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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
_______________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
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 001-36570
___________________________
ZOSANO PHARMA CORPORATION
(Exact name of registrant as specified in its charter)
____________________________
Delaware 45-4488360
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
34790 Ardentech Court
Fremont, CA 94555
(Address of principal executive offices) (Zip Code)
(510) 745-1200
(Registrant’s telephone number, including area code)
___________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueZSANThe Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    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  x    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 filerAccelerated filer
Non-accelerated filerSmaller 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  x
As of May 7, 2021, the registrant had a total of 106,728,371 shares of its common stock, $0.0001 par value per share, outstanding.


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Zosano Pharma Corporation
Quarterly Report on Form 10-Q
INDEX
 
Page




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Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.
Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “intend,” “seek,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” or the negative of those terms, and similar expressions and comparable terminology intended to reference future periods. Forward-looking statements include, but are not limited to, statements about:
our expectations regarding our expenses and revenue, the sufficiency of our cash resources and needs for additional financing;
our plans for and the anticipated timing with respect to the resubmission of our 505(b)(2) New Drug Application ("NDA") for Qtrypta to the U.S. Food and Drug Administration (the “FDA”), including our plan to conduct an additional pharmacokinetic study;
our plans for and the anticipated timing with respect to the commencement and completion of the pharmacokinetic study and the availability of data from the study;
our expectations regarding the clinical effectiveness and safety of our product candidates;
the ability to obtain and maintain regulatory approval of our product candidates, and the labeling for any approved product;
our manufacturing capabilities and strategy, and our ability to establish and maintain relationships with contract manufacturing organization(s) to expand our manufacturing capacity;
the anticipated timing, costs and conduct of our planned clinical trials and preclinical studies;
our intellectual property position and our ability to obtain and maintain intellectual property protection for our product candidates;
our expectations regarding competition;
the anticipated trends and challenges in our business and the markets in which we operate;
the scope, progress, expansion, and costs of developing and commercializing our product candidates;
the size and growth of the potential markets for our product candidates and the ability to serve those markets;
the rate and degree of market acceptance of our product candidates;
our ability to establish and maintain development partnerships;
our ability to attract or retain key personnel;
our expectations regarding federal, state and foreign regulatory requirements;
the pending securities class action and derivative lawsuits; and
regulatory developments in the United States and foreign countries.
These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, including those set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the U.S. Securities Exchange Commission. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q and, except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report.
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Risk Factors Summary
The following is a summary of the principal risks that could materially adversely affect our business, results of operations, and financial condition, all of which are more fully described in Part II, Item 1A, “Risk Factors.” This summary should be read in conjunction with Item 1A, “Risk Factors” and should not be relied upon as an exhaustive summary of the material risks we face.
Below is a summary of some of the principal risks we face.
We will need substantial additional funding to fund our operations, and we may not be able to continue as a going concern if we are unable to do so. We could also be forced to delay, reduce or terminate our product development, other operations or commercialization effort.
We have a history of operating losses. We expect to continue to incur losses over the next several years and may never become profitable.
We have generated only limited revenues and will need additional capital to develop and commercialize our product candidates, which may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or lead product candidates.
Our build-to-suit arrangement with Trinity Funding 1, LLC (successor to Trinity Capital Fund III, L.P.) ("Trinity"), imposes restrictions on our business, and if we default on our obligations, Trinity would have a right to request payment in full of the build-to-suit obligation.
We have limited operating history and capabilities.
The development and commercialization of our product candidates are subject to many risks. For example, we received a complete response letter from the FDA in response to our NDA for Qtrypta, and based on feedback from the FDA, we are planning to conduct an additional pharmacokinetic study for inclusion in an NDA resubmission package. However, there is no guarantee that we will be able to adequately address the issues raised to the FDA’s satisfaction. If we do not successfully develop, receive approval for, and commercialize our product candidates, our business will be adversely affected.
If the FDA does not conclude that our product candidates satisfy the requirements for the 505(b)(2) regulatory approval pathway, or if the requirements for approval of our product candidates under Section 505(b)(2) are not as we expect, the approval pathway for our product candidates will likely take significantly longer, cost significantly more and encounter significantly greater complications and risks than anticipated, and in any case may not be successful.
Clinical trials are very expensive, time-consuming and difficult to design and implement.
The COVID-19 pandemic could adversely impact our business, including our clinical trials.
The results of our clinical trials may not support the intended use of Qtrypta or any other product candidates we may develop.
Clinical failure can occur at any stage of clinical development. Because the results of earlier clinical trials are not necessarily predictive of future results, any product candidate we advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.
We use customized equipment to coat and package our transdermal microneedle system; any production or equipment performance failures could negatively impact the clinical trials of our product candidates that we may develop or sales of our product candidate(s), if approved.
We currently depend primarily on third-party suppliers for manufacture of our product candidates. If these manufacturers fail to provide us or our collaborators with adequate supplies of materials for clinical trials or commercial product or fail to comply with the requirements of regulatory authorities, we may be unable to develop or commercialize Qtrypta or any other product candidates we may develop.
We rely on contract manufacturing organizations for various components of our transdermal microneedle system, and our business could be harmed if those third parties fail to provide us with sufficient quantities of those components at acceptable quality levels and prices or fail to maintain or achieve satisfactory regulatory compliance.
We rely on third parties to conduct our clinical trials and those third parties may not perform satisfactorily, including failing to comply with applicable regulatory requirements or to meet deadlines for the completion of such trials.
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We have no experience selling, marketing or distributing approved product candidates and have no internal capabilities to do so, and will rely on Eversana and other third parties for the commercialization of Qtrypta, and we and they may not be able to effectively market, sell and distribute Qtrypta, if approved.
If we fail to comply with our obligations to our licensor in our intellectual property license, we could lose license rights that are important to our business.
Our failure to obtain and maintain patent protection for our technology and our product candidates could permit our competitors to develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and product candidates may be adversely affected.
The trading price of our common stock has been volatile with substantial price fluctuations on heavy volume, which could result in substantial losses for purchasers of our common stock and existing stockholders.
If we are unable to maintain listing of our securities on the Nasdaq Capital Market or another reputable stock exchange, it may be more difficult for our stockholders to sell their securities.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

ZOSANO PHARMA CORPORATION
BALANCE SHEETS
(in thousands, except par value and share amounts)
March 31,
2021
December 31,
2020
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$26,882 $35,263 
Prepaid expenses and other current assets1,591 453 
Total current assets28,473 35,716 
Restricted cash455 455 
Property and equipment, net32,128 30,909 
Operating lease right-of-use assets4,651 4,928 
Other long-term assets3 3 
Total assets$65,710 $72,011 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$2,661 $1,884 
Accrued compensation2,703 2,294 
Build-to-suit obligation, current portion, net of debt issuance costs and discount4,697 4,779 
Operating lease liabilities, current portion1,434 1,378 
Paycheck Protection Program loan, current portion1,422 809 
Other accrued liabilities1,491 3,367 
Total current liabilities14,408 14,511 
Build-to-suit obligation, long-term portion, net of debt issuance costs and discount3,426 4,359 
Operating lease liabilities, long-term portion4,304 4,687 
Paycheck Protection Program loan, long-term portion204 812 
Other long-term liabilities217 127 
Total liabilities22,559 24,496 
Commitments and contingencies (see note 10)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
  
Common stock, $0.0001 par value; 250,000,000 shares authorized as of March 31, 2021 and December 31, 2020, respectively; 106,372,820 and 102,066,218 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
11 10 
Additional paid-in capital383,472 379,695 
Accumulated deficit(340,332)(332,190)
Total stockholders’ equity
43,151 47,515 
Total liabilities and stockholders’ equity$65,710 $72,011 


The accompanying notes are an integral part of these financial statements.
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ZOSANO PHARMA CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended March 31,
 20212020
Service revenue$258 $ 
Operating expenses:
Cost of service revenue162  
Research and development5,330 5,514 
General and administrative2,814 3,082 
Total operating expenses
8,306 8,596 
Loss from operations(8,048)(8,596)
Other income (expense):
Interest income1 10 
Interest expense(97)(206)
Other income (expense), net2 103 
Loss before provision for income taxes
(8,142)(8,689)
Provision for income taxes
  
Net loss and comprehensive loss$(8,142)$(8,689)
Net loss per common share – basic and diluted$(0.08)$(0.24)
Weighted-average common shares used in computing net loss per common share – basic and diluted104,356 36,266 


























The accompanying notes are an integral part of these financial statements.
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ZOSANO PHARMA CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
(unaudited)
 
 Common StockAdditional
Paid-In Capital
Accumulated
Deficit
Total
Stockholders’
Equity
 SharesAmount
Balance at January 1, 2021102,066,218 $10 $379,695 $(332,190)$47,515 
Issuance of common stock upon exercise of Series E warrants4,078,667 1 3,273 — 3,274 
Issuance of common stock upon exercise of Series C warrants145,000 — 94 — 94 
Issuance of common stock in connection with at-the-market offering, net82,935 — — — — 
Stock-based compensation— — 410 — 410 
Net loss— — — (8,142)(8,142)
Balance at March 31, 2021106,372,820 $11 $383,472 $(340,332)$43,151 
Common StockAdditional
Paid-In Capital
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at January 1, 202023,503,214 $2 $308,211 $(298,821)$9,392 
Issuance of common stock and Series E warrants in connection with registered direct offering, net11,903,506 1 10,210 — 10,211 
Issuance of common stock and Series C and Series D pre-funded warrants in connection with public offering, net11,992,307 2 8,262 — 8,264 
Issuance of common stock upon exercise of Series D pre-funded warrants2,161,539 — — — — 
Issuance of common stock upon exercise of Series C warrants2,649,723 — 1,722 — 1,722 
Issuance of common stock in connection with at-the-market offering, net2,151,346 — 2,706 — 2,706 
Stock-based compensation— — 364 — 364 
Net loss— — — (8,689)(8,689)
Balance at March 31, 202054,361,635 $5 $331,475 $(307,510)$23,970 








The accompanying notes are an integral part of these financial statements.
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ZOSANO PHARMA CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Three Months Ended March 31,
 20212020
Cash flows from operating activities:
Net loss$(8,142)$(8,689)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation410 364 
Change in operating lease right-of-use assets277 230 
Depreciation and amortization435 172 
Effective interest on financing obligations141 243 
Capitalized effective interest(102)(157)
Other 3  
Change in operating assets and liabilities:
Prepaid expenses and other assets(1,138)(79)
Accounts payable332 (617)
Accrued compensation and other accrued liabilities651 358 
Operating lease liabilities(327)(269)
Net cash used in operating activities(7,460)(8,444)
Cash flows from investing activities:
Purchases of property and equipment(3,236)(1,384)
Net cash used in investing activities(3,236)(1,384)
Cash flows from financing activities:
Proceeds from exercise of Series E warrants3,274  
Proceeds from issuance of securities in connection with at-the-market offering program, net of commissions and offering costs105 2,668 
Proceeds from exercise of Series C warrants94 1,722 
Proceeds from registered direct offering of securities, net of commissions and offering costs 10,298 
Proceeds from public offering of securities and exercise of pre-funded Series D warrants, net of commissions and offering costs 8,483 
Principal payments on financing obligations(1,158)(1,102)
Net cash provided by financing activities2,315 22,069 
Net (decrease) increase in cash, cash equivalents and restricted cash(8,381)12,241 
Cash, cash equivalents and restricted cash at beginning of year35,718 6,771 
Cash, cash equivalents and restricted cash at end of year$27,337 $19,012 
Supplemental cash flow information:
Cash paid for interest$198 $254 
Non-cash investing and financing activities:
Acquisition of property and equipment under accounts payable and other accrued liabilities$1,750 $8,579 
Accrued offering costs$105 $396 
Asset retirement obligation $89 $ 



