Lipocine Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS LIPOCINE INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) September 30, December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 12,938,186 $ 9,728,523 Restricted cash 5,000,000 5,000,000 Marketable investment securities 5,861,797 4,340,041 Accrued interest income 11,216 16,522 Prepaid and other current assets 915,575 545,887 Total current assets 24,726,774 19,630,973 Property and equipment, net of accumulated depreciation of $1,142,540 and $1,140,143, respectively 1,157 3,554 Other assets 23,753 23,753 Total assets $ 24,751,684 $ 19,658,280 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,047,729 $ 1,182,241 Accrued expenses 1,534,495 449,303 Debt - current portion 3,206,290 3,333,333 Total current liabilities 5,788,514 4,964,877 Debt - non-current portion 3,151,010 3,814,407 Warrant liability 1,303,859 4,591,200 Total liabilities 10,243,383 13,370,484 Commitments and contingencies (notes 5, 7, 8 and 10) Stockholders' equity: Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized; zero issued and outstanding - - Common stock, par value $0.0001 per share, 100,000,000 shares authorized; 65,691,860 and 37,655,175 issued and 65,686,150 and 37,649,465 outstanding 6,569 3,766 Additional paid-in capital 182,062,701 157,391,969 Treasury stock at cost, 5,710 shares (40,712 ) (40,712 ) Accumulated other comprehensive gain (loss) 475 (38 ) Accumulated deficit (167,520,732 ) (151,067,189 ) Total stockholders' equity 14,508,301 6,287,796 Total liabilities and stockholders' equity $ 24,751,684 $ 19,658,280 See accompanying notes to unaudited condensed consolidated financial statements 3 LIPOCINE INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues: License revenue $ - $ 164,990 $ - $ 164,990 Total revenues - 164,990 - 164,990 Operating expenses: Research and development $ 2,487,861 $ 1,713,417 $ 7,268,599 $ 5,627,383 General and administrative 1,887,195 1,427,261 5,925,991 3,989,645 Total operating expenses 4,375,056 3,140,678 13,194,590 9,617,028 Operating loss (4,375,056 ) (2,975,688 ) (13,194,590 ) (9,452,038 ) Other income (expense): Interest and investment income 5,614 98,988 72,729 348,833 Interest expense (84,293 ) (183,500 ) (305,485 ) (611,864 ) Gain (loss) on warrant liability 140,477 - (3,025,997 ) - Total other expense, net 61,798 (84,512 ) (3,258,753 ) (263,031 ) Loss before income tax expense (4,313,258 ) (3,060,200 ) (16,453,343 ) (9,715,069 ) Income tax expense - - (200 ) (200 ) Net loss $ (4,313,258 ) $ (3,060,200 ) $ (16,453,543 ) $ (9,715,269 ) Basic loss per share attributable to common stock $ (0.07 ) $ (0.12 ) $ (0.32 ) $ (0.40 ) Weighted average common shares outstanding, basic 64,833,714 24,911,908 52,030,431 24,301,045 Diluted loss per share attributable to common stock $ (0.07 ) $ (0.12 ) $ (0.32 ) $ (0.40 ) Weighted average common shares outstanding, diluted 64,833,714 24,911,908 52,030,431 24,301,045 Comprehensive loss: Net loss $ (4,313,258 ) $ (3,060,200 ) $ (16,453,543 ) $ (9,715,269 ) Net unrealized gain (loss) on available-for-sale securities 579 (2,656 ) 513 1,224 Comprehensive loss $ (4,312,679 ) $ (3,062,856 ) $ (16,453,030 ) $ (9,714,045 ) See accompanying notes to unaudited condensed consolidated financial statements 4 LIPOCINE INC. AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Stockholders’ Equity For the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited) Common Stock Treasury Stock Additional Accumulated Other Total Number of Shares Amount Number of Shares Amount Paid-In Capital Comprehensive Gain (Loss) Accumulated Deficit Stockholders' Equity Balances at June 30, 2019 24,723,990 $ 2,473 5,710 $ (40,712 ) $ 154,600,442 $ 2,917 $ (144,714,914 ) $ 9,850,206 Net loss - - - - - - (3,060,200 ) (3,060,200 ) Unrealized net loss on marketable investment securities - - - - - (2,656 ) - (2,656 ) Stock-based compensation - - - - 58,113 - - 58,113 Common stock sold through ATM offering 283,782 28 - - 603,649 - - 603,677 Option exercises 20,000 2 - - 56,198 - - 56,200 Balances at September 30, 2019 25,027,772 $ 2,503 5,710 $ (40,712 ) $ 155,318,402 $ 261 $ (147,775,114 ) $ 7,505,340 Common Stock Treasury Stock Additional Accumulated Other Total Number of Shares Amount Number of Shares Amount Paid-In Capital Comprehensive Gain (Loss) Accumulated Deficit Stockholders' Equity Balances at December 31, 2018 21,731,486 $ 2,174 5,710 $ (40,712 ) $ 147,533,019 $ (963 ) $ (138,059,845 ) $ 9,433,673 Net loss - - - - - - (9,715,269 ) (9,715,269 ) Unrealized net gain on marketable investment securities - - - - - 1,224 - 1,224 Stock-based compensation - - - - 781,390 - - 781,390 Common stock sold through ATM offering 3,276,286 327 - - 6,947,795 - - 6,948,122 Option exercises 20,000 2 - - 56,198 - - 56,200 Balances at September 30, 2019 25,027,772 $ 2,503 5,710 $ (40,712 ) $ 155,318,402 $ 261 $ (147,775,114 ) $ 7,505,340 Common Stock Treasury Stock Additional Accumulated Other Total Number of Shares Amount Number of Shares Amount Paid-In Capital Comprehensive Gain (Loss) Accumulated Deficit Stockholders' Equity Balances at June 30, 2020 61,377,306 $ 6,138 5,710 $ (40,712 ) $ 176,327,120 $ (104 ) $ (163,207,474 ) $ 13,084,968 Net loss - - - - - - (4,313,258 ) (4,313,258 ) Unrealized net gain on marketable investment securities - - - - - 579 - 579 Stock-based compensation - - - - 351,623 - - 351,623 Vesting of restricted stock units - - - - Common stock issued for warrant exercises 1,478,844 148 - - 760,570 - - 760,718 Settlement of warrant liability on warrant exercises - - - - 721,976 - - 721,976 Common stock sold through ATM offering 2,830,000 283 - - 3,901,412 - - 3,901,695 Balances at September 30, 2020 65,686,150 $ 6,569 5,710 $ (40,712 ) $ 182,062,701 $ 475 $ (167,520,732 ) $ 14,508,301 Common Stock Treasury Stock Additional Accumulated Total Number of Shares Amount Number of Shares Amount Paid-In Capital Comprehensive Gain (Loss) Accumulated Deficit Stockholders' Equity Balances at December 31, 2019 37,649,465 $ 3,766 5,710 $ (40,712 ) $ 157,391,969 $ (38 ) $ (151,067,189 ) $ 6,287,796 Net loss - - - - - - (16,453,543 ) (16,453,543 ) Unrealized net gain on marketable investment securities - - - - - 513 - 513 Stock-based compensation - - - - 1,138,594 - - 1,138,594 Vesting of restricted stock units 25,000 2 - - (2 ) - - - Common stock sold through equity offering 10,084,034 1,008 - - 5,652,132 - - 5,653,140 Common stock issued for warrant exercises 15,097,651 1,510 - - 7,673,366 - - 7,674,876 Settlement of warrant liability on warrant exercises - - - - 6,313,338 - - 6,313,338 Common stock sold through ATM offering 2,830,000 283 - - 3,893,304 - - 3,893,587 Balances at September 30, 2020 65,686,150 $ 6,569 5,710 $ (40,712 ) $ 182,062,701 $ 475 $ (167,520,732 ) $ 14,508,301 See accompanying notes to unaudited condensed consolidated financial statements 5 LIPOCINE INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2020 2019 Cash flows from operating activities: Net loss $ (16,453,543 ) $ (9,715,269 ) Adjustments to reconcile net loss to cash used in operating activities: Depreciation expense 2,397 11,582 Stock-based compensation expense 1,138,594 781,390 Non-cash interest expense 87,134 175,305 Non-cash loss on change in fair value of warrant liability 3,025,997 - Amortization of discount on marketable investment securities (5,946 ) (147,437 ) Changes in operating assets and liabilities: Accrued interest income 5,306 27,660 Prepaid and other current assets (369,688 ) (234,391 ) Accounts payable (134,512 ) 689,166 Accrued expenses 1,085,192 53,819 Cash used in operating activities (11,619,069 ) (8,358,175 ) Cash flows from investing activities: Purchases of marketable investment securities (6,315,297 ) (15,108,973 ) Maturities of marketable investment securities 4,800,000 17,549,795 Cash provided by (used in) investing activities (1,515,297 ) 2,440,822 Cash flows from financing activities: Debt repayments (1,111,111 ) (2,500,000 ) Proceeds from debt 233,537 - Proceeds from stock option exercises - 56,200 Net proceeds from common stock offering 5,653,140 - Net proceeds from sale of common stock through ATM 3,893,587 6,948,122 Net proceeds from exercise of warrants 7,674,876 - Cash provided by financing activities 16,344,029 4,504,322 Net increase (decrease) in cash, cash equivalents, and restricted cash 3,209,663 (1,413,031 ) Cash, cash equivalents, and restricted cash at beginning of period 14,728,523 13,077,539 Cash, cash equivalents, and restricted cash at end of period $ 17,938,186 $ 11,664,508 Supplemental disclosure of cash flow information: Interest paid $ 217,319 $ 436,559 Income taxes paid 200 200 Supplemental disclosure of non-cash investing and financing activity: Settlement of warrant liability on warrant exercises $ 6,313,338 $ - Net unrealized gain on available-for-sale securities 513 1,224 Accrued final payment charge on debt 87,134 175,305 Other accrued interest 1,032 - See accompanying notes to unaudited condensed consolidated financial statements 6 LIPOCINE INC. Notes to Condensed Consolidated Financial Statements (Unaudited) (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Lipocine Inc. (“Lipocine” or the “Company”) in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements are comprised of the financial statements of Lipocine and its subsidiaries, collectively referred to as the Company. In management's opinion, the interim financial data presented includes all adjustments (consisting solely of normal recurring items) necessary for fair presentation. All intercompany accounts and transactions have been eliminated. Certain information required by U.S. generally accepted accounting principles has been condensed or omitted in accordance with rules and regulations of the SEC. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto for the year ended December 31, 2019. The preparation of the unaudited condensed consolidated financial statements requires management to make estimates and assumptions relating to reporting of the assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period in conformity with U.S. generally accepted accounting principles. Actual results could differ from these estimates. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the previously reported net loss. The Company believes that its existing capital resources, together with interest thereon, will be sufficient to meet its projected operating requirements through at least September 30, 2021 which includes an on-going clinical study for LPCN 1144, compliance with regulatory requirements and on-going litigation activities. The Company has based this estimate on assumptions that may prove to be wrong, and the Company could utilize its available capital resources sooner than it currently expects if additional activities are performed by the Company including pre-commercial and commercial activities for TLANDO and new clinical studies for LPCN 1144, TLANDO XR and LPCN 1148 .While the Company believes it has sufficient liquidity and capital resources to fund our projected operating requirements through at least September 30, 2021, the Company will need to raise additional capital at some point through the equity or debt markets or through out-licensing activities, before or after September 30, 2021, to support its operations. If the Company is unsuccessful in raising additional capital, its ability to continue as a going concern will become a risk. Further, the Company’s operating plan may change, and the Company may need additional funds to meet operational needs and capital requirements for product development, regulatory compliance and clinical trial activities sooner than planned. In addition, the Company’s capital resources may be consumed more rapidly if it pursues additional clinical studies for LPCN 1144, TLANDO XR and LPCN 1148. Conversely, the Company’s capital resources could last longer if it reduces expenses, reduces the number of activities currently contemplated under our operating plan, if it terminates, modifies the design or suspends on-going clinical studies, or if it terminates or settles any on-going litigation activities. (2) Earnings (Loss) per Share Basic earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is based on the weighted average number of common shares outstanding plus, where applicable, the additional potential common shares that would have been outstanding related to dilutive options, warrants and, unvested restricted stock units to the extent such shares are dilutive. The following table sets forth the computation of basic and diluted earnings (loss) per share of common stock for the three and nine months ended September 30, 2020 and 2019: 7 Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Basic loss per share attributable to common stock: Numerator Net loss $ (4,313,258 ) $ (3,060,200 ) $ (16,453,543 ) $ (9,715,269 ) Denominator Weighted avg. common shares outstanding 64,833,714 24,911,908 52,030,431 24,301,045 Basic loss per share attributable to common stock $ (0.07 ) $ (0.12 ) $ (0.32 ) $ (0.40 ) Diluted loss per share attributable to common stock: Numerator Net loss $ (4,313,258 ) $ (3,060,200 ) $ (16,453,543 ) $ (9,715,269 ) Denominator Weighted avg. common shares outstanding 64,833,714 24,911,908 52,030,431 24,301,045 Diluted loss per share attributable to common stock $ (0.07 ) $ (0.12 ) $ (0.32 ) $ (0.40 ) The computation of diluted loss per share for the nine months ended September 30, 2020 and 2019 does not include the following stock options and warrants to purchase shares or unvested restricted stock units in the computation of diluted loss per share because these instruments were antidilutive: September 30, 2020 2019 Stock options 2,958,485 2,310,485 Unvested restricted stock units 605,682 678,687 Warrants 1,944,366 - (3) Marketable Investment Securities The Company has classified its marketable investment securities as available-for-sale securities, all of which are debt securities. These securities are carried at fair value with unrealized holding gains and losses, net of the related tax effect, included in accumulated other comprehensive income (loss) in stockholders’ equity until realized. Gains and losses on investment security transactions are reported on the specific-identification method. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities by major security type and class of security at September 30, 2020 and December 31, 2019 were as follows: 8 September 30, 2020 Amortized Cost Gross unrealized holding gains Gross unrealized holding losses Aggregate fair value Government treasury bills $ 1,999,426 $ 274 $ - $ 1,999,700 Corporate bonds, notes and commercial paper 3,861,896 201 - 3,862,097 $ 5,861,322 $ 475 $ - $ 5,861,797 December 31, 2019 Amortized Cost Gross unrealized holding gains Gross unrealized holding losses Aggregate fair value Corporate bonds, notes and commercial paper 4,340,079 - (38 ) 4,340,041 $ 4,340,079 $ - $ (38 ) $ 4,340,041 Maturities of debt securities classified as available-for-sale securities at September 30, 2020 are as follows: September 30, 2020 Amortized Cost Aggregate fair value Due within one year $ 5,861,322 $ 5,861,797 $ 5,861,322 $ 5,861,797 There were no sales of marketable investment securities during the three and nine months ended September 31, 2020 and 2019 and therefore no realized gains or losses. Additionally, $450,000 and $8.5 million of marketable investment securities matured during the three months ended September 30, 2020 and September 30, 2019, respectively, and $4.8 million and $17.5 million of marketable investment securities matured during the nine months ended September 30, 2020 and 2019, respectively. The Company determined there were no other-than-temporary impairments for the three and nine months ended September 30, 2020 and 2019. (4) Fair Value The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: • Level 1 Inputs: Quoted prices for identical instruments in active markets. • Level 2 Inputs: Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuation in which all significant inputs and significant value drivers are observable in active markets. • Level 3 Inputs: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. 9 All of the Company’s financial instruments are valued using quoted prices in active markets or based on other observable inputs. For accrued interest income, prepaid and other current assets, accounts payable, and accrued expenses, the carrying amounts approximate fair value because of the short maturity of these instruments. The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019: September 30, Fair value measurements at reporting date using 2020 Level 1 inputs Level 2 inputs Level 3 inputs Assets: Cash equivalents - money market funds and commercial paper $ 12,447,182 $ 12,447,182 $ - $ - Government treasury bills 1,999,700 1,999,700 - - Corporate bonds, notes and commercial paper 3,862,097 - 3,862,097 - $ 18,308,979 $ 14,446,882 $ 3,862,097 $ - Liabilities: Warrant liability $ 1,303,859 - - 1,303,859 $ 19,612,838 $ 14,446,882 $ 3,862,097 $ 1,303,859 December 31, Fair value measurements at reporting date using 2019 Level 1 inputs Level 2 inputs Level 3 inputs Assets: Cash equivalents - money market funds and commercial paper $ 8,921,249 $ 6,575,862 $ 2,345,387 $ - Corporate bonds, notes and commercial paper 4,340,041 - 4,340,041 - $ 13,261,290 $ 6,575,862 $ 6,685,428 $ - Liabilities: Warrant liability $ 4,591,200 - - 4,591,200 $ 17,852,490 $ 6,575,862 $ 6,685,428 $ 4,591,200 The following methods and assumptions were used to determine the fair value of each class of assets and liabilities recorded at fair value in the balance sheets: Cash equivalents: Cash equivalents primarily consist of highly-rated money market funds, commercial paper and treasury bills with original maturities to the Company of three months or less and are purchased daily at par value with specified yield rates. Cash equivalents related to money market funds and treasury bills are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices or broker or dealer quotations for similar assets. Cash equivalents related to commercial paper are classified within Level 2 of the fair value hierarchy because they are valued using broker/dealer quotes, bids and offers, benchmark yields and credit spreads and other observable inputs. 10 Government treasury bills: The Company uses a third-party pricing service to value these investments. United States treasury bills are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets for identical assets and reportable trades. Corporate bonds, notes, and commercial paper: The Company uses a third-party pricing service to value these investments. Corporate bonds, notes and commercial paper are classified within Level 2 of the fair value hierarchy because they are valued using broker/dealer quotes, bids and offers, benchmark yields and credit spreads and other observable inputs. Warrant liability: The warrant liability (which relates to warrants to purchase shares of common stock) is marked-to-market each reporting period with the change in fair value recorded to other income (expense) in the accompanying statements of operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified to stockholders’ equity. The fair value of the warrant liability is estimated using a Black-Scholes option-pricing model. The significant assumptions used in preparing the option pricing model for valuing the warrant liability as of September 30, 2020, include (i) volatility of 103.45%, (ii) risk free interest rate of 0.22%, (iii) strike price of $0.50, (iv) fair value of common stock of $1.41, and (v) expected life of 4.13 years. The significant assumptions used in preparing the option pricing model for valuing the warrant liability as of December 31, 2019, include (i) volatility of 225.93%, (ii) risk free interest rate of 1.69%, (iii) strike price of $0.50, (iv) fair value of common stock of $0.385, and (v) expected life of 4.9 years. The Company’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1, Level 2, or Level 3 for the three and nine months ended September 30, 2020. (5) Loan and Security Agreements Silicon Valley Bank Loan On January 5, 2018, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Silicon Valley Bank (“SVB”) pursuant to which SVB agreed to lend the Company $10.0 million. The principal borrowed under the Loan and Security Agreement bears interest at a rate equal to the Prime Rate, as reported in the money rates section of The Wall Street Journal or any successor publication representing the rate of interest per annum then in effect, plus one percent per annum (4.25% as of September 30, 2020), which interest is payable monthly. Additionally on April 1, 2020, the Company and SVB entered into a Deferral Agreement. Under the Deferral Agreement, principal repayments are deferred by six months and the Company is only required to make monthly interest payments. The loan matures on June 1, 