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Item 7. Management’s Discussion and Analysis

2021-03-25 compared with 2020-03-16 · 155 added, 124 removed, 213 unchanged (57% of the section changed)

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Some of the statements contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

The words “anticipate,” “believe,” “continue” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would,” “could,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The words “anticipate,” “believe,” “continue” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

We have based these forward-looking statements on our current expectations and projections about future events.

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

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of nalbuphine ER to treat serious neurologically mediated conditions.

We are developing nalbuphine ER for the treatment of chronic pruritus, chronic cough in patients with idiopathic pulmonary fibrosis, or IPF, and levodopa-induced dyskinesia, or LID, in patients with Parkinson’s disease.

We are conducting a Phase 2b/3 clinical trial of nalbuphine ER, which we refer to as the PRISM trial, in patients with severe pruritus associated with prurigo nodularis.

The PRISM trial is a randomized, double-blind, placebo controlled, two-arm treatment study that is designed to evaluate the safety and anti-pruritic efficacy of nalbuphine ER in approximately 240 patients in the United States and Europe.

To date, we have enrolled approximately 45% of the target number of patients.

The pace of enrollment has been slower than anticipated primarily due to competition from other clinical trials and slower than planned site start-ups in Europe.

We expect to report top-line data from the 14-week blinded treatment period of the PRISM trial in the second half of 2020.

Additionally, the protocol for the PRISM trial provides for a sample size re-estimation analysis once 50% of the patients in the trial are evaluable for the primary endpoint.

We expect to reach 50% patient enrollment during the second quarter of 2020.

Once all of these patients complete the primary efficacy endpoint, the sample size re-estimation analysis will occur.

We expect this analysis will occur in mid-2020.

If we increase the target number of patients in the trial as a result of the re-estimation analysis, the timing of our report of top-line data may be delayed.

We are also conducting a Phase 2 clinical trial of nalbuphine ER for chronic cough in patients with IPF.

This Phase 2 clinical trial is a randomized, double-blind, placebo controlled, two-treatment, two-period, crossover study designed to evaluate the efficacy, safety, tolerability and dosing of nalbuphine ER for chronic cough in up to 56 patients with IPF in the United Kingdom.

We expect to report top-line data from the trial in the second half of 2020.

In addition, we are conducting a Phase 1b clinical trial in patients with chronic liver disease to evaluate the safety and pharmacokinetics, or PK, of nalbuphine ER in this population.

This trial was designed as an open label, non-randomized, parallel-group, single and multiple ascending dose pharmacokinetic trial in patients with mild, moderate and severe hepatic impairment.

We completed the single ascending dosing portion of this trial in patients with mild and moderate hepatic impairment and there were no serious adverse events reported in the trial.

After reviewing the safety and PK data generated to date in the single ascending dose portion of the trial, we believe that these data are sufficient to support further investigation of nalbuphine ER in potential future safety and efficacy studies in patients with relevant liver diseases.

We intend to start planning for a Phase 2 trial of nalbuphine ER in patients with pruritus associated with primary biliary cholangitis, or PBC.

In addition, we intend to use the data from the hepatic impairment study to support a new drug application, or NDA, submission for nalbuphine ER for pruritus in prurigo nodularis.

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

We are currently focusing our resources on completing the PRISM trial and Phase 2 trial for chronic cough in patients with IPF.

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

Since commencing operations in 2011, we have devoted substantially all of our efforts and financial resources to the clinical development of nalbuphine ER.

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of Haduvio (nalbuphine ER) to treat serious neurologically mediated conditions.

We are developing Haduvio for the treatment of chronic pruritus associated with prurigo nodularis and chronic cough in patients with idiopathic pulmonary fibrosis, or IPF.

We are also developing Haduvio in levodopa-induced dyskinesia, or LID, in patients with Parkinson’s disease.

We are conducting a Phase 2b/3 clinical trial of Haduvio, which we refer to as the Phase 2b/3 PRISM trial, in patients with severe pruritus associated with prurigo nodularis.

The Phase 2b/3 PRISM trial is a randomized, double-blind, placebo controlled, two-arm treatment study that is designed to evaluate the safety and anti-pruritic efficacy of Haduvio in patients in the United States and Europe.

In accordance with the protocol for the Phase 2b/3 PRISM trial, we conducted a sample size re-estimation, or SSRE, analysis in July 2020, following such time as approximately 45% of the patients in the trial were evaluable for the primary endpoint.

Based on the analysis, the independent Data Monitoring Committee, or DMC, recommended that the Phase 2b/3 PRISM trial should continue and that the trial size should increase from an initial enrollment target of 240 to 360 subjects, which maintains the statistical power for the primary endpoint.

Based on the DMC’s recommendation, we have increased the planned trial size to 360 subjects.

The pace of enrollment in the trial has been impacted by the COVID-19 pandemic as new patient screening and most patient enrollment were temporarily halted.

Patient screening restrictions have been lifted in the United States and Europe.

Our sites began to restart patient screening and enrollment during May and June 2020.

We have increased the number of active sites to more than 60 globally and approximately 240 subjects have enrolled in the trial.

Considering the uncertainties associated with the COVID-19 pandemic, we expect to complete enrollment in the third quarter of 2021 and report top-line data in the fourth quarter of 2021.

If the Phase 2b/3 PRISM trial is successful, we expect that we will use the Phase 2b/3 PRISM trial and an additional Phase 3 clinical trial that we believe we will need to conduct to support the submission of a new drug application, or NDA, to the United States Food and Drug Administration, or FDA, and a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, for Haduvio for the treatment of pruritus associated with prurigo nodularis.