The accompanying notes are an integral part of these financial statements.
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Zosano Pharma Corporation
Notes to Financial Statements
(unaudited)
 
1.    Organization
The Company
Zosano Pharma Corporation (the “Company”) is a clinical-stage biopharmaceutical company focused on providing rapid systemic administration of therapeutics and other bioactive molecules to patients using its proprietary transdermal microneedle system ("System").
The Company submitted a 505(b)(2) New Drug Application (“NDA”) for Qtrypta™ (M207) (“Qtrypta”) to the U.S. Food and Drug Administration (the “FDA”) on December 20, 2019, and on October 20, 2020, the Company received a Complete Response Letter (“CRL”) from the FDA with respect to the NDA. The CRL cited inconsistent zolmitriptan exposure levels observed across clinical pharmacology studies, which had been previously identified in the FDA’s discipline review letter received by the Company on September 29, 2020. Specifically, the CRL noted differences in zolmitriptan exposures observed between subjects receiving different lots of Qtrypta in the Company’s trials and inadequate pharmacokinetic ("PK") bridging between the lots that made interpretation of some safety data unclear. The CRL referenced unexpected high plasma concentrations of zolmitriptan observed in five study subjects enrolled in the Company’s PK studies. The FDA recommended that the Company conduct a repeat bioequivalence study comparing lots manufactured with the equipment used during development. The CRL noted that additional product quality validation data, which were planned to be submitted following approval, if received, were required to be submitted with the application. In addition, the CRL mentioned that due to U.S. Government and/or Agency-wide restrictions on travel, inspections of the Company’s contract manufacturing facilities were not able to be conducted but would be required before the application may be approved.
On January 29, 2021, the Company held a Type A meeting with the FDA Division of Neurology II (the “Division”) regarding the requirements for resubmission of the Qtrypta NDA. Based on feedback from the Type A meeting held with the Division, the Company plans to conduct an additional PK study for inclusion in an NDA resubmission package. During the meeting, the Division did not request that the Company conduct any further clinical efficacy studies to support the resubmission. On February 19, 2021, the Company received the official Type A meeting minutes from the FDA. The Type A meeting minutes were generally consistent with the Company's expectations to conduct an additional PK study for inclusion in an NDA resubmission package. In a post-meeting comment, the FDA recommended a skin assessment on patients in the planned PK study to generate additional safety information. This assessment was included in the proposed study protocol submitted to the FDA for review.
On April 12, 2021, the Company received FDA comments and recommendations to the Company’s proposed PK study protocol for Qtrypta. The Company has made the recommended changes to the study protocol and established an agreement with a contract research organization to conduct the PK study required to support the resubmission of the Qtrypta 505(b)(2) NDA. The study is expected to involve 48 healthy volunteers to generate comparative PK and safety data. The Company expects the study to begin in June 2021 and to be completed with data available in the third quarter of 2021. Subject to positive data, the Company expects to resubmit its NDA for Qtrypta by the end of 2021.
The Company does not anticipate realizing product revenues unless and until the FDA approves the Qtrypta NDA and the Company begins commercializing Qtrypta, which events may never occur.
Liquidity and Substantial Doubt about Going Concern
Since inception, the Company has incurred recurring operating losses and negative cash flows from operating activities, and as of March 31, 2021, had an accumulated deficit of approximately $340.3 million. As of March 31, 2021, the Company had approximately $26.9 million in cash and cash equivalents. Presently, the Company does not have sufficient cash and cash equivalents to enable it to fund its anticipated level of operations and meet its obligations as they become due within twelve months following the date of filing of this Quarterly Report on Form 10-Q. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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Shelf Registration
The Company filed a shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission (the "SEC"), which was declared effective by the SEC on April 16, 2020 ("2020 Shelf Registration Statement"). The 2020 Shelf Registration Statement provides the Company with the ability to issue common stock and other securities as described in the registration statement from time to time up to an aggregate amount of $74.5 million, of which approximately $33.7 million is available at March 31, 2021.
At-the-Market Offering Program - 2020
On June 8, 2020, the Company entered into a sales agreement with BTIG, LLC ("BTIG") as sales agent, to establish an at-the-market offering program (“2020 ATM”), under which the Company is permitted to offer and sell, from time to time, shares of common stock having a maximum aggregate offering price of up to $20.0 million. The Company is required to pay BTIG a commission of 3% of the gross proceeds from the sale of shares and has also agreed to provide BTIG with customary indemnification rights. During the three months ended March 31, 2021, the Company issued and sold 82,935 shares of its common stock at an average price of $1.31 per share under the 2020 ATM with aggregate net proceeds of less than $1,000 after deducting commissions and offering expenses payable by the Company. In April 2021, the Company issued and sold 355,551 shares of its common stock at an average price of $1.26 per share under the 2020 ATM with aggregate net proceeds of approximately $0.4 million after deducting commissions and offering expenses payable by the Company. The shares were sold pursuant to the Company’s 2020 Shelf Registration Statement and a prospectus supplement dated June 8, 2020. As of the date of this Quarterly Report on Form 10-Q, the Company has approximately $5.3 million available to be offered and sold under the 2020 ATM.
Registered Direct Offering - March 2020
On March 4, 2020, the Company entered into a securities purchase agreement with certain institutional investors for the issuance and sale in a registered direct offering (the "March 2020 Offering") of (i) 11,903,506 shares of the Company’s common stock and (ii) Series E Warrants to purchase up to a total of 11,903,506 shares of common stock at an offering price of $0.9275 per share and accompanying warrant. The Series E Warrants have an exercise price of $0.8025 per share, were immediately exercisable and expire five years from the date of issuance. During the three months ended March 31, 2021, Series E Warrants to purchase 4,078,667 shares of common stock were exercised at an exercise price of $0.8025 per share for aggregate proceeds of approximately $3.3 million. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement dated March 4, 2020. As of the date of this Quarterly Report on Form 10-Q, the Company has Series E Warrants to purchase 630,835 shares of common stock outstanding.
Public Offering - February 2020
On February 14, 2020, the Company closed an underwritten offering (the "February 2020 Offering") for the issuance and sale of (i) 10,146,154 Class A Units, each consisting of one share of common stock and one Series C Warrant to purchase one share of common stock, at a public offering price of $0.65 per Class A Unit, and (ii) 2,161,539 Class B Units, each consisting of one Series D Pre-Funded Warrant to purchase one share of common stock and one Series C Warrant to purchase one share of common stock, at a public offering price of $0.6499 per Class B Unit. The Series C Warrants have an exercise price of $0.65 per share, were immediately exercisable and expire five years from the date of issuance. The Series D Pre-Funded Warrants had an exercise price of $0.0001 per share and were fully exercised in connection with the closing of the offering. The Company granted the underwriter a 30-day option to purchase up to an additional 1,846,153 shares of common stock and/or additional Series C Warrants to purchase up to 1,846,153 shares of common stock. The underwriter fully exercised its option to purchase the shares and the Series C Warrants. During the three months ended March 31, 2021, Series C Warrants to purchase 145,000 shares of common stock were exercised at an exercise price of $0.65 per share for aggregate proceeds of approximately $0.1 million. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement dated February 12, 2020. As of the date of this Quarterly Report on Form 10-Q, the Company has Series C Warrants to purchase 22,700 shares of common stock outstanding.
The Company intends to raise additional capital through the issuance of additional equity through public or private offerings, debt financings or strategic alliances with pharmaceutical partners, or any combination of the above. However, there can be no assurances that, if the Company attempts to raise additional capital, it will be successful in doing so on terms acceptable to the Company, or at all. The Company’s inability to obtain required funding in the near future or its inability to obtain funding on favorable terms will have a material adverse effect on its operations and strategic development plan for future
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growth. If the Company cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and it may have to cease its operations.
Further, there can be no assurance that it will be able to gain access and/or be able to execute on securing new sources of funding, new development opportunities, successfully obtain regulatory approvals for and commercialize new products, achieve significant product revenues from its products (if approved), or achieve or sustain profitability in the future. The Company will continue to evaluate its timelines, strategic needs and working capital requirements.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. Due to the COVID-19 pandemic, there has been uncertainty in the global financial markets and economic conditions. The Company is closely monitoring the impact of the COVID-19 pandemic on its business, including how it will impact its employees, clinical trials and third-party service providers who perform critical services for the Company's business. The pandemic did appear to negatively impact enrollment and conduct of the Company's cluster headache study. In addition, the impact of the COVID-19 pandemic on the global financial markets and economic conditions could impact the Company's ability to raise capital through an equity financing, debt financing, a license or collaboration or a combination of such sources of capital, and as a result, its ability to continue as a going concern. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations and financial condition will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it. As of the date of issuance of this Quarterly Report on Form 10-Q, management is not aware of any specific event or circumstances that would require an update to its estimates or a revision of the carrying value of its assets or liabilities. These estimates may change, as new events occur, and additional information is obtained.
2.    Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Regulation S-X. They do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any other subsequent period. These financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020, included in the Company’s annual report on Form 10-K and filed with the United States Securities and Exchange Commission (“SEC”) on March 11, 2021. The preparation of the accompanying financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of expenses during the periods reported. Actual results could differ from those estimates or assumptions.
Significant Accounting Policies
The Company’s significant accounting policies are included in Note 2. Summary of Significant Accounting Policies to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.
As of March 31, 2021 and December 31, 2020, the Company had restricted cash of approximately $0.5 million primarily consisting of deposits of $0.3 million to secure its building lease until the end of the lease term and a deposit of approximately $0.1 million to a utility provider.
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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets and as presented as cash, cash equivalents and restricted cash in the statements of cash flows:
March 31, 2021March 31, 2020
(unaudited; in thousands)
Cash and cash equivalents$26,882 $18,557 
Restricted cash455 455 
Total$27,337 $19,012 
Fair Value Instruments
The Company records its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
    Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities.
    Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
    Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying values of certain assets and liabilities of the Company, such as cash and cash equivalents and accounts payable, approximate fair value due to their relatively short maturities. The carrying value of the Company’s short-term financial obligations approximates their fair value as the terms of the borrowing are consistent with current market rates and the duration to maturity is short. The carrying value of the Company's long-term financial obligations approximates fair value as interest rates approximate market rates that the Company could obtain for debt with similar terms and maturities.
Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, common stock warrants, stock options and restricted stock units ("RSUs") are considered to be potential dilutive securities but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.
The following outstanding common stock equivalents were excluded from the computations of diluted net loss per common share for the periods presented as the effect of including such securities would be antidilutive:
March 31, 2021March 31, 2020
(unaudited; shares)
Options to purchase common stock4,317,692 2,097,401 
Warrants to purchase common stock924,441 23,680,570 
RSUs922,941  
Total6,165,074 25,777,971 
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This new guidance simplifies the accounting for income taxes by removing certain exceptions to general principles, clarifying requirements and including amendments to improve consistent
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application of the guidance. The guidance specifically removes the exception to the incremental approach for intra period tax allocation when there is a loss from continuing operations and income or a gain from other items, such as discontinued operations or other comprehensive income. The guidance also requires an entity to recognize a franchise tax that is partially based on income as an income-based tax and to account for any other amounts incurred as a non-income based tax. The Company adopted the guidance beginning January 1, 2021 using a prospective approach. The adoption of the guidance did not have a material impact on its financial statements.
3. Master Services Agreement with Eversana
On August 6, 2020, the Company entered into a master services agreement (the “Eversana Agreement”) with Eversana Life Science Services, LLC (“Eversana”) for the commercialization of Qtrypta in the United States, if approved by the FDA. Under the terms of the Eversana Agreement, Eversana and the Company will cooperate to conduct activities over the term of the Eversana Agreement. The Company maintains ownership of the Qtrypta NDA as well as all legal, regulatory and manufacturing responsibilities for Qtrypta. Eversana receives an exclusive right to conduct agreed commercialization activities and will utilize its internal sales organization along with its other commercial capabilities for market access, marketing, distribution and patient support services for Qtrypta. Eversana will receive reimbursement of certain commercialization costs pursuant to a commercialization budget estimated at approximately $250.0 million and a low double digit to mid-teen percentage of product profits if and when Company net sales of Qtrypta surpass certain costs incurred by the parties pursuant to the commercialization budget.
The term of the Eversana Agreement is five years following the date, if any, that the FDA approves the Qtrypta NDA. Upon expiration or termination of the Eversana Agreement, the Company will retain all profits from product sales consummated after expiration or termination and assume all future corresponding commercialization responsibilities. The Company may terminate the Eversana Agreement if Eversana fails to provide pre-commercial or commercial plans and budgets by specified dates, if the Company decides to discontinue development or commercialization efforts for Qtrypta in the United States (subject to a termination payment if such termination occurs within a specified time period), or upon a change of control of the Company. Either party may terminate the Eversana Agreement if FDA approval is not received by July 31, 2021, if net profits are not realized within a specified time period following commercial launch, for material breach of the Eversana Agreement by the other party that is not cured within a defined time period, for insolvency of the other party, if Qtrypta is subject to a safety recall in the United States or if Qtrypta is not commercially launched within a specified time period after FDA approval of the NDA (other than by reason of the terminating party’s failure to perform its obligations under the Eversana Agreement).
In addition, under the Eversana Agreement, following FDA approval of the Qtrypta NDA, Eversana has agreed to provide a revolving credit facility of up to $5.0 million (the “Credit Facility”) to the Company pursuant to a loan agreement to be entered into between Eversana and the Company on a subsequent date. The loan will bear interest at an annual rate equal to 10.0%, to be paid monthly, and the Company will be able to prepay any amounts borrowed under the Credit Facility at any time without penalty or premium. The Credit Facility will be secured by substantially all of the Company’s assets, subject to prior liens and security interests.
The Company is accounting for the Eversana Agreement as a collaborative arrangement. As of March 31, 2021, no material accruals, expenses, payments, or revenues were recorded by the Company in connection with the Eversana Agreement.
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4.    Cash Equivalents and Investments in Marketable Securities
The following table summarizes the Company's cash equivalents and investments in marketable securities at fair value on a recurring basis:
As of March 31, 2021:Fair Value Measurements
 TotalQuoted prices in active market
Level 1
Significant other observable inputs
Level 2
Significant unobservable inputs
Level 3
 (unaudited; in thousands)
Money market funds classified as cash equivalents$24,419 $24,419 $ $ 

