Trevi Therapeutics, Inc. - Quarter Report: 2019 March (Form 10-Q)

 

 

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, 2019

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 June 13, 2019, 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,” “continue” “could,” “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:

 

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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’ 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			22
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			29
Item 4.		Controls and Procedures			29
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			30
Item 1A.		Risk Factors			30
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			70
Item 6.		Exhibits			72
Signatures					73

 

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, 2019				December 31, 2018
Assets
Current assets:
Cash and cash equivalents		$	12,946			$	7,202
Tax credit and other receivables			150				184
Prepaid expenses			1,668				1,438
Total current assets			14,764				8,824
Deferred offering costs			1,885				1,534
Operating lease right-of-use asset			368				-
Security deposit			19				19
Property, equipment and leasehold improvements, net			149				149
Total assets		$	17,185			$	10,526
Liabilities, redeemable convertible preferred stock, and stockholders’ deficit
Current liabilities:
Accounts payable		$	498			$	603
Accrued expenses			3,079				2,073
Operating lease liability - current portion			88				—
Total current liabilities			3,665				2,676
Obligation for loan success fee			512				460
Series C redeemable convertible preferred stock liability			-				1,096
Operating lease liability - long term portion			333				46
Commitments and contingencies (Note 13)
Series A redeemable convertible preferred stock: 15,387,923 shares authorized, issued and outstanding at March 31, 2019 (unaudited) and December 31, 2018; liquidation preference of $20,696 and $20,469 at March 31, 2019 (unaudited) and December 31, 2018, respectively.			21,169				21,033
Series B redeemable convertible preferred stock: 22,608,695 shares authorized, issued and outstanding at March 31, 2019 (unaudited) and December 31, 2018; liquidation preference of $33,284 and $32,900 at March 31, 2019 (unaudited) and December 31, 2018, respectively.			33,943				33,686
Series C redeemable convertible preferred stock: 48,200,412 shares authorized at March 31, 2019 (unaudited) and December 31, 2018 and 44,946,987 and 38,097,672 shares issued and outstanding at March 31, 2019 (unaudited) and December 31, 2018, respectively; liquidation preference of $70,739 and $59,798 at March 31, 2019 (unaudited) and December 31, 2018, respectively.			73,039				61,023
Stockholders’ equity (deficit):
Common stock: $0.001 par value; 101,929,904 shares authorized at March 31, 2019 (unaudited) and December 31, 2018, respectively, and 446,494 and 438,600 shares issued and outstanding at March 31, 2019 (unaudited) and December 31, 2018, respectively.			4				4
Additional paid-in capital			—				—
Accumulated deficit			(115,480	)			(109,498	)
Total stockholders’ deficit			(115,476	)			(109,494	)
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit		$	17,185			$	10,526

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,
		2019				2018
Operating expenses:
Research and development		$	3,338			$	2,363
General and administrative			1,474				779
Total operating expenses			4,812				3,142
Loss from operations			(4,812	)			(3,142	)
Other income (expense):
Change in fair value of Series C redeemable convertible preferred stock liability			-				(844	)
Change in fair value of obligation for loan success fee			(52	)			(12	)
Interest income			58				45
Interest expense			-				(123	)
Total other income (expense), net			6				(934	)
Loss before income tax benefit			(4,806	)			(4,076	)
Income tax benefit			4				25
Net loss		$	(4,802	)		$	(4,051	)
Accretion of redeemable convertible preferred stock			203				195
Dividends accrued on redeemable convertible preferred stock			(1,553	)			(1,280	)
Adjusted net loss attributable to common stockholders		$	(6,152	)		$	(5,136	)
Basic and diluted net loss per common share outstanding		$	(13.85	)		$	(11.82	)
Weighted average common shares used in net loss per share attributable to common stockholders, basic and diluted			444,132				434,567

See accompanying notes.

 

2

Trevi Therapeutics, Inc.

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

(unaudited)

(Amounts in thousands, except share amounts)

 

		Series A								Series B								Series C
		Redeemable								Redeemable								Redeemable
		Convertible								Convertible								Convertible																		Additional								Total
		Preferred Stock								Preferred Stock								Preferred Stock										Common Stock								Paid-				Accumulated				Stockholders’
		Shares				Amount				Shares				Amount				Shares				Amount						Shares				Amount				In Capital				Deficit				Deficit
Balance at December 31, 2017			15,387,923			$	20,479				22,608,695			$	32,640				30,886,507			$	46,087						432,921			$	4			$	—			$	(84,432	)		$	(84,428	)
Stock-based compensation			—				—				—				—				—				—						—				—				88				—				88
Issuance of common stock from exercise of stock options			—				—				—				—				—				—						5,679				—				13				—				13
Dividends accrued on redeemable convertible preferred stock			—				228				—				385				—				667						—				—				(101	)			(1,179	)			(1,280	)
Accretion (amortization) of premium (discount) on issuance of redeemable convertible preferred stock			—				(1	)			—				5				—				—						—				—				—				(4	)			(4	)
Accretion of discount on investor rights/obligation			—				14				—				19				—				—						—				—								(33	)			(33	)
Adjustment for excess (shortfall) of fair value over liquidation value of redeemable convertible preferred stock			—				(106	)			—				(153	)			—				—						—				—				—				259				259
Accretion of issuance costs on redeemable convertible preferred stock			—				1				—				1				—				25						—				—								(27	)			(27	)
Net loss			—				—				—				—				—				—						—				—				—				(4,051	)			(4,051	)
Balance at March 31, 2018			15,387,923			$	20,615				22,608,695			$	32,897				30,886,507			$	46,779						438,600			$	4			$	—			$	(89,467	)		$	(89,463	)
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	)

See accompanying notes.

 

3

Trevi Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(Amounts in thousands)

 

		Three Months Ended March 31,
		2019				2018
Operating activities
Net loss		$	(4,802	)		$	(4,051	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			9				2
Changes in fair value of Series C redeemable convertible preferred stock liability			—				844
Changes in fair value of obligation for loan success fee			52				12
Accretion/accrual of term loan discounts and debt issuance costs			—				43
Stock-based compensation			146				88
Changes in operating assets and liabilities:
Receivables			34				(18	)
Prepaid expenses			(230	)			(176	)
Accounts payable			(185	)			109
Accrued expenses			880				(799	)
Security deposit			—				(8	)
Net cash used in operating activities			(4,096	)			(3,954	)
Investing activities
Acquisitions of property, equipment and leasehold improvements			(9	)			(57	)
Net cash used in investing activities			(9	)			(57	)
Financing activities
Repayments of term loan			—				(2,063	)
Proceeds from exercises of stock options			24				13
Proceeds from sale of Series C redeemable convertible preferred stock, net of issuance costs			9,963				—
Deferred offering costs			(138	)			—
Net cash provided by (used in) financing activities			9,849				(2,050	)
Net cash increase (decrease)			5,744				(6,061	)
Cash and cash equivalents at beginning of period			7,202				22,020
Cash and cash equivalents at end of period		$	12,946			$	15,959
Supplemental disclosure of cash flow information
Interest paid		$	—			$	96
State research tax credits exchanged for cash		$	—			$	8
Supplemental disclosure of non-cash financing activities
Deferred offering costs		$	(214	)		$	—
Dividends accrued on redeemable convertible preferred stock		$	1,553			$	1,280
Accretion on redeemable convertible preferred stock		$	(203	)		$	(195	)

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 k-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 both the United States and Europe. The k- 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 or 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 approximately $62.6 million, after deducting aggregate underwriting discounts and commissions and private placement agent fees of $4.9 million and estimated expenses of approximately $2.5 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 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 $4.8 million for the three months ended March 31, 2019 (unaudited) and $20.5 million for the year ended December 31, 2018. In addition, as of March 31, 2019 (unaudited), the Company had an accumulated deficit of $115.5 million. The Company expects to continue to generate operating losses for the foreseeable future. As of June 13, 2019, the issuance date of these Condensed Consolidated Financial Statements, the Company expects that its cash and cash equivalents of $12.9 million as of March 31, 2019 (unaudited), together with the $62.6 million in net proceeds from the IPO and concurrent private placement, 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.

 

2.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements for the three months ended March 31, 2019 and 2018 included herein, have been prepared in accordance with accounting principles generally accepted in the United States of America

 

5

(“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, 2018 included in the final prospectus for the IPO filed with the SEC on May 8, 2019. 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, 2019 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 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, 2019 and the Condensed Consolidated Statements of Operations, the Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 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, 2019 and the results of its operations and its cash flows for the three months ended March 31, 2019 and 2018. The consolidated financial data and other information disclosed in these notes related to the three months ended March 31, 2019 and 2018 are unaudited. The results for the three months ended March 31, 2019 and 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim period, or any future year or period.

Fair Value Measurements

The Company’s financial instruments consist of cash and cash equivalents, income tax receivable, accounts payable, accrued expenses, term loan payable, Series C redeemable convertible preferred stock liability and obligation for loan success fee. 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, income tax receivable, 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. The fair value of the obligation for loan success fee is estimated utilizing a probability-weighted income approach, including variables for the timing of the success event and other probability estimates. The fair value of Series C redeemable convertible preferred stock liability at December 31, 2018 has been estimated as the excess, if any, of the fair value of the Company’s Series C redeemable convertible preferred stock (“Series C Preferred Stock”) over the purchase price of any outstanding tranches that may be sold pursuant to the Series C Preferred Stock purchase agreement (the “Series C Purchase Agreement”).

 

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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.

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of March 31, 2019 (unaudited) and December 31, 2018, and the basis for that measurement, by level within the fair value hierarchy (Note 6 and 8):

 

		Balance March 31, 2019				Level 1				Level 2				Level 3
Financial liabilities
Obligation for loan success fee		$	512			$	—			$	—			$	512
		$	512			$	—			$	—			$	512
		Balance December 31, 2018				Level 1				Level 2				Level 3
Financial liabilities
Series C redeemable convertible preferred stock liability		$	1,096			$	—			$	—			$	1,096
Obligation for loan success fee			460				—				—				460
		$	1,556			$	—			$	—			$	1,556

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

 

		March 31,				December 31,
		2019				2018
Financial liabilities
Balance at beginning of year(1)		$	1,556			$	322
Unrealized loss (gain) on Series C redeemable convertible preferred stock liability			—				2,105
Unrealized loss (gain) on obligation for loan success fee			52				138
Net settlements(2)			(1,096	)			(1,009	)
Ending balance		$	512			$	1,556

 

 

(1)	The balance at January 1, 2018 relates to the obligation for the loan success fee.

 

(2)

The net settlements in the three months ended March 31, 2019 (unaudited) relate to the $1,096 fair value of the Series C redeemable convertible preferred stock liability at the time the third tranche of Series C redeemable convertible preferred stock shares was issued. The net settlements in 2018 relate to the $1,009 fair value of the Series C redeemable convertible preferred stock liability at the time the second tranche of Series C redeemable convertible preferred stock shares was issued.

 

7

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 the 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 will be expensed immediately as a charge to operating expenses in the Condensed Consolidated Statements of Operations. Deferred offering costs capitalized as of March 31, 2019 (unaudited) and December 31, 2018 were $1,885 and $1,534, respectively.

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 redeemable convertible preferred stock (“Series C Preferred Stock”) 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.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02 titled Leases (“ASU 2016-02”), which requires rights and obligations arising from both operating and capital leases to be reported on the Consolidated Balance Sheet, and to disclose quantitative and qualitative information about lease transactions (such as information about variable lease payments and options to renew and terminate leases). ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted.