We are also conducting a Phase 2 clinical trial of Haduvio for chronic cough in patients with IPF which we refer to as the Phase 2 CANAL trial.

The Phase 2 CANAL trial is a randomized, double-blind, placebo controlled, two-treatment, two-period, crossover study that is designed to evaluate the efficacy, safety, tolerability and dosing of Haduvio for chronic cough in patients with IPF and is designed to enroll approximately 60 subjects with a goal to have 44 study completers.

We are conducting the trial at multiple sites in the United Kingdom.

Due to the COVID-19 pandemic and the specific at-risk nature of IPF patients, our clinical sites halted their enrollment and treatment of patients in this trial.

While patient screening and enrollment resumed at certain clinical trial sites in the fourth quarter of 2020, all sites in the trial paused screening again in December 2020 in response to a shelter in place directive from the U.K.

Once sites are able to resume screening, some sites may take longer to resume their trial activity due to increased COVID-19 infection rates in the areas where they are located, and we expect other sites may cease to participate in the trial entirely.

We recently amended the study protocol to reduce the number of in-person visits and procedures to facilitate this study being completed in an at-risk patient population for COVID-19.

We currently are in the process of seeking regulatory approval to add study sites in Germany which could potentially accelerate enrollment and reduce the risks inherent to single-country recruitment during the COVID-19 pandemic.

With respect to LID, we have written the protocol for a Phase 2 clinical trial for LID in patients with Parkinson’s disease.

We plan to determine next steps in the program once we complete the Phase 2b/3 PRISM and Phase 2 CANAL trials.

We are currently focusing our cash and operational resources on completing the Phase 2b/3 PRISM and the Phase 2 CANAL trials.

After we receive top-line data from both of these trials we will evaluate other additional indications for which we may choose to pursue development of Haduvio.

Since commencing operations in 2011, we have devoted substantially all of our efforts and financial resources to the clinical development of Haduvio.

We have not generated any revenue from product sales and, as a result, we have never been profitable and have incurred net losses in each year since commencement of our operations.

As of December 31, 2020, we had an accumulated deficit of $147.0 million, primarily as a result of research and development and general and administrative expenses.

We do not expect to generate product revenue unless and until we obtain marketing approval for and commercialize nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, chronic cough in patients with IPF or LID in patients with Parkinson’s disease, and we can provide no assurance that we will ever generate significant revenue or profits.

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

We do not expect to generate product revenue unless and until we obtain marketing approval for and commercialize Haduvio for the treatment of pruritus associated with prurigo nodularis, chronic cough in patients with IPF or LID in patients with Parkinson’s disease, and we can provide no assurance that we will ever generate significant revenue or profits.

In May 2019, we issued and sold 5,500,000 shares of common stock in our initial public offering, or IPO, and 1,500,000 shares of common stock in a concurrent private placement, in each case at an offering price of $10.00 per share, for combined net proceeds of $62.1 million after deducting aggregate underwriting discounts and commissions and private placement agent fees of $4.9 million and other offering expenses of $3.0 million.

Upon the closing of the IPO, our preferred stock then outstanding converted into an aggregate of 10,381,234 shares of common stock.

In June 2020, we entered into a sales agreement with SVB Leerink LLC, or SVB Leerink, which we refer to as the ATM Sales Agreement, under which we may issue and sell shares of common stock, from time to time, having an aggregate offering price of up to $12.0 million.

Sales of common stock under the ATM Sales Agreement may be made by any method that is deemed an “at the market” offering as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended.

We are not obligated to make any sales of our common stock under the ATM Sales Agreement.

We began making sales pursuant to the ATM Sales Agreement in July 2020, and as of December 31, 2020 we had issued and sold an aggregate of 687,876 shares of common stock for gross proceeds of $3.2 million, before deducting estimated commissions and allocated fees of $0.2 million.

Subsequent to December 31, 2020, and through March 24, 2021, we had issued and sold an additional 1,367,621 shares of common stock for gross proceeds of $4.4 million, before deducting estimated commissions and allocated fees of $0.3 million under the ATM Sales Agreement.

In August 2020, we entered into a loan and security agreement, or the SVB Loan Agreement, with Silicon Valley Bank pursuant to which Silicon Valley Bank provided a term loan, or the SVB Term Loan, to us in the original principal amount of $14.0 million.

On the first business day of each month, we will be required to make monthly interest payments and commencing on March 1, 2022, we will be required to repay the SVB Term Loan in 24 consecutive installments of principal plus monthly payments of accrued interest.

All outstanding principal and accrued and unpaid interest under the SVB Term Loan and all other outstanding obligations with respect to the SVB Term Loan are due and payable in full on February 1, 2024.

The SVB Loan Agreement permits voluntary prepayment of all, but not less than all, of the SVB Term Loan, subject to a prepayment premium.

For further discussion of the SVB Term Loan, see “—Liquidity and Capital Resources”.

As of December 31, 2020 , we had cash and cash equivalents of $ 45.0 million.

We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2021.

We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 202 2 .

Our estimate as to how long we expect our existing cash and cash equivalents to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we expect.

See “—Liquidity and Capital Resources.” Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations.

We expect to incur substantial expenditures in the foreseeable future as we advance nalbuphine ER through clinical development, the regulatory approval process and, if approved, commercial launch activities.

Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing Phase 2b/3 PRISM trial in patients with pruritus associated with prurigo nodularis, the additional Phase 3 clinical trial we will be required to conduct to support the submission of an NDA to the United States Food and Drug Administration, or FDA, for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, our ongoing Phase 2 clinical trial in chronic cough in patients with IPF, the development and validation of our commercial manufacturing process for nalbuphine ER and other development activities, including potentially commencing Phase 2 clinical trials for the treatment of LID in patients with Parkinson’s disease and for pruritus associated with PBC.

Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

We expect to incur substantial expenditures in the foreseeable future as we advance Haduvio through clinical development, the regulatory approval process and, if approved, commercial launch activities.

Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing Phase 2b/3 PRISM trial in patients with pruritus associated with prurigo nodularis, including as a result of the increase in the target number of subjects to be enrolled from 240 to 360 following the completion of the SSRE analysis, the additional Phase 3 clinical trial we believe we will be required to conduct to support the submission of an NDA to the FDA for Haduvio for the treatment of pruritus associated with prurigo nodularis, our ongoing Phase 2 CANAL trial in chronic cough in patients with IPF, the development and validation of our commercial manufacturing process for Haduvio and other development activities, including potentially commencing Phase 2 clinical trials for the treatment of LID in patients with Parkinson’s disease.

In addition, we may continue to incur additional expenses as a result of the COVID-19 pandemic and related clinical trial delays and interruptions.

We will need substantial additional funding to support our continuing operations and pursue our growth strategy.

Until such time as we can generate significant revenue from sales of nalbuphine ER, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions.

Until such time as we can generate significant revenue from sales of Haduvio, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions.

Adequate funding may not be available to us on acceptable terms, or at all.

If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of nalbuphine ER for one or more indications or delay our efforts to expand our product pipeline.

If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of Haduvio for one or more indications or delay our efforts to expand our product pipeline.

Impacts of COVID-19 Pandemic

The COVID-19 pandemic and government measures taken in response thereto have had a significant impact, both direct and indirect, on segments of the global economy and have interrupted our clinical trial activities, disrupted our business operations and have the potential to interrupt our supply chain.

We have experienced restrictions and delays at our existing clinical sites.

For example, in our ongoing Phase 2b/3 PRISM trial, new patient screening and most enrollment was temporarily halted due to the COVID-19 pandemic.

Patient screening restrictions have been lifted in the United States and Europe.

Many of our sites restarted patient screening and enrollment throughout May and June 2020.

Furthermore, multiple sites in the Phase 2b/3 PRISM trial are requiring remote monitoring of patient data and we could be required to amend the protocol for the trial to have fewer patient visits over the course of the trial.

We also experienced slower recruitment activities worldwide through the latter part of 2020 and the beginning of 2021 due to the resurgence of the COVID-19 pandemic.

In addition, the clinical sites in our ongoing Phase 2 CANAL trial temporarily suspended enrollment and treatment of patients in the trial due to the vulnerability of IPF patients to COVID-19 and we amended the protocol for the trial to reduce the number of in-person patient visits and procedures.

While patient screening and enrollment for our Phase 2 CANAL trial resumed at certain clinical trial sites in the fourth quarter of 2020, all sites in the trial paused screening again in December 2020 in response to a shelter in place directive from the U.K.

The COVID-19 pandemic may also adversely affect our ability to recruit and retain principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, and may result in further disruptions to our clinical trials due to prioritization of hospital and medical resources toward the outbreak, restrictions on travel of patients and healthcare providers, potential unwillingness of patients to enroll in trials at this time, or the inability of patients to comply with clinical trial protocols if quarantines or travel restrictions impede patient movement or interrupt healthcare services.

The response to the COVID-19 pandemic may also redirect resources of regulators in a way that could adversely impact our ability to progress towards regulatory approvals and we may face impediments to regulatory meetings and approvals relating to our clinical trials due to measures intended to limit in-person interactions.

The COVID-19 pandemic may also affect employees of third-party contract research organizations located in affected geographies that we rely upon to carry out our clinical trials.

The spread of COVID-19, or another infectious disease, could also negatively affect the operations at our third-party suppliers, which could result in delays or disruptions in the supply of drug product used in our clinical trials.

We have taken temporary precautionary measures intended to help minimize the risk of the virus to our employees, including allowing employees to work remotely, suspending all non-essential travel worldwide for our employees and discouraging employee attendance at industry events.

Components of Operating Results

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Research and Development Expenses

All of our research and development expenses consist of expenses incurred in connection with the development of nalbuphine ER.

All of our research and development expenses consist of expenses incurred in connection with the development of Haduvio.

These expenses include certain payroll and personnel expenses, including stock-based compensation, consulting costs, contract manufacturing costs and fees paid to clinical research organizations, or CROs, to conduct certain research and development activities on our behalf.

We do not allocate our costs by each indication for which we are developing nalbuphine ER, as a significant amount of our development activities broadly support all indications.

In addition, several of our departments support our nalbuphine ER drug candidate development program and we do not identify internal costs for each potential indication.

We expect our research and development expenses to increase over the next few years as we pursue our development program, pursue regulatory approval of nalbuphine ER in the United States and Europe and prepare for a possible commercial launch of nalbuphine ER.

Predicting the timing or the cost to conduct our nalbuphine ER development program and prepare for a possible commercial launch of nalbuphine ER is difficult and delays may occur because of many factors including factors outside of our control such as the sample size re-estimation for our PRISM trial.

For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on our development program.

Furthermore, we are unable to predict when or if nalbuphine ER will receive regulatory approval in the United States or elsewhere with any certainty.

We do not allocate our costs by each indication for which we are developing Haduvio, as a significant amount of our development activities broadly support all indications.

