trvi-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2020

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: 001-38886

 

TREVI THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

45-0834299

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

195 Church Street, 14th Floor

New Haven, Connecticut

06510

(Address of principal executive offices)

(Zip Code)

 

(203) 304-2499

(Registrant’s telephone number, including area code)

 

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, $0.001 par value per share

 

TRVI

 

The Nasdaq Stock Market LLC

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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

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

As of May 7, 2020, the registrant had 17,834,570 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues and profitability, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,”  “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would,” “could,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

 

the impact of the COVID-19 pandemic on our clinical trials, business and operations;

 

our ongoing clinical trials, including our Phase 2b/3 PRISM trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis;

 

our plans to develop and, if approved, subsequently commercialize nalbuphine ER for the treatment of pruritus associated with prurigo nodularis or for other serious neurologically mediated conditions;

 

our expectations regarding the timing for the initiation of clinical trials and the reporting of data from such trials;

 

the timing of and our ability to submit applications for, and to obtain and maintain regulatory approvals for nalbuphine ER;

 

our expectations regarding our ability to fund our operating expenses and capital expenditure requirements with our cash and cash equivalents;

 

our estimates regarding expenses, future revenue, timing of any future revenue, capital requirements and needs for additional financing;

 

the impact of government laws and regulations;

 

our competitive position; and

 

our ability to establish and maintain collaborations or obtain additional funding.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the section titled “Risk Factors,” that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may differ materially from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward-looking statements except as required by applicable law.

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations

2

 

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

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

66

Item 6.

Exhibits

67

Signatures

68

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Trevi Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(Amounts in thousands, except share and per share amounts)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,640

 

 

$

57,313

 

Tax credit and other receivables

 

 

125

 

 

 

558

 

Prepaid expenses

 

 

1,055

 

 

 

1,681

 

Total current assets

 

 

53,820

 

 

 

59,552

 

Operating lease right-of-use asset

 

 

292

 

 

 

312

 

Security deposit

 

 

19

 

 

 

19

 

Property, equipment and leasehold improvements, net

 

 

107

 

 

 

118

 

Total assets

 

$

54,238

 

 

$

60,001

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,193

 

 

$

1,599

 

Accrued expenses

 

 

4,911

 

 

 

3,501

 

Operating lease liability - current portion

 

 

102

 

 

 

99

 

Total current liabilities

 

 

7,206

 

 

 

5,199

 

Operating lease liability - long term portion

 

 

230

 

 

 

257

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock: $0.001 par value; 200,000,000 shares authorized at March 31, 2020

   and December 31, 2019, respectively; and 17,834,570 shares issued and outstanding at

   March 31, 2020 and December 31, 2019, respectively.

 

 

18

 

 

 

18

 

Preferred stock: $0.001 par value; 5,000,000 shares authorized at March 31, 2020

   and December 31, 2019, respectively; no shares issued or outstanding at

   March 31, 2020 or December 31, 2019.

 

 

 

 

 

 

Additional paid-in capital

 

 

169,476

 

 

 

168,746

 

Accumulated deficit

 

 

(122,692

)

 

 

(114,219

)

Total stockholders’ equity

 

 

46,802

 

 

 

54,545

 

Total liabilities and stockholders’ equity

 

$

54,238

 

 

$

60,001

 

 

See accompanying notes.

1


Trevi Therapeutics, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(Amounts in thousands, except share and per share amounts)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

6,019

 

 

$

3,338

 

General and administrative

 

 

2,620

 

 

 

1,474

 

Total operating expenses

 

 

8,639

 

 

 

4,812

 

Loss from operations

 

 

(8,639

)

 

 

(4,812

)

Other income (expense):

 

 

 

 

 

 

 

 

Change in fair value of obligation for loan success fee

 

 

 

 

 

(52

)

Interest income

 

 

157

 

 

 

58

 

Total other income (expense), net

 

 

157

 

 

 

6

 

Loss before income tax benefit

 

 

(8,482

)

 

 

(4,806

)

Income tax benefit

 

 

9

 

 

 

4

 

Net loss

 

$

(8,473

)

 

$

(4,802

)

Accretion of redeemable convertible preferred stock

 

 

 

 

 

203

 

Dividends accrued on redeemable convertible preferred stock

 

 

 

 

 

(1,553

)

Adjusted net loss attributable to common stockholders

 

$

(8,473

)

 

$

(6,152

)

Basic and diluted net loss per common share outstanding

 

$

(0.48

)

 

$

(13.85

)

Weighted average common shares used in net loss per share

   attributable to common stockholders, basic and diluted

 

 

17,834,570

 

 

 

444,132

 

 

See accompanying notes.

 

2


 

Trevi Therapeutics, Inc.

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

(unaudited)

(Amounts in thousands, except share amounts)

 

 

 

Series A

 

 

Series B

 

 

Series C

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

Redeemable

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Convertible

 

 

Convertible

 

 

Convertible

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Stockholders’

 

 

 

Preferred Stock

 

 

Preferred Stock

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-

 

 

Accumulated

 

 

Equity

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Deficit

 

 

(Deficit)

 

Balance at December 31, 2018

 

 

15,387,923

 

 

$

21,033

 

 

 

22,608,695

 

 

$

33,686

 

 

 

38,097,672

 

 

$

61,023

 

 

 

438,600

 

 

$

4

 

 

$

 

 

$

(109,498

)

 

$

(109,494

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

146

 

 

 

 

 

146

 

Issuance of common stock from exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,894

 

 

 

 

 

24

 

 

 

 

 

24

 

Issuance of Series C redeemable convertible

   preferred stock, net of issuance costs

 

 

 

 

 

 

 

 

 

 

6,849,315

 

 

 

11,059

 

 

 

 

 

 

 

 

 

 

 

Dividends accrued on redeemable

   convertible preferred stock

 

 

 

 

228

 

 

 

 

 

384

 

 

 

 

 

941

 

 

 

 

