMPEL PHARMACEUTICALS INC.

Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands, except share data)

(Unaudited)

 

 

Redeemable Convertible
Preferred Stock

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance — December 31, 2021

 

 

 

 

$

 

 

 

 

23,123,062

 

 

$

23

 

 

$

267,283

 

 

$

(214,798

)

 

$

52,508

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,795

 

 

 

 

 

 

1,795

 

Issuance of common stock upon the exercise of stock options

 

 

 

 

 

 

 

 

 

50,235

 

 

 

 

 

 

149

 

 

 

 

 

 

149

 

Net loss and comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,970

)

 

 

(26,970

)

Balance — March 31, 2022

 

 

 

 

$

 

 

 

 

23,173,297

 

 

$

23

 

 

$

269,227

 

 

$

(241,768

)

 

$

27,482

 

 

 

 

Redeemable Convertible
Preferred Stock

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity (Deficit)

 

Balance — December 31, 2020

 

 

202,009,981

 

 

$

127,039

 

 

 

 

755,478

 

 

$

 

 

$

4,762

 

 

$

(138,262

)

 

$

(133,500

)

Accretion to redemption value on redeemable convertible preferred stock

 

 

 

 

 

129

 

 

 

 

 

 

 

 

 

 

(129

)

 

 

 

 

 

(129

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

493

 

 

 

 

 

 

493

 

Issuance of common stock upon the exercise of stock options

 

 

 

 

 

 

 

 

 

8,095

 

 

 

 

 

 

18

 

 

 

 

 

 

18

 

Net loss and comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,291

)

 

 

(11,291

)

Balance — March 31, 2021

 

 

202,009,981

 

 

$

127,168

 

 

 

 

763,573

 

 

$

 

 

$

5,144

 

 

$

(149,553

)

 

$

(144,409

)

 

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

 

 

5


 

IMPEL PHARMACEUTICALS INC.

Condensed Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended
March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(26,970

)

 

$

(11,291

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

310

 

 

 

250

 

Non-cash lease expense

 

 

232

 

 

 

 

Stock-based compensation

 

 

1,795

 

 

 

493

 

Change in fair value of warrant liabilities

 

 

(187

)

 

 

55

 

Change in fair value of convertible notes

 

 

 

 

 

839

 

Loss on early extinguishment of debt

 

 

3,251

 

 

 

 

Non-cash interest expense and amortization of debt discount and issuance costs

 

 

484

 

 

 

246

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(2,534

)

 

 

 

Inventory

 

 

(2,672

)

 

 

 

Prepaid expenses and other current assets

 

 

(777

)

 

 

(715

)

Accounts payable

 

 

2,628

 

 

 

1,277

 

Accrued liabilities

 

 

448

 

 

 

(1,064

)

Operating lease

 

 

(219

)

 

 

 

Net cash used in operating activities

 

$

(24,211

)

 

$

(9,910

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(8

)

 

 

(27

)

Net cash used in investing activities

 

$

(8

)

 

$

(27

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from deferred royalty obligation, net of issuance costs

 

 

49,774

 

 

 

 

Proceeds from issuance of long-term debt, net of issuance costs

 

 

48,774

 

 

 

 

Payments on long-term debt, including final payment

 

 

(32,853

)

 

 

 

Proceeds from issuance of convertible notes

 

 

 

 

 

7,500

 

Proceeds from issuance of common stock upon exercise of stock options

 

 

149

 

 

 

18

 

Payment of deferred offering costs

 

 

 

 

 

(209

)

Net cash provided by financing activities

 

$

65,844

 

 

$

7,309

 

Net increase (decrease) in cash

 

 

41,625

 

 

 

(2,628

)

Cash — Beginning of period

 

 

88,212

 

 

 

7,095

 

Cash — End of period

 

$

129,837

 

 

$

4,467

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Accretion to redemption value on redeemable convertible preferred stock

 

$

 

 

$

129

 

Right-of-use asset obtained in exchange for new operating lease liability

 

 

2,812

 

 

 

 

Recognition of derivative liabilities

 

 

1,395

 

 

 

 

Deferred offering costs included in accounts payable and accrued liabilities

 

 

 

 

 

1,315

 

Purchase of property and equipment included in accounts payable and accrued liabilities

 

 

 

 

 

35

 

Debt issuance costs included in accounts payable and accrued liabilities

 

 

2,569

 

 

 

 

 

 

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

6


 