In addition, several of our departments support our Haduvio drug candidate development program and we do not identify internal costs for each potential indication.

We expect our research and development expenses to increase over the next few years as we pursue our development program, pursue regulatory approval of Haduvio in the United States and Europe and prepare for a possible commercial launch of Haduvio.

Predicting the timing or the cost to conduct our Haduvio development program and prepare for a possible commercial launch of Haduvio is difficult and delays may occur because of many factors including factors outside of our control.

For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, whether as a result of the COVID-19 pandemic or otherwise, we could be required to expend significant additional financial resources and time on our development program.

Furthermore, we are unable to predict when or if Haduvio will receive regulatory approval in the United States or elsewhere with any certainty.

General and Administrative Expenses

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

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

We anticipate that our general and administrative expenses will increase as a result of increased personnel costs, including stock-based compensation and expanded infrastructure.

Other Income (Expense), Net

Interest Expense on our Term Loan Facility

In December 2014, we entered into a loan and security agreement with Solar Capital, Ltd.

and Square 1 Bank under which we borrowed $15.0 million under a term loan, or the Term Loan.

The Term Loan accrued interest at a floating rate equal to the one-month LIBOR plus 7.75% per annum.

The Term Loan required interest-only payments until March 2016, which was extended to November 2016.

After November 2016, payments on the Term Loan were made monthly in 20 equal installments of principal plus interest.

In June 2018, we paid all amounts owed under the Term Loan.

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

The stock purchase agreement under which we sold shares of Series C preferred stock provided for the issuance and sale of our Series C preferred stock in three separate tranches.

The tranches represented a free-standing financial instrument under Accounting Standards Codification, or ASC, 480 and required fair value accounting until they were settled.

We recognized a liability on our consolidated balance sheet for the obligations under this financial instrument.

We adjusted this liability to fair value at each reporting date and recognized the changes in fair value in our statements of operations as a component of other income (expense), net.

We continued to recognize changes in the fair value of this liability through the closing of the third tranche, which occurred on January 18, 2019.

In August 2020, we entered into the SVB Loan Agreement under which we borrowed $14.0 million under a term loan, or the SVB Term Loan.

The SVB Term Loan bears interest at a floating rate per annum equal to the greater of (A) the prime rate plus 1.00% and (B) 4.25%.

If Silicon Valley Bank receives evidence satisfactory to it that we have (i) received positive data for the Phase 2b/3 PRISM trial sufficient to advance Haduvio into a second Phase 3 clinical trial for prurigo nodularis, and (ii) raised sufficient financing to fund such Phase 3 clinical trial and our operations, which we refer to together as the Phase 3 Event, the interest rate under the SVB Term Loan will be adjusted to a floating rate equal to the greater of (A) the prime rate plus 3.00% and (B) 6.25% .

The SVB Term Loan requires interest-only payments until March 2022.

We will then be required to repay the SVB Term Loan in 24 consecutive installments of principal plus monthly payments of accrued interest.

Change in Fair Value of Obligation for Loan Success Fee

In connection with the Term Loan, we entered into the Success Fee Agreement under which we agreed to pay the lenders a Success Fee upon the occurrence of an exit event, as defined in the Success Fee Agreement.

We classified this contingent obligation for the Success Fee as a liability on our consolidated balance sheet and we adjusted this liability to fair value at each reporting date.

In connection with our prior term loan with Solar Capital, Ltd.

and Square 1 Bank, which we refer to as the Solar Term Loan, we entered into a success fee agreement under which we agreed to pay the lenders a success fee, which we refer to as the Success Fee, upon the occurrence of an exit event, as defined in the success fee agreement.

We recognized changes in the fair value of this obligation for the Success Fee in our statements of operations as a component of other income (expense), net.

We recognized changes in the fair value of the obligation for the Success Fee until the Success Fee payment was triggered and paid upon the closing of our IPO in May 2019.

Change in Fair Value of Term Loan Derivative Liability

In connection with the SVB Term Loan, upon the occurrence of the Phase 3 Event, the interest rate on the SVB Term Loan will increase by 2.00%.

This contingent interest rate increase represents a free-standing financial instrument.

Accordingly, we accounted for the contingent interest rate increase as a derivative under Accounting Standards Codification, or ASC, 815, Derivatives and Hedging , and therefore, we recorded a term loan derivative liability for the contingent interest rate increase at its fair value.

We adjust this liability to fair value at each reporting date it remains outstanding.

We recognized changes in the fair value of this term loan derivative in our statements of operations as a component of other income (expense), net.

Interest Income

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Other income (expense):

Change in fair value of Series C redeemable convertible

preferred stock liability

Change in fair value of obligation for loan success fee

Change in fair value of term loan derivative liability

Interest income

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Total research and development expenses

Research and development expenses increased $ 5.3 million, or 37.4 %, from $ 14.1 million for the year ended December 31, 2018 to $19.3 million for the year ended December 31, 2019.

The increase was primarily due to a $4.8 million increase in clinical development expenses primarily related to increased activities in several clinical trials including our Phase 2b/3 PRISM trial, our Phase 2 trial in chronic cough in patients with IPF and our Phase 1b trial in patients with chronic liver disease.

In addition, personnel and related expenses increased by $ 0.3 million as a result of an increase in our employee headcount, and consulting expenses and professional fees increased by $0.3 million as a result of our increased clinical trial activity.

For the years ended December 31, 2019 and 2018, all of our research and development expenses relate to our development activity for nalbuphine ER.