 

 

 

(170

)

 

 

(1,383

)

 

 

(1,553

)

Accretion (amortization) of premium (discount) on

   issuance of redeemable convertible preferred stock

 

 

 

 

(1

)

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(4

)

Accretion of discount on investor rights/obligation

 

 

 

 

14

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

(34

)

Adjustment for excess (shortfall) of fair value over

   liquidation value of redeemable convertible

   preferred stock

 

 

 

 

(106

)

 

 

 

 

(153

)

 

 

 

 

(19

)

 

 

 

 

 

 

 

 

278

 

 

 

278

 

Accretion of issuance costs on redeemable

   convertible preferred stock

 

 

 

 

1

 

 

 

 

 

1

 

 

 

 

 

35

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(37

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,802

)

 

 

(4,802

)

Balance at March 31, 2019

 

 

15,387,923

 

 

$

21,169

 

 

 

22,608,695

 

 

$

33,943

 

 

 

44,946,987

 

 

$

73,039

 

 

 

446,494

 

 

$

4

 

 

$

 

 

$

(115,480

)

 

$

(115,476

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

17,834,570

 

 

$

18

 

 

$

168,746

 

 

$

(114,219

)

 

$

54,545

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

730

 

 

 

 

 

730

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,473

)

 

 

(8,473

)

Balance at March 31, 2020

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

17,834,570

 

 

$

18

 

 

$

169,476

 

 

$

(122,692

)

 

$

46,802

 

 

See accompanying notes.

 

 

3


 

 

Trevi Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(Amounts in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(8,473

)

 

$

(4,802

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

10

 

 

 

9

 

Changes in fair value of obligation for loan success fee

 

 

 

 

 

52

 

Stock-based compensation

 

 

730

 

 

 

146

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

433

 

 

 

34

 

Prepaid expenses

 

 

626

 

 

 

(230

)

Accounts payable

 

 

594

 

 

 

(185

)

Accrued expenses

 

 

1,407

 

 

 

880

 

Net cash used in operating activities

 

 

(4,673

)

 

 

(4,096

)

Investing activities

 

 

 

 

 

 

 

 

Acquisitions of property, equipment and leasehold improvements

 

 

 

 

 

(9

)

Net cash used in investing activities

 

 

 

 

 

(9

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from exercises of stock options

 

 

 

 

 

 

24

 

Proceeds from sale of Series C redeemable convertible preferred stock, net of

   issuance costs

 

 

 

 

 

9,963

 

Deferred offering costs

 

 

 

 

 

(138

)

Net cash provided by financing activities

 

 

 

 

 

9,849

 

Net cash increase (decrease)

 

 

(4,673

)

 

 

5,744

 

Cash and cash equivalents at beginning of period

 

 

57,313

 

 

 

7,202

 

Cash and cash equivalents at end of period

 

$

52,640

 

 

$

12,946

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

 

 

Deferred offering costs

 

$

 

 

$

(214

)

Dividends accrued on redeemable convertible preferred stock

 

$

 

 

$

1,553

 

Accretion on redeemable convertible preferred stock

 

$

 

 

$

(203

)

 

See accompanying notes.

 

4


 

Trevi Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(in thousands, except share and per share data)

1.

Nature of the Business

Trevi Therapeutics, Inc. (“Trevi” or the “Company”) is a clinical-stage biopharmaceutical company focused on the development and commercialization of nalbuphine ER to treat serious neurologically mediated conditions. The Company is currently developing nalbuphine ER for the treatment of chronic pruritus, chronic cough in patients with idiopathic pulmonary fibrosis (“IPF”), and levodopa-induced dyskinesia (“LID”) in patients with Parkinson’s disease. These conditions share a common pathophysiology that is mediated through opioid receptors in the central and peripheral nervous systems. Due to nalbuphine’s mechanism of action as a modulator of opioid receptors, the Company believes nalbuphine ER has the potential to be effective in treating each of these conditions.

Nalbuphine ER is an oral extended release formulation of nalbuphine. Nalbuphine is a mixed κ-opioid receptor agonist and μ-opioid receptor antagonist that has been approved and marketed as an injectable for pain indications for more than 20 years in the United States and Europe. The κ- and μ-opioid receptors are known to be critical mediators of itch, cough and certain movement disorders. Nalbuphine’s mechanism of action also mitigates the risk of abuse associated with μ-opioid agonists because it antagonizes, or blocks, the μ-opioid receptor. Nalbuphine is currently the only opioid approved for marketing that is not classified as a controlled substance in the United States and most of Europe.

 

On April 22, 2019, the Company filed an amendment to the Company’s amended and restated certificate of incorporation to effect a one-for 9.5 reverse stock split of the Company’s common stock, which resulted in a proportional adjustment to the existing conversion ratios for each series of the Company’s redeemable convertible preferred stock. Accordingly, all share and per share amounts in the condensed consolidated financial statements have been retrospectively adjusted, where applicable, to reflect the effect of the reverse stock split and adjustments of the redeemable convertible preferred stock conversion for all periods presented.

On May 9, 2019, the Company completed its initial public offering (“IPO”) and a concurrent private placement in which it issued and sold an aggregate of 7,000,000 shares of common stock at an offering price of $10.00 per share, for net proceeds of $62.1 million, after deducting aggregate underwriting discounts and commissions and private placement agent fees of $4.9 million and other offering expenses of $3.0 million. The Company’s common stock began trading on The Nasdaq Global Market on May 7, 2019 under the ticker symbol “TRVI”.

Upon the closing of the IPO, the Company’s outstanding redeemable convertible preferred stock, including the accrued dividends thereon, automatically converted into shares of the Company’s common stock.  Upon such conversion of the redeemable convertible preferred stock, the Company reclassified the carrying values of the redeemable convertible preferred stock to common stock and additional paid-in capital.