As of December 31, 2020:Fair Value Measurements
 TotalQuoted prices in active market
Level 1
Significant other observable inputs
Level 2
Significant unobservable inputs
Level 3
 (in thousands)
Money market funds classified as cash equivalents$33,918 $33,918 $ $ 

5.    Balance Sheet Components
Prepaid Expenses and Other Current Assets
The following table summarizes the Company’s prepaid expenses and other current assets for each of the periods presented:
March 31, 2021December 31, 2020
 
(unaudited; in thousands)(in thousands)
Prepaid insurance$807 $66 
Unbilled revenue157 124 
Prepaid services120 97 
Accounts receivable86  
Prepaid software and subscriptions81 118 
Deferred offering costs70 48 
Other270  
Total$1,591 $453 

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Property and Equipment
The following table summarizes the Company’s property and equipment for each of the periods presented:
March 31, 2021December 31, 2020
(unaudited; in thousands)(in thousands)
Leasehold improvements$24,212 $24,212 
Manufacturing equipment14,893 14,893 
Laboratory and office equipment1,641 1,641 
Computer equipment and software172 172 
Construction-in-progress19,893 18,239 
Property and equipment at cost60,811 59,157 
Less: accumulated depreciation property and equipment(28,683)(28,248)
Total$32,128 $30,909 
Depreciation expense was approximately $0.4 million and $0.2 million for the three months ended March 31, 2021 and March 31, 2020, respectively.
Construction-in-progress ("CIP") included $15.4 million and $14.6 million of an asset relating to the build-to-suit arrangement for construction of the Company's commercial coating and primary packaging system as of March 31, 2021 and December 31, 2020, respectively, of which capitalized construction period interest was $2.7 million and $2.4 million as of March 31, 2021 and December 31, 2020, respectively (See Note 7. Debt Financing).
Other Accrued Liabilities
The following table summarizes the Company’s other accrued liabilities for each of the periods presented:
March 31, 2021December 31, 2020
(unaudited; in thousands)(in thousands)
Construction-in-progress obligations$874 $2,993 
Professional service fees315 175 
Contract manufacturing176 71 
Deferred revenue47  
Pre-clinical and clinical studies10 22 
Other69 106 
Total$1,491 $3,367 