2022. Previously, the Company only made monthly interest payments until December 31, 2018, following which the Company also made equal monthly payments of principal and interest until the signing of the Deferral Agreement. The Company will also be required to pay an additional final payment at maturity equal to $650,000 (the “Final Payment Charge”). The Final Payment Charge will be due on the scheduled maturity date and to date approximately $568,000 has been recognized as an increase to the principal balance with a corresponding charge to interest expense with the remaining final payment charge to be recognized over the term of the facility using the effective interest method. At its option, the Company may prepay all amounts owed under the Loan and Security Agreement (including all accrued and unpaid interest and the Final Payment Charge). In connection with the Loan and Security Agreement, the Company granted to SVB a security interest in substantially all of the Company’s assets now owned or hereafter acquired, excluding intellectual property and certain other assets. In addition, as TLANDO was not approved by the United States Food and Drug Administration (“FDA”) prior to May 31, 2018, the Company maintains $5.0 million of cash collateral at SVB as required under the Loan and Security Agreement until such time as TLANDO is approved by the FDA. While any amounts are outstanding under the Loan and Security Agreement, the Company is subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates, among other customary covenants. The credit facility also includes events of default, the occurrence and continuation of which could cause interest to be charged at the rate that is otherwise applicable plus 5.0% and would provide SVB, as collateral agent, with the right to exercise remedies against the Company and the collateral securing the credit facility, including foreclosure against the property securing the credit facilities, including its cash. These events of default include, among other things, any failure by the Company to pay principal or interest due under the credit facility, a breach of certain covenants under the credit facility, the Company’s insolvency, a material adverse change, and one or more judgments against the Company in an amount greater than $100,000 individually or in the aggregate. 11 Future maturities of principal payments on the Loan and Security Agreement at September 30, 2020, are as follows: Years Ending December 31, Amount (in thousands) 2020 $ 556 2021 3,333 2022 1,667 Thereafter — $ 5,556 The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the statement of cash flows. September 30, 2020 Cash and cash equivalents $ 12,938,186 Restricted cash 5,000,000 Cash, cash equivalents, and restricted cash shown in the statement of cash flows $ 17,938,186 Amounts included in restricted cash represent those required to be set aside by the Loan and Security Agreement. The restriction will lapse if and when TLANDO is approved by the FDA. Payroll Protection Program Loan On April 21, 2020, the Company was granted a loan from SVB in the aggregate amount of $233,537, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The PPP loan, which was in the form of a note dated April 21, 2020 issued by SVB, matures on April 21, 2022 and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 21, 2020 (“Note”). The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the PPP loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire PPP loan amount for qualifying expenses. Under the terms of the PPP loan, certain amounts of the PPP loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company has requested forgiveness of the PPP loan and is awaiting a final decision from the Small Business Administration. Future maturities of principal payments on the PPP Loan at September 30, 2020, are as follows: Years Ending December 31, Amount (in thousands) 2020 $ 27 2021 165 2022 42 Thereafter — $ 234 Other Effective June 15, 2020, the Company began deferring Federal Insurance Contributions Act (“FICA”) taxes under the CARES Act Section 2302. Payment of these tax deferrals are delayed to December 31, 2021 and December 31, 2022. 12 (6) Income Taxes The tax provision for interim periods is determined using an estimate of the Company’s effective tax rate for the full year adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if the estimated tax rate changes, the Company makes a cumulative adjustment. At September 30, 2020 and December 31, 2019, the Company had a full valuation allowance against its deferred tax assets, net of expected reversals of existing deferred tax liabilities, as it believes it is more likely than not that these benefits will not be realized. (7) Contractual Agreements (a) Abbott Products, Inc. On March 29, 2012, the Company terminated its collaborative agreement with Solvay Pharmaceuticals, Inc. (later acquired by Abbott Products, Inc.) for TLANDO. As part of the termination, the Company reacquired the rights to the intellectual property from Abbott. All obligations under the prior license agreement have been completed except that Lipocine will owe Abbott a perpetual 1% royalty on net sales. Such royalties are limited to $1.0 million in the first two calendar years following product launch, after which period there is not a cap on royalties and no maximum aggregate amount. If generic versions of any such product are introduced, then royalties are reduced by 50%. The Company did not incur any royalties during the three and nine months ended September 30, 2020 and 2019. (b) Contract Research and Development The Company has entered into agreements with various contract organizations that conduct preclinical, clinical, analytical and manufacturing development work on behalf of the Company as well as a number of independent contractors and primarily clinical researchers who serve as advisors to the Company. The Company incurred expenses of $1.8 million and $1.2 million, respectively, for the three months ended September 30, 2020 and 2019 and $5.1 million and $4.0 million, respectively, for the nine months ended September 30, 2020 and 2019 under these agreements and has recorded these expenses in research and development expenses. 