The accompanying financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business.  Since inception, the Company has financed its operations primarily through private placements of its redeemable convertible preferred stock and convertible notes as well as borrowings under a term loan facility, and most recently, with proceeds from the IPO and concurrent private placement completed in May 2019.  The Company has incurred recurring losses since inception, including net losses attributable to the Company of $8.5 million for three months ended March 31, 2020 and $26.1 million for the year ended December 31, 2019.  In addition, as of March 31, 2020, the Company had an accumulated deficit of $122.7 million. The Company expects to continue to generate operating losses for the foreseeable future. As of May 7, 2020, the issuance date of these Condensed Consolidated Financial Statements, the Company expects that its cash and cash equivalents of $52.6 million as of March 31, 2020, will be sufficient to fund its operating expenses and capital expenditure requirements through at least 12 months from the date of issuance of these Condensed Consolidated Financial Statements.

5


 

2.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements for the three months ended March 31, 2020 and 2019 included herein, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim information.  Certain information and footnote disclosure typically prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations.  The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report on Form 10-K”). In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, which include normal recurring adjustments necessary for the fair presentation of the Company’s interim financial statements presented.  The results of operations for the interim periods are not necessarily indicative of the results expected for the full year or any subsequent period.

The accompanying Condensed Consolidated Financial Statements include the accounts of Trevi Therapeutics, Inc. and its wholly-owned subsidiary Trevi Therapeutics Limited. Intercompany balances and transactions have been eliminated.

All amounts presented are in thousands of dollars, except share and per share amounts, unless noted otherwise.  The Company has evaluated events occurring subsequent to March 31, 2020 for potential recognition or disclosure in the Condensed Consolidated Financial Statements and concluded there were no subsequent events that required recognition or disclosure other than those provided.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of the expenses during the reporting periods. Significant estimates and assumptions reflected in these Condensed Consolidated Financial Statements include, but are not limited to the recognition of research and development (“R&D”) expenses and the valuation of redeemable convertible preferred stock, common stock and stock-based awards. On an ongoing basis, management evaluates its estimates in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Unaudited Interim Financial Information

The accompanying interim Condensed Consolidated Balance Sheet as of March 31, 2020, the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the three months ended March 31, 2020 and 2019, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 are unaudited.  The unaudited interim Condensed Consolidated Financial Statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the Company’s opinion, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statements of its financial position as of March 31, 2020, the results of its operations for the three months ended March 31, 2020 and 2019, and its cash flows for the three months ended March 31, 2020 and 2019. The results for the three months ended March 31, 2020 and 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim period, or any future year or period.

Fair Value Measurements

The Company’s financial instruments have consisted of cash and cash equivalents, tax credit and other receivables, accounts payable, accrued expenses and obligation for loan success fee (Note 6). Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. The carrying amounts of cash and cash equivalents, tax credit and other receivables, accounts payable and accrued expenses are generally considered to be representative of their respective fair values because of the short term nature of those instruments.

6


 

Current accounting guidance defines fair value, establishes a framework for measuring fair value in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and requires certain disclosures about fair value measurements. The valuation techniques included in the guidance are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions and are classified into the following fair value hierarchy:

Level 1—Observable inputs—quoted prices in active markets for identical assets and liabilities.

Level 2—Observable inputs other than the quoted prices in active markets for identical assets and liabilities—such as quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Unobservable inputs—includes amounts derived from valuation models where one or more significant inputs are unobservable and require the company to develop relevant assumptions.

There were no fair value financial assets or liabilities as of March 31, 2020.

 

 

 

The following table represents a roll-forward of the fair value of Level 3 instruments (significant unobservable inputs):

 

Financial liabilities

 

 

 

 

Beginning balance at January 1, 2019(1)

 

$

1,556

 

Unrealized loss on Series C redeemable convertible preferred stock liability

 

 

 

Unrealized loss on obligation for loan success fee

 

 

215

 

Net settlements(2)

 

 

(1,771

)

Ending balance at December 31, 2019

 

$

 

 

(1)

The balance at January 1, 2019 relates to the $460 obligation for the loan success fee and the $1,096 fair value of the Series C redeemable convertible preferred stock liability at the time of the third tranche of the Series C Preferred Stock financing in January 2019.

 

(2)

The net settlements for the year ended December 31, 2019 relate to the $1,096 fair value of the Series C redeemable convertible preferred stock liability at the time of the third tranche of the Series C Preferred Stock financing in January 2019 and the payment of the $675 obligation for the loan success fee in May 2019.

 

Deferred Offering Costs

The Company capitalizes certain legal, professional, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of an equity financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering. Should the planned equity financing no longer be considered probable of being consummated, the deferred offering costs are expensed immediately as a charge to operating expenses.  The Company’s IPO was completed in May 2019 and IPO costs incurred in 2019 were recorded as a reduction to stockholders’ equity (deficit). As a result, as of March 31, 2020 and December 31, 2019, the Company did not have any deferred offering costs.

Basic and Diluted Net Income (Loss) per Common Share

Basic and diluted net loss per common share outstanding is determined by dividing net loss, as adjusted for accretion and accrued dividends on redeemable convertible preferred stock, by the weighted average common shares outstanding during the period. For all periods presented, outstanding shares of Series A redeemable convertible preferred stock (“Series A Preferred Stock”), shares of Series B redeemable convertible preferred stock (“Series B Preferred Stock”), shares of Series C Preferred Stock, if any, and shares issuable upon exercise of stock options have been excluded from the calculation because their effects would be anti-dilutive. Therefore, the weighted average common shares used to calculate both basic and diluted net loss per share are the same for each of the periods presented.

Recently Adopted Accounting Pronouncements

There have been no new accounting pronouncements adopted during the three months ended March 31, 2020.

7


 

Recently Issued Accounting Pronouncements

There have been no new accounting pronouncements during the three months ended March 31, 2020, as compared to the recent accounting pronouncements described in Note 2 to the Company’s audited consolidated financial statements for the year ended December 31, 2019 included in the Annual Report on Form 10-K, which could be expected to materially impact the Company’s unaudited Condensed Consolidated Financial Statements.