6.    Leases
Operating Leases
The Company has a non-cancelable operating lease for office, research and development, and manufacturing facilities in Fremont, California through August 31, 2024, with an option to further extend the lease for an additional 60 months subject to certain terms and conditions. The Company also has operating leases for manufacturing space at two of its contract manufacturing organizations ("CMOs"). The operating leases are embedded in agreements with these CMOs that include lease and non-lease components.
The following table summarizes information regarding the Company's leases for each of the periods presented:
Three Months Ended March 31,
20212020
(unaudited; in thousands)
Operating lease costs$439 $422 
Operating cash flows from operating leases - cash paid for operating leases$489 $461 
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The following table summarizes the lease terms and discount rates for the Company's leases as of March 31, 2021:
(unaudited)
Weighted-average remaining lease term (in years)3.38
Weighted average discount rate11 %
The following table summarizes the maturities of the Company's lease liabilities for each year ending December 31, as of March 31, 2021:
(unaudited; in thousands)
2021$1,485 
20222,043 
20232,017 
20241,371 
Total undiscounted cash flows6,916 
Less: amount representing interest(1,178)
Present value of lease liabilities$5,738 
Current portion$1,434 
Long-term portion4,304 
Total$5,738 
7.    Debt Financing
Build-to-Suit Obligation with Trinity
The Company has a build-to-suit arrangement (the "Agreement") with Trinity Funding 1, LLC (successor to Trinity Capital Fund III, L.P.) ("Trinity") to finance the third-party construction of the Company's commercial coating and primary packaging system (the "Equipment"), expected to be completed in 2021. Under the Agreement, Trinity provided the Company $14.0 million for equipment costs and associated soft costs ("Total Cost"), with an initial drawdown of $5.0 million and additional drawdowns in increments of not less than $0.5 million. Under the Agreement, each individual drawdown represents a separate financing arrangement with its own term and stated interest rate. Each drawdown is non-cancelable, with no prepayment options. In consideration of the financing arrangement, as collateral, the Company granted Trinity a first-priority lien and security interest in substantially all of the Company's assets.
On May 27, 2020, the Company entered into the First Amendment to Lease Documents (the “Trinity Amendment”). The Trinity Amendment, among other things, extended each individual drawdown term from 36 months to 42 months by providing for an interest-only period from May 2020 through October 2020. Principal payments recommenced November 1, 2020. Additionally, the Trinity Amendment removed all end-of-term options other than the option to purchase the equipment at 12% of the Total Cost, which is equal to the drawdown amount (“Purchase Option Fee”), which the Company intends to exercise at the end of each 42-month-term. The transfer of title from Trinity to the Company will occur at the end of the final 42-month-term, provided that the purchase option was executed, and the Purchase Option Fee was paid in full at the end of each 42-month-term. The security interest will terminate on the earlier to occur of (i) the date that falls six (6) months after the delivery and installation of the Equipment or (ii) payment in full of all amounts owed. The Company accounted for the Trinity Amendment as a debt modification under ASC 470-50, as the amended terms were not substantially different from the terms of the Agreement.
The Company determined that it controls the Equipment during the construction period due to its involvement in and its obligations related to the construction of the Equipment. Accordingly, construction costs incurred were recorded as construction-in-progress, a component of property and equipment on the balance sheet, and the Trinity financing obligation was recorded as a build-to-suit obligation on the balance sheet. As of March 31, 2021, the Company had an aggregate commercial coating and primary packaging system CIP balance of $15.4 million, that included $2.7 million of interest related to its build-to-suit obligation.
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In connection with the build-to-suit arrangement, the Company issued common stock warrants ("Trinity Warrants") for a total of 75,000 shares of common stock at an exercise price of $3.5928 per share. The Trinity Warrants expire on September 25, 2025. Proceeds allocated to the Trinity Warrants based on their relative fair value approximated $243,000 and were recorded as a discount to the initial $5.0 million drawdown under the Trinity financing arrangement and are being amortized as interest over the term of the September 2018 drawdown.
The Trinity build-to-suit arrangement requires compliance with various affirmative and restrictive covenants in regard to making certain investments and other restricted payments, engaging in mergers or consolidations, and the sale or transfer of certain assets. Failure to comply with any of these covenants, or pay principal, interest or other amounts when due, would constitute an event of default under the applicable agreement. The Company was in compliance with its covenants with respect to the Trinity build-to-suit arrangement as of March 31, 2021.
The following table summarizes the debt obligations as of March 31, 2021:
Drawdown DateDrawdown AmountPrincipal Balance Purchase Option FeeDiscount on Purchase Option FeeUnamortized Discounts and Issuance CostsMonthly PaymentStated Interest RateAmended Effective Interest RateMaturity Date
(unaudited; in thousands)
09/25/2018$5,000 $1,667 $600 $(14)$(82)$160 9.43 %24.38 %04/01/2022
12/11/20182,800 1,177 336 (12)(39)90 9.68 %18.25 %07/01/2022
06/06/20192,300 1,350 276 (20)(64)74 9.93 %18.08 %01/01/2023
09/13/20192,300 1,534 276 (26)(86)74 9.93 %18.04 %04/01/2023
11/27/20191,600 1,151 192 (21)(72)52 9.93 %18.16 %06/01/2023
Total$14,000 $6,879 $1,680 $(93)$(343)$450 
The following table summarizes the Company's build-to-suit obligation as of March 31, 2021 (unaudited; in thousands):
Build-to-suit obligation principal amount$6,879 
Build-to-suit obligation Purchase Option Fees at present value1,587 
Less: unamortized Purchase Option Fees(271)
unamortized warrants, discounts and issuance costs(72)
Build-to-suit obligation, net of debt issuance costs and discount$8,123 
Build-to-suit obligation, current portion$4,697 
Build-to-suit obligation, long-term portion, net of debt issuance costs and discount3,426 
Build-to-suit obligation, net of debt issuance costs and discount$8,123 
The following table summarizes future minimum payments on the Company’s build-to-suit obligation, including payments of principal and interest and Purchase Option Fees for each year ending December 31 as of March 31, 2021:
PrincipalInterestPurchase Option FeesTotal
(unaudited; in thousands)
2021$3,628 $420 $ $4,048 
20222,979 189 936 4,104 
2023272 8 744 1,024 
Total$6,879 $617 $1,680 $9,176 
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The following table summarizes interest incurred on the Company's build-to-suit obligation for each of the periods presented:
Three Months Ended March 31,
20212020
(unaudited; in thousands)
Build-to-suit obligation, cash interest expense$197 $252 
Build-to-suit obligation, effective interest expense137 243 
Less: build-to-suit obligation, interest capitalized(242)(298)
Build-to-suit obligation interest expense$92 $197 
PPP Loan
On April 21, 2020, the Company executed a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $1.6 million under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (“PPP”) was established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The Loan was made through Silicon Valley Bank (the "Lender"). Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and the maintenance of the Company's payroll levels.
The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. The Company applied for forgiveness of the entire $1.6 million loan amount and accrued interest on October 4, 2020. The Lender reviewed the application and submitted it to the SBA on October 7, 2020. No assurance is provided that forgiveness for any portion of the PPP Loan or accrued interest will be obtained.
The Paycheck Protection Flexibility Act of 2020, P.L. 116-142, extended the deferral period for loan payments to either (1) the date that the SBA remits the borrower’s loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period. The Company’s first payment is due on September 21, 2021 and if the loan is fully forgiven, the Company is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the Company on or before April 21, 2022, the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The Company is responsible for paying the accrued interest on any amount of the loan that is not forgiven.
The PPP Note contains customary events of default relating to, among other things, payment defaults, providing materially false and misleading representation to the SBA or Lender or breaching the terms of the PPP Note. The occurrence of an event of default may result in the immediate repayment of all amounts outstanding, collection of all amounts owing from the Company or filing suit and obtaining judgment against the Company.
8.    Common Stock Warrants
The following table summarizes the Company's issued and outstanding common stock warrants:
Warrants Outstanding as of December 31, 2020IssuedExercisedExpiredWarrants Outstanding as of March 31, 2021Exercise Price per ShareExpiration Date
unaudited
Series E - March 20204,709,502  (4,078,667) 630,835 $0.8025 03/06/25
Series C - February 2020167,700  (145,000) 22,700 $0.6500 02/14/25
Trinity - September 201875,000    75,000 $3.5928 09/25/25
Series B - August 2016195,906    195,906 $31.0000 08/19/21
Total5,148,108  (4,223,667) 924,441 
Each warrant grants the holder the right to purchase one share of common stock. Equity warrants are recorded at their relative fair market value in the stockholders’ equity section of the balance sheet. The Company’s equity warrants can only be settled through the issuance of shares and do not have any anti-dilution or price reset provision.
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9.    Stock-Based Compensation
The following table summarizes activity under the Amended and Restated 2014 Equity and Incentive Plan (“2014 Plan”), the 2012 Stock Incentive Plan and inducement grants issued to new employees outside of the 2014 Plan in accordance with Nasdaq Listing Rule 5635(c)(4) for the three months ended March 31, 2021 (unaudited):
Number of Shares Subject to Outstanding Stock OptionsWeighted-Average Exercise Price per ShareNumber of RSUs OutstandingWeighted-Average Grant Date Fair Value per Share
Outstanding at January 1, 20212,724,537 $3.31 335,004 $0.84 
Granted1,640,500 $1.25 595,250 $1.20 
Canceled/forfeited/expired(47,345)$2.54 (7,313)$0.84 
Outstanding at March 31, 20214,317,692 $2.54 922,941 $1.07 
On January 1, 2021, the shares of common stock authorized for issuance under the 2014 Plan were increased by 3,572,317 shares pursuant to the automatic annual increase provisions of the 2014 Plan. As of March 31, 2021, 1,475,534 shares of common stock were available for issuance under the 2014 Plan.
Stock-Based Compensation Expense
The following table summarizes the Company's stock compensation expense for each of the periods presented:
Three Months Ended March 31,
 20212020
 (unaudited; in thousands)
Research and development$138 $169 
General and administrative272 195 
Total$410 $364 

10.    Commitments and Contingencies
Equipment Purchase Commitments
The Company has a remaining commitment of approximately $1.1 million recorded as a current liability on the balance sheet at March 31, 2021, with an equipment manufacturer to purchase a commercial coating and primary packaging machine for the production of its product candidate, Qtrypta.
Contract Manufacturing Organizations
The Company has a technology transfer agreement and a manufacturing and supply agreement with a CMO to provide services related to the manufacture and commercialization of Qtrypta. During the term of the agreement, the CMO will provide services related to processing, packaging, labeling and storing Qtrypta, in addition to other services such as stability testing, quality control and assurance, and waste disposal.
The agreements call for annual fees of $2.8 million in 2021 escalating to $14.0 million in 2024, to be paid in equal monthly installments. The annual fee includes the production of a defined number of units with an option to purchase additional units at a defined price, the transfer of technology in 2021 and other operating expenses. The agreement contains negotiated representations and warranties, indemnification, limitations of liability, and other provisions. The initial term of the manufacturing and supply agreement continues until the seventh anniversary of the date on which the Company receives NDA approval of Qtrypta in the United States. As of March 31, 2021, the Company had recorded a right-of-use asset and associated lease liability at the present value of the amount of the manufacturing and supply agreement identified as an embedded operating lease (See Note 6. Leases).
The Company may terminate the agreements upon denial of regulatory approvals or if regulatory approvals are withdrawn under certain circumstances for the cost to remove the Company's equipment and restore the CMO's facility, which is recorded as a liability on the balance sheet. The Company may also elect to terminate the contracts for convenience, which would result in cancellation fees in the amount of 50% of the annual fee due in the year that the contract is terminated, and costs to remove the Company's equipment and restore the CMO's facility. The Company or the CMO may terminate the agreement for the other’s uncured material breach, uncured force majeure or bankruptcy or insolvency-related events.
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The Company has non-cancelable commitments with this CMO for the construction of manufacturing space and technology transfer fees totaling $3.3 million, of which $0.8 million was a current liability on the balance sheet as of March 31, 2021.
The Company has an agreement with another CMO (the “Agreement”) to provide services related to the manufacture and assembly of a component (the “Product”) of Qtrypta. Under the Agreement, the parties expressed their mutual intent to enter into a commercial supply agreement (“Supply Agreement”). The Agreement provides that if the Company does not enter into a Supply Agreement with this CMO or ceases to purchase the Product from this CMO prior to reaching a minimum commitment level, then the Company would be required to pay the CMO up to $2.5 million; however, no such payment will be required in the event of this CMO’s material breach. The Company may be required to pay an additional payment of up to $4.6 million if the Company ceases to purchase the Product from this CMO and a Supply Agreement is not entered into, except that no such payment will be required in the event of this CMO’s material breach or if the FDA does not approve Qtrypta. As of March 31, 2021, the Company had recorded a right-of-use asset and associated lease liability at the present value of the amount of the Agreement identified as an embedded operating lease (See Note 6. Leases).
The Company has a manufacturing and supply agreement through September 2023 with another supplier for a component part that includes an inactivity fee of up to $85,000 annually.
Indemnification and Guarantees
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. The Company also has indemnification obligations to its officers and directors for specified events or occurrences, subject to some limits, while they are serving at the Company’s request in such capacities. There have been no claims to date and the Company has director and officer insurance that may enable the Company to recover a portion of any amounts paid for future potential claims. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of March 31, 2021.
Legal Proceedings
On October 29, 2020 and November 6, 2020, two stockholders filed alleged class action lawsuits against the Company and certain of its current and former executive officers in the United States District Court for the Northern District of California: Carr v. Zosano Pharma Corporation, et al., Case No. 3:20-cv-07625, and Becerra v. Zosano Pharma Corporation, et al., Case No. 3:20-cv-07850. The complaints were filed purportedly on behalf of all persons who purchased or otherwise acquired the Company's securities between February 13, 2017 and September 30, 2020 (the "Class Period"). The complaints allege that the Company and certain of its current and former executive officers made false and/or misleading statements and failed to disclose material adverse facts about the Company's business, operations and prospects in violation of Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The plaintiffs seek damages, interest, costs, attorneys’ fees and other unspecified relief. On February 4, 2021, the Carr and Becerra actions were consolidated and the court appointed two Co-Lead Plaintiffs and two law firms as Co-Lead Counsel in the consolidated action (the “Securities Action”). The Co-Lead Plaintiffs filed their consolidated amended complaint on March 30, 2021, which alleges the same claims as the previous complaints and extends the Class Period through October 20, 2020. The Company anticipates filing a motion to dismiss the consolidated amended complaint. Pursuant to a stipulated court order, the Company expects to file the motion by May 14, 2021; the Co-Lead Plaintiffs are expected to file their opposition by June 14, 2021; and the Company expects to file a reply brief by July 6, 2021. The earliest date upon which the Court may hear the motion is July 20, 2021.
On February 9, 2021, a stockholder filed a derivative action, purportedly on behalf of the Company (named as a nominal defendant), against certain of the Company's current and former executive officers and directors in the United States District Court for the District of Delaware: Gensemer v. Lo, et al., Case No. 1:21-cv-00168 (the “Derivative Action”). The complaint alleges breaches of the defendants’ fiduciary duties as the Company's directors and/or officers, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, violations of Section 14(a) of the Exchange Act, and for contribution under Sections 10(b) and 21D of the Exchange Act. The plaintiff seeks damages, restitution, interest, attorneys’ fees and costs, and other unspecified relief. Pursuant to stipulation of the parties, on March 24, 2021, the Court entered an order staying the Derivative Action, including all deadlines, conferences and hearings, until the final resolution of the Company's anticipated motion to dismiss in the Securities Action, including through any amendments and/or appeals.
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The Company believes the cases are without merit and it intends to vigorously defend itself against the claims. Given the uncertainty of litigation and the preliminary stage of the cases, the Company cannot predict the outcome of or estimate the possible loss or range of loss that may result from these actions.
The Company, from time to time, may be involved in other lawsuits and legal proceedings, which arise, in the ordinary course of business. Lawsuits and legal proceedings are subject to inherent uncertainties and an adverse result in any lawsuit or legal proceeding may materially adversely affect our business, financial condition and results of operations. The Company accrues for contingencies when it believes that a loss is probable and that it can reasonably estimate the amount of any such loss. To the extent that there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred and the amount of such additional loss would be material, the Company will either disclose the estimated additional loss or state that such an estimate cannot be made.
11.    Subsequent Event
On April 5, 2021, the Company signed a Master Services Agreement with a contract research organization to perform services related to clinical trials for the Company. On April 21, 2021, the Company and the contract research organization signed a work order in association with the Master Services Agreement, under which the contract research organization will perform the PK study required to support the resubmission of the Qtrypta 505(b)(2) NDA. The total estimated budget for the PK study is $1.4 million.