IMPEL PHARMACEUTICALS INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Description of Business

Impel Pharmaceuticals Inc. (“the Company”, "we", and "our"), formerly known as Impel Neuropharma, Inc., is a commercial-stage biopharmaceutical company focused on the development and commercialization of transformative therapies for people suffering from diseases with high unmet medical needs, with an initial focus on diseases of the central nervous system, or CNS. The Company's lead product, Trudhesa™ (dihydroergotamine mesylate) Nasal Spray was approved by the U.S. Food and Drug Administration ("FDA") in September 2021. Using the Company’s proprietary Precision Olfactory Delivery (POD®) technology, Trudhesa™ gently delivers dihydroergotamine mesylate ("DHE"), a proven, well-established therapeutic, quickly to the bloodstream through the vascular-rich upper nasal space.

The Company’s strategy is to pair its POD®, upper nasal delivery technology with well-understood therapeutics or other therapeutics where rapid vascular absorption is preferred to drive therapeutic benefit, improve patient outcomes, reduce drug development risk and expand the commercial opportunity within its target diseases. The Company was incorporated under the laws of the State of Delaware on July 24, 2008, maintains its headquarters and principal operations in Seattle, Washington, and performs certain of its research and development activities in Australia. On April 20, 2022, the Company changed its name from Impel NeuroPharma, Inc. to Impel Pharmaceuticals Inc.

Liquidity and Capital Resources

From the Company’s inception through March 31, 2022, it has raised an aggregate of $392.8 million in proceeds from its initial public offering (“IPO”), follow-on public offering, proceeds pursuant to the Revenue Interest Financing Agreement (deferred royalty obligation) (“RIF”), sale and issuance of redeemable convertible preferred stock, convertible notes, debt and warrants. The Company had a cash and cash equivalents balance of $129.8 million as of March 31, 2022. Based upon the Company’s current operating plan, it estimates that its cash and cash equivalents as of March 31, 2022, are sufficient for the Company to fund operating, investing, and financing cash flow needs for at least one year from the issuance date of these interim financial statements. The Company may be required to raise additional capital to meet working capital needs associated with commercialization and research and development activities. If sufficient funds on acceptable terms are not available when needed, the Company could be required to reduce operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs or planned product launch plans. Failure to manage discretionary spending or raise additional financing, as needed, may adversely impact the Company’s ability to achieve its intended business objectives.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments relating to the recoverability and reclassifications of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.

 

7

 


 

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, and rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. The condensed consolidated financial statements include the operations of Impel Pharmaceuticals Inc., and its wholly owned Australian subsidiary. All intercompany balances and transactions have been eliminated upon consolidation.

The condensed consolidated balance sheet as of March 31, 2022, the condensed consolidated statements of operations and comprehensive loss, changes in redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for the three months ended March 31, 2022 and 2021 are unaudited. These unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s consolidated financial position as of March 31, 2022 and its results of operations and cash flows for the three months ended March 31, 2022 and 2021. The financial data and the other financial information contained in these notes to the condensed consolidated financial statements related to the three month periods are also unaudited. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other future annual or interim period. The condensed consolidated balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2021 included in its Annual Report on Form 10-K filed with the SEC on March 29, 2022.

Reclassifications

We have reclassified prior period financial statements to conform to the current period presentation. During the three months ended March 31, 2021, we reclassified certain amounts previously recorded as general and administrative expense to research and development expense.

 

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates such estimates and assumptions for continued reasonableness. In particular, management makes estimates with respect to revenue recognition, inventory valuation, the fair values of derivative liabilities, common stock, stock-based compensation expense, convertible debt and income taxes. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.

Segments

The Company’s chief operating decision maker is its Chief Executive Officer. The Chief Executive Officer reviews financial information on an aggregate basis for the purposes of evaluating financial performance and allocating the Company’s resources. Accordingly, the Company has determined that it operates in one segment.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents consist primarily of demand deposit accounts and deposits in short-term money market funds. At March 31, 2022 and December 31, 2021, cash consisted of cash in bank deposits held at financial institutions.

Accounts Receivable, net

 

The Company’s trade accounts receivable consists of amounts due from specialty pharmacies in the U.S. net of distribution service fees, prompt pay discounts and other adjustments. The Company's contracts with customers have standard payment terms that generally require payment within 45 days. The Company analyzes accounts that are past due for collectability, and periodically evaluates the creditworthiness of its customers. As of March 31, 2022, we determined an allowance for doubtful accounts was not required based upon our review of contractual payment terms and individual customer circumstances. As of March 31, 2022, two customers accounted for 100% of the accounts receivable balance, with each of these individual customers ranging from 44% to 56% of the accounts receivable balance.