3.

Prepaid Expenses

Prepaid expenses consist of the following:

 

 

 

As of

March 31,

2020

 

 

As of

December 31,

2019

 

Prepaid R&D payments

 

$

770

 

 

$

1,113

 

Prepaid corporate insurance

 

 

151

 

 

 

491

 

Other

 

 

134

 

 

 

77

 

 

 

$

1,055

 

 

$

1,681

 

 

4.

Leases

 

Effective March 1, 2013, the Company entered into a lease for office space in New Haven, CT and commencing March 1, 2018, the Company entered into the First Amendment to the lease. The leased space approximates 5,600 square feet and the lease has a term of 60 months. The lease requires monthly payments ranging from approximately $10 to $11 through February 1, 2023 and provides for two designated months of free rent. The Company has the option to terminate the lease after 36 months by providing six months notice along with a payment to the landlord in an amount representing the unamortized cost of tenant improvements plus the unamortized broker’s commission, both of which had been paid by the landlord, and as defined in the agreement.

 

Under ASC 842, the Company determines if an arrangement is a lease at its inception.  If an operating lease has a term greater than one year, the lease is recognized in the balance sheet as a right-of-use asset and an operating lease liability at lease commencement.  The Company elected the short-term lease practical expedient; therefore, if an operating lease has a term less than one year, the Company will not recognize the lease on its balance sheet.  The operating right-of-use asset represents the Company’s right of use to an underlying asset for the term of the lease, and the operating liability represents the Company’s obligation to make lease payments arising from the lease.

Operating lease right-of-use assets and operating lease liabilities are determined and recognized on the commencement date of the lease based on the present value of lease payments over the term of the lease.  As the Company’s leases do not provide an implicit rate within the lease, the Company uses its incremental borrowing rate, which is updated periodically, based on information available at the commencement date of the lease to determine the present value of the lease payments.  The incremental borrowing rate used on existing leases as of March 31, 2020 was 13.0%.  The right-of-use asset also includes any lease payments related to initial direct costs and prepayments, and excludes lease incentives.  Lease expense is recognized on a straight line basis over the lease term.  The Company had no new leases during the three months ended March 31, 2020.

The Company’s operating leases consist of real estate and equipment, and have remaining terms ranging from approximately 1 to 4 years. The Company has no financing leases. The following table summarizes the Company’s operating leases as presented on its Condensed Consolidated Balance Sheet:

 

 

 

As of

March 31,

2020

 

 

As of

December 31,

2019

 

Assets:

 

 

 

 

 

 

 

 

Operating lease right-of-use asset

 

$

292

 

 

$

312

 

Liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities, current portion

 

 

102

 

 

 

99

 

Operating lease liabilities, long term portion

 

 

230

 

 

 

257

 

Total operating lease liabilities

 

$

332

 

 

$

356

 

 

8


 

Future minimum lease payments under the operating leases are as follows as of March 31, 2020:

 

 

 

As of

March 31,

2020

 

2020

 

$

104

 

2021

 

 

138

 

2022

 

 

131

 

2023

 

 

24

 

Total lease payments

 

 

397

 

Less: imputed discount rate

 

 

(65

)

Carrying value of operating lease liabilities

 

$

332

 

 

Lease expense under operating leases, including leases of office equipment, was $34 and $31 for the three months ended March 31, 2020 and 2019, respectively. Lease payments made in the three months ended March 31, 2020 and 2019 were $45 and $35, respectively, with such amounts reflected in the Condensed Consolidated Statement of Cash Flows in operating activities.

5.

Accrued Expenses  

Accrued expenses consist of the following:

 

 

 

As of

March 31,

2020

 

 

As of

December 31,

2019

 

Accrued research projects

 

$

3,736

 

 

$

2,084

 

Accrued professional fees

 

 

388

 

 

 

338

 

Accrued compensation and benefits

 

 

565

 

 

 

776

 

Other

 

 

222

 

 

 

303

 

 

 

$

4,911

 

 

$

3,501

 

 

6.

Term Loan Payable

 

On December 29, 2014, the Company entered into a loan and security agreement (the “Loan Agreement”) with Solar Capital, Ltd. (“Solar”) and Square 1 Bank (“Square 1”), together (the “Lenders”), which provided $15.0 million in debt financing (the “Term Loan”).  On June 29, 2018, the maturity date of the Loan Agreement, the Company made its final payments of principal and interest due to the Lenders in connection with the Term Loan, as well as $450 in full payment of the final fee and $82 in full payment of the amendment fee. As a result, there were no outstanding borrowings under the Term Loan as of March 31, 2020 or December 31, 2019, and the Company’s obligations to the Lenders under the Loan Agreement, other than the obligations under the Success Fee Agreement as described below, were terminated.

Under the terms of the Loan Agreement, the Company was obligated to pay the Lenders a Success Fee (“Success Fee”) under a Success Fee Agreement (“Success Fee Agreement”) upon the first occurrence of an Exit Event, as defined. The Exit Event included, among other things, the completion of a public offering of common stock. The amount of the Success Fee was equal to 4.5% of the $15.0 million Term Loan funded. The Success Fee Agreement was scheduled to terminate on the earlier to occur of (a) payment in full of the Success Fee pursuant to its terms, or (b) December 29, 2021. The completion of the IPO on May 9, 2019 (see Note 1) triggered the Success Fee payment obligation and the Company made payments to its Lenders totaling $675 in May 2019. Upon such payments, the Success Fee Agreement terminated.