Research and development expenses for the year ended December 31, 2020 increased $3.0 million, or 15.5%, to $22.3 million from $19.3 million for the year ended December 31, 2019 The increase was primarily due to a $2.0 million increase in clinical development expenses primarily related to increased activity and enrollment in our ongoing Phase 2b/3 PRISM trial as well as an increase in expenses related to the purchase of clinical trial supplies.

The increased expenses from these activities was partially offset by decreased expenses associated with a decrease in activity in our Phase 1b clinical trial in patients with chronic liver disease due to the completion of the trial in the first half of 2020, as well as decreased activity in our Phase 2 CANAL trial due to the temporary pausing of enrollment and treatment of patients as a result of the COVID-19 pandemic.

In addition, personnel and related expenses increased by $0.7 million as a result of an increase in our employee headcount, consulting expenses and professional fees increased by $0.2 million as a result of our increased clinical trial activity, and stock-based compensation expenses increased $0.2 million due to the issuance of new stock option grants in the first quarter of 2020 and expanded operations .

For the years ended December 31, 2020 and 2019, all of our research and development expenses related to our development activity for Haduvio.

General and Administrative Expenses

General and administrative expenses increased $3.0 million, or 68.5%, from $ 4.3 million for the year ended December 31, 2018 to $ 7.3 million for the year ended December 31, 2019.

The increase was primarily due to an increase in personnel and stock-based compensation expenses of $1.4 million, which we incurred from the issuance of new stock option grants upon the IPO and from expanded operations, an increase in expenses related to being a public company of $1.1 million and an increase in consulting expenses and professional fees of $0.5 million.

General and administrative expenses for the year ended December 31, 2020 increased $2.9 million, or 39.1%, to $10.2 million from $7.3 million for the year ended December 31, 2019.

T he increase was primarily due to an increase in stock-based compensation expenses of $1.2 million, primarily attributable to the issuance of new stock option grants in the second quarter of 2019 in connection with the IPO and in the first quarter of 2020, an increase in expenses related largely to being a public company of approximately $0.8 million and an increase in expenses related primarily to consulting fees of $0.4 million.

Other Income (Expense), Net

Other income (expense ), net for the year ended December 31, 2019 increased to other income, net of $0.6 million from other (expense), net of $2.3 million for the year ended December 31, 2018.

The increase primarily reflects the change in fair value of our liability during the year ended December 31, 2018 for the shares of Series C preferred stock purchasable in the second and third tranches of our Series C preferred stock financing as well as increased interest income of $0.8 million due to our larger cash balance following our IPO in May 2019.

Other income (expense), net for the year ended December 31, 2020 decreased to other (expense), net of $0.3 million from other income, net of $0.6 million for the year ended December 31, 2019.

The decrease reflects a decrease in interest income of $0.6 million for the year ended December 31, 2020 as compared to the prior year, primarily due to lower market interest rates and a $0.5 million increase in expense due to interest expense on the SVB Term Loan recognized in the year ended December 31, 2020 with no comparable expense recognized in 2019.

These changes in interest income and interest expense were partially offset by a decrease in expense of $0.2 million attributable to expense being recognized in the year ended December 31, 2019 for the change in fair value of obligation for the Success Fee with no comparable expense recognized in 2020.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue and have incurred significant operating losses and negative cash flows from our operations.

Prior to the completion of our IPO and concurrent private placement in May 2019, we financed our operations primarily through private placements of our preferred stock and convertible notes as well as borrowings under the Term Loan.

From inception to our IPO, we raised an aggregate of $102.2 million in gross proceeds from sales of our preferred stock and convertible notes and borrowed $15.0 million under the Term Loan.

As of June 30, 2018, all amounts owed under the Term Loan had been paid in full.

From inception to our IPO, we raised an aggregate of $102.2 million in gross proceeds from sales of our preferred stock and convertible notes and borrowed $15.0 million under the Solar Term Loan.

As of June 30, 2018, all amounts owed under the Solar Term Loan had been paid in full.

In May 2019, we issued and sold 5,500,000 shares of common stock in our IPO and 1,500,000 shares of common stock in a concurrent private placement, in each case at an offering price of $10.00 per share, for combined net proceeds of $62.1 million after deducting aggregate underwriting discounts and commissions and private placement agent fees of $4.9 million and other offering expenses of $3.0 million.

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Our cash and cash equivalents are primarily held in money market accounts.

I n June 2020, we entered into the ATM Sales Agreement, under which we may issue and sell shares of common stock, from time to time, having an aggregate offering price of up to $12.0 million.

Sales of common stock under the ATM Sales Agreement may be made by any method that is deemed an “at the market” offering as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended.

We are not obligated to make any sales of our common stock under the ATM Sales Agreement.

We began making sales pursuant to the ATM Sales Agreement in July 2020, and as of December 31, 2020, we had issued and sold an aggregate of 687,876 shares of common stock for gross proceeds of $3.2 million, before deducting estimated commissions and allocated fees of $0.2 million.

In August 2020, we entered into the SVB Loan Agreement, with Silicon Valley Bank, as lender, or SVB, pursuant to which SVB provided the SVB Term Loan in the original principal amount of $14.0 million.

The proceeds from the SVB Term Loan may be used by us for working capital and general corporate purposes.

The SVB Term Loan bears interest at a floating rate per annum equal to the greater of (A) the prime rate plus 1.00% and (B) 4.25%.