8


 

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

Product Revenue, Net

Subsequent to its regulatory approval in the United States in September 2021, the Company began to sell Trudhesa in the United States. The product is distributed through an exclusive third-party logistics, or 3PL, distribution agent that does not take title to the product. The 3PL distributes Trudhesa to the Company's customers, a specialty pharmacy and a specialty distributor (collectively referred to as "customers"), who then distribute the product to health care providers and patients. In our exclusive distribution agreement with the 3PL company, the Company acts as principal because we retain control of the product.

Revenue from product sales is recognized when the customer obtains control of our product, which occurs upon transfer of title to the customer. We classify payments to customers or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative expenses in our condensed consolidated statements of operations. Payments to customers or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below. Taxes collected from the customer relating to product sales and remitted to governmental authorities are excluded from revenue. Because our payment terms are generally forty-five days, we conclude there is not a significant financing component because the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less. The Company expenses incremental costs of obtaining a contract as and when incurred since the expected amortization period of the asset that we would have recognized is one year or less.


Reserves for Variable Consideration

 

Revenues from product sales are recorded at the net sales price, or the transaction price, which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, co-pay assistance, chargebacks, rebates and other allowances that are offered within contracts between us and our customer, health care providers and other indirect customers relating to the sale of Trudhesa. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable or a current liability. Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

The following are the components of variable consideration related to product revenue:

Product Returns: Our customers have limited return rights related to the product’s damage or defect. The Company estimates the amount of product sales that may be returned and records the estimate as a reduction of revenue and a refund liability in the period the related product revenue is recognized. Based on the distribution model for Trudhesa and the price of Trudhesa, the Company believes there will be minimal returns.

Other incentives: Other incentives include co-payment assistance the Company provides to patients with commercial insurance that have coverage and reside in states that allow co-payment assistance. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue. The estimate is recorded as a reduction of revenue in the same period the related revenue is recognized.

Managed care rebates: The Company is subject to rebates with certain commercial payers in the future. We record these rebates as an accrual on our consolidated balance sheet in the same period we recognize the related revenue. We estimate our managed care rebates based on our estimated payer mix and the applicable contractual rebate rate.

9


 

Chargebacks: The Company estimates obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers and patients at prices lower than the list prices charged to our customer. The government and other entities charge us for the difference between what they pay for the product and the selling price to our customer. The Company records reserves for these chargebacks related to product sold to our customer during the reporting period, as well as our estimate of product that remains in the distribution channel at the end of the reporting period that we expect will be sold to qualified healthcare providers and patients in future periods.

Government rebates: The Company is subject to discount obligations under government programs, including Medicaid programs, Medicare and Tricare in the U.S. We estimate Medicaid, Medicare and Tricare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payer mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability that is included in accrued expenses on our consolidated balance sheet. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments.

Inventory

 

Prior to receiving approval from the FDA in September 2021 to sell Trudhesa in the U.S., the Company expensed all costs incurred related to the manufacture of Trudhesa as research and development expense because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for the Company of regulatory approval of drug candidates. Subsequent to receiving FDA approval in September 2021, the Company began to capitalize inventory related costs that were incurred subsequent to FDA approval. The Company values its inventories at the lower-of-cost or net realizable value and determines the cost of its inventories, which includes costs related to products held for sale in the ordinary course of business, products in process of production for such sale and items to be currently consumed in the production of goods to be available for sale, on a first-in, first-out (FIFO) basis. Due to the nature of the Company’s supply chain process, inventory that is owned by the Company, is physically stored at third-party warehouses, logistics providers and contract manufacturers. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and writes down any excess and obsolete inventories to their net realizable value in the period in which the impairment is first identified. If they occur, such impairment charges are recorded as a component of cost of goods sold in the consolidated statements of operations and comprehensive loss.

Cost of Goods Sold

 

Cost of goods sold consists primarily of third-party manufacturing, distribution, and overhead costs associated with Trudhesa. A portion of the costs of producing Trudhesa sold to date was expensed as research and development prior to the FDA approval of Trudhesa and, therefore, it is not reflected in the cost of goods sold.