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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, this discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. You should not place undue reliance on these forward-looking statements, which involve risks and uncertainties. As a result of many factors, including but not limited to those set forth under ‘‘Risk Factors,’’ our actual results may differ materially from those anticipated in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”
Overview
Zosano Pharma Corporation is a clinical-stage biopharmaceutical company focused on providing rapid systemic administration of therapeutics and other bioactive molecules to patients using our proprietary transdermal microneedle system (the “System”). Our System is designed to facilitate rapid drug absorption into the bloodstream, which can result in an improved pharmacokinetic ("PK") profile compared to original dosage forms. The System consists of a 3cm2 to 6cm2 array of titanium microneedles approximately 200-350 microns in length, coated with a hydrophilic formulation of drug, mounted on an adhesive patch. The patch is applied with a reusable hand-held applicator that presses the microneedles into the skin to a uniform depth in each application, close to the capillary bed, allowing for dissolution and absorption of the drug, but not deep enough to contact the nerve endings in the skin. The microneedles penetrate the stratum corneum to allow the drug to be absorbed into the microcapillary system of the skin. We are focused on developing products for indications in which we believe rapid onset, ease of use and stability may offer significant therapeutic and practical advantages, and on developing products where rapid administration of approved drugs with established safety and efficacy profiles provides an increased benefit to patients, in markets where patients remain underserved by existing therapies. We anticipate that many of our current and future development programs may enable us to utilize a regulatory pathway that would streamline clinical development and accelerate the path towards potential commercialization.
Our development efforts are currently focused on our product candidate, Qtrypta™ (M207) ("Qtrypta"). Qtrypta is our proprietary formulation of zolmitriptan delivered utilizing our System. Zolmitriptan is one of a class of serotonin receptor agonists known as triptans and is used as an acute treatment for migraine. Migraine is a debilitating neurological disease, symptoms of which include moderate to severe headache pain, nausea and vomiting, and abnormal sensitivity to light and sound. Qtrypta was developed with the intent of providing faster onset of efficacy and sustained freedom from migraine symptoms. Qtrypta is designed for rapid absorption of zolmitriptan into the bloodstream without dependence on the gastrointestinal ("GI") tract.
We submitted a 505(b)(2) New Drug Application (“NDA”) for Qtrypta to the U.S. Food and Drug Administration (the “FDA”) on December 20, 2019, and on October 20, 2020, we received a Complete Response Letter (“CRL”) from the FDA with respect to the NDA. The CRL cited inconsistent zolmitriptan exposure levels observed across clinical pharmacology studies, which had been previously identified in the FDA’s discipline review letter that we received on September 29, 2020. Specifically, the CRL noted differences in zolmitriptan exposures observed between subjects receiving different lots of Qtrypta in our clinical trials and inadequate PK bridging between the lots that made interpretation of some safety data unclear. The CRL referenced unexpected high plasma concentrations of zolmitriptan observed in five study subjects enrolled in our PK studies. The FDA recommended that we conduct a repeat bioequivalence study comparing lots manufactured with the equipment used during development. The CRL noted that additional product quality validation data, which were planned to be submitted following approval, if received, were required to be submitted with the application. In addition, the CRL mentioned that due to U.S. Government and/or Agency-wide restrictions on travel, inspections of our contract manufacturing facilities were not able to be conducted but would be required before the application may be approved.
On January 29, 2021, we held a Type A meeting with the FDA Division of Neurology II (the “Division”) regarding the requirements for resubmission of the Qtrypta NDA. Based on feedback from the Type A meeting held with the Division, we plan to conduct an additional PK study for inclusion in an NDA resubmission package. During the meeting, the Division did not request that we conduct any further clinical efficacy studies to support the resubmission. On February 19, 2021, we received the official Type A meeting minutes from the FDA. The Type A meeting minutes were generally consistent with our expectations to conduct an additional PK study for inclusion in an NDA resubmission package. In a post-meeting comment, the FDA recommended a skin assessment on patients in the planned PK study to generate additional safety information. This assessment was included in the proposed study protocol submitted to the FDA for review.
On April 12, 2021, we received FDA comments and recommendations to our proposed PK study protocol for Qtrypta. We have made the recommended changes to the study protocol and established an agreement with a contract research organization
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to conduct the PK study required to support the resubmission of the Qtrypta 505(b)(2) NDA. The study is expected to involve 48 healthy volunteers to generate comparative PK and safety data. We expect the study to begin in June 2021 and to be completed with data available in the third quarter of 2021. Subject to positive data, we expect to resubmit our NDA for Qtrypta by the end of 2021. There is no guarantee that we will be able to adequately address the issues raised to the FDA’s satisfaction.
We do not anticipate realizing product revenues unless and until the FDA approves our Qtrypta NDA and we begin commercializing Qtrypta, which may never occur.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported results of operations during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions.
There have been no changes to our critical accounting policies which are included in Note 2. Summary of Significant Accounting Policies to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 11, 2021.
Financial Operations Overview
General
As of March 31, 2021, we had an accumulated deficit of approximately $340.3 million. We have incurred significant losses and expect to incur significant and increasing losses in the foreseeable future as we advance our Qtrypta product candidate into later stages of development and, if approved, commercialization. We cannot assure you that we will receive additional capital or collaboration revenue in the future, as a result of any partnership that we might pursue.
We expect our pre-commercialization expenses related to our Qtrypta product candidate to increase as we continue to advance this program towards regulatory approval and, if approved, commercialization. Because of the numerous risks and uncertainties associated with our technology and drug development, we cannot forecast with any degree of certainty the timing or amount of expenses incurred or when, or if, we will be able to achieve profitability.
We will require additional capital to undertake our planned research and development activities, pre-commercialization activities, and to meet our operating requirements in and beyond 2021. We intend to raise such capital through the issuance of additional equity through public or private offerings, debt financings, strategic alliances, or any combination of the above. However, if such financing is not available at adequate levels or on acceptable terms, we could be required to further reduce our operating expenses and suspend, delay or reduce the scope of our Qtrypta development program, out-license intellectual property rights to our transdermal delivery technology, or a combination of the above, which may have a material adverse effect on our business, results of operations, financial condition and/or our ability to fund our scheduled obligations on a timely basis or at all.
We are actively seeking opportunities to evaluate collaborations with strategic partners to further the clinical and commercial development of our technology. We cannot forecast with any degree of certainty if we will enter into collaborations for Qtrypta or any other potential future use of our technology or how such arrangements would affect our development plans or capital requirements. As a result of these uncertainties, we are unable to determine the duration and completion of costs of our research and development projects or if, when and to what extent we will generate revenue from their commercialization and sale. Additionally, a future collaborative partner may only be interested in applying our technology in the development and advancement of their own product candidates.
The process of conducting the necessary clinical trials to obtain regulatory approval is costly and time consuming. We consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and clinical program may be affected by a variety of factors, including, but not limited to: the quality of the product candidate, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. In situations in which third parties have control over the clinical development of a product candidate, the estimated completion dates are largely under the control of such third parties and not under our control.
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Service revenue
Service revenue is related to feasibility studies in which we provide research and development services to customers to determine the feasibility of using our System in connection with the customers’ pharmaceutical agents. In the first quarter of 2021, we recognized revenue on agreements with three pharmaceutical companies for such studies. We expect service revenue to fluctuate based on the volume and activity of the feasibility studies.
Cost of service revenue
Cost of service revenue consists of personnel and material costs associated with feasibility studies. In the first quarter of 2021, we incurred costs related to three such studies. We expect cost of service revenue to fluctuate in 2021 based on the volume and activity of the feasibility studies.
Research and development expenses
Research and development expenses consist primarily of:
Salaries and related expenses for personnel in research and development functions, including stock-based compensation;
Expenses related to the production of our System, including the purchase of active pharmaceutical ingredients and raw materials as well as fees paid to contract manufacturing organizations;
Expenses related to the performance of drug formulation and clinical trials and studies, including fees paid to CROs, clinical consultants, clinical trial sites and vendors, including Institutional Review Boards, in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis; and
Allocation of certain shared costs, such as facilities-related costs.
In the first quarter of 2021, our research and development efforts and resources focused primarily on advancing the development of Qtrypta.
General and administrative expenses
General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services and other general operating expenses not otherwise included in research and development. We expect that our general and administrative expenses will increase as we move toward commercialization of our product candidate, Qtrypta, if approved.
Other income and expense
Interest income. Interest income consists primarily of interest and amortization of purchase premiums and accretion of purchase discounts related to our investments in marketable securities.
Interest expense. Interest expense consists primarily of interest costs and associated amortization of debt discounts and issuance costs, if any, related to debt financing.
Other income (expense). Other income (expense), net consists of miscellaneous income and expenses that are not included in other categories of the statement of operations.
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Results of Operations
Comparison of the three months ended March 31, 2021 and 2020
 Three Months Ended March 31,Change
 20212020Amount%
 (unaudited; in thousands)
Service revenue$258 $— $258 N/A
Operating expenses:
Cost of service revenue$162 $— $162 N/A
Research and development$5,330 $5,514 $(184)(3)%
General and administrative$2,814 $3,082 $(268)(9)%
Other income (expense):
Interest income$$10 $(9)(90)%
Interest expense$(97)$(206)$109 (53)%
Other income (expense), net$$103 $(101)*
* Not meaningful.
Service revenue
In the first quarter of 2021, service revenue related to agreements with three pharmaceutical companies for feasibility studies. We expect these studies to continue in 2021 and for service revenue to fluctuate based on the volume and activity of the feasibility studies.
Cost of service revenue
In the first quarter of 2021, cost of service revenue related to three feasibility studies. We expect these studies to continue in 2021 and expect cost of service revenue to fluctuate in 2021 based on the volume and activity of the feasibility studies.
Research and development expenses
Research and development expenses decreased approximately $0.2 million, or 3%, for the three months ended March 31, 2021, as compared to the same period in 2020. The decrease was primarily due to lower employee and temporary employee costs of $0.6 million and $0.2 million of lower clinical trial costs. These decreases were partially offset by increases of $0.3 million in production and manufacturing costs due to the scale up and technology transfer to our commercial manufacturing organizations and $0.3 million of additional depreciation related to assets placed into service at our contract manufacturing organizations.
General and administrative expenses
General and administrative expenses decreased approximately $0.3 million, or 9%, for the three months ended March 31, 2021, as compared to the same period in 2020. The decrease was primarily due to a decrease of $0.3 million decrease in professional service fees.
Other income and expense
Interest income. For the three months ended March 31, 2021 and 2020, interest income resulted primarily from interest recognized related to investments in marketable securities. The decrease for the three months ended March 31, 2021 as compared to the same period in 2020 resulted from lower interest rates.
Interest expense. For the three months ended March 31, 2021 and 2020, interest expense consisted primarily of interest and amortization of debt discount. The decrease in interest expense resulted from a lower outstanding balance on our build-to-suit obligation with Trinity Funding 1, LLC (successor to Trinity Capital Fund III, L.P.) ("Trinity") during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. For the three months ended March 31, 2021 and 2020, we capitalized a portion of interest paid to Trinity as construction-in-progress.
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Other income (expense). Other income (expense), net consists of miscellaneous income and expenses that are not included in other categories of the statement of operations.
Liquidity and Capital Resources
Our liquidity and capital resources are summarized as follows:
March 31, 2021December 31, 2020
(unaudited; in thousands)(in thousands)
Cash and cash equivalents$26,882 $35,263 
Working capital*$14,065 $21,205 
Accumulated deficit$(340,332)$(332,190)
* We define working capital as current assets less current liabilities. See our financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q for further details regarding our current assets and current liabilities.
As of March 31, 2021, we had approximately $26.9 million in cash and cash equivalents, $14.1 million of working capital and an accumulated deficit of $340.3 million. The decrease in cash and cash equivalents and working capital as of March 31, 2021 as compared to December 31, 2020 was primarily the result of our loss from operations, investments made in property and equipment and our payments to Trinity, offset primarily by cash received from warrant exercises. Presently, we do not have sufficient cash and cash equivalents to enable us to fund our anticipated level of operations and meet our obligations as they become due during the twelve months following the date of filing of this Quarterly Report on Form 10-Q, and we will need to obtain additional capital resources through equity offerings, debt financings, a license or collaboration agreement, or through a combination of such sources of capital. The aforementioned factors raise substantial doubt about our ability to continue as a going concern.
We filed a shelf registration statement on Form S-3 with the SEC, which was declared effective by the SEC on April 16, 2020 (the "2020 Shelf Registration Statement"). The 2020 Shelf Registration Statement provides us with the ability to issue common stock and other securities as described in the registration statement from time to time up to an aggregate amount of $74.5 million, of which approximately $33.7 million is available at March 31, 2021.
Our ability to complete the sale of equity securities and access the market as a source of liquidity is dependent on investor demand, market conditions and other factors. Therefore, we can provide no assurance that any such offering will be on terms favorable to us or our stockholders, or that such offering will be successful at all. Our inability to obtain required funding in the near future or our inability to obtain funding on favorable terms will have a material adverse effect on our operations and strategic development plan for future growth. If we cannot successfully raise additional capital and implement our strategic development plan, our liquidity, financial condition and business prospects will be materially and adversely affected, and we may have to cease operations.
We expect to incur additional losses in the future and will require additional financing to develop our Qtrypta product candidate, conduct pre-commercialization manufacturing activities and fund our operations. If we are unable to raise additional funds when needed, we may be required to suspend, delay, reduce or terminate our development programs and clinical trials. We may also be required to sell or license our technologies, clinical product candidates, or programs, if any, that we would prefer to develop and commercialize ourselves.
We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:
the scope, progress, expansion and costs of manufacturing our product candidates;
the timing of and costs involved in obtaining regulatory approvals;
the scope, progress, expansion, costs and results of our clinical trials;
the type, number, costs and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;
our ability to establish and maintain development partnering arrangements;
the timing, receipt and amount of contingent, royalty and other payments from any of our future development partners;
the emergence of competing technologies and other adverse market developments;
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the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
the economic and global financial market uncertainty resulting from the COVID-19 pandemic;
the resources we devote to marketing and, if approved, commercializing our product candidates; and
the costs associated with being a public company.
The COVID-19 pandemic has caused volatility in the global financial markets and threatened a slowdown in the global economy, which may adversely affect our ability to raise additional capital on attractive terms or at all. A recession, depression or other sustained adverse market event resulting from the spread of COVID-19 may also limit our ability to obtain financing for our operations.
Cash Flows
Three Months Ended March 31,
20212020
 (unaudited; in thousands)
Net cash provided by (used in):
Operating activities$(7,460)$(8,444)
Investing activities(3,236)(1,384)
Financing activities2,315 22,069 
(Decrease) increase in cash, cash equivalents, and restricted cash$(8,381)$12,241 
Operating Cash Flow: Net cash used in the three months ended March 31 in both 2021 and 2020 was primarily related to personnel, manufacturing, facility and technology transfer and development costs in conjunction with services performed by our contract manufacturers, clinical development and trial costs, other pre-commercial activities and other administrative expenses incurred in the course of our continuing operations. The changes in net cash used in operating activities were primarily related to our net loss, working capital fluctuations and changes in our non-cash expenses, all of which are highly variable.
Net cash used in operating activities for the three months ended March 31, 2021 of $7.5 million was primarily due to our net loss of $8.1 million adjusted for non-cash stock-based compensation of $0.4 million and depreciation and amortization of $0.4 million and an increase in our prepaid expenses of $1.1 million, offset by an increase in accounts payable and accrued compensation and other accrued liabilities of approximately $1.0 million. Net cash used in operating activities for the three months ended March 31, 2020 of $8.4 million was primarily due to our net loss of $8.7 million, adjusted for non-cash stock-based compensation of $0.4 million and depreciation and amortization of $0.2 million and an increase in accrued compensation and other accrued liabilities of $0.3 million, offset by a decrease in accounts payable of $0.6 million.
Investing Cash Flow: Net cash used in investing activities of $3.2 million and $1.4 million for the three months ended March 31, 2021 and 2020, respectively, was the result of property and equipment purchases to support our pre-commercialization activities.
Financing Cash Flow: Net cash provided by financing activities of $2.3 million for the three months ended March 31, 2021 was primarily due to the proceeds from the issuance of common stock from the exercise of warrants of $3.4 million. These proceeds were offset by repayments on the Trinity build-to-suit obligation of $1.2 million. See below for a further discussion of our equity activity in the first three months of 2021. Net cash provided by financing activities of $22.1 million in the first three months of 2020 was primarily due to net proceeds from various common stock offerings amounting to $21.4 million and proceeds from the exercise of warrants of $1.7 million, offset by repayments on the Trinity build-to-suit obligation of $1.1 million.
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2021 Issuance of Shares
At-the-Market Offering Program - 2020
On June 8, 2020, we entered into a sales agreement with BTIG, LLC ("BTIG") as sales agent, to establish an at-the-market offering program (“2020 ATM”), under which we are permitted to offer and sell, from time to time, shares of common stock having a maximum aggregate offering price of up to $20.0 million. We are required to pay BTIG a commission of 3% of the gross proceeds from the sale of shares and have also agreed to provide BTIG with customary indemnification rights. During the three months ended March 31, 2021, we issued and sold 82,935 shares of our common stock at an average price of $1.31 per share under the 2020 ATM with aggregate net proceeds of less than $1,000 after deducting commissions and offering expenses. In April 2021, we issued and sold 355,551 shares of our common stock at an average price of $1.26 per share under the 2020 ATM with aggregate net proceeds of approximately $0.4 million after deducting commissions and offering expenses. The shares were sold pursuant to our 2020 Shelf Registration Statement and a prospectus supplement dated June 8, 2020. As of the date of this Quarterly Report on Form 10-Q, we have approximately $5.3 million available to be offered and sold under the 2020 ATM.
Registered Direct Offering - March 2020
On March 4, 2020, we entered into a securities purchase agreement with certain institutional investors for the issuance and sale in a registered direct offering (the "March 2020 Offering") of (i) 11,903,506 shares of our common stock and (ii) Series E Warrants to purchase up to a total of 11,903,506 shares of common stock at an offering price of $0.9275 per share and accompanying warrant. The Series E Warrants have an exercise price of $0.8025 per share, were immediately exercisable and expire five years from the date of issuance. During the three months ended March 31, 2021, Series E Warrants to purchase 4,078,667 shares of common stock were exercised at an exercise price of $0.8025 per share for aggregate proceeds of approximately $3.3 million. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement dated March 4, 2020. As of the date of this Quarterly Report on Form 10-Q, we have Series E Warrants to purchase 630,835 shares of our common stock outstanding.
Public Offering - February 2020
On February 14, 2020, we closed an underwritten offering (the "February 2020 Offering") for the issuance and sale of (i) 10,146,154 Class A Units, each consisting of one share of common stock and one Series C Warrant to purchase one share of common stock, at a public offering price of $0.65 per Class A Unit, and (ii) 2,161,539 Class B Units, each consisting of one Series D Pre-Funded Warrant to purchase one share of common stock and one Series C Warrant to purchase one share of common stock, at a public offering price of $0.6499 per Class B Unit. The Series C Warrants have an exercise price of $0.65 per share, were immediately exercisable and will expire five years from the date of issuance. The Series D Pre-Funded Warrants had an exercise price of $0.0001 per share and were fully exercised in connection with the closing of the offering. We granted the underwriter a 30-day option to purchase up to an additional 1,846,153 shares of common stock and/or additional Series C Warrants to purchase up to 1,846,153 shares of common stock. The underwriter fully exercised its option to purchase the shares and the Series C Warrants. During the three months ended March 31, 2021, Series C Warrants to purchase 145,000 shares of common stock were exercised at an exercise price of $0.65 per share for aggregate proceeds of approximately $0.1 million. The shares were sold pursuant to an effective shelf registration statement and a prospectus supplement dated February 12, 2020. As of the date of this Quarterly Report on Form 10-Q, we have Series C Warrants to purchase 22,700 shares of our common stock outstanding.
Contractual Obligations
During the three months ended March 31, 2021, there were no material changes to our contractual obligations described under Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2020, filed with the SEC on March 11, 2021, other than the subsequent event described in Note 11 to our financial statements and the fulfillment of existing obligations in the ordinary course of business.
Recently Issued Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies, of the Notes to Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for a summary of Recent Accounting Pronouncements.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. Some of the securities that we invest in have market risk where a change in prevailing interest rates may cause the principal amount of the marketable securities to fluctuate. Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, as well as investments in marketable securities. We had cash and cash equivalents of $26.9 million as of March 31, 2021, which consisted of bank deposits and money market accounts. The primary objectives of our investment activities are to ensure liquidity and to preserve principal while at the same time maximizing the income we receive from our marketable securities without significantly increasing risk. Additionally, we established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.
Our cash and cash equivalents are held for working capital purposes. Cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to regulatory limits, and we are exposed to credit risk when our cash balances exceed FDIC insurance limits. Our total cash and cash equivalent balances exceed the maximum amounts insured by the FDIC.
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of United States interest rates. We hold interest-earning instruments, which carry a degree of interest rate risk. To date, fluctuations in interest income and expense have not been significant. However, fluctuations in market interest rates in the future could have a material impact on our financial condition and results of operations.
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 of March 31, 2021. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Act of 1933, as amended, is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
Based on the evaluation of our disclosure controls and procedures as of March 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
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 management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended) during the quarter ended March 31, 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS
On October 29, 2020 and November 6, 2020, two stockholders filed alleged class action lawsuits against us and certain of our current and former executive officers in the United States District Court for the Northern District of California: Carr v. Zosano Pharma Corporation, et al., Case No. 3:20-cv-07625, and Becerra v. Zosano Pharma Corporation, et al., Case No. 3:20-cv-07850. The complaints were filed purportedly on behalf of all persons who purchased or otherwise acquired our securities between February 13, 2017 and September 30, 2020 (the "Class Period"). The complaints allege that we and certain of our current and former executive officers made false and/or misleading statements and failed to disclose material adverse facts about our business, operations and prospects in violation of Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The plaintiffs seek damages, interest, costs, attorneys’ fees and other unspecified relief. On February 4, 2021, the Carr and Becerra actions were consolidated and the court appointed two Co-Lead Plaintiffs and two law firms as Co-Lead Counsel in the consolidated action (the "Securities Action"). The Co-Lead Plaintiffs filed their consolidated amended complaint on March 30, 2021, which alleges the same claims as the previous complaints and extends the Class Period through October 20, 2020. We anticipate filing a motion to dismiss the consolidated amended complaint. Pursuant to a stipulated court order, we expect to file the motion by May 14, 2021; the Co-Lead Plaintiffs are expected to file their opposition by June 14, 2021; and we expect to file a reply brief by July 6, 2021. The earliest date upon which the Court may hear the motion is July 20, 2021.
On February 9, 2021, a stockholder filed a derivative action, purportedly on behalf of the Company (named as a nominal defendant), against certain of our current and former executive officers and directors in the United States District Court for the District of Delaware: Gensemer v. Lo, et al., Case No. 1:21-cv-00168 (the "Derivative Action"). The complaint alleges breaches of the defendants’ fiduciary duties as our directors and/or officers, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, violations of Section 14(a) of the Exchange Act, and for contribution under Sections 10(b) and 21D of the Exchange Act. The plaintiff seeks damages, restitution, interest, attorneys’ fees and costs, and other unspecified relief. Pursuant to stipulation of the parties, on March 24, 2021, the Court entered an order staying the Derivative Action, including all deadlines, conferences and hearings, until the final resolution of our anticipated motion to dismiss in the Securities Action, including through any amendments and/or appeals.
We believe the cases are without merit and we intend to vigorously defend against the claims.
From time to time, we may be involved in other lawsuits and legal proceedings, which arise, in the ordinary course of business. Lawsuits and legal proceedings are subject to inherent uncertainties and an adverse result in any lawsuit or legal proceeding may materially adversely affect our business, financial condition and results of operations. In addition, even if not meritorious, these matters could result in the expenditure of significant financial resources and diversion of management efforts.

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Item 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, as well as general economic and business risks, and all of the other information contained in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, including our financial statements and related notes thereto, and other documents that we file with the U.S. Securities and Exchange Commission ("SEC"). Any of the following risks could have a material adverse effect on our business, operating results, financial condition and prospects and cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. Any of the following risks and uncertainties are, and will be, exacerbated by COVID-19 pandemic and any worsening of the global business and economic environment as a result.
RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITAL
We will need substantial additional funding to fund our operations, and we may not be able to continue as a going concern if we are unable to do so. We could also be forced to delay, reduce or terminate our product development, other operations or commercialization effort.
Developing and commercializing biopharmaceutical products, including launching new products into the marketplace and conducting preclinical studies and clinical trials, is an expensive and highly uncertain process that takes years to complete. As of March 31, 2021, we had an accumulated deficit of $340.3 million and approximately $26.9 million in cash and cash equivalents as well as negative cash flows from operating activities. We do not have sufficient cash and cash equivalents to fund our anticipated level of operations as they become due during the twelve months following the date of filing of this Quarterly Report on Form 10-Q. The aforementioned factors raise substantial doubt about our ability to continue as a going concern.
There is no assurance that additional funds will be obtained for our ongoing operations or that we will succeed in our future operations. Specifically, the COVID-19 pandemic has caused volatility in the global financial markets and threatened a slowdown in the global economy, which may adversely affect our ability to raise additional capital on attractive terms or at all. A recession, depression or other sustained adverse market event resulting from the spread of COVID-19 may also limit our ability to obtain financing for our operations. In addition, our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 and our unaudited financial statements included in this Quarterly Report on Form 10-Q include an explanatory paragraph regarding our ability to continue as a going concern which may discourage some third parties from contracting with us and some investors from purchasing our stock or providing alternative capital financing, which could adversely affect our business, financial condition, results of operations and prospects.
We have a history of operating losses. We expect to continue to incur losses over the next several years and may never become profitable.
Since inception, we have incurred significant operating losses. For the twelve months ended December 31, 2020 and the three months ended March 31, 2021, we incurred a net loss of $33.4 million and $8.1 million, respectively, and, as of March 31, 2021, we had an accumulated deficit of $340.3 million. We expect to continue to incur additional significant operating losses and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we continue the development of our product candidate, QtryptaTM (M207) ("Qtrypta"), or any other product candidates that we develop. These expenditures will be incurred for manufacturing, development, clinical trials, regulatory compliance and infrastructure. Even if we succeed in developing, obtaining regulatory approval for and commercializing Qtrypta or any other product candidates that we develop, because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict that we will ever be able to manufacture, distribute and sell any of our products profitably, and we may never generate revenue that is significant enough to achieve or maintain profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.
We have generated only limited revenues and will need additional capital to develop and commercialize our product candidates, which may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or lead product candidates.
Since inception, we have generated no revenues from product sales. We are not approved to make and have not made any commercial sales of products. We expect that our product development activities will require additional significant operating and capital expenditures resulting in negative cash flow for the foreseeable future.
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We expect to finance our cash needs through a combination of equity offerings, debt financing and license and collaboration agreements. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans.
However, adequate and additional funding may not be available to us on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends on our common stock.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our research programs or product candidates or grant licenses on terms that may not be favorable to us.
If we are unable to raise additional funds through equity or debt financings or other arrangements with third parties when needed, we may be required to delay, limit, reduce or terminate our development or future commercialization efforts or partner with third parties to develop and market product candidates that we would otherwise prefer to develop and market ourselves. The amount and timing of our future financing requirements will depend on many factors, including:
the scope, progress, expansion, and costs of manufacturing our product candidates;
the scope, progress, expansion, costs, and results of our clinical trials;
the timing of, and costs involved in, obtaining regulatory approvals;
the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;
our ability to establish and maintain development partnering arrangements;
the timing, receipt and amount of contingent, royalty, and other payments from any of our future development partners;
the emergence of competing technologies and other adverse market developments;
the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
the resources we devote to marketing, and if approved, commercializing our product candidates, including expenses we are obligated to incur under our commercialization agreement with Eversana for Qtrypta, if approved; and
the costs associated with being a public company.
Our build-to-suit arrangement with Trinity Funding 1, LLC (successor to Trinity Capital Fund III, L.P.) ("Trinity") imposes restrictions on our business, and if we default on our obligations, Trinity would have a right to request payment in full of the build-to-suit obligation.
We agreed to covenants in connection with the Trinity build-to-suit arrangement that may limit our ability to take some actions without the consent of Trinity, as applicable. In particular, without Trinity’s consent under the terms of the build-to-suit arrangement, we are restricted in our ability to:
create liens on our property;
sell, transfer, or otherwise dispose of all or substantially all of our assets;
transfer, dispose or relocate financed equipment;
acquire or merge with another entity; and
engage in a transaction that would constitute 50% or more in change in control.
Our indebtedness to Trinity may prevent us from engaging in activities that could be beneficial to our business and our stockholders unless we repay the outstanding obligation, which may not be desirable or possible.
We have pledged substantially all of our assets, including our intellectual property, to secure our obligations to Trinity. If we default on our obligations prior to repaying this indebtedness and are unable to obtain a waiver for such default, Trinity
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would have a right to accelerate our payments under the build-to-suit arrangement, as applicable, and possibly foreclose on the collateral, which would potentially include our intellectual property. Any such action on the part of Trinity would significantly harm our business and our ability to operate.
We have limited operating history and capabilities.
Although our business was formed in 2006, we have had limited operations since that time. We do not currently have the ability to perform the sales, marketing and manufacturing functions at the Fremont, California site, necessary for the production and sale of Qtrypta or any other product candidate on a commercial scale. The successful commercialization of Qtrypta or any other product candidate will require us to perform a variety of functions, including:
continuing to conduct clinical development of our product candidates;
obtaining required regulatory approvals;
formulating and manufacturing product; and
conducting sales and marketing activities.
Our operations continue to be focused on pre-commercialization efforts for Qtrypta, developing and securing our proprietary technology and undertaking preclinical and clinical trials of our product candidates.
We expect our financial condition and operating results to continue to fluctuate from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. We are currently transitioning from a research and development focused company to a company capable of undertaking commercial activities. We may encounter unforeseen expenses, difficulties, complications and delays and may not be successful in such a transition.
Interim, “topline” and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publicly disclose preliminary or topline data from our preclinical studies and clinical trials, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the topline or preliminary results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, topline data should be viewed with caution until the final data are available.
From time to time, we may also disclose interim data from our preclinical studies and clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects. Further, disclosure of interim data by us or by our competitors could result in volatility in the price of our common stock.
Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our company in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is material or otherwise appropriate information to include in our disclosure.
If the interim, topline, or preliminary data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may be harmed, which could harm our business, operating results, prospects or financial condition.
We face risks related to the Paycheck Protection Program loan, which could adversely affect our future cash flows and financial condition.
On April 21, 2020, we entered into a note (the “PPP Note”) with Silicon Valley Bank pursuant to the Paycheck Protection Program (“PPP”), which provides for a loan in the amount of $1.6 million (the “PPP Loan”). The PPP, established as part of the
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Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), provides for loans to qualifying businesses and is administered by the U.S. Small Business Administration (“SBA”). The PPP Note is subject to the terms and conditions applicable to loans administered by the SBA under the CARES Act, which are subject to revisions and changes by Congress, the Treasury Department and SBA. The term of the PPP Loan is two years. The annual interest rate on the PPP Loan is 1.0% and principal and interest payments are deferred until September 21, 2021. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and the maintenance of our payroll levels. We applied for forgiveness of the entire $1.6 million loan amount and accrued interest on October 4, 2020, utilizing the 24-week covered period allowed by the SBA. The lender reviewed the application and submitted it to the SBA on October 7, 2020. No assurance is provided that we will obtain forgiveness of the PPP Loan in whole or in part. If forgiveness is not granted, the PPP Loan will need to be repaid by us, which could have an adverse effect on our future cash flows and financial condition. Additionally, the Treasury Department and SBA continue to develop and issue new and updated regulations and guidance regarding the PPP loan process, including regarding required borrower certifications and requirements for forgiveness of loans made under the PPP. We continue to track the regulations and guidance as they are released and assess and re-assess various aspects of our application as necessary. However, given the potential for additional legislation, regulation or guidance, and based on our projected ability to use the loan proceeds for qualifying expenses, we cannot give any assurance that the PPP Loan will be forgivable in whole or in part. Finally, we may be subject to CARES Act-specific lookbacks and audits conducted by the Treasury, SBA or other federal agencies, including oversight bodies created under the CARES Act. These bodies have the ability to coordinate investigations and audits and refer matters to the Department of Justice for civil or criminal enforcement and other actions.
RISKS RELATED TO THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES
The development and commercialization of our product candidates are subject to many risks. If we do not successfully develop, receive approval for, and commercialize our product candidates, our business will be adversely affected.
To date, we have devoted the majority of our research, development and clinical efforts and financial resources toward the development of Qtrypta, our proprietary formulation of zolmitriptan for the acute treatment of migraine headaches. In December 2019, we submitted a 505(b)(2) New Drug Application (“NDA”) to the FDA seeking approval for Qtrypta. On September 29, 2020, we received a Discipline Review Letter (“DRL”) from the FDA in response to the application. The DRL described two concerns with respect to the clinical pharmacology section of the NDA. First, the FDA raised questions regarding unexpected high plasma concentrations of zolmitriptan observed in five study subjects from two pharmacokinetic ("PK") studies, and how the data from these subjects affect the overall clinical pharmacology section of the application. Second, the FDA raised questions regarding differences in zolmitriptan exposures observed between subjects receiving different lots of Qtrypta in our clinical trials.
On October 20, 2020, we received a complete response letter (“CRL”) from the FDA in response to the Qtrypta NDA. The CRL stated that the FDA determined it could not approve the NDA in its present form and provided recommendations to address the remaining approvability issues in an NDA resubmission. The approvability issues are related to clinical pharmacology and product quality. The CRL cited inconsistent zolmitriptan exposure levels observed across clinical pharmacology studies, which had been previously identified in the DRL. Specifically, the CRL noted differences in zolmitriptan exposures observed between subjects receiving different lots of Qtrypta in our clinical trials and inadequate PK bridging between the lots that made interpretation of some safety data unclear. The CRL referenced unexpected high plasma concentrations of zolmitriptan observed in five study subjects enrolled in our PK studies. The FDA recommended that we conduct a repeat bioequivalence study comparing lots manufactured with the equipment used during development to address these issues.
The CRL further noted that additional product quality validation data, which were planned to be submitted following approval, if received, were required to be submitted with the application. In addition, the CRL mentioned that due to U.S. Government and/or FDA-wide restrictions on travel, inspections of our contract manufacturing facilities were not able to be conducted, but that such inspections would be required before the application may be approved.
On January 29, 2021, we held a Type A meeting with the FDA Division of Neurology II (the “Division”) regarding the requirements for resubmission of the Qtrypta NDA. Based on feedback from the Type A meeting held with the Division, we plan to conduct an additional PK study for inclusion in an NDA resubmission package. On February 19, 2021, we received the official Type A meeting minutes from the FDA. The Type A meeting minutes were generally consistent with our expectations to conduct an additional PK study for inclusion in an NDA resubmission package. In a post-meeting comment, the FDA recommended a skin assessment on patients in the planned PK study to generate additional safety information. This assessment was included in the PK study protocol, submitted to the FDA for review.
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On April 12, 2021, we received FDA comments and recommendations to our proposed PK study protocol for Qtrypta. We have made the recommended changes to the study protocol and established an agreement with a contract research organization (“CRO”) to conduct the PK study required to support the resubmission of the Qtrypta 505(b)(2) NDA. The study is expected to involve 48 healthy volunteers to generate comparative PK and safety data. We expect the study to begin in June 2021 and to be completed with data available in the third quarter of 2021. Subject to positive data, we expect to resubmit the NDA for Qtrypta by the end of 2021.
We will incur additional costs and delays in our previously anticipated timeline for potential commercialization due to the additional PK study, and our plan to resubmit the NDA may be further delayed and we may incur higher than anticipated additional costs depending on the time it takes to complete the PK study, or any additional studies or other requirements of the FDA. In addition, there is no guarantee that we will be able to adequately address the issues raised to the FDA’s satisfaction.
In addition to the above factors, the development and commercialization of Qtrypta and any product candidates we may develop and commercialize in the future is subject to many risks including:
we may be unable to obtain additional funding to develop our product candidates;
we may experience delays in regulatory review and approval of our product candidates in clinical development;
the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA for marketing approval;
the FDA may disagree with the number, design, size, conduct or implementation of our clinical trials;
the FDA may not find the data from preclinical studies and clinical trials sufficient to demonstrate that clinical and other benefits outweigh its safety risks;
the FDA may disagree with our interpretation of data from our preclinical studies and clinical trials or may require that we conduct additional studies or trials;
we will be required to undertake additional clinical trials of Qtrypta before we receive approval of the NDA;
the FDA may not accept data generated at our clinical trial sites;
we may be unable to obtain and maintain regulatory approval of our product candidates in the United States and foreign jurisdictions;
potential side effects of our product candidates could delay or prevent commercialization, limit the indications for any approved product candidate, require the establishment of a risk evaluation and mitigation strategy (“REMS”), or cause an approved product candidate to be taken off the market;
the FDA may identify deficiencies in our manufacturing processes or facilities or those of our contract manufacturing organizations (“CMOs”);
the FDA may change its approval policies or adopt new regulations;
we will depend on third-party manufacturers to supply or manufacture our products;
we depend on contract research organizations to conduct our clinical trials;
we may experience delays in the commencement of, enrollment of patients in and timing of our clinical trials;
we may not be able to demonstrate that our product candidates are safe and effective treatments for their intended indications to the satisfaction of the FDA or other similar regulatory bodies;
we may be unable to establish or maintain collaborations, licensing or other arrangements;
the market may not accept our product candidates, if approved;
we may be unable to establish and maintain an effective sales and marketing infrastructure;
we will depend on Eversana or another third party to commercialize Qtrypta, if approved;
we may experience competition from existing products or new products that may emerge; and
we and our licensors may be unable to successfully obtain, maintain, defend and enforce intellectual property rights important to protect our product candidates.
Moreover, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under certain circumstances, we may be required to report
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some of these relationships to regulatory authorities, which may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected interpretation of a study. This could result in a delay in approval, or rejection, of our marketing applications. If any of these risks materializes, we could experience significant delays or an inability to successfully commercialize our product candidates, which would have a material adverse effect on our business, financial condition and results of operations.
The Long-term Safety Study ("LTSS") for Qtrypta is an important step in the development of Qtrypta. If the results from the study do not establish the safety of Qtrypta to the FDA's satisfaction, the regulatory approval process could be delayed or failed, and our business could be adversely affected.
In February 2019, we announced the completion of the final phase of our LTSS where more than 50 evaluable subjects were treated for a year, and in September 2019, we announced the presentation of final results from the LTSS at the 19th Congress of the International Headache Society in Dublin, Ireland. The results of the LTSS will need to support the safety of Qtrypta for the acute treatment of migraine. If the results do not provide sufficient evidence for the FDA to determine the safety of Qtrypta, we could be required to conduct additional clinical or preclinical studies or we may be required to delay, limit, reduce or terminate our development of Qtrypta. Also, even though we have discussed our development strategy with the FDA on our Qtrypta program and received feedback from the FDA about the size and the length of the safety study, the FDA may require us to provide more data than we currently anticipate before approving Qtrypta, if ever, which would further delay the regulatory approval process and require additional clinical or preclinical work; for example, in the CRL, the FDA recommended that we conduct a repeat bioequivalence study comparing lots manufactured with the equipment used during development.
If the FDA does not conclude that our product candidates satisfy the requirements for the 505(b)(2) regulatory approval pathway, or if the requirements for approval of our product candidates under Section 505(b)(2) are not as we expect, the approval pathway for our product candidates will likely take significantly longer, cost significantly more and encounter significantly greater complications and risks than anticipated, and in any case may not be successful.
We intend to seek FDA approval through the 505(b)(2) regulatory pathway for our product candidates described in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug and Cosmetics Act (“FDCA”). Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant.
If the FDA does not allow us or any partner with which we collaborate to pursue the 505(b)(2) regulatory pathway for our product candidates, we or they may need to conduct additional clinical trials, provide additional data and information and meet additional standards for regulatory approval. If this were to occur, we or they will need to successfully complete additional Phase 2 and/or Phase 3 clinical trials and submit to the FDA for approval one or more NDAs in order to obtain FDA approval to market our product candidates. The time and financial resources required to obtain FDA approval for our product candidates would likely substantially increase. The conduct of later-stage clinical trials and the submission of a successful NDA is a complicated process. To date, we have conducted only one Phase 2/3 clinical trial and one LTSS of Qtrypta. In addition, we have limited experience in preparing and submitting regulatory filings, and other than the NDA for Qtrypta, we have not previously submitted an NDA for any product candidate. Consequently, the completion of our clinical trials for Qtrypta for the potential treatment of migraine may not lead to a successful NDA submission. As discussed above, we received a CRL from the FDA in response to the Qtrypta NDA. In addition, we may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to an NDA submission for any other product candidate we may develop in the future.
Moreover, the inability to pursue the 505(b)(2) regulatory pathway could result in new competitive products reaching the market faster than our product candidates, which could materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the 505(b)(2) regulatory pathway for our product candidates, we cannot assure you that we will receive the requisite approvals for commercialization of such product candidates.
In addition, our competitors may file petitions with the FDA in an attempt to persuade the FDA that our product candidates, or the clinical studies that support their approval, contain deficiencies. Such actions by our competitors could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2).
Clinical trials are very expensive, time-consuming and difficult to design and implement.
Human clinical trials are very expensive, time-consuming and difficult to design and implement, in part because they are subject to rigorous regulatory requirements, and their outcome is inherently uncertain. Furthermore, failure of a product candidate can occur at any stage of the trials, and we could encounter problems that cause us to abandon or repeat clinical trials.
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Further, we may experience delays in our ongoing clinical trials and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. The commencement and completion of clinical trials may be delayed by several factors, including:
changes in government regulation, administrative action or changes in FDA policy with respect to clinical trials that change the requirements for approval;
delays in obtaining authorization from regulators and required Institutional Review Board ("IRB") approval at each site to commence a trial;
imposition of a clinical hold for safety reasons or following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authority;
delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites, or failure by such CROs or trial sites to carry out the clinical trial at each site in accordance with the terms of our agreements with them;
difficulties or delays in having patients complete participation in a trial or return for post-treatment follow-up;
clinical sites electing to end their participation in one of our clinical trials, which would likely have detrimental effect on subject enrollment;
time required to add new clinical sites;
delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials;
unforeseen safety issues;
determination of dosing issues;
lack of effectiveness during clinical trials;
slower than expected rates of patient recruitment and enrollment;
inability to raise or delays in raising funding necessary to initiate or continue a trial;