If SVB receives evidence satisfactory to it that we have (i) received positive data for the Phase 2b/3 PRISM trial, sufficient to advance Haduvio into a second Phase 3 clinical trial for prurigo nodularis, and (ii) raised sufficient financing to fund such Phase 3 clinical trial and our operations, the interest rate under the SVB Term Loan will be adjusted to a floating rate equal to the greater of (A) the prime rate plus 3.00% and (B) 6.25%.

On the first business day of each month, we are required to make monthly interest payments and commencing on March 1, 2022, we will be required to repay the SVB Term Loan in 24 consecutive installments of principal plus monthly payments of accrued interest.

The SVB Loan Agreement permits voluntary prepayment of all, but not less than all, of the SVB Term Loan, subject to a prepayment premium.

Such prepayment premium would be 3.00% of the principal amount of the SVB Term Loan if prepaid prior to the first anniversary of the date on which we entered into the SVB Term Loan, or the Effective Date, 2.00% of the principal amount of the SVB Term Loan if prepaid on or after the first anniversary of the Effective Date, but prior to the second anniversary of the Effective Date, and 1.00% of the principal amount of the SVB Term Loan if prepaid on or after the second anniversary of the Effective Date but prior to February 1, 2024.

Upon repayment in full of the SVB Term Loan, we will be required to pay a final payment fee equal to $1.2 million.

The SVB Term Loan and related obligations under the SVB Loan Agreement are secured by substantially all of our properties, rights and assets, except for our intellectual property (which is subject to a negative pledge under the SVB Loan Agreement).

If we fail to meet certain equity raise requirements under the SVB Loan Agreement, we will be required to deposit unrestricted and unencumbered cash equal to 100% of the principal amount of the SVB Term Loan then outstanding in a cash collateral account with SVB, which can be used by SVB to prepay the SVB Term Loan at any time.

The SVB Loan Agreement contains customary representations, warranties, events of default and covenants.

The occurrence and continuation of an event of default could cause interest to be charged at the rate that is otherwise applicable plus 5.00% (unless SVB elects to impose a smaller increase) and would provide SVB with the right to accelerate all obligations under the SVB Loan Agreement and exercise remedies against us and the collateral securing the SVB Term Loan and other obligations under the SVB Loan Agreement, including foreclosure against assets securing the SVB Term Loan and other obligations under the SVB Loan Agreement, including our cash.

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

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During the year ended December 31, 2020, operating activities used $29.0 million of cash, resulting from our net loss of $32.8 million, partially offset by changes in our operating assets and liabilities of $1.1 million and non-cash charges of $2.7 million.

Changes in our operating assets and liabilities for the year ended December 31, 2020 consisted of a $0.4 million decrease in prepaid expenses, a $0.4 million increase in accounts payable, a $0.3 million decrease in receivables and a $0.1 million decrease in accrued expenses.

The decrease in prepaid expenses was primarily due to the application of such prepaid amounts to clinical trial activity in 2020.

The increase in accounts payable was primarily due to timing of vendor invoices.

The decrease in receivables was primarily due to a refund of prepayments made to one of our vendors, which we received in the first quarter of 2020.

This decrease in receivables was primarily offset by additional prepayments made to one of our vendors, which we expect will be paid back to us in the first quarter of 2021.

The non-cash charges for the year ended December 31, 2020 consisted primarily of stock-based compensation expense of $2.4 million and $0.2 million of accretion/accrual of term loan discounts and debt issuance costs.

During the year ended December 31, 2019, operating activities used $23.1 million of cash, resulting from our net loss of $26.1 million, partially offset by changes in our operating assets and liabilities of $1.6 million and non-cash charges of $1.4 million.

Changes in our operating assets and liabilities for the year ended December 31, 2019 consisted primarily of a $1.4 million increase in accrued expenses, a $0.8 million increase in accounts payable, a $0.4 million increase in receivables, and a $0.2 million increase in prepaid expenses.

The increase in accrued expenses was primarily due to increases in accruals related to our Phase 2b/3 PRISM trial in prurigo nodularis and our Phase 2 trial for chronic cough in IPF.

The increase in accrued expenses was primarily due to increases in accruals related to our Phase 2b/3 PRISM trial and our Phase 2 CANAL trial.

The increase in accounts payable was primarily due to timing of vendor invoices.

The increase in receivables was primarily due to prepayments made to one of our vendors, which we expect will be paid back to us in the first half of 2020.

The increase in receivables was primarily due to prepayments made to one of our vendors, which was paid back to us in the first half of 2020.

The increase in prepaid expenses was primarily due to prepayments of our insurance policies.

The non-cash charges for the year ended December 31, 2019 consisted primarily of stock-based compensation expense of $1.1 million and changes in fair value of the Success Fee of $0.2 million.

During the year ended December 31, 2018, operating activities used $18.3 million of cash, resulting from our net loss of $20.5 million and net cash used in changes in our operating assets and liabilities of $0.6 million, partially offset by non-cash charges of $2.8 million.

Net cash used in changes in our operating assets and liabilities for the year ended December 31, 2018 consisted primarily of a $1.3 million increase in prepaid expenses.

The increase in prepaid expenses was primarily due to increases in prepayments under our ongoing research, development and clinical trial work performed by CROs.

The non-cash charges for the year ended December 31, 2018 consisted primarily of a $2.1 million expense related to the change in fair value of our Series C redeemable convertible preferred stock liability and stock-based compensation expense of $0.5 million.

Investing Activities

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Financing Activities

During the year ended December 31, 2020, net cash provided by financing activities was $16.7 million, primarily consisting of cash proceeds from the SVB Term Loan of $14.0 million and gross cash proceeds of $3.2 million from sales of our common stock under the ATM Sales Agreement, before deducting estimated commissions and allocated fees of $0.2 million.