The Company adopted this new guidance as of January 1, 2019, which included an assessment of the impact of the new guidance on the condensed consolidated financial statements. The Company utilized the transition practical expedient added by the FASB, which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption. The Company elected to use the package of practical expedients that allowed the Company to not reassess: (1) whether any expired or existing contracts were or contained leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company additionally used the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. The adoption of this standard resulted in the recognition of a right-of-use asset of approximately $379 and related lease liabilities of approximately $424 related to the Company’s operating lease commitments on the Condensed Consolidated Balance Sheet as of January 1, 2019 (Note 4). The impact of adoption of the new leasing standard did not have a material impact on the condensed consolidated statement of operations during the three months ended March 31, 2019 (unaudited).

Recently Issued Accounting Pronouncements

There have been no new accounting pronouncements during the three months ended March 31, 2019, 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, 2018 included in the final prospectus for the IPO, 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,          2019								As of       December 31,       2018
Prepaid R&D payments		$	1,593							$	1,337
Prepaid corporate insurance			37								59
Other			38								42
		$	1,668							$	1,438

 

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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 is approximately 5,600 square feet and has a term of 60 months. The lease requires monthly lease 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 paid by the landlord, and as defined in the agreement.

Under ASC 842, the Company determines if an arrangement is a lease at 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 the 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. As of March 31, 2019, the incremental borrowing rate used on leases 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 for the three months ended March 31, 2019 (unaudited).

The Company’s operating leases consist of real estate and equipment and have remaining terms ranging from 1 year to approximately 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, 2019 (unaudited):

 

Assets:
Operating lease right-of-use asset		$	368
Liabilities:
Operating lease liabilities, current portion		$	88
Operating lease liabilities, long term portion			333
Total operating lease liabilities		$	421

Future minimum lease payments under the operating leases are as follows as of March 31, 2019 (unaudited):

 

2019		$	102
2020			138
2021			138
2022			131
2023			24
Total lease payments			533
Less: imputed discount rate			(112	)
Total		$	421

Lease expense under operating leases, including leases of office equipment, was $31 and $20 for the three months ended March 31, 2019 and 2018 (unaudited), respectively. Lease payments made for the three months ended March 31, 2019 and 2018 (unaudited) were $34 and $26, respectively, with such amounts reflected the Condensed Consolidated Statement of Cash Flows in operating activities.

 

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5.    Accrued Expenses

Accrued expenses consist of the following:

 

		As of          March 31,          2019								As of       December 31,       2018
Accrued research projects		$	2,070							$	942
Accrued professional fees			561								477
Accrued compensation and benefits			364								584
Other			84								70
		$	3,079							$	2,073

 

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, 2019 or December 31, 2018, 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”) 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.

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 loan success fee at its fair value on the closing date of each advance under the Loan Agreement. Upon recording such obligations for loan 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 loan success fee to fair value at each reporting date they remain outstanding. The total fair value of these liabilities was determined to be $512 at March 31, 2019 and $460 at December 31, 2018. The Company recorded a non-cash charge in the amount of $52 and $12 for the three months ended March 31, 2019 and 2018, respectively, representing the changes in the fair value of these liabilities since their last measurement date. The non-cash charges are presented as other income (expense) in the Company’s Condensed Consolidated Statement of Operations. The obligation for loan success fee is presented as a non-current liability in the Company’s Condensed Consolidated Balance Sheet.

The fair values of the obligation for loan success fee have been estimated utilizing a probability-weighted income approach, including variables for the timing of the success event and other probability estimates. For the fair value calculations at March 31, 2019, significant inputs included the Success Fee rate of 4.5% of the Term Loan funded; a discount rate of 13.0%; weighted estimated time to Exit Event ranging from 0.1 to 2.9 years and probability estimates of several potential Exit Events ranging from 5.0% to 50.0%. For the fair value calculations at December 31, 2018, significant inputs included the Success Fee rate of 4.5% of the Term Loan funded; a discount rate of 13.0%; weighted estimated time to Exit Event ranging from 0.4 to 3.1 years and probability estimates of several potential Exit Events ranging from 5.0% to 40.0%.

Interest expense on the Term Loan, comprised of interest payments, amortization of financing costs, accrual of final and amendment fees, and accretion of success fee are shown below for the three months ended March 31, 2018. There was no such interest expense on the Term Loan for the three months ended March 31, 2019.

 

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		Three Months Ended       March 31,
		2018
Interest payments		$	80
Amortization of financing costs			12
Accrual of final and amendment fees			17
Accretion of success fee			14
		$	123

 

7.	Common Stock

As of March 31, 2019 (unaudited) and December 31, 2018, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 101,929,904 shares, respectively, of common stock with a par value of $0.001 per share.

As of March 31, 2019 (unaudited) and December 31, 2018, the Company had reserved 11,530,381 and 10,690,261 shares of common stock, respectively, for the conversion of outstanding shares of Redeemable Convertible Preferred Stock, the exercise of outstanding stock options and the number of shares of common stock remaining available for future grant under the Company’s 2012 Stock Incentive Plan, as follows:

 

		March 31,         2019								December 31,       2018
Shares of common stock reserved for conversion of Series A preferred stock outstanding			2,178,535								2,154,572
Shares of common stock reserved for conversion of Series B preferred stock outstanding			3,046,601								3,011,392
Shares of common stock reserved for conversion of Series C preferred stock outstanding			5,100,121								4,311,279
Shares of common stock reserved for future issuance under the 2012 Stock Incentive Plan			1,205,124								1,213,018
			11,530,381								10,690,261

 

8.	Redeemable Convertible Preferred Stock

As of each of March 31, 2019 (unaudited) and December 31, 2018, under the Company’s certificate of incorporation, the authorized number of shares of redeemable convertible preferred stock was 86,197,030. See Note 1 with respect to the Company’s IPO and the conversion of its redeemable convertible preferred stock into shares of its common stock.

The Company’s redeemable convertible preferred stock is redeemable on or after July 14, 2020 and carries a cumulative coupon dividend rate of 6%. The redemption amount per share for a share of redeemable convertible preferred stock is the greater of (A) the applicable original issue price per share for such series of redeemable convertible preferred stock, plus any of the dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon, and (B) the fair market value per share of redeemable convertible preferred stock, as described below under Redemption Rights. The Company is accounting for its redeemable convertible preferred stock under the requirements of ASC 480, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The carrying value of the redeemable convertible preferred stock is presented as temporary equity and is adjusted by periodic accretions so that the carrying amount equals the redemption amount at the estimated date that the redeemable convertible preferred stock will be redeemed. These adjustments are effected through charges against additional paid-in capital, to the extent it is available, or accumulated deficit. For all issuances of redeemable convertible preferred stock, the difference between the amount invested by the holders of redeemable convertible preferred stock, net of issuance costs and premiums (or discounts), as compared to the redemption value, is recorded as accretion over the redemption period of the redeemable convertible preferred stock. The accretion is added to net loss to arrive at the net loss available to common stockholders in the calculation of net loss per common share.

Issuance of Series A Redeemable Convertible Preferred Stock

On December 4, 2012, the Company entered into the Series A Preferred Stock Purchase Agreement (the “Series A Purchase Agreement”) with TPG and nine other holders of the Company’s convertible notes that were issued in 2011 and 2012 (the “Series A Investors”). Pursuant to the Series A Purchase Agreement, the Company issued 6,000,000 shares (the “Series A Initial Closing”) of

 

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Series A Preferred Stock to TPG at a purchase price of $1.00 per share, resulting in proceeds, net of $128 in issuance costs, of $5.9 million (the “Series A Financing”). Concurrently, convertible notes held by the Series A Investors totaling $564, including accrued interest, were automatically converted at a conversion price of $0.467 per share in accordance with calculations specified in the applicable note purchase agreement, and the Company issued 1,207,923 shares of Series A Preferred Stock in settlement of the convertible notes.

The Series A Purchase Agreement also provided for the sale of 4,000,000 additional shares of Series A Preferred Stock (the “Series A Milestone Shares”) to TPG at a purchase price of $1.00 per share upon the Company’s achievement of specified Milestone Events, as defined in the Series A Purchase Agreement, involving the Company’s Phase 1b clinical trial in uremic pruritus and a pending patent application. In the event the Milestone Events were not achieved, TPG had the right to purchase the Series A Milestone Shares, in full or in part, under the same terms and conditions as the Series A Initial Closing, including the $1.00 per share purchase price, on or before June 30, 2014.

In addition, TPG had the right to purchase, under the same terms and conditions as the Series A Initial Closing, including the $1.00 per share purchase price, the lesser of 2,500,000 additional shares of Series A Preferred Stock (the “Additional Series A Preferred Shares”) and the number of shares of Series A Preferred Stock equal to 25% of the total number of shares of Series A Preferred Stock it previously purchased for cash under the Series A Purchase Agreement. This additional right was exercisable until the date six months after the completion date of the Company’s Phase 2b/3 clinical trial of nalbuphine ER in patients with uremic pruritus.

On December 26, 2013, TPG purchased under a Series A Extension Preferred Stock Purchase Agreement (the “Series A Extension Purchase Agreement”) 6,500,000 additional shares of Series A Preferred Stock at $1.00 per share, which consisted of the Series A Milestone Shares and the Additional Series A Preferred Shares discussed above, resulting in proceeds, net of $39 in issuance costs, of $6.5 million. This agreement also provided that the Company could sell up to 2,000,000 additional shares at $1.00 per share to existing stockholders deemed accredited investors within 45 days of the December 26, 2013 closing.

In January 2014, the Company issued 1,680,000 shares of Series A Preferred Stock to eight of the Series A Investors at $1.00 per share, as provided for as Additional Closings under the Series A Extension Purchase Agreement, resulting in proceeds, net of $7 in issuance costs, of $1.7 million. The Company recorded this issuance at its fair value of $1.08 per share, totaling $1.8 million before financing costs, resulting in a discount on this issuance in the amount of $134, which amount is being amortized out of the carrying value of Series A Preferred Stock over the expected redemption period, which is three years from July 14, 2017, the date of the First Tranche Closing of the Series C Preferred Stock Financing (each such term as defined below), or July 14, 2020 (the “Redemption Period”). Such amortization totaled $1 for the three months ended March 31, 2019 and 2018 (unaudited), respectively.

Holders of Series C Preferred Stock receive a higher liquidation preference than the holders of Series A Preferred Stock and Series B Preferred Stock. (See Liquidation Preferences note below)

Issuance of Series B Redeemable Convertible Preferred Stock

On May 23, 2014, the Company entered into the Series B Preferred Stock Purchase Agreement (the “Series B Purchase Agreement”) with TPG. Pursuant to the Series B Purchase Agreement, the Company issued 13,043,478 shares (the “Series B Initial Closing”) of Series B Preferred Stock to TPG at a purchase price of $1.15 per share, resulting in proceeds, net of $56 in issuance costs, of $15.0 million.

The Series B Purchase Agreement also provided for the sale of 4,347,826 additional shares of Series B Preferred Stock (the “Series B Milestone Shares”) to TPG at a purchase price of $1.15 per share upon the Company’s achievement of specified Milestone Events, as defined in the Series B Purchase Agreement, involving the Company’s Phase 2b/3 clinical trial of nalbuphine ER in patients with uremic pruritus; its planned Phase 2 clinical trial of nalbuphine ER in patients with pruritus associated with prurigo nodularis; and a pending patent application. In the event the Milestone Events were not achieved, TPG had the right to purchase the Series B Milestone Shares, in full or in part, under the same terms and conditions as the Series B Initial Closing, at a purchase price of $1.15 per share, on or before November 30, 2015.

In addition, TPG had the right to purchase, on the same terms and conditions as the Series B Initial Closing, including the $1.15 per share purchase price, the lesser of 4,347,826 additional shares of Series B Preferred Stock and the number of shares equal to 25% of the total number of shares it previously purchased for cash under the Series B Purchase Agreement (the “Additional Series B Shares”). This additional right was exercisable until the date six months after the completion date of the Company’s Phase 2b/3 clinical trial of nalbuphine ER in patients with uremic pruritus.