 

Deferred Royalty Obligation

 

The Company accounts for the liability related to net revenues, as discussed further in Note 7, as a deferred royalty obligation, amortized under the effective interest rate method over the estimated life of the revenue streams. We recognize interest expense thereon using the effective rate, which is based on our current estimates of future revenues over the life of the arrangement. In connection therewith, we periodically assess our expected revenues using internal projections, impute interest on the carrying value of the deferred royalty obligation, and record interest expense using the imputed effective interest rate. To the extent our estimates of future revenues are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, we will account for any such changes by adjusting the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of our deferred royalty obligation. The assumptions used in determining the expected repayment term of the deferred royalty obligation and amortization period of the issuance costs requires that we make estimates that could impact the short-term and long-term classification of such costs, as well as the period over which such costs will be amortized.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivables. The Company’s cash is deposited with high credit quality financial institutions. At times such deposits may be in excess of the Federal Depository Insurance Corporation insured limits.

10


 

Fair Value Measurement

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active;

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.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash, other current assets, accounts payable, and accrued liabilities approximate their fair values, due to their short-term nature.

Convertible Notes

In March 2021, the Company issued convertible promissory notes to various investors for an aggregate amount of $7.5 million. As permitted under Accounting Standards Codification ("ASC") 825, Financial Instruments ("ASC 825"), the Company elected the fair value option for recognition of the convertible notes. The Company elected the fair value option to allow the Company to eliminate the burden of complying with the requirements for derivative accounting. Under the fair value option, the convertible notes were remeasured at fair value in each reporting period until their conversion in April 2021, with changes in the fair value recognized in the Company’s condensed consolidated statement of operations as other income (expense), net. Accrued interest on the convertible notes is recorded in interest income (expense), net. The notes were automatically converted into shares of the Company’s common stock upon the closing of the IPO in April 2021.

 

Research and Development Expense

Research and development costs are expensed as incurred and consist primarily of salaries, benefits and other staff-related costs, including associated stock-based compensation, laboratory supplies, nonclinical and clinical studies and trials and related clinical manufacturing costs, costs related to manufacturing preparation, fees paid to other entities that conduct certain research and development activities on the Company’s behalf. Non-refundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized as prepaid expenses until the related goods are delivered or services are performed. Such payments are evaluated for current or long-term classification based on when such services are expected to be received.

The Company considers regulatory approval of product candidates to be uncertain, and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. The Company expenses manufacturing costs as incurred to research and development expense for product candidates prior to regulatory approval. If, and when, regulatory approval of a product is obtained, the Company begins capitalizing manufacturing costs related to the approved product into inventory.

Selling, General and Administrative Expense

Selling, general and administrative expenses are primarily comprised of compensation and benefits associated with sales and marketing, finance, human resources, legal, information technology and other administrative personnel, outside marketing, advertising and legal expenses and other general and administrative costs. The Company expenses the cost of advertising, including promotional expenses, as incurred. Advertising expenses were $2.1 million for the three months ended March 31, 2022. The Company did not incur any advertising expenses for the three month period ended March 31, 2021.

11


 

Advance Payments and Accruals for Research and Development Services

As part of the process of preparing its condensed consolidated financial statements, the Company is required to estimate its expenses resulting from its obligation under contracts with vendors and consultants and clinical site agreements in connection with its research and development efforts. The financial terms of these contracts are subject to negotiations which vary contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts.

The Company’s objective is to reflect the appropriate research and development expenses in its condensed consolidated financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of its research and development efforts. The Company determines advance payments for research and development services and accrual estimates through discussion with applicable personnel and outside service providers as to the progress of clinical trials, or other services completed. The Company adjusts its rate of research and development expense recognition if actual results differ from its estimates. The Company makes estimates of its advance payments and accrued expenses as of each balance sheet date in its condensed consolidated financial statements based on facts and circumstances known at that time. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. Through March 31, 2022, there had been no material adjustments to the Company’s prior period estimates of advance payments and accruals for research and development expenses. The Company’s research and development advance payments and accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors.

Warrant Liabilities

The Company determines the accounting classification of warrants that are issued, as either liability or equity, by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, ("ASC 480-10"), and then in accordance with ASC 815-40, Derivatives and Hedging -- Contracts in Entity's Own Equity ("ASC 815-40"). Under ASC 480-10, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate the issuer to settle the warrants or the underlying shares by paying cash or other assets, or must or may require settlement by issuing variable number of shares.