13 (8) Leases On August 6, 2004, the Company assumed a non-cancelable operating lease for office space and laboratory facilities in Salt Lake City, Utah. On May 6, 2014, the Company modified and extended the lease through February 28, 2018. On February 8, 2018, the Company extended the lease through February 28, 2019, on January 2, 2019, the Company extended the lease through February 29, 2020, and on February 24, 2020, the Company extended the lease through February 28, 2021. Future minimum lease payments under non-cancelable operating leases as of September 30, 2020 are: Year ending December 31: 2020 $ 82,596 2021 55,064 Total minimum lease payments $ 137,660 The Company’s rent expense was $83,000 for each of the three months ended September 30, 2020 and 2019 and was $248,000 and $246,000, respectively, for the nine months ended September 30, 2020 and 2019. (9) Stockholders’ Equity (a) Issuance of Common Stock On February 27, 2020, the Company completed a registered direct offering of securities registered under an effective registration statement filed pursuant to the Securities Act of 1933, as amended (“February 2020 Offering”). The gross proceeds from the February 2020 Offering were approximately $6.0 million, before deducting placement agent fees and other offering expenses of approximately $347,000. In the February 2020 Offering, the Company sold 10,084,034 Class A Units at an offering price of $0.595 per unit, with each Class A Unit consisting of one share of its common stock and one-half of a common warrant to purchase one share of common stock at an exercise price of $0.53 per share of common stock. Additionally, the common stock warrants were immediately exercisable and expire on February 27, 2025. By their terms, however, the common stock warrants cannot be exercised at any time that the common stock warrant holder would beneficially own, after such exercise, more than 4.99% (or, at the election of the holder, 9.99%) of the shares of common stock then outstanding after giving effect to such exercise. 14 On November 18, 2019, the Company completed a public offering of securities registered under an effective registration statement filed pursuant to the Securities Act of 1933, as amended (“November 2019 Offering”). The gross proceeds from the November 2019 Offering were approximately $6.0 million, before deducting placement agent fees and other offering expenses of $404,000. In the November 2019 Offering, the Company sold (i) 10,450,000 Class A Units, with each Class A Unit consisting of one share of its common stock and a common warrant to purchase one share of its common stock, and (ii) 1,550,000 Class B Units, with each Class B Unit consisting of one pre-funded warrant to purchase one share of its common stock and a common warrant to purchase one share of its common stock, at a price of $0.50 per Class A Unit and $0.4999 per Class B Unit. The pre-funded warrants, which were exercised for common stock in December 2019, were issued in lieu of common stock in order to ensure the purchaser did not exceed certain beneficial ownership limitations. The pre-funded warrants were immediately exercisable at an exercise price of $.0001 per share, subject to adjustment. Additionally, the common stock warrants were immediately exercisable at an exercise price of $0.50 per share, subject to adjustment, and expire on November 17, 2024. By their terms, however, neither the pre-funded warrants nor the common stock warrants can be exercised at any time that the pre-funded warrant holder or the common stock warrant holder would beneficially own, after such exercise, more than 4.99% (or, at the election of the holder, 9.99%) of the shares of common stock then outstanding after giving effect to such exercise. On the date of the November 2019 Offering, the Company allocated approximately $768,000 and $4.8 million to common stock/additional paid-in capital and warrant liability, respectively. In March 2017, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), to sell shares of our common stock, with aggregate gross sales proceeds of up to $20.0 million, from time to time, through an “at the market” (“ATM”), equity offering program, under which Cantor acts as sales agent. The shares of common stock to be sold under the Sales Agreement were originally sold and issued pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-199093) (the “Prior Form S-3”), which was previously declared effective by the Securities and Exchange Commission, and the related prospectus and one or more prospectus supplements. On October 13, 2017, the Company filed a Form S-3 (File No. 333-220942) (the “New Form S-3”) to replace the Prior Form S-3. The New Form S-3 has been declared effective by the Securities and Exchange Commission, and the Prior Form S-3 has been terminated. The New Form S-3 registered the sale of up to $150.0 million of any combination of common stock, preferred stock, debt securities, warrants and units pursuant to a shelf registration statement. The New Form S-3 also contains a prospectus pursuant to which we may sell, from time to time, shares of our common stock having an aggregate offering price of up to $25.0 million through Cantor as our sales agent, pursuant to the Sales Agreement. On August 21, 2020, the Company filed a prospectus supplement in which the Company increased the aggregate offering price in which shares of our common stock can be sold through Cantor as our sales agent, pursuant to the Sales Agreement to a total of $63.0 million of which $13.0 million of our common stock has already been sold under the Sales Agreement. As of September 30, 2020, we had sold an aggregate of 9,465,535 shares at a weighted-average sales price of $2.54 per share under the ATM for aggregate gross proceeds of $24.1 million and net proceeds of $23.2 million, after deducting sales agent commission and discounts and our other offering costs. During the three and nine months ended September 30, 2020, the Company sold 2,830,000 shares at a weighted-average sales price of $1.43 per share under the ATM for aggregate gross proceeds of $4.0 million and net proceeds of $3.9 million. During the three months ended September 30, 2019, the Company sold an aggregate of 283,782 shares at a weighted-average sales price of $2.22 per share under the ATM for aggregate gross proceeds of $629,000 and $604,000 in net proceeds. During the nine months ended September 30, 2019, the Company sold an aggregate of 3,276,286 shares at a weighted-average sales price of $2.19 per share under the ATM for aggregate gross proceeds of $7.2 million and $6.9 million in net proceeds. (b) Rights Agreement On November 13, 2015, the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent, entered into a Rights Agreement. Also on November 12, 2015, the board of directors of the Company authorized and the Company declared a dividend of one preferred stock purchase right (each a “Right” and collectively, the “Rights”) for each outstanding share of common stock of the Company. The dividend was payable to stockholders of record as of the close of business on November 30, 2015 and entitles the registered holder to purchase from the Company one one-thousandth of a fully paid non-assessable share of Series A Junior Participating Preferred Stock of the Company at a price of $63.96 per one-thousandth share (the “Purchase Price”). The Rights will generally become exercisable upon the earlier to occur of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons has become an Acquiring Person (as defined below) or (ii) 10 business days (or such later date as may be determined by action of the board of directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding common stock of the Company. Except in certain situations, a person or group of affiliated or associated persons becomes an “Acquiring Person” upon acquiring beneficial ownership of 15% or more of the outstanding shares of common stock of the Company. 