On October 30, 2014, TPG exercised its rights described above and purchased under an Additional Closing Agreement (the “Series B Second Closing”) 8,695,652 additional shares of Series B Preferred Stock at $1.15 per share, which consisted of the Series B Milestone Shares and the Additional Series B Shares. This agreement also provided for the Company to sell 869,565 additional

 

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shares of Series B Preferred Stock at $1.15 per share to an existing stockholder. The Series B Second Closing resulted in proceeds, net of $19 in issuance costs, of $11.0 million. The Company recorded this issuance at its fair value of $1.10 per share, totaling $10.5 million, net of financing costs, resulting in a premium on this issuance in the amount of $478, which amount is being accreted into the carrying value of the Series B Preferred Stock over the Redemption Period. Such accretion totaled $5 for the three months ended March 31, 2019 and 2018 (unaudited), respectively.

Holders of Series C Preferred Stock receive a higher liquidation preference than the holders of Series A Preferred Stock and Series B Preferred Stock. (See Liquidation Preferences note below)

Issuance of Series C Redeemable Convertible Preferred Stock

On July 14, 2017, the Company entered into the Series C Purchase Agreement with TPG and other institutional investors (the “Series C Initial Purchasers”) for the issuance of $50.5 million of its Series C Preferred Stock. The Series C Purchase Agreement provided for the Company’s Series C Preferred Stock to be issued in two tranches, with the closing of the first tranche on July 14, 2017 (the “First Tranche Closing”) and the closing of the second tranche to occur following a determination by the Company’s board of directors that the Company’s cash and cash equivalents at such time are not sufficient to fund its operations for a period of three months following such determination (the “Second Tranche Closing”). Upon the First Tranche Closing, the Company issued 20,547,946 shares of its Series C Preferred Stock at a purchase price of $1.46 per share, resulting in proceeds of $29.7 million, net of issuance costs of $291.

Also party to the Series C Purchase Agreement are eleven holders of the Company’s Convertible Notes (together with the Initial Purchasers and the Series C Additional Purchasers, as defined below, the “Series C Investors”). Concurrently with the First Tranche Closing and pursuant to the Series C Purchase Agreement, the outstanding principal on the Company’s Convertible Notes, totaling $10.6 million, and all accrued interest thereon, totaling $564, were automatically converted at the Mandatory Conversion Price of $1.095 per share, and the Company issued 10,181,233 shares of its Series C Preferred Stock in full settlement of the Convertible Notes.

The Series C Purchase Agreement provided for a subsequent closing (the “Special Closing”), on the same terms and conditions as the First Tranche Closing, including the $1.46 per share purchase price, and on October 11, 2017, the Special Closing occurred, resulting in the issuance to two additional investors (the “Series C Additional Purchasers”) of 101,707 shares of the Company’s Series C Preferred Stock, at a purchase price of $1.46 per share, resulting in proceeds of $129, net of issuance costs of $19.

On November 12, 2017, one of the Series C Additional Purchasers purchased its second tranche shares pursuant to an election under the Series C Purchase Agreement, resulting in the issuance of 55,621 shares of the Company’s Series C Preferred Stock at a purchase price of $1.46 per share, resulting in proceeds of $81.

On August 28, 2018, the Company amended the Series C Purchase Agreement to provide that a portion of the shares of Series C Preferred Stock that would otherwise be issued and sold at the Second Tranche Closing would instead be issued and sold at a third tranche closing (the “Third Tranche Closing”), with such closing to occur following a determination by the Company’s board of directors that the Company’s cash and cash equivalents at such time are not sufficient to fund its operations for a period of three months following such determination.

On August 30, 2018, the Company completed the Second Tranche Closing, resulting in the issuance of 7,211,165 shares of the Company’s Series C Preferred Stock, at a purchase price of $1.46 per share, resulting in proceeds of $10.5 million, net of issuance costs of $32.

On January 18, 2019, the Company completed the Third Tranche Closing, resulting in the issuance of 6,849,315 shares of the Company’s Series C Preferred Stock, at a purchase price of $1.46 per share, resulting in proceeds of $10.0 million, net of issuance costs of $37. At such time, the Series C redeemable convertible preferred stock liability of $1.1 million was reclassified as Series C Preferred Stock.

Series C Redeemable Convertible Preferred Stock Liability and Changes in Fair Value

As discussed above, the Series C Purchase Agreement provides for the issuance and sale of Series C Preferred Stock in three separate tranches. The tranches represent a freestanding financial instrument under ASC 480 and require fair value accounting until they are settled. The Company recognizes a liability on its Consolidated Balance Sheet for the obligations under this financial instrument. The Company adjusts this liability to fair value at each reporting date, as applicable, and recognizes any changes in fair value of the Series C Preferred Stock in its Consolidated Statements of Operations as a component of other income (expense) and in net loss. The Company will continue to recognize changes in the fair value of this liability through the closing of the third tranche.

Accordingly, for the year ended December 31, 2018, the Company recorded the Series C redeemable convertible preferred stock liability at its fair value of $2.1 million, with a corresponding charge to other income (expense) in the Company’s Consolidated Statement of Operations. Upon the Second Tranche Closing in August 2018, as described above, $1.0 million was reclassified to

 

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Series C Preferred Stock. As a result, at December 31, 2018, the fair value of this liability, relating to the outstanding third tranche, was determined to be $1.1 million and was reclassified to Series C Preferred Stock upon the Third Tranche Closing in January 2019.

The fair value of the Series C redeemable convertible preferred stock liability has been estimated as the excess, if any, of the fair value per share of the Company’s Series C Preferred Stock, as described below under Redemption Rights, over the purchase price of any outstanding tranches that may be sold pursuant to the Series C Purchase Agreement.

Holders of Series C Preferred Stock receive a higher liquidation preference than the holders of Series A Preferred Stock and Series B Preferred Stock. (See Liquidation Preferences note below)

As of each balance sheet date presented, redeemable convertible preferred stock consisted of the following (in thousands, except share amounts):

 

		As of March 31, 2019
		Preferred Shares      Authorized				Preferred Shares Issued and     Outstanding				Carrying       Value				Liquidation     Preference				Common Shares     Issuable Upon     Conversion
Series A redeemable convertible preferred stock			15,387,923				15,387,923			$	21,169			$	20,696				2,178,535
Series B redeemable convertible preferred stock			22,608,695				22,608,695				33,943				33,284				3,046,601
Series C redeemable convertible preferred stock			48,200,412				44,946,987				73,039				70,739				5,100,121
			86,197,030				82,943,605			$	128,151			$	124,719				10,325,257
		As of December 31, 2018
		Preferred Shares Authorized				Preferred Shares Issued and Outstanding				Carrying Value				Liquidation Preference				Common Shares Issuable Upon Conversion
Series A redeemable convertible preferred stock			15,387,923				15,387,923			$	21,033			$	20,469				2,154,572
Series B redeemable convertible preferred stock			22,608,695				22,608,695				33,686				32,900				3,011,392
Series C redeemable convertible preferred stock			48,200,412				38,097,672				61,023				59,798				4,311,279
			86,197,030				76,094,290			$	115,742			$	113,167				9,477,243

Dividends

Dividends on outstanding shares of Series A, Series B and Series C Preferred Stock accrue at a rate of 6% per annum on their original purchase price of $1.00, $1.15 and $1.46 per share, respectively (the “Accruing Dividends”), whether or not declared, and are cumulative. However, Accruing Dividends on the Company’s outstanding redeemable convertible preferred stock are payable only when, as and if declared by the Company’s board of directors, or upon liquidation, redemption or conversion. No dividends may be paid to the holders of the Company’s common stock unless equivalent dividends have been declared and paid on the Company’s outstanding Series A, Series B and Series C Preferred Stock. No dividends have been declared or paid by the Company through March 31, 2019 (unaudited) or December 31, 2018. Accrued dividends totaled $17.7 million and $16.2 million as of March 31, 2019 (unaudited) and December 31, 2018, respectively. Such amounts are included in the carrying values of Series A, Series B and Series C Preferred Stock, and in the accumulated deficit on the Company’s Condensed Consolidated Balance Sheets at March 31, 2019 (unaudited) and December 31, 2018.

Liquidation Preferences

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or deemed liquidation event, the holders of shares of Series C Preferred Stock then outstanding are entitled to be paid out of the assets of the Company that are available for distribution to its stockholders, before any payments are made to the holders of Series A Preferred Stock, Series B Preferred Stock or common stock by reason of their ownership thereof, an amount per share equal to the Series C Preferred Stock original issue price of $1.46 per share, plus any Accruing Dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon. If upon any such liquidation, dissolution or winding up of the Company or

 

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deemed liquidation event, the assets of the Company available for distribution to its stockholders are insufficient to pay the holders of shares of Series C Preferred Stock the full amount to which they are entitled, the holders of Series C Preferred Stock are entitled to share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares of Series C Preferred Stock held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or deemed liquidation event, the holders of shares of Series A Preferred Stock and Series B Preferred Stock then outstanding are entitled to be paid out of the assets of the Company available for distribution to its stockholders after the payment of all preferential amounts required to be paid to the holders of shares of Series C Preferred Stock but before any payment is made to the holders of common stock by reason of their ownership thereof, (i) an amount per share equal to the Series A original issue price of $1.00 per share in the case of the Series A Preferred Stock, plus any Accruing Dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon, and (ii) an amount per share equal to the Series B original issue price of $1.15 per share in the case of the Series B Preferred Stock, plus any Accruing Dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon. If upon any such liquidation, dissolution or winding up of the Company or deemed liquidation event, the assets of the Company available for distribution to its stockholders are insufficient to pay the holders of shares of Series A Preferred Stock and Series B Preferred Stock the full amount to which they are entitled (after the payment in full of all preferential amounts required to be paid to the holders of shares of Series C Preferred Stock), the holders of shares of Series A Preferred Stock and Series B Preferred Stock are entitled to share ratably in any distribution of the assets available for distribution in respect of such shares in proportion to the respective amounts which would otherwise be payable in respect of the share of Series A Preferred Stock and Series B Preferred Stock held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or deemed liquidation event, after the payment of all preferential amounts required to be paid to the holders of shares of redeemable convertible preferred stock, the remaining assets of the Company available for distribution to its stockholders would be distributed among the holders of the shares of redeemable convertible preferred stock and common stock, in proportion to the number of shares held by each such holder, treating for this purpose all such securities as if they had been converted into common stock pursuant to the terms of the Company’s certificate of incorporation immediately prior to such dissolution, liquidation or winding up of the Company.

Redemption Rights

The Company’s certificate of incorporation provides that, unless prohibited by Delaware law governing distributions to stockholders, shares of the redeemable convertible preferred stock must be redeemed by the Company in three annual installments commencing not more than 60 days after receipt by the Company, at any time on or after July 14, 2020, of written notice from the holders of at least a majority of the outstanding shares of redeemable convertible preferred stock, voting together as a single class on an as-converted basis, requesting redemption of all shares of redeemable convertible preferred stock (a “Redemption Request”).

In that event, unless prohibited by Delaware law governing distributions to stockholders, generally in connection with an insolvent corporation, shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, respectively, are redeemed by the Company at a price equal to the greater of (A) the applicable original issue price per share for such series of redeemable convertible preferred stock, plus any Accruing Dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon, which totaled $20.7 million for Series A Preferred Stock, $33.3 million for Series B Preferred Stock and $70.7 million for Series C Preferred Stock at March 31, 2019 (unaudited), and (B) the fair market value per share of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, as the case may be, as of the date of the Company’s receipt of the Redemption Request. For purposes of these redemption rights, the fair market value per share of the Series A Preferred Stock is the value per share of Series A Preferred Stock as mutually agreed upon by the Company and the holders of 60% of the shares of Series A Preferred Stock then outstanding, and, in the event that they are unable to reach agreement, by a third-party appraiser agreed to by the Company and the holders of a majority of the shares of Series A Preferred Stock then outstanding; the fair market value per share of the Series B Preferred Stock is the value per share of Series B Preferred Stock as mutually agreed upon by the Company and the holders of 60% of the shares of Series B Preferred Stock then outstanding, and, in the event that they are unable to reach agreement, by a third-party appraiser agreed to by the Company and the holders of a majority of the shares of Series B Preferred Stock then outstanding; and the fair market value per share of the Series C Preferred Stock is the value per share of Series C Preferred Stock as mutually agreed upon by the Company and the holders of 66 2/3% of the shares of Series C Preferred Stock then outstanding, and, in the event that they are unable to reach agreement, by a third-party appraiser agreed to by the Company and the holders of a majority of the shares of Series C Preferred Stock then outstanding.

As a result of the redemption rights described above, the carrying values of Series A Preferred Stock of $21.2 million and $21.0 million as of March 31, 2019 (unaudited) and December 31, 2018, respectively, Series B Preferred Stock of $33.9 million and $33.7 million as of March 31, 2019 (unaudited) and December 31, 2018, respectively, and Series C Preferred Stock of $73.0 million and $61.0 million as of March 31, 2019 (unaudited) and December 31, 2018, respectively, have been classified as temporary equity,

 

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and are presented between liabilities and stockholders’ equity on the Company’s Condensed Consolidated Balance Sheets in accordance with ASC 480. The Company will accrete the carrying value of the redeemable convertible preferred stock up to the expected redemption value over the estimated Redemption Period. The accretion will include cumulative unpaid and undeclared Accruing Dividends as well as additional increases, if any, when the fair value of the redeemable convertible preferred stock exceeds the liquidation value at any point during the Redemption Period. As a result of the shortfall of the fair value of the Series A Preferred Stock as compared to its liquidation value as of March 31, 2019 and 2018 (unaudited), the Company adjusted accretion recorded in previous periods by $0.1 million in the three months ended March 31, 2019 and 2018 (unaudited). As a result of the shortfall of the fair value of the Series B Preferred Stock as compared to its liquidation value as of March 31, 2019 and 2018 (unaudited), the Company adjusted accretion recorded in previous periods $0.2 million in the three months ended March 31, 2019 and 2018 (unaudited). At March 31, 2019 (unaudited), as a result of the shortfall of fair value of the Series C preferred stock as compared to its liquidation value, the Company reversed accretion previously recorded in 2018 by $0.1 million. As a result of the excess of the fair value of the Series C Preferred Stock as compared to its liquidation value as of March 31, 2018, the Company recorded accretion of $0.1 million.

At March 31, 2019 (unaudited), the fair value of the Company’s Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock was determined utilizing a probability-weighted modeling approach that included both IPO and non-IPO based scenarios. The non-IPO based scenarios included the fair value estimates of the Company’s common stock, before marketability discount, of $0.37, and each issue of its redeemable convertible preferred stock of: $0.82 for its Series A Preferred Stock; $0.86 for its Series B Preferred Stock; and $1.44 for its Series C Preferred Stock, each calculated at December 31, 2018 as described below, as there were no clinical development milestones either achieved or not achieved during the period, and it was deemed that the Company’s total equity value had not changed to any significant degree though the March 31, 2019 (unaudited) measurement date. Additional significant inputs utilized for the non-IPO based scenario was a probability factor of 50% and a marketability discount of 20% applied in arriving at the fair value of the common stock. The IPO-based scenario utilized an expected pre-money valuation upon IPO; cost of equity estimate of 15%; estimated time to IPO date of 0.12 years; and probability factor of 50%.

At December 31, 2017, the fair value of the Company’s Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock was determined utilizing the OPM; whereby each class of stock is modeled as a call option with a unique claim on the assets of the Company. Stock characteristics that were incorporated directly into the option valuation model include liquidation preferences, participation features, convertibility features and ratios, and value-sharing between classes of stock. The Company’s equity value was estimated by employing a back-solving approach to determine its implied equity value at December 31, 2017 based on the initial closing of the Series C Preferred Stock financing completed in July 2017. A Black-Scholes options pricing approach was utilized under the OPM to determine the fair value of each security, with significant inputs including a $1.44 fair value of the Series C Preferred Stock, a risk-free rate of 1.95%, volatility of 78.0% and a probability-weighted estimate of time to liquidity event of 2.71 years.

Financing costs of approximately $166 that were netted against the proceeds from the 2013 and 2012 Series A Preferred Stock financings are being accreted to Series A Preferred Stock over the period from their respective issuance dates to the earliest redemption date of July 14, 2020. The Company recorded $1 in accretion for financing costs for the three months ended March 31, 2019 and 2018 (unaudited ), respectively, with such amounts included in accumulated deficit. In addition, the investor rights/obligation that was allocated from proceeds from the Series A Preferred Stock financings of $2.8 million, less $520 representing its fair value on the date of its exercise as noted above, is being accreted over the Redemption Period. The Company recorded $14 in accretion of investor rights/obligation in the three months ended March 31, 2019 and 2018 (unaudited), respectively, with such amounts included in accumulated deficit.

Financing costs of approximately $76 that were netted against the proceeds from the 2014 Series B Preferred Stock financings are being accreted to Series B Preferred Stock over the period from their respective issuance dates to the earliest redemption date of July 14, 2020. The Company recorded $1 and $3 in accretion for financing costs in the three months ended March 31, 2019 (unaudited) and the year ended December 31, 2018, respectively, with such amounts included in accumulated deficit. In addition, the investor rights/obligation that was allocated from proceeds from the Series B Preferred Stock financings of $2.0 million is being accreted over the remaining Redemption Period discussed above. The Company recorded $19 and $20 in accretion of Series B Preferred Stock investor rights/obligation in the three months ended March 31, 2019 and 2018 (unaudited), respectively, with such amounts included in accumulated deficit.

Financing costs of approximately $379 that were netted against the proceeds from the 2017, 2018 and 2019 Series C Preferred Stock financings are being accreted to Series C Preferred Stock over the period from their respective issuance dates to the earliest redemption date of July 14, 2020. The Company recorded $35 and $25 in accretion for financing costs in the three months ended March 31, 2019 and 2018 (unaudited), respectively, with such amounts included in accumulated deficit.

 

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Optional Conversion

Each holder of Series A, Series B or Series C Preferred Stock may convert any or all of such holder’s redeemable convertible preferred stock into common stock at any time. Each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock is convertible into such number of shares of common stock as is determined by dividing the original issue price of such series by the conversion price for such series in effect at the time of conversion. As of March 31, 2019 (unaudited) and December 31, 2018, each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock was convertible into common stock at a one-to-one conversion ratio.

In addition, upon conversion of shares of Series A, Series B or Series C Preferred Stock, a holder is entitled to receive, at the election of the holder, either (i) payment in cash of any Accruing Dividends declared but unpaid thereon, or (ii) such number of shares of common stock as is determined by dividing the Accruing Dividends for such share of Series A, Series B or Series C Preferred Stock, by the applicable conversion price for such series of redeemable preferred stock in effect at the time of conversion. The conversion prices for Series A, Series B or Series C Preferred Stock are subject to adjustment based on certain events specified in the Company’s certificate of incorporation, including anti-dilution adjustments.

Mandatory Conversion

Upon the closing of a qualified public offering of common stock, as defined in the Company’s certificate of incorporation, or approval of (i) the holders of at least 60% of the Series A Preferred Stock then outstanding, voting separately as a class, (ii) the holders of at least 60% of the Series B Preferred Stock then outstanding, voting separately as a class and (iii) the holders of at least 66 2/3% of the Series C Preferred Stock then outstanding, voting separately as a class, all outstanding shares of redeemable convertible preferred stock automatically convert into common stock at the then-applicable conversion rate for such shares.

Voting Rights

Except as otherwise provided by law or by the other provisions of the Company’s certificate of incorporation, the holders of redeemable convertible preferred stock are entitled to vote as one class with the holders of common stock on any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of a meeting), and each holder of outstanding shares of redeemable convertible preferred stock is entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of redeemable convertible preferred stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on the matter. The holders of record of the shares of the Company’s Series B Preferred Stock, exclusively and as a separate class, are entitled to elect two directors of the Company, the holders of record of the shares of Series C Preferred Stock, exclusively, and as a separate class, are entitled to elect three directors of the Company, and the holders of record of the shares of common stock of the Company, exclusively and as a separate class, are entitled to elect two directors of the Company.

Registration Rights

The holders of shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock have certain registration rights as set forth in an investors’ rights agreement between the Company and certain of its stockholders.

 

9.	Stock-Based Awards

The Company’s 2012 Stock Incentive Plan (the “Plan”), as amended, was adopted by the Company’s board of directors and stockholders. The Company’s board of directors administers the Plan. The 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.

On May 30, 2018, the Company’s board of directors adopted a resolution to amend the Plan, thereby giving authority to the Company to grant awards under the Plan for up to 1,245,903 shares of common stock.

Options granted under the 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, 2019 (unaudited) and December 31, 2018, respectively, options to purchase 1,059,057 and 1,077,148 shares of common stock were granted and outstanding, net of cancelations.

No stock options were granted during the three months ended March 31, 2019 and 2018 (unaudited).

During the three months ended March 31, 2019 and 2018 (unaudited), stock options were exercised for 7,894 and 5,679 shares of common stock, respectively.

 

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During the three months ended March 31, 2019 (unaudited), stock options to purchase 10,197 shares of the Company’s common stock were forfeited. No stock options were forfeited during the three months ended March 31, 2019 (unaudited).

During the three months ended, March 31, 2019 and 2018 (unaudited), no stock options expired.

A summary of the Company’s option activity 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, 2018			1,077,148			$	3.90				7.8			$	5,857
Granted			-				—
Forfeited			(10,197	)			3.04
Expired			—				—
Exercised			(7,894	)			3.04
Outstanding as of March 31, 2019 (unaudited)			1,059,057			$	3.90				7.4			$	5,745
Options vested as of March 31, 2019 (unaudited)			540,706			$	2.38				6.0			$	3,750
Options unvested as of March 31, 2019 (unaudited)			518,351			$	5.51				9.0			$	1,995

The aggregate fair value of stock options that vested during the three months ended March 31, 2019 and 2018 (unaudited) was $68 and $39, respectively.

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2019 and 2018 (unaudited) $50 and $6, respectively.

The following table summarizes the classifications of stock-based compensation expenses recognized in the Condensed Consolidated Statements of Operations:

 

		Three Months Ended March 31,
		2019				2018
Research and development expense		$	22			$	36
General and administrative expense			124				52
		$	146			$	88

As of March 31, 2019 (unaudited), total unrecognized compensation cost related to the unvested share-based awards was $1.6 million, which is expected to be recognized over a weighted average period of 3.0 years.

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. Our employees, officers, directors, consultants and advisors are eligible to receive awards under the 2019 Plan. Incentive stock options, however, may only be granted to our employees. The 2019 Plan will be administered by the Company’s board of directors or by a committee appointed by the Company’s board of directors.

In April 2019, the Company’s board of directors adopted the 2019 Employee Stock Purchase Plan (the “2019 ESSP”), which became effective on May 7, 2019. The 2019 ESPP will be administered by the Company’s board of directors or by a committee appointed by the Company’s board of directors.

 

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All of the Company’s employees or employees of any designated subsidiary, as defined in the 2019 ESPP, are eligible to participate in the 2019 ESPP, provided that:

 

•

such person is customarily employed by the Company or a designated subsidiary 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 or by a designated subsidiary for at least three months prior to enrolling in the 2019 ESPP; and

•

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

 

10.	Income Taxes

During the three months ended March 31, 2019 and 2018 (unaudited), the Company maintained a full valuation allowance on deferred tax assets due to excess research and development credits. Therefore, the Company has not recorded a provision for income taxes.

 

11.	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,
		2019				2018
Net loss		$	(4,802	)		$	(4,051	)
Plus: Dividends accrued on redeemable convertible preferred stock			203				195
Plus: Accretion of redeemable convertible preferred stock			(1,553	)			(1,280	)
Adjusted net loss attributable to common stockholders		$	(6,152	)		$	(5,136	)
Weighted average common shares used in net loss per share attributable to common stockholders, basic and diluted			444,132				434,567
Basic and diluted net loss per common share outstanding		$	(13.85	)		$	(11.82	)

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 amounts outstanding at each period end, 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:

 

		Three Months Ended March 31,
		2019				2018
Series A preferred stock			15,387,923				15,387,923
Series B preferred stock			22,608,695				22,608,695
Series C preferred stock			44,946,987				38,097,672
Outstanding stock options			1,059,057				1,077,148
			84,002,662				77,171,438

 

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12.	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 sublicenseable 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), sublicenseable 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.

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

 

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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 us 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, Inc.

On November 6, 2018, concurrent with the signing of the agreement with Rutgers described above, the Company entered into a restructuring agreement with MentiNova, Inc. (“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.

13.    Commitments and Contingencies

A significant portion of the Company’s development activities are outsourced to third parties under agreements, including with CROs, 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 5 and Note 12)

 

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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, 2018 included in the final prospectus for our initial public offering of our common shares, or IPO, filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424(b)(4) on May 8, 2019. 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,” “continue” “could,” “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 currently 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.

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, 2019, we had an accumulated deficit of $115.5 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.

Prior to our initial public offering, or IPO, and concurrent placement in May 2019, we financed our operations primarily through private placements of our redeemable convertible preferred stock, which we refer to as our preferred stock, and convertible notes as well as borrowings under a term loan facility. From inception to March 31, 2019, we raised an aggregate of $102.2 million in gross proceeds from sales of our preferred stock and convertible notes and borrowed $15.0 million under a term loan facility. As of June 30, 2018, all amounts owed under the term loan facility had been paid in full.

On May 9, 2019, we issued and sold 5,500,000 shares of common stock in our 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 $62.6 million after deducting aggregate underwriting discounts and commissions and private placement agent fees of $4.9 million and estimated offering expenses of $2.5 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, 2019, we had cash and cash equivalents of $12.9 million. We completed our IPO and concurrent private placement in May 2019, resulting in combined net proceeds of $62.6 million. We believe that our existing cash and cash equivalents, including the net proceeds from our IPO and concurrent private placement, will enable us to fund our operating expenses and capital expenditure requirements through the end of 2020. Our estimate as to how long we expect our existing cash and cash equivalents to

 

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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 a new drug application, or 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 1b clinical trial in patients with chronic liver disease, our ongoing Phase 2 clinical trial in chronic cough in patients with IPF and our planned Phase 2 clinical trial for the treatment of LID in patients with Parkinson’s disease, the development and validation of our commercial manufacturing process for nalbuphine ER and other development activities, including potentially commencing a Phase 2 clinical trial for pruritus associated with chronic liver disease. 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.

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 or 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. 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 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.

 

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Other Income (Expense), Net

Interest Expense on our Term Loan Facility

In December 2014, we entered into a loan and security agreement with Solar Capital Ltd. and Square 1 Bank under which we borrowed $15.0 million under a term loan, or the Term Loan. The Term Loan accrued interest at a floating rate equal to the one-month LIBOR plus 7.75% per annum. The Term Loan required interest-only payments until March 2016, which was extended to November 2016. After November 2016, payments on the Term Loan were made monthly in 20 equal installments of principal plus interest. In June 2018, we paid all amounts owed under the Term Loan.

Change in Fair Value of Series C Redeemable Convertible Preferred Stock Liability

The stock purchase agreement under which we sold shares of Series C preferred stock provided for the issuance and sale of our Series C preferred stock in three separate tranches. The tranches represented a free-standing financial instrument under Accounting Standards Codification, or ASC, 480 and required fair value accounting until they are settled. We recognized a liability on our consolidated balance sheet for the obligations under this financial instrument. We adjusted this liability to fair value at each reporting date and recognized the changes in fair value in our statements of operations as a component of other income (expense), net. We continued to recognize changes in the fair value of this liability through the closing of the third tranche, which occurred on January 18, 2019.

Change in Fair Value of Obligation for Loan Success Fee

In connection with the Term Loan, we entered into a 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 classify this contingent obligation for the success fee as a liability on our consolidated balance sheet and we adjust this liability to fair value at each reporting date. We recognize changes in the fair value of this obligation for loan success fee in our statements of operations as a component of other income (expense), net and net loss. We will continue to recognize changes in the fair value of the obligation for loan success fee until the success fee payment is triggered. The success fee was triggered and paid upon the closing of our IPO in May 2019.

Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

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

 

		Three Months Ended March 31,
		2019				2018				Change
Operating expenses:
Research and development		$	3,338			$	2,363			$	975
General and administrative			1,474				779				695
Total operating expenses			4,812				3,142				1,670
Loss from operations			(4,812	)			(3,142	)			(1,670	)
Other income (expense):
Change in fair value of Series C redeemable convertible preferred stock liability			—				(844	)			844
Change in fair value of obligation for loan success fee			(52	)			(12	)			(40	)
Interest income			58				45				13
Interest expense			—				(123	)			123
Total other income (expense), net			6				(934	)			940
Loss before income tax benefit			(4,806	)			(4,076	)			(730	)
Income tax benefit			4				25				(21	)
Net loss		$	(4,802	)		$	(4,051	)		$	(751	)

 

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Operating Expenses

Research and Development Expenses

The following table summarizes our research and development expenses for the periods indicated (in thousands):

 

		Three Months Ended March 31,
		2019				2018
Clinical development expenses		$	2,500			$	1,616
Personnel and related expenses			589				496
Consulting expenses and professional fees			157				171
Stock-based compensation expenses			22				36
Other research and development expenses			70				44
Total research and development expenses		$	3,338			$	2,363

Research and development expenses for the three months ended March 31, 2019 increased to $3.3 million from $2.4 million for the corresponding period in 2018. The increase was primarily due to a $0.9 million increase in clinical development expenses primarily related to commencement of our ongoing Phase 2b/3 PRISM trial and an increase in personnel and related expenses of $0.1 million as a result of an increase in our employee headcount. For the periods presented, all of our research and development expenses related to our development activity for nalbuphine ER.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2019 increased to $1.5 million from $0.8 million for the corresponding period in 2018. The increase was primarily due to an increase in personnel and stock-based compensation expenses of $0.3 million, which we incurred as we expanded our operations and an increase in consulting expenses and professional fees of $0.2 million.

Other Income (Expense), Net

Other income (expense), net for the three months ended March 31, 2019 increased to net income of approximately $6 thousand from net expense of $0.9 million for the corresponding period in 2018. The increase was primarily due to the change in fair value of our liability for the shares of Series C preferred stock purchasable in the second and third tranches of our Series C preferred stock financing, which closed in August 2018 and January 2019, respectively.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue and have incurred significant operating losses and negative cash flows from our operations. Prior to the completion of our IPO and concurrent private placement in May 2019, we financed our operations primarily through private placements of our preferred stock and convertible notes as well as borrowings under a term loan facility. From inception to March 31, 2019, we raised an aggregate of $102.2 million in gross proceeds from sales of our preferred stock and convertible notes and borrowed $15.0 million under a term loan facility. As of June 30, 2018, all amounts owed under the term loan facility had been paid in full.

As of March 31, 2019, we had cash and cash equivalents of $12.9 million. In May 2019, we issued and sold 5,500,000 shares of common stock in our 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 $62.6 million after deducting aggregate underwriting discounts and commissions and private placement agent fees of $4.9 million and estimated offering expenses of $2.5 million. Our cash and cash equivalents are primarily held in money market accounts.

 

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Cash Flows

The following table summarizes our cash flows for each of the periods presented below (in thousands):

 

		Three Months Ended March 31,
		2019				2018
Net cash used in operating activities		$	(4,096	)		$	(3,954	)
Net cash used in investing activities			(9	)			(57	)
Net cash provided by (used in) financing activities			9,849				(2,050	)
Net cash increase (decrease)		$	5,744			$	(6,061	)

Operating Activities

During the three months ended March 31, 2019, operating activities used $4.1 million of cash, resulting from our net loss of $4.8 million, net cash provided by changes in our operating assets and liabilities of $0.5 million and non-cash charges of $0.2 million. Net cash provided by changes in our operating assets and liabilities for the three months ended March 31, 2019 consisted primarily of a $0.9 million increase in accrued expenses. The increase in accrued expenses was primarily due to increases in accruals related to our Phase 2b/3 PRISM trial in prurigo nodularis. The non-cash charges for the three months ended March 31, 2019 consisted primarily of stock-based compensation expense of $0.1 million.

During the three months ended March 31, 2018, operating activities used $4.0 million of cash, resulting from our net loss of $4.0 million and net cash used in changes in our operating assets and liabilities of $0.9 million, partially offset by non-cash charges of $1.0 million. Net cash used in changes in our operating assets and liabilities for the three months ended March 31, 2018 consisted primarily of a $0.8 million decrease in accrued expenses due to the reversal of accrued expenses related to our Phase 2 prurigo nodularis trial. The non-cash charges for the three months ended March 31, 2018 consisted primarily of a $0.8 million expense related to the change in fair value of our Series C redeemable convertible preferred stock liability.

Investing Activities

During the three months ended March 31, 2019 and the three months ended March 31, 2018, we used an insignificant amount of cash in investing activities, consisting of purchases of property and equipment.

Financing Activities

During the three months ended March 31, 2019, net cash provided by financing activities was $9.8 million, primarily consisting of net cash proceeds of $10.0 million from our sales of shares of Series C preferred stock in the third tranche of our Series C preferred stock financing in January 2019, partially offset by deferred costs relating to our IPO of $0.1 million.

During the three months ended March 31, 2018, net cash used in financing activities was $2.1 million, primarily consisting of repayments of $2.1 million on the Term Loan.

Funding Requirements

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, the additional Phase 3 clinical trial we will need to conduct to support the submission of an NDA to the FDA and a marketing authorization application to the European Medicines Agency for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, our ongoing Phase 1b clinical trial in patients with chronic liver disease, our ongoing Phase 2 clinical trial in chronic cough in patients with IPF and our planned Phase 2 clinical trial for the treatment of LID in patients with Parkinson’s disease, the costs of commercialization activities, including manufacturing capabilities, for nalbuphine ER and other development activities including potentially commencing a Phase 2 clinical trial for pruritus associated with chronic liver diseases. 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 public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to achieve our business

 

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objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. Our future funding requirements, both short-term and long-term, will depend on many factors, including:

 

•

the scope, progress, timing, costs and results of clinical trials of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis and for other serious neurologically mediated conditions, as well of as any future product candidates;

 

•

the number and characteristics of indications for which we seek to develop nalbuphine ER or any future product candidates, and their respective development requirements;

 

•

the outcome, timing and costs of clinical and nonclinical trials and of seeking regulatory approvals, including the costs of supportive clinical studies such as our planned human abuse liability, or HAL, study and our planned Thorough QT, or TQT, studies;

 

•

the costs associated with the manufacture of necessary quantities of nalbuphine ER or any future product candidate for clinical development in connection with regulatory submissions;

 

•

the costs of commercialization activities for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis or for any other serious neurologically mediated conditions or for any future product candidates that receive marketing approval, if any, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

•

subject to receipt of marketing approvals, revenue, if any, received from commercial sales of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis or for any other serious neurologically mediated conditions or from any future product candidates;

 

•

our ability to identify potential collaborators for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis or for any future product candidates and the terms and timing of any collaboration agreement that we may establish for the development and any commercialization of such product candidates;

 

•

the extent to which we acquire or in-license rights to other potential product candidates or technologies, and the terms and timing of any such acquisition or licensing arrangements;

 

•

our headcount growth and associated costs as we expand our research and development activities and establish a commercial infrastructure;

 

•

the costs of preparing, filing and prosecuting patent applications, maintaining, expanding and protecting our intellectual property rights and defending against intellectual property-related claims;

 

•

the effect of competing technological and market developments;

 

•

our ability to establish and maintain healthcare coverage and adequate reimbursement for our products; and

 

•

the costs of operating as a public company.

We believe that our existing cash and cash equivalents, together with the net proceeds from our IPO and concurrent private placement that closed in May 2019, will enable us to fund our operating expenses and capital expenditure requirements through the end of 2020.

We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case we would be required to obtain additional financing, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

We do not have any committed external source of funds. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to complete the clinical development and commercialization of nalbuphine ER for pruritus associated with prurigo nodularis or any other indication. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter would result in fixed payment obligations and may involve agreements that include grants of security interests on our assets and restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, granting liens over our assets, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business. Any debt financing or additional equity that we raise may contain terms that could adversely affect our common stockholders.

If we are unable to raise sufficient capital as and when needed, we may be required to delay, reduce or abandon our product development programs or commercialization efforts. If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.

 

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Critical Accounting Policies and Use of Estimates

Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

During the three months ended March 31, 2019, there were no material changes to our critical accounting policies. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in the final prospectus for our IPO filed with the SEC pursuant to Rule 424(b)(4) on May 8, 2019 and in the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Item 3.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. See Note 13 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for discussion regarding our guarantees and indemnifications.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-02 titled Lease, or ASU 2016-02, which requires rights and obligations arising from both operating and capital leases to be reported on the Consolidated Balance Sheet, and to disclose quantitative and qualitative information about lease transactions (such as information about variable lease payments and options to renew and terminate leases). ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted.

We adopted this new guidance as of January 1, 2019, which included an assessment of the impact of the new guidance on the condensed consolidated financial statements. We utilized the transition practical expedient added by the FASB, which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption. We elected to use the package of practical expedients that allowed us to not reassess: (1) whether any expired or existing contracts were or contained leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We additionally used the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. The adoption of this standard resulted in the recognition of a right-of-use asset of approximately $379 and related lease liabilities of approximately $424 related to our operating lease commitments on the Condensed Consolidated Balance Sheet as of January 1, 2019 (Note 4). The impact of adoption of the new leasing standard did not have a material impact on the condensed consolidated statement of income during the three months ended March 31, 2019.

Recently Issued Accounting Pronouncements

There have been no new accounting pronouncements during the three months ended March 31, 2019, as compared to the recent accounting pronouncements described in Note 2 to our audited consolidated financial statements for the year ended December 31, 2018 included in the final prospectus for our IPO, which could be expected to materially impact our unaudited condensed consolidated financial statements.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Required.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2019. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not subject to any material legal proceedings.

Item 1A. Risk Factors.

Our business is subject to numerous risks. The following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in this Quarterly Report on Form 10-Q and other filings with the Securities and Exchange Commission, press releases, communications with investors, and oral statements. Actual future results may differ materially from those anticipated in our forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since inception, expect to incur significant and increasing losses for the foreseeable future, and may never achieve or maintain profitability.

We have incurred significant annual net losses every year since our inception. We expect to continue to incur significant and increasing net losses for at least the next several years. Our net losses were $4.8 million, $20.5 million and $12.9 million for the three months ended March 31, 2019, the year ended December 31, 2018 and the year ended December 31, 2017, respectively. As of March 31, 2019, we had an accumulated deficit of $115.5 million. We have not generated any revenues from product sales, have not completed the development of any product candidate and may never have a product candidate approved for commercialization. We have financed our operations to date primarily through private placements of our convertible preferred stock. We have devoted substantially all of our financial resources and efforts to the clinical development of our product candidate nalbuphine ER and related activities. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:

 

•

continue to develop and conduct clinical trials of nalbuphine ER, including our ongoing Phase 2b/3 trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, which we refer to as our PRISM trial;

 

•

complete other development work required for the filing of a new drug application, or NDA, with the U.S. Food and Drug Administration, or FDA, and the filing of a marketing authorization application, or MAA, with the European Medicines Agency, or EMA, for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, including completing our PRISM trial and at least one additional Phase 3 clinical trial in this indication;

 

•

seek regulatory and marketing approvals for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis or for other serious neurologically mediated conditions or for any future product candidate that successfully completes clinical trials, if any;

 

•

establish sales, marketing, distribution and other commercial infrastructure to commercialize any products for which we may obtain marketing approval;

 

•

require the manufacture of larger quantities of nalbuphine ER or any future product candidate for clinical development and, potentially, commercialization;

 

•

acquire or in-license rights to other potential product candidates or technologies;

 

•

initiate and conduct research, preclinical and clinical development efforts for any future product candidates;

 

•

maintain, expand and protect our intellectual property portfolio;

 

•

hire and retain additional personnel, such as clinical, quality control and scientific personnel;

 

•

add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts, and to help us comply with our obligations as a public company; and

 

•

add equipment and physical infrastructure to support our development program for nalbuphine ER and for any future product candidates.

 

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Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are able to obtain marketing approval for, and successfully commercialize, nalbuphine ER or any future product candidate. Successful commercialization will require achievement of key milestones, including completing clinical trials of nalbuphine ER or any future product candidate, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for any such product from private insurance or government payors. For example, in order to successfully commercialize nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, we will be required, at a minimum, to successfully complete our ongoing PRISM trial as well as an additional Phase 3 clinical trial prior to submitting an NDA and MAA to regulatory authorities to obtain marketing approval. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of revenues, and if or when we might achieve profitability. We may never succeed in these activities and, even if we do, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our development efforts, develop a pipeline of product candidates or continue our operations.

We have a limited operating history and no products approved for commercial sale, which may make it difficult to evaluate the prospects for our future success and viability.

We were founded and commenced operations in 2011. Our operations to date have been limited to financing and staffing our company and conducting preclinical and clinical development of nalbuphine ER. We have not yet demonstrated an ability to successfully complete clinical development of any product candidates, obtain marketing approvals, manufacture a commercial-scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful commercialization of any products. Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by clinical-stage biopharmaceutical companies such as ours. Any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.

We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business objectives. If we are able to obtain marketing approval for nalbuphine ER or any future product candidate, we will need to transition from a company focused on clinical development to a company capable of supporting commercial activities. We may not be successful in effectuating such a transition.

We expect our financial condition and operating results will continue to fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Accordingly, you should not rely upon the results of any quarterly or annual periods as indications of future operating performance.

We will need substantial additional funding, and if we are unable to raise sufficient capital when needed on acceptable terms, or at all, we could be forced to delay, reduce or abandon our product development programs or commercialization efforts.

Developing pharmaceutical products, including conducting preclinical and nonclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We have consumed substantial amounts of cash since our inception. For example, in the three months ended March 31, 2019 and in the years ended December 31, 2018 and 2017, we used net cash of $3.9 million, $18.3 million and $8.0 million, respectively, in our operating activities, substantially all of which related to development activities for nalbuphine ER. As of March 31, 2019, our cash and cash equivalents were $12.9 million, and we received $62.6 million in net proceeds from our initial public offering and concurrent private placement that closed on May 9, 2019. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we continue to develop and conduct clinical trials of nalbuphine ER, including our ongoing PRISM trial and the additional Phase 3 clinical trial we will need to conduct for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, acquire or in-license rights to other potential product candidates or technologies and seek regulatory and marketing approvals for nalbuphine ER or any future product candidate that successfully completes clinical trials, if any. In addition, if we obtain marketing approval for nalbuphine ER or any future product candidate, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. For instance, we currently intend to commercialize nalbuphine ER in the United States ourselves by developing a focused, specialty sales, marketing and distribution organization. Furthermore, we expect to incur significant additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise sufficient capital when needed on acceptable terms, or at all, we may be forced to delay, reduce or abandon our development programs or any future commercialization efforts.

 

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We plan to use our existing cash and cash equivalents, to fund the development of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, to fund the development of nalbuphine ER for other serious neurologically mediated conditions and for working capital and other general corporate purposes. We will be required to expend significant funds in order to advance the development of nalbuphine ER in multiple indications, as well as any future product candidates we may seek to develop. Our existing cash and cash equivalents may not be sufficient to complete development of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis or for any other condition or of any future product candidate. We do not have any committed external source of funds. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements through the end of 2020. 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 currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our future funding requirements, both short-term and long-term, will depend on many factors, including:

 

•

the scope, progress, timing, costs and results of clinical trials of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis and for other serious neurologically mediated conditions, as well of as any future product candidates;

 

•

the number and characteristics of indications for which we seek to develop nalbuphine ER or any future product candidates, and their respective development requirements;

 

•

the outcome, timing and costs of clinical and nonclinical trials and of seeking regulatory approvals, including the costs of supportive clinical studies such as our planned human abuse liability, or HAL, study and our planned Thorough QT, or TQT, studies;

 

•

the costs associated with the manufacture of necessary quantities of nalbuphine ER or any future product candidate for clinical development in connection with regulatory submissions;

 

•

the costs of commercialization activities for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis or for any other serious neurologically mediated conditions or for any future product candidates that receive marketing approval, if any, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

•

subject to receipt of marketing approvals, revenue, if any, received from commercial sales of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis or for any other serious neurologically mediated conditions or from any future product candidates;

 

•

our ability to identify potential collaborators for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis or for any future product candidates and the terms and timing of any collaboration agreement that we may establish for the development and any commercialization of such product candidates;

 

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the extent to which we acquire or in-license rights to other potential product candidates or technologies, and the terms and timing of any such acquisition or licensing arrangements;

 

•

our headcount growth and associated costs as we expand our research and development activities and establish a commercial infrastructure;

 

•

the costs of preparing, filing and prosecuting patent applications, maintaining, expanding and protecting our intellectual property rights and defending against intellectual property-related claims;

 

•

the effect of competing technologies and market developments;

 

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our ability to establish and maintain healthcare coverage and adequate reimbursement for our products; and

 

•

the costs of operating as a public company.

 

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The report of our independent registered public accounting firm included a “going concern” explanatory paragraph.

The report of our independent registered public accounting firm on our consolidated financial statements as of and for the year ended December 31, 2018 that was issued prior to our initial public offering included an explanatory paragraph indicating that there was substantial doubt about our ability to continue as a going concern. Given our planned expenditures, including expenditures in connection with our clinical trials of nalbuphine ER, our independent registered public accounting firm may conclude, in connection with the audit of our financial statements for the year ended December 31, 2019 or any other subsequent period, that there is substantial doubt regarding our ability to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The inclusion of a going concern explanatory paragraph by our independent registered public accounting firm may materially adversely affect our share price and our ability to raise new capital, enter into critical contractual relations with third parties and otherwise execute our development strategy.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our product candidates.

We expect our expenses to increase substantially in connection with our planned operations, particularly as we conduct our ongoing PRISM trial as well as the additional Phase 3 clinical trial we will need to conduct for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis and develop nalbuphine ER for the treatment of other serious neurologically mediated conditions. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, your ownership interest may be diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect your rights as a common stockholder. In addition, debt financing, if available, would result in fixed payment obligations and may involve agreements that include grants of security interests on our assets and restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, granting liens over our assets, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business. Securing financing could also require a substantial amount of time from our management and may divert a disproportionate amount of their attention away from daily activities, which may adversely affect our management’s ability to oversee the development of nalbuphine ER or that of any future product candidates. If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.

Risks Related to the Development and Commercialization of Nalbuphine ER and Any Future Product Candidates

We are dependent on the successful development and commercialization of nalbuphine ER, our sole product candidate. If we are unable to complete the clinical development of, obtain marketing approval for or successfully commercialize nalbuphine ER, or if we experience significant delays in doing so, our business would be substantially harmed.

We currently have no products approved for sale and are investing substantially all of our efforts and financial resources to fund the development of nalbuphine ER for multiple serious neurologically mediated conditions. Our prospects are dependent on our ability to develop, obtain marketing approval for and successfully commercialize nalbuphine ER in one or more indications as we currently have no other product candidates under development. We may acquire or in-license rights to other potential product candidates or technologies in the future, but we are currently not developing any other product candidates.

Our most advanced program for nalbuphine ER is our program to develop nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, as our efforts to develop nalbuphine ER for other serious neurologically mediated conditions are only at an early stage. As a result, if our efforts to develop and commercialize nalbuphine ER for the treatment of pruritus associated with prurigo nodularis are unsuccessful, or we experience significant delays in doing so, our business could also be substantially harmed.

The success of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, as well as for other serious neurologically mediated conditions, will depend on several factors, including the following:

 

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successfully recruiting, enrolling and retaining patients in and completing our PRISM trial;

 

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initiating and successfully recruiting, enrolling and retaining patients in and completing additional clinical and nonclinical trials, including the additional Phase 3 clinical trial we will need to conduct for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis and other supportive clinical studies such as our planned HAL study and TQT studies;

 

•

demonstrating safety, tolerability and efficacy profiles that are satisfactory to the FDA, EMA and other comparable regulatory authorities for marketing approval;

 

•

receiving timely marketing approvals from applicable regulatory authorities;

 

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•

managing the extent and cost of any required post-marketing approval commitments to applicable regulatory authorities;

 

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establishing and maintaining arrangements with third-party suppliers of drug substance for nalbuphine ER;

 

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establishing and maintaining arrangements with third-party manufacturers of nalbuphine ER, including developing, validating and maintaining a commercially viable manufacturing process that is compliant with current good manufacturing practices, or cGMPs;

 

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obtaining, maintaining and protecting our patents, trade secrets and regulatory exclusivity in the United States and other countries;

 

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establishing a focused, specialty sales organization in the United States and successfully launching commercial sales following any marketing approval;

 

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obtaining commercial acceptance of our products, if approved, by patients, the medical community and third-party payors and obtaining and maintaining healthcare coverage and adequate reimbursement;

 

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maintaining an acceptable safety profile following any marketing approval; and

 

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our ability to compete with other therapies.

Many of these factors are beyond our control, including the clinical development and regulatory approval process; potential threats to our intellectual property rights; and the manufacturing, marketing and sales efforts, respectively, of any current or future third-party contractors. If we are unable to develop, receive marketing approval for and successfully commercialize nalbuphine ER, or if we experience delays as a result of any of these factors or otherwise, our business would be substantially harmed.

Our approach to the development and commercialization of nalbuphine ER to treat serious neurologically mediated conditions is unproven.

We are currently focused on the development and commercialization of nalbuphine ER to treat serious neurologically mediated conditions. Nalbuphine ER is an oral extended release formulation of nalbuphine, which is a mixed k-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. Nalbuphine is currently not commercially available in an oral dosage form, such as nalbuphine ER. While we believe that nalbuphine’s dual mechanism of action, which targets both the central and peripheral nervous systems, makes nalbuphine ER a promising potential therapy for the treatment of chronic pruritus and other serious neurologically mediated conditions, and that nalbuphine ER has the potential to be safe and well-tolerated, nalbuphine has not been approved in any indications other than pain. Additionally, nalbuphine ER has not been approved in any indication, including the treatment of pruritus associated with prurigo nodularis, the lead indication for which we are pursuing clinical development of nalbuphine ER. No therapies have been approved in the United States or Europe for the treatment of moderate to severe pruritus, and we can provide no assurance that either nalbuphine ER or any other future product candidate that we may seek to develop for this indication or for any other serious neurologically mediated condition will be effective or safe, obtain regulatory approval or be commercially successful.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome.

We are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the FDA. Foreign regulatory authorities, such as the EMA, impose similar requirements. We must complete extensive clinical trials to demonstrate the safety and efficacy of nalbuphine ER and any future product candidate in humans and complete required regulatory submissions before we will be able to obtain these approvals. We may never receive such approvals.

Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. The clinical development of nalbuphine ER and any future product candidate is susceptible to the risk of failure at any stage of product development and we may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent clinical development, marketing approval or commercialization of nalbuphine ER or any future product candidate, including:

 

•

clinical trials may produce unfavorable or inconclusive results;

 

•

we may decide, or regulators may require us, to restructure clinical trials, conduct additional clinical and nonclinical trials or abandon product development programs;

 

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the number of patients required for clinical trials may be larger than we anticipate, patient enrollment in these clinical trials may be slower than we anticipate or participants may discontinue their participation in these clinical trials at a higher rate than we anticipate, as we experienced in our Phase 2 clinical trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis;

 

•

the cost of planned clinical trials may be greater than we anticipate;

 

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•

our third-party contractors, including any that may be manufacturing a product candidate or drug substance or conducting clinical trials on our behalf, may deviate from applicable trial protocols, fail to comply with regulatory requirements or fail to meet their contractual obligations to us in a timely manner or at all;

 

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regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

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we may experience delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

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patients who enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with applicable clinical trial protocols, resulting in the need to drop the patients from the clinical trial, increase the needed enrollment size for the clinical trial or extend the clinical trial’s duration;

 

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we may have to delay, suspend or terminate clinical trials for various reasons, including a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of a product candidate;

 

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regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar product or product candidate;

 

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the FDA or comparable foreign regulatory authorities may disagree with our clinical trial designs or our interpretation of data from preclinical studies and clinical trials;

 

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the FDA or comparable foreign regulatory authorities may fail to approve or subsequently find fault with the manufacturing processes or facilities of third-party manufacturers with which we enter into agreements for clinical and commercial supplies;

 

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the supply or quality of drug substance for our product candidates or the manufactured product candidate or other materials necessary to conduct clinical trials of the product candidate may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply;

 

•

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient to obtain marketing approvals; and

 

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the FDA or comparable foreign regulatory authorities may refuse to accept for substantive review any NDA, MAA or other comparable foreign regulatory application that we submit for a product candidate or may conclude after review of our data that our application is insufficient to obtain marketing approval of a product candidate.

If we are required to conduct additional clinical trials or other testing of nalbuphine ER or any future product candidate beyond the trials and testing that we contemplate, we are unable to successfully and timely complete clinical trials or other testing of nalbuphine ER or any future product candidate, the results of these trials or tests are unfavorable, uncertain or are only modestly favorable or there are unacceptable safety concerns associated with the product candidate, we may:

 

•

incur additional unplanned costs, which may exceed the resources that we have available or are able to obtain on reasonable terms;

 

•

experience delays in obtaining marketing approval for the applicable product candidate for several years or more, which could shorten the periods during which we may have the exclusive right to commercialize the product candidate or allow competitors to bring products to market before us;

 

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fail to obtain marketing approval at all;

 

•

obtain marketing approval for indications or patient populations that are not as broad as we originally intended or desired;

 

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obtain marketing approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;

 

•

be subject to additional post-marketing testing or other requirements; or

 

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be required to remove the product from the market after obtaining marketing approval.

 

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Our failure to successfully and timely complete clinical trials of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis or for any other serious neurologically mediated condition or of any future product candidate and to demonstrate the efficacy and safety necessary to obtain regulatory approval to market any such product candidates would significantly harm our business and could result in the loss or impairment of our ability to generate revenues and effectuate our business strategy.

Our clinical trials may fail to demonstrate adequately the safety and efficacy of nalbuphine ER or any future product candidates, which would likely prevent or delay regulatory approval and commercialization.

Before obtaining regulatory approvals for the commercial sale of nalbuphine ER or any future product candidate we must demonstrate through lengthy, complex and expensive clinical trials that the product candidate is both safe and effective for use in the target indication. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. It is possible that even if nalbuphine ER or any future product candidate has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. For example, our Phase 2 clinical trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis failed to meet its primary endpoint, and the number of patients who discontinued treatment prior to the end of the trial had a substantial impact on the results. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of nalbuphine ER or any future product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials we may fail to detect toxicity of, or intolerability caused by, nalbuphine ER or any future product candidate, or mistakenly believe that nalbuphine ER or any future product candidate is toxic or not well tolerated when that is not the case after the clinical evaluation is completed. Many pharmaceutical and biotechnology companies have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face setbacks as we continue our clinical development of nalbuphine ER and develop any other product candidates. It is also possible that any of our development programs could be placed on full or partial clinical hold by regulatory authorities at any point, which would delay and possibly prevent further development of those programs.

In addition, even if the clinical trials we plan are successfully completed and nalbuphine ER or any future product candidate achieves its specified endpoints in such trials, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do, and more trials could be required before we are able to submit product candidates for marketing approval. For example, patients with prurigo nodularis may have pruritus that is caused by dermatological conditions other than prurigo nodularis, and at a meeting with the FDA following the completion of our Phase 2 clinical trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, the FDA raised the need to adequately isolate a patient population with pruritus associated with prurigo nodularis for our planned Phase 3 clinical trials. While the inclusion criteria in our PRISM trial require that enrolled patients not be suffering from any active, uncontrolled dermatoses other than prurigo nodularis, it is possible that the FDA could conclude that this is not sufficient to identify patients suffering from pruritus associated with prurigo nodularis, in which case the FDA could question the overall validity of the results of the trial. To the extent that the results of our clinical trials are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, approval of product candidates may be significantly delayed, or we may be required to expend significant additional resources, which may not be available to us, to conduct additional trials in support of potential approval of product candidates. For instance, if nalbuphine ER does not achieve the primary endpoint in our PRISM trial, or the FDA does not otherwise believe that the results of the trial are sufficiently supportive of an application for marketing approval, the FDA may require us to conduct another Phase 3 clinical trial in addition to the PRISM trial and the additional Phase 3 clinical trial we plan to conduct, which would cause us to incur substantial additional costs and significantly delay our development of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis.

Use of patient-reported outcome assessments, or PROs, in our clinical trials and high placebo response rates may delay or impair the development of nalbuphine ER or adversely impact our clinical trials.

Due to the difficulty of objectively measuring pruritus, the assessment of pruritus in clinical trials typically involves the use of PROs. Our clinical trials evaluating the efficacy of nalbuphine ER in pruritus indications have used PROs as primary endpoints. For example, the primary endpoint of our Phase 2 clinical trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis was the proportion of patients reporting at least a 30% reduction from baseline to week 10 in seven-day mean Worst Itching Numerical Rating Scale, or WI-NRS, scores, which is a patient-reported assessment on an 11-point scale from 0 to 10 of the severity of the worst itch experienced in the last 24 hours. The primary endpoint of our PRISM trial is the proportion of patients achieving at least a 4-point improvement from baseline with respect to their worst itch at week 14 as measured by WI-NRS, which is also a PRO. PROs have an important role in the development and regulatory approval of treatments for pruritus. However, PROs involve patients’ subjective assessments of efficacy, and this subjectivity can increase the uncertainty of clinical trial outcomes assessing pruritus. Such assessments can be influenced by a number of factors and can vary widely from day to day for any particular patient, and from patient to patient and site to site within a clinical trial, leading to high variability in PRO measurements.

 

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In addition, PROs for the assessment of pruritus have historically been observed to have high placebo group response rates. We observed this in some of our clinical trials of nalbuphine ER. For example, in our Phase 2 clinical trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, we observed a mean reduction from baseline in WI-NRS score for the trial’s modified intention-to-treat population of 1.75 points for placebo as compared to 2.14 points for nalbuphine ER dosed twice-daily at 81 mg and 2.51 points for nalbuphine ER dosed twice-daily at 162 mg. In discussions, the FDA has also indicated to us that changes in WI-NRS alone may not translate to clinically meaningfully differences and therefore may not be acceptable for labeling purposes. The variability of PRO measures may be greater than other measures used for clinical trial assessments, and that variability can complicate clinical trial design, adversely impact the ability of a trial to show a statistically significant improvement and generally adversely impact a clinical development program by introducing additional uncertainties.

The variability of PRO measures and related high placebo response rates have adversely impacted clinical results of other therapies being tested for pruritus and could adversely impact our clinical development of nalbuphine ER. The FDA could also require changes in the PROs we are currently using or indicate that the PROs we are using are insufficient for demonstrating efficacy in pruritus, potentially delaying clinical development of nalbuphine ER, increasing our costs and making additional clinical trials necessary.

Adverse events or undesirable side effects caused by, or other unexpected properties of, nalbuphine ER or any future product candidate may be identified during development and could delay or prevent the marketing approval or limit the use of nalbuphine ER or any future product candidate.

Adverse events or undesirable side effects caused by, or other unexpected properties of, nalbuphine ER or any future product candidate could cause us, an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of such product candidate and could result in a more restrictive label, or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities. We cannot be certain that serious adverse events, or SAEs, will not occur in future clinical trials, which could cause the FDA or comparable foreign regulatory authorities to interrupt, delay or halt clinical trials of such product candidate, approve a more restrictive label than we desire or delay or deny regulatory approval.

In addition, nalbuphine ER, as a mixed k-opioid receptor agonist and µ-opioid receptor antagonist, may be susceptible to side effects associated with drugs having either of those mechanisms of action. k-opioid receptor agonists have been associated with poorly tolerated psychiatric side effects, such as feelings of emotional and mental discomfort, or dysphoria, and hallucinations, at high doses. While we believe that the dual k-opioid receptor agonist and µ-opioid receptor antagonist mechanism of action of nalbuphine reduces the likelihood of such psychiatric side effects, we have observed mild psychiatric side effects, including a few reported cases of mild euphoria, somnolence and feeling relaxed or feeling “high,” in clinical trials of nalbuphine ER to date. µ-opioid receptor antagonists have the potential to precipitate withdrawal effects in patients, including drug addicts, and are associated with respiratory depression and potential cardiac risk. The drug label for nalbuphine, the active ingredient in nalbuphine ER, carries a warning for serious, life-threatening or fatal respiratory depression, and nalbuphine ER, if approved for marketing in any indication, will likely carry a similar label. To support our planned submission of an NDA to the FDA for nalbuphine ER, we will be required to conduct a clinical trial of nalbuphine ER to assess cardiac risk and, due to the association of opioids with endocrine dysfunction, a clinical trial to evaluate potential endocrine side effects. We cannot be certain that any of these side effects often associated with opioids, or other side effects, will not be observed, or observed at more severe levels, in the future, or that the FDA will not require additional trials or impose more severe labeling restrictions due to these side effects or other concerns. Such drug-related side effects could also affect patient recruitment or the ability of enrolled patients to complete a trial or result in potential product liability claims.

In our Phase 2 clinical trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, the most frequently reported adverse events associated with nalbuphine ER were nausea, dizziness and headache. In the open label extension of the trial, nausea, dizziness and fatigue were reported. Across both the Phase 2 clinical trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis and the open label extension, a total of four patients reported SAEs, but none of these events was attributed to nalbuphine ER.

In our Phase 2b/3 trial of nalbuphine ER in patients with uremic pruritus, the most frequently reported adverse events attributed to nalbuphine ER were nausea, vomiting, somnolence and dizziness. In patients with uremic pruritus, SAEs were frequent but were primarily related to associated underlying diseases or to procedural complications related to hemodialysis.

If nalbuphine ER or any future product candidate is associated with adverse events or undesirable side effects or demonstrates unexpected properties, we may need to abandon development or limit development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that have initially shown promise in clinical or earlier stage testing were later discovered to cause undesirable or unexpected side effects or raised other safety issues that delayed or prevented further development of the compound.

 

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Many currently approved µ-opioid products are subject to restrictive marketing and distribution regulations which, if applied to nalbuphine ER, could potentially restrict its use and harm our ability to generate profits.

Many currently approved µ-opioid receptor agonists require a Risk Evaluation and Mitigation Strategy, or REMS, as part of their approval by the FDA. REMS programs may require medication guides for patients, special communication plans to healthcare professionals or elements to assure safe use, such as restricted distribution methods, patient registries and/or other risk minimization tools. While nalbuphine ER has a µ-antagonist mechanism of action and has been well-tolerated in clinical trials to date, we have observed a few cases of mild euphoria, somnolence and feeling relaxed or feeling “high,” which are characteristics that have led to misuse, abuse and addiction of µ-opioids. We plan to conduct a HAL study to further characterize the abuse potential of oral nalbuphine. If the results of the HAL study suggest that nalbuphine ER may carry risks of misuse, abuse or addiction, or even if the trial indicates that nalbuphine ER does not carry such risks, the FDA may require us to implement a REMS program in connection with any commercialization of nalbuphine ER. We cannot predict whether a REMS program would be required as part of FDA approval of nalbuphine ER and, if required, what requirements it might entail. Any limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensation of nalbuphine ER, if approved. If a REMS program is required, depending on the extent of the REMS requirements, the program might significantly increase our costs to commercialize nalbuphine ER. Furthermore, risks of nalbuphine ER that are not adequately addressed through proposed a REMS program for nalbuphine ER may also prevent or delay any approval for commercialization.

In addition, while nalbuphine is currently not classified as a controlled substance under the federal Controlled Substances Act of 1970, or the CSA, or the regulations of the U.S. Drug Enforcement Agency, or the DEA, it is the only opioid analgesic that is approved for marketing in the United States that is not classified as a controlled substance. It is possible that, based on the results of our HAL study, adverse events in our clinical trials or for other reasons, the DEA could determine that nalbuphine ER should be classified as a controlled substance. The DEA regulates controlled substances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have no established medicinal use and may not be marketed or sold in the United States. A pharmaceutical product may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the highest risk of abuse and carrying the greater level of regulatory control and Schedule V substances considered to present the lowest relative risk of abuse among such substances and, accordingly, the lowest level of regulatory control. Various states also independently regulate controlled substances. Though state-controlled substance laws often mirror federal law, because the states are separate jurisdictions, they may separately regulate drugs as well. While some states automatically classify a drug when the DEA does so, in other states there must be rulemaking or a legislative action. Regulatory authorities in foreign jurisdictions may also determine to classify nalbuphine ER as a controlled substance under different, but potentially no less burdensome, regulations.

If nalbuphine ER is classified as a controlled substance, the level of regulation would depend on how it is scheduled, and we and our suppliers, manufacturers, contractors, distributors and any future customers would be required to obtain and maintain any applicable registrations from state, federal and foreign law enforcement and regulatory agencies and comply with any applicable state, federal and foreign laws and regulations regarding the manufacture, use, sale, importation, exportation and distribution of controlled substances. Also, if nalbuphine ER is classified as a controlled substance, there is a risk that such regulations could limit its supply for use in clinical trials and, in the future, limit our ability to produce and distribute nalbuphine ER in the volume needed to meet potential commercial demand.

Regulations associated with controlled substances govern manufacturing, labeling, packaging, testing, dispensing, production and procurement quotas, record keeping, reporting, handling, shipment and disposal. These regulations increase the personnel needs and the expense associated with development and commercialization of product candidates, including controlled substances. The DEA, and some states, conduct periodic inspections of registered establishments that handle controlled substances. If nalbuphine ER is classified as a controlled substance, failure to obtain and maintain required registrations or comply with any applicable regulations could delay or preclude us from developing and commercializing nalbuphine ER and subject us to enforcement action. The DEA may seek civil penalties, refuse to renew necessary registrations or initiate proceedings to revoke those registrations. In some circumstances, violations could lead to criminal proceedings. Because of the restrictive nature of these regulations, if nalbuphine ER is classified as a controlled substance, depending on how it is scheduled, its commercial prospects could be limited.

Results of preclinical studies and clinical trials may not be predictive of results of later clinical trials.

The outcome of preclinical studies and clinical trials may not be predictive of the success of later clinical trials, and preliminary or interim results of clinical trials do not necessarily predict final results. For instance, nalbuphine ER or any future product candidate may fail to show the desired safety and efficacy in clinical development despite demonstrating positive results in preclinical studies or successfully advancing through Phase 1 and Phase 2 clinical trials. Many pharmaceutical and biotechnology companies have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier stages of clinical development, and we could face similar setbacks. Similarly, the design of a clinical trial can determine whether its results will support marketing approval of a product and adjustments in the design of a clinical trial may not be possible once the clinical trial has commenced.

 

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At a meeting with the FDA following the completion of our Phase 2 clinical trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, the FDA advised us that the findings of the Phase 2 clinical trial may not be reliable and recommended that we conduct an additional Phase 2 dose ranging trial to identify the optimal dose and obtain reliable estimates of treatment effect for the recommended primary efficacy endpoint so as to better design and power our planned Phase 3 clinical trials. In providing such advice, the FDA noted the small number of patients in each arm of the Phase 2 clinical trial and the large differential discontinuation rate among the three treatment arms, as well as our plan to increase the fixed-dose treatment duration from eight weeks in the Phase 2 clinical trial to 12 weeks in our PRISM trial.

We have limited experience in designing pivotal clinical trials, and flaws in the design of a clinical trial could result in significant delays in completing the clinical trial or may require us to abandon the clinical trial altogether or conduct additional clinical trials. For example, we have designed our PRISM trial based on an assumed discontinuation rate that takes into account observed discontinuation rates in our Phase 2 clinical trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis. If enrolled patients withdraw from our PRISM trial at a rate that is higher than expected, as occurred in our Phase 2 clinical trial of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, or at rates that are inconsistent across clinical sites and treatment arms, we may not achieve the primary endpoint of the trial, the validity or statistical significance of the trial could be impaired and regulatory authorities may not view the trial as supportive of an application for marketing approval. Preclinical and clinical data are also often susceptible to varying interpretations and analyses. Many pharmaceutical and biotechnology companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for those product candidates. Even if we believe that the results of clinical trials for nalbuphine ER or any future product candidate warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of the product candidate.

In addition, some of our data for nalbuphine ER for the treatment of pruritus is drawn from post hoc analyses of data subsets from our Phase 2 clinical trials of nalbuphine ER in patients with prurigo nodularis and uremic pruritus. While we believe these data may be useful in informing the design of our PRISM trial and other future Phase 3 clinical trials for nalbuphine ER, post hoc analyses performed after unmasking trial results can result in the introduction of bias and may not be predictive of success in Phase 3 clinical trials.

In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of patient populations, changes in and adherence to dosing regimens and other clinical trial protocols, as well as the rate of discontinuation among clinical trial participants. If we fail to receive positive results in clinical trials of nalbuphine ER or any future product candidate, the development timeline and regulatory approval and commercialization prospects for those product candidates and, correspondingly, our business and financial prospects would be negatively impacted.

If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.

We may not be able to initiate or continue clinical trials for nalbuphine ER or any future product candidate if we are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials as required by the FDA or comparable foreign regulatory authorities. Patient enrollment is a significant factor in the timing of our clinical trials and is affected by many factors, including:

 

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the size and nature of the eligible patient population;

 

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the severity of the disease under investigation;

 

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the proximity of eligible patients to clinical sites;

 

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patient referral practices of physicians;

 

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the eligibility criteria for the clinical trial;

 

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the design of the clinical trial;

 

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efforts to facilitate timely enrollment;

 

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competing clinical trials; and

 

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clinicians’ and patients’ perceptions as to the potential advantages and risks of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications under investigation.

 

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