If the warrants do not meet liability classification under ASC 480-10, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815-40, in order to conclude equity classification, the Company assesses whether the warrants are indexed to its common stock and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. After all relevant assessments are made, the Company concludes whether the warrants are classified as liability or equity. Liability classified warrants are required to be accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded as a component of other income (expense), net in the accompanying condensed consolidated statements of operations. Equity classified warrants are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date. See Note 7 for additional details.

Leases

The Company adopted Accounting Standards Codification (“ASC”) Topic 842 - Leases, on January 1, 2022, effective January 1, 2022 using a modified retrospective method. The Company recognized $2.8 million of lease assets and liabilities and there was no impact to retained earnings upon adoption of ASC 842. The underlying assets of the Company’s leases primarily relate to office space leases and a commercial vehicle fleet. The Company determines if an arrangement contains a lease at inception. The Company performed an evaluation of contracts in accordance with ASC 842 and has determined it has an operating lease agreement for the office facilities that the Company occupies and its commercial vehicle fleet. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized at the date the underlying asset becomes available for the Company’s use. Operating lease liabilities are based on the present value of the future minimum lease payments over the lease term. ROU assets are measured at the amount of the lease liability, adjusted for any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. As the Company’s leases generally do not provide an implicit interest rate, the present value of the future minimum lease payments is determined using the Company’s incremental borrowing rate. This rate is an estimate of the collateralized borrowing rate the Company would incur on its future lease payments over a similar term and is based on the information available to the Company at the lease commencement date, discussed in more detail below.

The Company’s leases contain options to extend the leases; lease terms are adjusted for these options only when it is reasonably certain the Company will exercise these options. The Company’s lease agreements do not contain residual value guarantees or covenants.

12


 

The Company has made a policy election regarding its real estate leases not to separate non-lease components from lease components, to the extent they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease expense. The Company’s lease includes variable non-lease components, such as common-area maintenance costs. The Company has elected not to record on the balance sheet a lease that has a lease term of 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise. The Company accounts for leases with initial terms of 12 months or less as operating expenses on a straight-line basis over the lease term.

Lease expense is recognized within operating expenses on a straight-line basis over the terms of the lease. Incentives granted under the Company’s facilities lease, including rent holidays, are recognized as adjustments to lease expense on a straight-line basis over the term of the lease.

Stock-Based Compensation

The Company recognizes stock-based compensation expense for stock options and restricted stock unit awards on a straight-line basis over the requisite service period. The Company’s stock-based compensation costs for stock options are based upon the grant date fair value of options estimated using the Black-Scholes-Merton option pricing model. This model utilizes as inputs the estimated fair value of the underlying common stock at the measurement date, the estimated term of the stock options (weighted-average period of time that the options granted are expected to be outstanding), risk-free interest rates, expected dividends, and the expected volatility of the Company’s common stock. The Company has elected to recognize forfeitures of share-based payment awards as they occur.

In determining the fair value of the stock options granted, the Company uses the Black-Scholes option-pricing model and assumptions discussed below.

Fair Value of Common Stock—Prior to the IPO, given the absence of a public trading market, the Company’s board of directors with input from management considered numerous objective and subjective factors to determine the fair value of common stock. The factors included, but were not limited to: (1) third-party valuations of the Company’s common stock; (2) the Company’s stage of development; (3) the status of research and development efforts; (4) the rights, preferences and privileges of the Company’s preferred stock relative to those of the Company’s common stock; (5) the Company’s operating results and financial condition, including the Company’s levels of available capital resources; and (6) equity market conditions affecting comparable public companies; (7) general U.S. market conditions; and (8) the lack of marketability of the Company’s common stock. Following the IPO, as a public trading market for the Company’s common stock has been established, the fair value of the common stock is determined based on the quoted market price of the common stock on the date of grant.

Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company used the simplified method (based on the mid-point between the vesting date and the end of the contractual term) to determine the expected term.

Expected Volatility—Since the Company recently completed its IPO and does not have substantial trading history for its common stock, the expected volatility was estimated based on the average historical volatilities for comparable publicly traded pharmaceutical companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle and area of specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Expected Dividend—The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.

The Company recognizes stock-based compensation expense for stock options granted to non-employees based on the estimated fair value of the award as it is more readily measurable than the fair value of the services received.

Restricted stock units and performance stock units have a grant-date fair value equal to the fair market value of the underlying stock on the grant date. Compensation expense for performance stocks units with performance metrics is calculated based upon expected achievement of the metrics specified in the grant, or when a grant contains a market condition, the grant date fair value using a Monte Carlo simulation.