During the year ended December 31, 2019, net cash provided by financing activities was $73.2 million, primarily consisting of cash proceeds, net of underwriting discounts and commissions and placement agent fees, of $65.1 million from our IPO and concurrent private placement, and $10.0 million from our sales of shares of Series C preferred stock in the third tranche of our Series C preferred stock financing in January 2019, partially offset by costs relating to our IPO of $1.2 million and payment of the $0.7 million Success Fee.

During the year ended December 31, 2018, net cash provided by financing activities was $3.6 million, primarily consisting of net cash proceeds of $10.5 million from our sales of shares of Series C preferred stock in the second tranche of our Series C preferred stock financing in August 2018, partially offset by payments of $4.8 million on the Term Loan and $0.5 million of final fees on the Term Loan.

Funding Requirements

Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing Phase 2b/3 PRISM trial, the additional Phase 3 clinical trial we will need to conduct to support the submission of an NDA to the FDA and a marketing authorization application to the European Medicines Agency for nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, our ongoing Phase 2 clinical trial in chronic cough in patients with IPF, the costs of commercialization activities, including manufacturing capabilities, for nalbuphine ER and other development activities including potentially commencing Phase 2 clinical trials for the treatment of LID in patients with Parkinson’s disease and for pruritus associated with PBC.

Furthermore, we expect to continue to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing Phase 2b/3 PRISM trial, including as a result of the increase in the target number of patients to be enrolled from 240 to 360 based on the SSRE analysis, the additional Phase 3 clinical trial we believe we will need to conduct to support the submission of an NDA to the FDA and a marketing authorization application to the European Medicines Agency for Haduvio for the treatment of pruritus associated with prurigo nodularis, our ongoing Phase 2 CANAL trial, the costs of commercialization activities, including manufacturing capabilities, for Haduvio and other development activities including potentially commencing Phase 2 clinical trials for the treatment of LID in patients with Parkinson’s disease.

In addition, we have incurred and may continue to incur additional expenses as a result of COVID-19 and resulting clinical trial delays and interruptions.

Furthermore, we expect to continue to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses.

We will need substantial additional funding to support our continuing operations and pursue our growth strategy.

Until such time as we can generate significant revenue from sales of nalbuphine ER, if ever, we expect to finance our operations through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to achieve our business objectives.

Until such time as we can generate significant revenue from sales of Haduvio, if ever, we expect to finance our operations through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to achieve our business objectives.

Adequate additional financing may not be available to us on acceptable terms, or at all.

Our future funding requirements, both short-term and long-term, will depend on many factors, including:

the scope, progress, timing, costs and results of clinical trials of nalbuphine ER for the treatment of pruritus associated with prurigo nodularis, including the results of the sample size re-estimation for our ongoing Phase 2b/3 PRISM trial that we expect will take place in mid-2020 as well as the scope, progress, timing, costs and results of clinical trials of nalbuphine ER for other serious neurologically mediated conditions, including our ongoing Phase 2 trial for chronic cough in patients with IPF, as well as any future product candidates;

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

the scope, progress, timing, costs and results of clinical trials of Haduvio for the treatment of pruritus associated with prurigo nodularis, as well as the scope, progress, timing, costs and results of clinical trials of Haduvio for other serious neurologically mediated conditions, including our ongoing Phase 2 CANAL trial, as well as any future product candidates;

the impacts of the COVID-19 pandemic on the scope, progress, timing, costs and results of our ongoing and planned clinical trials of Haduvio;

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

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

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

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

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

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

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

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

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

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

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

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

the effect of competing technological and market developments;

the effect of competing technologies and market developments;

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

the costs of operating as a public company.

We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2021.

We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2022.

We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case we would be required to obtain additional financing, which may not be available to us on acceptable terms, or at all.

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We do not have any committed external source of funds.

Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to complete the clinical development and commercialization of nalbuphine ER for pruritus associated with prurigo nodularis or any other indication.

Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to complete the clinical development and commercialization of Haduvio for pruritus associated with prurigo nodularis or any other indication.

If we raise additional funds by issuing equity securities, our stockholders may experience dilution.

Any future debt financing into which we enter would result in fixed payment obligations and may involve agreements that include grants of security interests on our assets and restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, granting liens over our assets, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business.

Any debt financing into which we enter would result in fixed payment obligations and may involve agreements that include grants of security interests on our assets and restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, granting liens over our assets, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business.

For example, in connection with the SVB Term Loan, we granted a security interest on all of our assets, excluding our intellectual property, agreed to a negative pledge on our intellectual property, agreed to restrictive covenants including, subject to certain exceptions, covenants that prohibit us from transferring all or any part of our business or property, changing our business, liquidating or dissolving, merging with or acquiring another entity, entering into a transaction that will result in a change in control, incurring additional indebtedness, creating any lien on our property, paying dividends or redeeming stock, making payments on subordinated debt or entering into material transactions with affiliates, and agreed to cash collateralize the SVB Term Loan in certain circumstances.

Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants.

In addition, securing financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.

Any debt financing or additional equity that we raise may contain terms that could adversely affect our common stockholders.

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Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.

We have entered into agreements with CROs, contract manufacturing organizations and other companies.

We have entered into agreements with CROs, contract manufacturing organizations and other companies that provide services in connection with our research and development activities.

Our research and development accruals are estimated based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs.

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Stock-Based Compensation Expense

We account for stock-based compensation arrangements with employees in accordance with ASC 718, Stock Compensation , or ASC 718.