9


 

The Success Fee Agreement represented a free-standing financial instrument. Accordingly, the Company accounted for the Success Fee provision as a derivative under ASC 815, Derivatives and Hedging, and therefore recorded an obligation for the Success Fee at its fair value on the closing date of each advance under the Loan Agreement. Upon recording such obligations for the Success Fee, the Company also recorded an offsetting loan discount, which was accreted to interest expense in the Company’s Statements of Operations through the Term Loan’s maturity date. The Company adjusted these liabilities for the Success Fee to fair value at each reporting date they remained outstanding. As discussed above, the Success Fee was paid in May 2019; and therefore, the total fair value of the Success Fee liabilities was $0 at March 31, 2020. The total fair value of these liabilities was determined to be $512 at March 31, 2019. The Company recorded non-cash charges in the amount of $0 and $52 for the three months ended March 31, 2020 and 2019, respectively, representing the changes in the fair value of these liabilities since their last measurement date. The fair values of the obligation for the Success Fee were estimated utilizing a probability-weighted income approach, including variables for the timing of the success event and other probability estimates. The non-cash charges are included in other income (expense) in the Company’s Condensed Consolidated Statements of Operations.

 

7.

Common Stock

As of March 31, 2020 and December 31, 2019, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 200,000,000 shares of common stock, respectively, with a par value of $0.001 per share.

As of March 31, 2020 and December 31, 2019, the Company had reserved 3,670,540 shares and 2,778,812 shares of common stock, respectively, for the exercise of outstanding stock options and the number of shares of common stock remaining available for future stock-based awards under the Company’s 2012 Stock Incentive Plan, 2019 Stock Incentive Plan and 2019 Employee Stock Purchase Plan, as shown in the table below (Note 8):

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Shares of common stock reserved for future issuance under the 2012 Stock Incentive Plan

 

 

1,043,992

 

 

 

1,043,992

 

Shares of common stock reserved for future issuance under the 2019 Stock Incentive Plan

 

 

2,293,097

 

 

 

1,579,714

 

Shares of common stock reserved for future issuance under the 2019 Employee Stock

   Purchase Plan

 

 

333,451

 

 

 

155,106

 

 

 

 

3,670,540

 

 

 

2,778,812

 

 

8.

Stock-Based Awards

In April 2019, the Company’s board of directors adopted the 2019 Stock Incentive Plan (the “2019 Plan”), which became effective on May 7, 2019. The 2019 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. The Company’s employees, officers, directors, consultants and advisors are eligible to receive awards under the 2019 Plan. The 2019 Plan is administered by the Company’s board of directors.

As of March 31, 2020, awards may be made under the 2019 Plan for up to such number of shares of the Company’s common stock as is equal to the sum of i) 1,578,947 shares; plus ii) the number of shares (up to 1,157,894 shares) equal to the number of shares of the Company’s common stock subject to outstanding awards under the Company’s 2012 Stock Incentive Plan (the “2012 Plan”), as amended that expire, terminate or are otherwise cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right; plus iii) an annual increase to be added on the first day of each fiscal year, beginning with 2020 and continuing through 2029, equal to the least of (a) 2,105,623 shares of common stock, (b) 4% of the number of outstanding shares of the Company’s common stock on such date, and (c) an amount determined by the Company’s board of directors. The number of shares reserved for issuance under the 2019 Plan increased, pursuant to the terms of the 2019 Plan, by an additional 713,383 shares, equal to 4% of the Company’s then-outstanding Common Stock, effective as of January 1, 2020.

The 2012 Plan was adopted by the Company’s board of directors and stockholders. The Company’s board of directors administers the 2012 Plan. The 2012 Plan provides for the issuance of stock-based awards to the Company’s employees, officers and directors, as well as non-employee/consultants and advisors to the Company.  

 

10


 

Options granted under the 2019 Plan and the 2012 Plan have a maximum term of ten years. Options vest over four years based on varying vesting schedules including: 25% vesting on the first anniversary date of grant and the balance ratably over the next 36 months or vesting in equal monthly or quarterly installments over four years. As of March 31, 2020 and December 31, 2019, respectively, options to purchase 1,161,543 shares and 631,234 shares of common stock were granted and outstanding, net of cancelations, under the 2019 Plan. As of March 31, 2020 and December 31, 2019, respectively, options to purchase 1,043,992 shares of common stock were granted and outstanding, net of cancelations, under the 2012 Plan.

 

In April 2019, the Company’s board of directors adopted a resolution effective on May 7, 2019 that no further stock options or other equity-based awards may be granted under the 2012 Plan.

 

During the three months ended March 31, 2019, no stock options were granted.

During the three months ended March 31, 2019, options granted were exercised for 7,894 shares of common stock.  

During the three months ended March 31, 2019, stock options to purchase 10,197 shares of the Company’s common stock were forfeited.  

 

A summary of the Company’s combined stock option activity for the 2019 Plan and the 2012 Plan for the three months ended March 31, 2020 is as follows:

 

 

 

Number of

Option

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

 

(in thousands)

 

Outstanding as of December 31, 2019

 

 

1,675,226

 

 

$

6.20

 

 

 

7.8

 

 

$

864

 

Granted

 

 

530,309

 

 

$

5.50

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Outstanding as of March 31, 2020

 

 

2,205,535

 

 

$

6.03

 

 

 

8.1

 

 

$

512

 

Options exercisable as of March 31, 2020

 

 

742,947

 

 

$

3.34

 

 

 

6.0

 

 

$

502

 

Options unvested as of March 31, 2020

 

 

1,462,588

 

 

$

7.40

 

 

 

9.2

 

 

$

10

 

 

The following table summarizes the classifications of stock-based compensation expenses for the 2012 Plan and the 2019 Plan recognized in the Condensed Consolidated Statements of Operations:

 

 

 

Three Months Ended

March 31,

 

 

 

 

2020

 

 

2019

 

 

Research and development expense

 

$

93

 

 

$

22

 

 

General and administrative expense

 

 

637

 

 

 

124

 

 

 

 

$

730

 

 

$

146

 

 

 

In April 2019, the Company’s board of directors adopted the 2019 Employee Stock Purchase Plan (the “2019 ESPP”), which became effective on May 7, 2019. The 2019 ESPP is administered by the Company’s board of directors.  As of March 31, 2020, there has been no activity under the 2019 ESPP.