13


 

Net Loss Per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period, without consideration of potentially dilutive securities. Diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders since the effect of potentially dilutive securities is anti-dilutive given the net loss of the Company.

Comprehensive Loss

Comprehensive loss represents the change in the Company’s stockholders’ equity (deficit) from all sources other than investments by or distributions to stockholders. The Company has no items of other comprehensive loss; as such, net loss equals comprehensive loss.

 

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with certain new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is (1) no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

 

 

3. Fair Value Measurements

The following table summarizes the fair value of the Company’s financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

 

March 31, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrant liabilities

 

$

 

 

$

 

 

$

450

 

 

$

450

 

Derivative liability - Deferred royalty obligation

 

 

 

 

 

 

 

 

990

 

 

 

990

 

Derivative liability - Oaktree term loan

 

 

 

 

 

 

 

 

405

 

 

 

405

 

Total financial liabilities

 

$

 

 

$

 

 

$

1,845

 

 

$

1,845

 

 

 

 

 

 

December 31, 2021

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrant liabilities

 

$

 

 

$

 

 

$

637

 

 

$

637

 

Total financial liabilities

 

$

 

 

$

 

 

$

637

 

 

$

637

 

 

The following table summarizes the change in the fair value of the common stock warrant liabilities for the three months ended March 31, 2022 (in thousands):

 

Beginning balance as of December 31, 2021

$

637

 

Changes in fair value

 

(187

)

Ending balance as of March 31, 2022

$

450

 

 

14


 

 

The following table summarizes the change in the estimated fair value of the Company’s derivative liabilities for the three months ended March 31, 2022 (in thousands):

 

Beginning balance as of December 31, 2021

$

 

Initial fair value of derivative liability - Deferred royalty obligation

 

990

 

Initial fair value of derivative liability - Oaktree term loan

 

405

 

Ending balance as of March 31, 2022

$

1,395

 

 

Fair values of the Company’s common stock warrants and the embedded derivative liability are based on significant inputs not observed in the market, and thus represent a Level 3 measurement.

Pursuant to the loan and security agreement with Oxford Finance LLC and Silicon Valley Bank, the Company issued common stock warrants (see Note 7). The Company's warrants are not indexed to the Company’s common stock in the manner contemplated by ASC 815-40 because the warrant provides for an adjustment to the exercise price upon an acquisition. The Warrants were measured at fair value at inception and are subsequently remeasured at each reporting date with changes in fair value recognized as a component of other income (expense), net in the condensed consolidated statement of operations and other comprehensive loss. The Company determined the fair value of the common stock warrants using the following assumptions as of March 31, 2022 using the Black-Scholes-Merton option pricing model based on significant unobservable inputs. The significant unobservable inputs used in the fair value measurement of the warrant liabilities were the volatility rate and the estimated term of the warrants. Assumptions used included an expected term of 10 years, stock volatility of 78% and risk-free interest rate of 2.3% during the three months ended March 31, 2022.

The senior secured loan agreement and related security agreement with Oaktree Fund Administration, LLC, or the Oaktree Loan and Security Agreement (see Note 7), contains embedded derivatives requiring bifurcation as a derivative instrument. The fair value of the embedded derivative liabilities associated with the term loans was estimated using a probability weighted discounted cash flow model to measure the fair value. This involves significant Level 3 inputs and assumptions including an (i) estimated probability and timing of a change in control (ii) our risk-adjusted discount rate.

The embedded derivative liability associated with our deferred royalty obligation (see Note 7) is measured at fair value and the assumptions used in the valuation model include: (i) our estimates of the probability and timing of related events; (ii) the probability-weighted net sales of Trudhesa; (iii) our risk-adjusted discount rate; (iv) our cost of debt; and (v) the probability of a change in control occurring during the term of the instrument.

4. Balance Sheet Components

Inventory

Inventories consisted of the following:

 

 

 

March 31,
2022

 

 

December 31,
2021

 

Raw materials

 

$

2,229

 

 

$

1,024

 

Work-in-process

 

 

1,272

 

 

 

876

 

Finished goods

 

 

1,995

 

 

 

924

 

Total inventories

 

$

5,496

 

 

$

2,824

 

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

March 31,
2022

 

 

December 31,
2021

 

Other prepaids and current assets

 

$

2,585

 

 

$