15 In general, in the event a person becomes an Acquiring Person, then each Right not owned by such Acquiring Person will entitle its holder to purchase from the Company, at the Right’s then current exercise price, in lieu of shares of Series A Junior Participating Preferred Stock, common stock of the Company with a market value of twice the Purchase Price. In addition, if after any person has become an Acquiring Person, (a) the Company is acquired in a merger or other business combination, or (b) 50% or more of the Company’s assets, or assets accounting for 50% or more of its earning power, are sold, leased, exchanged or otherwise transferred (in one or more transactions), proper provision shall be made so that each holder of a Right (other than the Acquiring Person, its affiliates and associates and certain transferees thereof, whose Rights became void) shall thereafter have the right to purchase from the acquiring corporation, for the Purchase Price, that number of shares of common stock of the acquiring corporation which at the time of such transaction would have a market value of twice the Purchase Price. The Company will be entitled to redeem the Rights at $0.001 per Right at any time prior to the time an Acquiring Person becomes such. The terms of the Rights are set forth in the Rights Agreement, which is summarized in the Company's Current Report on Form 8-K dated November 13, 2015. The rights plan was originally set to expire on November 12, 2018; however, on November 5, 2018 our Board of Directors approved an Amended and Restated Rights Agreement pursuant to which the expiration date was extended to November 5, 2021, unless the rights are earlier redeemed or exchanged by the Company. (c) Share-Based Payments The Company recognizes stock-based compensation expense for grants of stock option awards, restricted stock units and restricted stock under the Company’s Incentive Plan to employees and nonemployee members of the Company’s board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award’s requisite service period. In addition, the Company grants stock options to nonemployee consultants from time to time in exchange for services performed for the Company. The Company uses the Black-Scholes model to compute the estimated fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of the Company’s common stock price, (ii) the periods of time over which employees and members of the board of directors are expected to hold their options prior to exercise (expected term), (iii) expected dividend yield on the Common Stock, and (iv) risk-free interest rates. Stock-based compensation expense also includes an estimate, which is made at the time of grant, of the number of awards that are expected to be forfeited. This estimate is revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation cost that has been expensed in the statements of operations amounted to approximately $352,000 and $58,000, respectively, for the three months ended September 30, 2020 and 2019 and amounted to $1.1 million and $781,000, respectively, for the nine months ended September 30, 2020 and 2019, and is allocated as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Research and development $ 150,435 $ 27,072 $ 484,876 $ 313,247 General and administrative 201,188 31,041 653,718 468,143 $ 351,623 $ 58,113 $ 1,138,594 $ 781,390 The Company did not issue any stock options during the three months ended September 30, 2020 and issued 24,000 stock options during the three months ended September 30, 2019. Additionally, during the nine months ended September 30, 2020 and 2019, the Company issued 739,000 and 79,000 stock options, respectively. Key assumptions used in the determination of the fair value of stock options granted are as follows: 2020 2019 Expected term 5.81 years 5.67 years Risk-free interest rate 1.33 % 1.82 % Expected dividend yield — — Expected volatility 99.52 % 80.38 % Expected Term : The expected term represents the period that the stock-based awards are expected to be outstanding. Due to limited historical experience of similar awards, the expected term was estimated using the simplified method in accordance with the provisions of Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment, for awards with stated or implied service periods. The simplified method defines the expected term as the average of the contractual term and the vesting period of the stock option. For awards with performance conditions, and that have the contractual term to satisfy the performance condition, the contractual term was used. Risk-Free Interest Rate : The risk-free interest rate used was based on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term. Expected Dividend : The expected dividend assumption is based on management’s current expectation about the Company’s anticipated dividend policy. The Company does not anticipate declaring dividends in the foreseeable future. Expected Volatility : The volatility factor is based solely on the Company’s trading history since March 2014. FASB ASC 718, Stock Compensation, requires the Company to recognize compensation expense for the portion of options that are expected to vest. Therefore, the Company applied estimated forfeiture rates that were derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods. As of September 30, 2020, there was $430,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock option plan. That cost is expected to be recognized over a weighted average period of 1.59 years and will be adjusted for subsequent changes in estimated forfeitures. Additionally, as of September 30, 2020, there was $118,000 of total unrecognized compensation cost related to unvested restricted stock units that have either time-based or performance vesting. 16 (d) Stock Option Plan In April 2014, the board of directors adopted the 2014 Stock and Incentive Plan ("2014 Plan") subject to shareholder approval which was received in June 2014. The 2014 Plan provides for the granting of nonqualified and incentive stock options, stock appreciation rights, restricted stock units, restricted stock and dividend equivalents. An aggregate of 1,000,000 shares were authorized for issuance under the 2014 Plan. Additionally, 271,906 remaining authorized shares under the 2011 Equity Incentive Plan ("2011 Plan") were issuable under the 2014 Plan at the time of the 2014 Plan adoption. Upon receiving shareholder approval in June 2016, the 2014 Plan was amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 1,271,906 to 2,471,906. Additionally, upon receiving shareholder approval in June 2018, the 2014 Plan was further amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 2,471,906 to 3,221,906. Finally, upon receiving shareholder approval in June 2020, the 2014 Plan was further amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 3,221,906 to 5,721,906. The board of directors, on an option-by-option basis, determines the number of shares, exercise price, term, and vesting period for options granted. Options granted generally have a ten-year contractual life. The Company issues shares of common stock upon the exercise of options with the source of those shares of common stock being either newly issued shares or shares held in treasury. An aggregate of 5,721,906 shares are authorized for issuance under the 2014 Plan, with 2,544,888 shares remaining available for grant as of September 30, 2020. A summary of stock option activity is as follows: Outstanding stock options Number of shares Weighted average exercise price Balance at December 31, 2019 2,310,485 $ 4.81 Options granted 739,000 0.54 Options exercised - - Options forfeited (37,444 ) 0.94 Options cancelled (53,556 ) 6.32 Balance at September 30, 2020 2,958,485 3.77 Options exercisable at September 30, 2020 2,070,073 5.04 17 The following table summarizes information about stock options outstanding and exercisable at September 30, 2020: Options outstanding Options exercisable Number outstanding Weighted average remaining contractual life (Years) Weighted average exercise price Aggregate intrinsic value Number exerciseable Weighted average remaining contractual life (Years) Weighted average exercise price Aggregate intrinsic value 2,958,485 6.26 $ 3.77 $ 627,210 2,070,073 5.02 $ 5.04 $ 9,084 The intrinsic value for stock options is defined as the difference between the current market value and the exercise price. There were no stock options exercised during the three and nine months ended September 30, 2020 and there were 20,000 stock options exercised during the three and nine months ended September 30, 2019. (e) Restricted Stock Units A summary of restricted stock unit activity is as follows: Number of unvested restricted stock units Balance at December 31, 2019 661,307 Granted - Vested (25,000 ) Forfeited (30,625 ) Balance at September 30, 2020 605,682 (f) Common Stock Warrants The Company accounts for its common stock warrants under ASC 480, Distinguishing Liabilities from Equity , which requires any financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and requires or may require the issuer to settle the obligation by transferring assets, to be classified as a liability. In accordance with ASC 480, the Company’s outstanding warrants from the November 2019 Offering are classified as a liability. The liability is adjusted to fair value at each reporting period, with the changes in fair value recognized as gain (loss) on change in fair value of warranty liability in the Company’s consolidated statements of operations. The warrants issued in the November 2019 Offering allow the warrant holder, if certain change in control events occur, the option to receive an amount of cash equal to the value of the warrants as determined in accordance with the Black-Scholes option pricing model with certain defined assumptions upon a fundamental transaction. As of September 30, 2020, the Company had 1,104,030 common stock warrants outstanding from the November 2019 Offering to purchase an equal number of shares of common stock. The fair value of these warrants on September 30, 2020 and December 31, 2019 was determined using the Black-Scholes option pricing model with the following Level 3 inputs (as defined in the November 2019 Offering): September 30, 2020 December 31, 2019 Expected life in years 4.13 4.88 Risk-free interest rate 0.22 % 1.69 % Dividend yield — — Volatility 103.45 % 225.93 % Stock price $ 1.41 $ 0.39 18 During the three and nine months ended September 30, 2020, the Company recorded a non-cash gain of approximately $140,000 and a non-cash loss of approximately $3.0 million, respectively, from the change in fair value of the November 2019 Offering warrants. The following table is a reconciliation of the warrant liability measured at fair value using level 3 inputs: Warrant Liability Balance at December 31, 2019 $ 4,591,200 Settlement of liabilty on warrant exercise (6,313,338 ) Change in fair value of common stock warrants 3,025,997 Balance at September 30, 2020 $ 1,303,859 Additionally, in the February 2020 Offering, the Company issued 5,042,017 common stock warrants. However, the February 2020 Offering warrants do not provide the warrant holder the option to receive an amount of cash equal to the Black-Scholes value of the warrants upon a fundamental transaction. Therefore, the Company has not recorded a warrant liability with respect to the warrants issued in the February 2020 Offering. The following table summarizes the number of common stock warrants outstanding and the weighted average exercise price: Common Stock Warrants Weighted Average Exercise Price Outstanding at December 31, 2019 12,000,000 $ 0.50 Issued 5,042,017 0.53 Exercised (15,097,651 ) 0.51 Expired - - Cancelled - - Forfeited - - Balance at September 30, 2020 1,944,366 $ 0.51 During the three and nine months ended September 30, 2020, 1,478,844, and 15,097,651 common stock warrants to purchase one share of our common stock were exercised, respectively, resulting in proceeds of approximately $761,000 and $7.7 million, respectively, in the three and nine months ended September 30, 2020. The following table summarizes information about common stock warrants outstanding at September 30, 2020: Warrants outstanding Number exercisable Weighted average remaining contractual life (Years) Weighted average exercise price Aggregate intrinsic value 1,944,366 4.25 $ 0.51 $ 1,744,163 19 (10) Commitments and Contingencies Litigation The Company is involved in various lawsuits, claims and other legal matters from time to time that arise in the ordinary course of conducting business. The Company records a liability when a particular contingency is probable and estimable. On February 15, 2019, a purported shareholder filed a shareholder derivative complaint in the Court of Chancery of the State of Delaware, John Wajda, derivatively on behalf of Lipocine Inc. v. Mahesh Patel, et al., against certain of the Company’s current and former officers and directors as well as the Company as a nominal defendant. The complaint asserts claims for alleged breaches of fiduciary duty and unjust enrichment arising out of the Company’s dissemination of purportedly false and misleading statements relating to the filing of the New Drug Application (“NDA”) for TLANDO. The relief sought in the complaint includes unspecified damages, changes to the Company’s corporate governance procedures, equitable and/or injunctive relief, restitution, and attorneys’ fees. On August 16, 2019, defendants filed a motion to dismiss the complaint. In response, the plaintiff’s filed an amended stockholder derivative complaint. Defendants’ motion to dismiss the amended complaint was filed on December 12, 2019; plaintiff’s response was filed on January 27, 2020 and defendants’ reply was filed on February 26, 2020. Oral arguments on the motion to dismiss were held on July 28, 2020. On July 30, 2020, the court entered an order dismissing the complaint in its entirety. On April 2, 2019, the Company filed a lawsuit against Clarus in the United States District Court for the District of Delaware alleging that Clarus’s JATENZO® product infringes six of Lipocine’s issued U.S. patents: 9,034,858; 9,205,057; 9,480,690; 9,757,390; 6,569,463; and 6,923,988. Clarus has answered the complaint and asserted counterclaims of non-infringement and invalidity. The Company answered Clarus’s counterclaims on April 29, 2019. The Court held a scheduling conference on August 15, 2019, a claim construction hearing on February 11, 2020 and scheduled a five-day jury trial beginning on February 8, 2021. On February 11, 2020, the Company voluntarily dismissed allegations of patent infringement for expired U.S. Patent Nos. 6,569,463 and 6,923,988 in an effort to streamline the issues and associated costs for dispute. The parties are currently engaged in the fact discovery and expert testimony phase of the lawsuit. On November 14, 2019, the Company and certain of its officers were named as defendants in a purported shareholder class action lawsuit, Solomon Abady v. Lipocine Inc. et al ., 2:19-cv-00906-PMW, filed in the United District Court for the District of Utah. The complaint alleges that the defendants made false and/or misleading statements and/or failed to disclose that our filing of the NDA for TLANDO to the FDA contained deficiencies and as a result the defendants’ statements about our business and operations were false and misleading and/or lacked a reasonable basis in violation of federal securities laws. The lawsuit seeks certification as a class action (for a purported class of purchasers of the Company’s securities from March 27, 2019 through November 8, 2019), compensatory damages in an unspecified amount, and unspecified equitable or injunctive relief. The Company has insurance that covers claims of this nature. The retention amount payable by the Company under our policy is $1.25 million. The Company filed a motion to dismiss the class action lawsuit on July 24, 2020. In response, the plaintiff’s filed their response to the motion to dismiss the class action lawsuit on September 22, 2020. Further, the Company intends to vigorously defend itself and its current and former officers and directors against these allegations and has not recorded a liability related to this shareholder class action lawsuit as the outcome is not probable nor can an estimate be made of loss, if any. Beyond Solomon Abady v. Lipocine Inc. et al ., 2:19-cv-00906-PM, management does not currently believe that any other matter, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations. Guarantees and Indemnifications In the ordinary course of business, the Company enters into agreements, such as lease agreements, licensing agreements, clinical trial agreements, and certain services agreements, containing standard guarantee and / or indemnification provisions. Additionally, the Company has indemnified its directors and officers to the maximum extent permitted under the laws of the State of Delaware. 20 (11) Spriaso, LLC On July 23, 2013, the Company entered into an assignment/license and a services agreement with Spriaso, a related-party that is majority-owned by certain current and former directors of Lipocine Inc. and their affiliates. Under the license agreement, the Company assigned and transferred to Spriaso all of the Company’s rights, title and interest in its intellectual property to develop products for the cough and cold field. In addition, Spriaso received all rights and obligations under the Company’s product development agreement with a third-party. In exchange, the Company will receive a royalty of 20 percent of the net proceeds received by Spriaso, up to a maximum of $10.0 million. Spriaso also granted back to the Company an exclusive license to such intellectual property to develop products outside of the cough and cold field. Under the service agreement, the Company provided facilities and up to 10 percent of the services of certain employees to Spriaso for a period of 18 months which expired January 23, 2015. Effective January 23, 2015, the Company entered into an amended services agreement with Spriaso in which the Company agreed to continue providing up to 10 percent of the services of certain employees to Spriaso at a rate of $230/hour for a period of six months. The agreement was further amended on July 23, 2015, on January 23, 2016, on July 23, 2016, on January 23, 2017, on July 23, 2017, on January 23, 2018, on July 23, 2018 and again on January 23, 2019 to extend the term of the agreement for an additional six months. The agreement was further amended on July 23, 2019 and again on July 23, 2020 to extend the term of the agreement for an additional twelve months. The agreement may be extended upon written agreement of Spriaso and the Company. The Company did not receive any reimbursements during the three and nine months ended September 30, 2020 and 2019, respectively. Additionally, the Company did not receive any royalty payments from Spriaso during the three and nine months ended September 30, 2020. The Company received $165,000 during the three and nine months ended September 30, 2019. Spriaso filed its first NDA and as an affiliated entity of the Company, it used up the one-time waiver for user fees for a small business submitting its first human drug application to the FDA. Spriaso is considered a variable interest entity under the FASB ASC Topic 810-10, Consolidations , however the Company is not the primary beneficiary and has therefore not consolidated Spriaso. (12) Recent Accounting Pronouncements Accounting Pronouncements Issued Not Yet Adopted In 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables, and requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The original effective date for ASU 2016-13 was for annual and interim periods beginning after December 15, 2019. However, in October 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses, Derivatives and Hedging, and Leases: Effective Dates , which deferred the effective date of ASU 2016-13 for certain entities, including those that are eligible to be smaller reporting companies . A company’s determination about whether it is eligible for the deferral is a one-time assessment as of November 15, 2019 based on its most recent determination of its small reporting company eligibility as of the last business day of the most recently completed second quarter. Based on this determination, the Company qualifies as a smaller reporting entity and is therefore eligible for the deferral of adoption of ASU 2016-13, resulting in a new effective date of January 1, 2023. The Company has historically not had credit losses on financial instruments and is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements 21