 

As of March 31, 2020, the number of shares of the Company’s common stock that has been reserved to be issued under the 2019 ESPP is equal to the sum of i) 155,106 shares plus ii) an annual increase to be added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2020 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2029, equal to the least of (a) 526,315 shares of common stock, (b) 1% of the number of outstanding shares of the Company’s common stock on such date, and (c) an amount determined by the Company’s board of directors. The number of shares of the Company’s common stock reserved for issuance under the 2019 ESPP increased, pursuant to the terms of the 2019 ESPP, by an additional 178,345 shares, equal to 1% of the Company’s then-outstanding common stock, effective as of January 1, 2020.

11


 

 

All of the Company’s employees are eligible to participate in the 2019 ESPP, provided that:

 

such person is customarily employed by the Company for more than 20 hours a week and for more than five months in a calendar year;

 

such person has been employed by the Company for at least three months prior to enrolling in the 2019 ESPP; and

 

such person was an employee of the Company on the first day of the applicable offering period under the 2019 ESPP.

 

9.

Income Taxes

 

During the three months ended March 31, 2020 and 2019, the Company maintained a full valuation allowance on deferred tax assets. Therefore, the Company has not recorded a provision for income taxes.

 

10.

Net Loss per Share

The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company:

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Net loss

 

$

(8,473

)

 

$

(4,802

)

Plus: Accretion of redeemable convertible preferred stock

 

 

 

 

 

203

 

Plus: Dividends accrued on redeemable convertible preferred stock

 

 

 

 

 

(1,553

)

Adjusted net loss attributable to common stockholders

 

$

(8,473

)

 

$

(6,152

)

Weighted average common shares used in net loss per share

   attributable to common stockholders, basic and diluted

 

 

17,834,570

 

 

 

444,132

 

Basic and diluted net loss per common share outstanding

 

$

(0.48

)

 

$

(13.85

)

 

Accretion and dividends included in the table above were calculated through the IPO date.

 

The Company’s potential dilutive securities, which include stock options and redeemable convertible preferred stock, have been excluded from the computation of diluted net loss per share attributable to common stockholders whenever the effect of including them would be to reduce the net loss per share. In periods where there is a net loss, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The following potential common shares, presented based on shares outstanding as of March 31, 2020 and 2019, were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

Shares as of

March 31,

 

 

 

2020

 

 

2019

 

Series A redeemable convertible preferred stock

 

 

 

 

 

15,387,923

 

Series B redeemable convertible preferred stock

 

 

 

 

 

22,608,695

 

Series C redeemable convertible preferred stock

 

 

 

 

 

44,946,987

 

Outstanding stock options

 

 

2,205,535

 

 

 

1,059,057

 

 

 

 

2,205,535

 

 

 

84,002,662

 

 

12


 

11.

Collaborative and Licensing Agreements

The Company enters into collaborative and licensing agreements with pharmaceutical companies to in-license, develop, manufacture and/or market products that fit within its business strategy.

Endo Pharmaceuticals Inc.

In May 2011, the Company entered into an agreement with Penwest Pharmaceuticals Co. (“Penwest”) (subsequently merged into its parent, Endo Pharmaceuticals Inc. (“Endo”)) for an exclusive worldwide sublicensable license under certain patent rights and know-how controlled by Penwest to develop and commercialize products incorporating nalbuphine hydrochloride in any formulation, including an extended release formulation such as nalbuphine ER, in all fields and for any use.

Under the license agreement, the Company paid Penwest a non-creditable, non-refundable upfront license fee of $25. The Company may also become obligated to make milestone payments to Endo of $250, which would become due upon the successful completion of the first Phase 3 clinical trial of a licensed product candidate, such as the PRISM trial, and $750, which would become due upon the marketing approval of a licensed product in the United States, and to pay mid-single-digit royalties based on net sales of the licensed products by the Company, its affiliates and sublicensees. In addition, the Company is obligated to pay Endo a low-to-mid double-digit percentage of certain income it receives from sublicensees, based on the date of the definitive agreement under which the sublicense was granted.

The Company’s royalty obligation with respect to each licensed product in each country commences upon the first commercial sale of the product in that country and extends until the later of the expiration, unenforceability or invalidation of the last valid claim of any licensed patent or application covering the licensed product in the country or the expiration of 10 years after the first commercial sale of the licensed product in the country, which period is referred to as the royalty term. Upon the expiration of the royalty term for a product in a country, the Company is thereafter obligated to pay a low single-digit know-how and trademark royalty.

Under the agreement, the Company has granted Endo a non-exclusive, royalty-free (except for pass-through payments to third parties), sublicensable license under its relevant patent rights, to use any improvement the Company makes to Endo’s controlled release technology, for any product other than the products under which it is licensed by Endo.

Both the Company and Endo have the right to terminate the agreement if the other party materially breaches the agreement and fails to cure the breach within specified cure periods. Endo also has the right to terminate in the event the Company undergoes specified bankruptcy, insolvency or liquidation events, and the Company has the right to terminate the agreement at its convenience at any time on 180 days’ notice to Endo. Additionally, if the Company or any of the Company’s sublicensees challenge the validity or enforceability of any licensed patent rights covering a licensed product, and that challenge is not terminated within a specified period, the agreement will immediately terminate and all licenses granted under the agreement shall be revoked.

Upon termination of the agreement, the Company must transfer to Endo all regulatory filings and approvals relating to the development, manufacture or commercialization of the licensed products and all trademarks, other than the Company’s corporate trademarks, then being used in connection with the licensed products. If the agreement is terminated under certain specified circumstances, the Company will be deemed to have granted Endo a perpetual, royalty-free (except for pass-through payments to third parties), worldwide, exclusive, sublicensable license, under any improvements the Company made to the licensed know-how, and any related patent rights the Company has, to manufacture and commercialize the licensed products.

Exclusive License Agreement with Rutgers

On November 6, 2018, the Company entered into an agreement with Rutgers, The State University of New Jersey (“Rutgers”) for an exclusive, worldwide, sublicensable license under certain patent rights controlled by Rutgers and for a non-exclusive, worldwide, sublicensable license under certain know-how controlled by Rutgers, in each case to develop and commercialize products incorporating nalbuphine for any human or animal use.

Upon entering into the license agreement, the Company paid Rutgers a minimal upfront license issue fee, which was recorded as R&D expense in 2018 and agreed to pay Rutgers a minimal annual license fee. The Company may become obligated to make milestone payments to Rutgers in the aggregate of up to $331 based on the achievement of certain clinical, regulatory and sales milestones. The Company has also agreed to pay Rutgers a low single-digit percentage of certain income it receives from sublicensees and to pay tiered low single-digit royalties based on net sales of licensed products by the Company and its affiliates and sublicensees.

13


 

The Company’s royalty obligation with respect to each licensed product in each country commences on the date of the first commercial sale of the licensed product in that country following receipt of marketing approval and extends until the later of the date of expiration, unenforceability or invalidation of the last valid claim of any licensed patent or patent application covering the licensed product in the country and 10 years after the first commercial sale of the first licensed product sold anywhere in the world, which period is referred to as the royalty term. Upon the expiration of the royalty term for a licensed product in a country, the license granted to the Company under the agreement shall become perpetual, fully paid-up, irrevocable and royalty-free in such country. The royalty is subject to reduction in certain circumstances.

Restructuring Agreement with MentiNova, LLC

On November 6, 2018, concurrent with the signing of the agreement with Rutgers described above, the Company entered into a restructuring agreement with MentiNova, LLC (“MentiNova”) for the purchase of specified information and know-how, specified contractual rights and benefits, and all books and records of MentiNova related thereto (collectively, the “Acquired Assets”).

Upon entering into the license agreement, the Company paid MentiNova an aggregate upfront payment of $119, which was recorded as R&D expense in 2018, subject to specified closing adjustments. The Company may become obligated to make milestone payments to MentiNova in the aggregate of up to $1,188 based on the achievement of certain clinical and regulatory milestones as well as tiered low single-digit royalties based on net sales of products containing nalbuphine as the sole active pharmaceutical ingredient that are developed by the Company using the Acquired Assets or the intellectual property licensed to the Company under the Rutgers agreement described above (the “Rutgers IP”) for indications that are within the scope of the Rutgers IP. The royalty is subject to reduction in certain circumstances.

12.

Commitments and Contingencies  

A significant portion of the Company’s development activities are outsourced to third parties under agreements, including with clinical research organizations, and contract manufacturers in connection with the production of clinical trial materials. These arrangements may require the Company to pay termination costs to the third parties for reimbursement of costs and expenses incurred in the event of the orderly termination of contractual services.

The Company also has commitments under lease and licensing agreements (Note 4 and Note 11).

 

 

 

14


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission, or SEC, on March 16, 2020. Some of the statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “anticipate,” “believe,”  “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would,” “could,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements on our current expectations and projections about future events. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, particularly including those risks identified in Part II-Item 1A “Risk Factors” and our other filings with the SEC.

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Statements made herein are as of the date of the filing of this Quarterly Report on Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made.

Overview

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of nalbuphine ER to treat serious neurologically mediated conditions. We are developing nalbuphine ER for the treatment of chronic pruritus, chronic cough in patients with idiopathic pulmonary fibrosis, or IPF, and levodopa-induced dyskinesia, or LID, in patients with Parkinson’s disease.

 

We are conducting a Phase 2b/3 clinical trial of nalbuphine ER, which we refer to as the PRISM trial, in patients with severe pruritus associated with prurigo nodularis. The PRISM trial is a randomized, double-blind, placebo controlled, two-arm treatment study that is designed to evaluate the safety and anti-pruritic efficacy of nalbuphine ER in approximately 240 patients in the United States and Europe. The pace of enrollment in the trial has been impacted by the COVID-19 pandemic with new patient screening and most patient enrollment temporarily halted. Patient screening restrictions have been lifted in the United States and are in the process of being lifted in Europe. We expect many of our sites will restart patient screening and enrollment throughout May and June 2020. The protocol for the PRISM trial provides for a sample size re-estimation, or SSRE, analysis once approximately 50% of the patients in the trial are evaluable for the primary endpoint. In light of the pandemic-related delays, we have decided to conduct the SSRE analysis once approximately 45% of the patients in the trial are evaluable for the primary endpoint.  We have enrolled all the patients that will be included in the SSRE and will conduct the SSRE analysis once the last of these patients has completed the 14-week blinded treatment period. We expect the SSRE analysis will occur in mid-2020. We plan to provide updated guidance on our expected timing to report top-line data from the 14-week blinded treatment period of the PRISM trial when we report the results of the SSRE analysis in mid-2020 based on the results of the SSRE analysis and our progress in restarting patient screening and enrollment related to COVID-19.

We are also conducting a Phase 2 clinical trial of nalbuphine ER for chronic cough in patients with IPF. This Phase 2 clinical trial is a randomized, double-blind, placebo controlled, two-treatment, two-period, crossover study designed to evaluate the efficacy, safety, tolerability and dosing of nalbuphine ER for chronic cough in up to 56 patients with IPF in the United Kingdom. Due to the COVID-19 pandemic and the specific at-risk nature of IPF patients our clinical sites halted their enrollment and treatment of patients in this trial. We believe that enrollment may restart in the second half of 2020 and plan to provide guidance on the expected timing of top-line data from the trial in the second half of 2020.

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In addition, we are conducting a Phase 1b clinical trial in patients with chronic liver disease to evaluate the safety and pharmacokinetics, or PK, of nalbuphine ER in this population. This trial was designed as an open label, non-randomized, parallel-group, single and multiple ascending dose pharmacokinetic trial in patients with mild, moderate and severe hepatic impairment. We completed the single ascending dosing portion of this trial in patients with mild and moderate hepatic impairment and there were no serious adverse events reported in the trial.  After reviewing the safety and PK data generated to date in the single ascending dose portion of the trial, we believe that these data are sufficient to support further investigation of nalbuphine ER in potential future safety and efficacy studies in patients with relevant liver diseases. We intend to start planning for a Phase 2 trial of nalbuphine ER in patients with pruritus associated with primary biliary cholangitis, or PBC. In addition, we intend to use the data from the hepatic impairment study to support a new drug application, or NDA, submission for nalbuphine ER for pruritus in prurigo nodularis.

We have written the protocol for a Phase 2 clinical trial for LID in patients with Parkinson’s disease and plan to submit an Investigational New Drug, or IND, application to the FDA in the upcoming months.

We are currently focusing our resources on completing the PRISM trial and Phase 2 trial for chronic cough in patients with IPF. We are continuing to prepare to conduct the Phase 2 trials for LID in patients with Parkinson’s disease and pruritus associated with PBC but plan to prioritize our cash and operational resources on our two lead clinical programs.

Since commencing operations in 2011, we have devoted substantially all of our efforts and financial resources to the clinical development of nalbuphine ER. We have not generated any revenue from product sales and, as a result, we have never been profitable and have incurred net losses in each year since commencement of our operations. As of March 31, 2020, we had an accumulated deficit of $122.7 million, primarily as a result of research and development and general and administrative expenses. We do not expect to generate product revenue unless and until we obtain marketing approval for and commercialize nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, chronic cough in patients with IPF or LID in patients with Parkinson’s disease, and we can provide no assurance that we will ever generate significant revenue or profits.

On May 9, 2019, we issued and sold 5,500,000 shares of common stock in our initial public offering, or IPO, and 1,500,000 shares of common stock in a concurrent private placement, in each case at an offering price of $10.00 per share, for combined net proceeds of $62.1 million after deducting aggregate underwriting discounts and commissions and private placement agent fees of $4.9 million and other offering expenses of $3.0 million. Upon the closing of the IPO, our preferred stock then outstanding converted into an aggregate of 10,381,234 shares of common stock.

As of March 31, 2020, we had cash and cash equivalents of $52.6 million. We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2021. Our estimate as to how long we expect our existing cash and cash equivalents to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.” Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations.

We expect to incur substantial expenditures in the foreseeable future as we advance nalbuphine ER through clinical development, the regulatory approval process and, if approved, commercial launch activities. Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing Phase 2b/3 PRISM trial in patients with pruritus associated with prurigo nodularis, the additional Phase 3 clinical trial we will be required to conduct to support the submission of an NDA to the United States Food and Drug Administration, or FDA, for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, our ongoing Phase 2 clinical trial in chronic cough in patients with IPF, the development and validation of our commercial manufacturing process for nalbuphine ER and other development activities, including potentially commencing Phase 2 clinical trials for the treatment of LID in patients with Parkinson’s disease and for pruritus associated with PBC. In addition, we may incur additional expenses as a result of COVID-19 and resulting clinical trial delays and interruptions. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

We will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from sales of nalbuphine ER, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of nalbuphine ER for one or more indications or delay our efforts to expand our product pipeline.

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Components of Operating Results

Operating Expenses

Research and Development Expenses

All of our research and development expenses consist of expenses incurred in connection with the development of nalbuphine ER. These expenses include certain payroll and personnel expenses, including stock-based compensation, consulting costs, contract manufacturing costs and fees paid to clinical research organizations, or CROs, to conduct certain research and development activities on our behalf. We do not allocate our costs by each indication for which we are developing nalbuphine ER, as a significant amount of our development activities broadly support all indications. In addition, several of our departments support our nalbuphine ER drug candidate development program and we do not identify internal costs for each potential indication.

We expect our research and development expenses to increase over the next few years as we pursue our development program, pursue regulatory approval of nalbuphine ER in the United States and Europe and prepare for a possible commercial launch of nalbuphine ER. Predicting the timing or the cost to conduct our nalbuphine ER development program and prepare for a possible commercial launch of nalbuphine ER is difficult and delays may occur because of many factors including factors outside of our control such as the sample size re-estimation for our PRISM trial. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment, whether as a result of the COVID-19 pandemic or otherwise, in any of our clinical trials, we could be required to expend significant additional financial resources and time on our development program. Furthermore, we are unable to predict when or if nalbuphine ER will receive regulatory approval in the United States or elsewhere with any certainty.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, including stock-based compensation, for personnel in executive, finance, commercial and other administrative functions, professional fees for legal, consulting and accounting services as well as rent and other general operating expenses not otherwise classified as research and development expenses.

We anticipate that our general and administrative expenses will increase as a result of increased personnel costs, including stock-based compensation, expanded infrastructure and higher consulting, legal and accounting services associated with maintaining compliance with stock exchange listing and SEC requirements, investor relations costs and director and officer insurance premiums associated with being a public company.

Other Income (Expense), Net

Change in Fair Value of Obligation for Loan Success Fee

In connection with the Term Loan, we entered into the Success Fee Agreement under which we agreed to pay the lenders a Success Fee upon the occurrence of an exit event, as defined in the Success Fee Agreement. We recognized changes in the fair value of this obligation for the Success Fee in our statements of operations as a component of other income (expense), net. We recognized changes in the fair value of the obligation for the Success Fee until the Success Fee payment was triggered and paid upon the closing of our IPO in May 2019.

Interest Income

Interest income consists of interest earned from money market funds on our cash and cash equivalents.

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Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

The following table summarizes our results of operations for the periods indicated (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

6,019

 

 

$

3,338

 

 

$

2,681

 

General and administrative

 

 

2,620

 

 

 

1,474

 

 

 

1,146

 

Total operating expenses

 

 

8,639

 

 

 

4,812

 

 

 

3,827

 

Loss from operations

 

 

(8,639

)

 

 

(4,812

)