We account for stock-based compensation arrangements with employees and non-employees for consultancy services in accordance with ASC 718, Stock Compensation , or ASC 718.

ASC 718 requires the recognition of compensation expense, using a fair value based method, for costs related to all stock-based payments, including stock options.

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These variables include expected term that options will remain outstanding, expected common stock price volatility over the term of the option awards, risk-free interest rates and expected dividends.

We have awarded stock options to non-employees for consultancy services.

We have adopted new guidance, effective as of January 1, 2018, which requires that non-employee share-based payment transactions be measured at the grant-date fair value and no longer remeasured at the then-current fair values at each reporting date until the stock options have vested.

The fair value of an option award is recognized over the period during which the optionee is required to provide services in exchange for the option award, known as the requisite service period (usually the vesting period) on a straight-line basis.

Forfeitures are accounted for as they occur.

Estimating the fair value of equity-settled awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of complex variables.

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We then discounted that future value back to the valuation date at an appropriate discount rate.

Based on our early stage of development and other relevant factors, our board of directors determined that the OPM was the most appropriate method for allocating our enterprise value to determine the estimated fair value of our common stock for the valuation performed for December 2017, which resulted in our board of directors determining that the fair value of our common stock was $3.33.

Following its determination in early 2018 that we should explore a potential IPO, our board of directors determined that the Hybrid Method was the most appropriate method for allocating our enterprise value to determine the estimated fair value of our common stock for valuations performed for April 2018, September 2018 and December 2018, which resulted in the fair value of our common stock being $6.65, $9.12 and $9.31, respectively.

In determining the estimated fair value of our common stock prior to our IPO in May 2019, our board of directors also considered the fact that our stockholders could not freely trade our common stock in the public markets.

In determining the estimated fair value of our common stock prior to our IPO in May 2019, our board of directors considered the fact that our stockholders could not freely trade our common stock in the public markets.

Accordingly, our board of directors applied discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity.

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Fair Value Measurements

Our financial instruments have consisted of cash and cash equivalents, income tax receivable, accounts payable, accrued expenses, term loan payable, Series C redeemable convertible preferred stock liability and obligation for loan success fee.

Our financial instruments have consisted of cash and cash equivalents, tax credit and other receivables, accounts payable, accrued expenses, term loans, term loan derivative liability and obligation for loan success fee.

Fair value estimates of these instruments are made at a specific point in time, based on relevant market information.

The carrying amounts of cash and cash equivalents, income tax receivable, accounts payable and accrued expenses are generally considered to be representative of their respective fair values because of the short term nature of those instruments.

The carrying amounts of cash and cash equivalents, tax credit and other receivables, accounts payable and accrued expenses are generally considered to be representative of their respective fair values because of the short term nature of those instruments.

The carrying amount of the term loan approximates its fair value due to its floating market-based interest rate.

The fair value of the term loan derivative liability is estimated utilizing a probability-weighted cash flow approach.

The fair value of the obligation for loan success fee has been estimated utilizing a probability-weighted income approach, including variables for the timing of the success event and other probability estimates.

The fair value of Series C redeemable convertible preferred stock liability has been estimated as the excess, if any, of the fair value of our Series C preferred stock over the purchase price of any outstanding tranches that may be sold pursuant to our stock purchase agreement referred to in “—Components of Operating Results—Other Income (Expense), Net—Change in Fair Value of Series C Redeemable Convertible Preferred Stock Liability”.

Current accounting guidance defines fair value, establishes a framework for measuring fair value in accordance with ASC 820, Fair Value Measurements and Disclosures , and requires certain disclosures about fair value measurements.

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Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions and are classified into the following fair value hierarchy:

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

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

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

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Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No.

2016-02 titled Leases , or ASU 2016-02, which requires rights and obligations arising from both operating and capital leases to be reported on the Consolidated Balance Sheet, and to disclose quantitative and qualitative information about lease transactions (such as information about variable lease payments and options to renew and terminate leases).

ASU 2016-02 was effective for fiscal years beginning after December 15, 2018, with early adoption permitted.

We adopted this new guidance as of January 1, 2019, which included an assessment of the impact of the new guidance on the consolidated financial statements.

We utilized the transition practical expedient added by the FASB, which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption.

We elected to use the package of practical expedients that allowed us to not reassess:

(1) whether any expired or existing contracts were or contained leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases.

We used the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component.

The adoption of this standard resulted in the recognition of a right-of-use asset of $379 and related lease liabilities of $424 related to our operating lease commitments on the Consolidated Balance Sheet as of January 1, 2019 (Note 4).

The impact of adoption of the new leasing standard did not have a material impact on the Consolidated Statement of Operations during the year ended December 31, 2019.

There have been no new accounting pronouncements adopted during the year ended December 31, 2020.

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes .

The list of changes is comprehensive and many will not have a significant effect on our consolidated financial reporting.

The changes include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments.

In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in stand-alone financial statement reporting.

ASU 2019-12 also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other codification adjustments have been made to employee stock ownership plans.

For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued.

An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period.

Additionally, an entity that elects early adoption must adopt all the amendments in the same period.

We are currently evaluating whether to early adopt ASU 2019-12 in the first interim period of the year ending December 31, 2020.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which changes the way credit losses on certain financial instruments are estimated.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted.

We do not expect that the adoption of ASU 2016-13 will have a material effect on our Consolidated Financial Statements.

There have been no new pronouncements during the year ended December 31, 2020, which could be expected to materially impact our consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis