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Item 7. Management’s Discussion and Analysis

2022-03-17 compared with 2021-03-25 · 165 added, 182 removed, 186 unchanged (65% 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,” “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,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

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

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Annual Report on Form 10-K, particularly including those risks identified in Part I-Item 1A “Risk Factors” and our other filings with the SEC.

The following information and any forward-looking statements should be considered in light of factors

discussed elsewhere in this Annual Report on Form 10- K , particularly including those risks identified in Part I-Item 1A “Risk Factors” and our other filings with the SEC.

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements.

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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 Haduvio (nalbuphine ER) to treat serious neurologically mediated conditions.

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of the investigational therapy 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.

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 initial targeted number of subjects 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.

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

We completed enrollment in the trial on January 31, 2022.

We expect to report top-line data in the second quarter of 2022.

Food and Drug Administration, or FDA, a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, and an MAA to the Medicines and Healthcare Products Regulatory Agency in the United Kingdom, or MHRA, 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.

This trial 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.

In February 2022, we conducted an interim statistical analysis for this trial.

The interim analysis (N=26) was statistically significant on the primary efficacy endpoint demonstrating a 52% placebo-adjusted reduction in the geometric mean percent change in daytime cough events (p<0.0001, conditional power 100%) for Haduvio.

P-value is a conventional statistical method for measuring the statistical significance of clinical results.

A p-value of less than 0.05 is generally considered to represent statistical significance, meaning that there is a less than five percent likelihood that the observed results occurred by chance.

The interim analysis was conducted by an independent statistical team according to the pre-specified endpoint in the protocol.

In March 2022, we concluded enrollment early for our Phase 2 CANAL trial following the statistically significant efficacy results from the interim analysis.

Because the trial achieved statistical significance in the interim analysis, sites were notified that they could enroll eligible subjects already in screening but that no additional recruitment was required.

Approximately 40 subjects in total were enrolled in the study.

We expect to report efficacy and safety data for the full set of subjects for this trial in the third quarter of 2022.

We are currently focusing our financial 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 additional indications for which we may choose to pursue the 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 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.

As of December 31, 2021, we had an accumulated deficit of $180.9 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 Haduvio for the treatment of pruritus associated with prurigo nodularis or chronic cough in patients with IPF 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 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.

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We began making sales pursuant to the ATM Sales Agreement in July 2020, and as of December 31, 2021 we had issued and sold an aggregate of 3,583,394 shares of common stock for gross proceeds of $11.0 million, before deducting estimated commissions and allocated fees of $0.8 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.

In August 2020, we entered into a loan and security agreement, or the SVB Loan Agreement, with Silicon Valley Bank, or SVB pursuant to which SVB 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 commencing on March 1, 2022, we are 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”.

In July 2021, we entered into an amendment to the SVB Loan Agreement with SVB, which we refer to as the Loan Amendment, that modified the conditions under which we will be required to cash collateralize the outstanding amounts owed to them under the SVB Loan Agreement.

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

On October 5, 2021 and October 18, 2021, we issued and sold in two private placements, or the October 2021 Private Placements, in the aggregate (i) 4,225,053 shares of our common stock and accompanying warrants to purchase an aggregate of 8,450,106 shares of our common stock, and (ii) pre-funded warrants to purchase up to an aggregate of 4,926,069 shares of our common stock and accompanying warrants to purchase an aggregate of 9,852,138 shares of our common stock.

Each share of our common stock and accompanying common stock warrants were sold together at a combined price of $1.62, and each pre-funded warrant and accompanying common stock warrants were sold together at a combined price of $1.619, for gross proceeds of approximately $14.8 million.

Each pre-funded warrant had an exercise price of $0.001 per share, became exercisable immediately upon issuance and continued to be exercisable until exercised in full.

As of February 10, 2022, all of the pre-funded warrants had been exercised.

Of the accompanying common stock warrants, warrants to purchase an aggregate of 9,151,122 shares will expire in April 2025 and warrants to purchase an aggregate of 9,151,122 shares will expire in October 2028.

The accompanying common stock warrants have an exercise price of $1.37 per share and became exercisable immediately upon issuance.

As of December 31, 2021, we had cash and cash equivalents of $36.8 million.

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.

We believe that our existing cash and cash equivalents will not enable us to fund our operating expenses and capital expenditure requirements for 12 months from the date of issuance of the Consolidated Financial Statements included in this Annual Report on Form 10-K.

After considering various risks and uncertainties as prescribed by Accounting Standards Update No.

2014-15, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40) , we concluded that there is substantial doubt about our ability to continue as a going concern as of the date of issuance of the Consolidated Financial Statements included in this Annual Report on Form 10-K without additional capital.

We have based our estimate as to how long we expect our existing cash and cash equivalents to continue to fund our operations 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 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.

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 and 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 and the next trial we plan to conduct for Haduvio for the treatment of chronic cough associated with IPF which we intend to design as a Phase 2b/3 trial.

We also expect to incur substantial expenditures in the foreseeable future related to the development and validation of our commercial manufacturing process for Haduvio and other development activities.

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

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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

Impacts of the 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.

We have experienced restrictions and delays at our existing clinical sites for both our Phase 2b/3 PRISM and Phase 2 CANAL trials.

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.

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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.

We have taken precautionary measures intended to help minimize the risk of the virus to our employees, including allowing employees to work remotely part of the week.

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 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 Haduvio, as a significant amount of our development activities broadly support all indications.

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

These expenses include personnel-related costs, 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 all of 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.

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 U.S., Europe and other jurisdictions outside the U.S.

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.

Furthermore, we are unable to predict when or if, Haduvio will receive regulatory approval in the U.S.

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.

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 and expanded infrastructure.

Other Income (Expense), Net

Interest Expense on our Term Loan Facility

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 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.

Other (Expense) Income, Net

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.

In connection with the SVB Term Loan, u pon the occurrence of the Phase 3 Event, as described below, the interest rate on the SVB Term Loan will increase by 2.00% .

Th is c ontingent i nterest r ate i ncrease represents a free-standing financial instrument.

Accordingly, we accounted for the c ontingent i nterest r ate i ncrease as a derivative under Accounting Standards Codification, or ASC , 815, Derivatives and Hedging , and therefore, we recorded a term loan derivative liability for the c ontingent i nterest r ate i ncrease 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.

Other Expense

Other expense consists of the value of the shares of our common stock that we issued to Lincoln Park Capital Fund, LLC, or Lincoln Park, as a commitment fee as consideration for Lincoln Park’s commitment to purchase shares of our common stock under the common stock purchase agreement, or the LPC Purchase Agreement, we entered into with Lincoln Park in June 2021.

Interest Income

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

Interest Expense

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.

In connection with the SVB Term Loan, we recognize interest expense which includes amortization of deferred financing charges, accretion of loan discount-financing costs, accrual of the final payment fee, amortization of the term loan discount-interest and the stated interest on 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 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 chronic pruritus associated with 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 required interest-only payments until March 2022.

Commencing on March 1, 2022, we are required to repay the SVB Term Loan in 24 consecutive installments of principal plus monthly payments of accrued interest.

Results of Operations

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Loss from operations

Other income (expense):

Change in fair value of obligation for loan success fee

Other (expense) income:

Change in fair value of term loan derivative liability

Other expense

Interest income

Interest expense

Total other income (expense), net

Loss before income tax benefit

Total other expense, net

Loss before income taxes

Income tax benefit

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Total research and development expenses

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 .

Research and development expenses for the year ended December 31, 2021 increased $0.7 million, or 2.9%, to $23.0 million from $22.3 million for the year ended December 31, 2020, primarily due to an increase in personnel-related expenses as a result of an increase in our employee headcount, including an increase in stock-based compensation associated with the increase in employee headcount.

Costs associated with our clinical trials also increased along with consulting and professional fees.

These increases were partially offset by decreased purchases of clinical trial supplies.

For the years ended December 31, 2021 and 2020, all of our research and development expenses related to our development activity for Haduvio.

General and Administrative Expenses

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, 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.

General and administrative expenses for the year ended December 31, 2021 decreased $0.7 million, or 6.6%, to $9.5 million from $10.2 million for the year ended December 31, 2020.

The decrease was primarily due to decreased market research costs as well as lower stock-based compensation expense as a result of employee turnover, which were partially offset by higher legal and other professional fees.

Other Expense, Net

Other expense, net for the year ended December 31, 2021 increased to $1.5 million from other expense, net of $0.3 million for the year ended December 31, 2020.

This change was primarily due to a $0.7 million increase in interest expense due to a full twelve months of recognition of interest expense on the SVB Term Loan as the SVB Term Loan was entered into in August 2020, as well as an increase of $0.4 million related to the value of the shares of our common stock that we issued to Lincoln Park as consideration for Lincoln Park’s commitment to purchase shares of our common stock under the LPC Purchase Agreement.

Also contributing to the change was a decrease in interest income of $0.2 million, primarily due to lower market interest rates and lower average cash balances.

These changes in interest expense and interest income were partially offset by an increase in income of $0.1 million attributable to income being recognized in the year ended December 31, 2021 for the change in fair value of the term loan derivative liability.

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 Solar 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 Solar Term Loan.

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

Prior to the completion of our initial public offering, or the 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 our prior 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 our prior term loan.

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.

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

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.

In 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.

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We began making sales pursuant to the ATM Sales Agreement in July 2020, and as of December 31, 2021, we had issued and sold an aggregate of 3,583,394 shares of common stock for gross proceeds of $11.0 million, before deducting estimated commissions and allocated fees of $0.8 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.

SVB Loan Agreement

In August 2020, we entered into the SVB Loan Agreement with 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%.

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.

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

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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.

On July 6, 2021, we and SVB entered into the Loan Amendment.

The Loan Amendment modifies the conditions under which we are required to cash collateralize outstanding amounts owed to SVB under the SVB Loan Agreement.

Under the Loan Amendment, if we fail to receive positive data in our Phase 2b/3 PRISM trial or, prior to June 30, 2022, fail to raise sufficient net proceeds from the sale of equity securities to finance our planned second Phase 3 clinical trial of Haduvio for prurigo nodularis and our ongoing operations, each of which we refer to as a Milestone Condition, 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.

In addition, the Loan Amendment provides that if we fail to maintain at least $20.0 million in unrestricted and unencumbered cash in our accounts with SVB at any time prior to the satisfaction of all the Milestone Conditions, we will be required to cash collateralize all outstanding amounts owed to SVB under the SVB Loan Agreement.

We would also have been required to cash collateralize all outstanding amounts owed to SVB under the SVB Loan Agreement if we did not raise at least $15.0 million in net proceeds from the sale of equity securities during the period from June 1, 2021 through October 31, 2021.

We satisfied this equity funding condition through a combination of equity issuances under our ATM Sales Agreement and the proceeds from the October 2021 Private Placements.

Private Placements

On October 5, 2021 and October 18, 2021, we issued and sold in two private placements in the aggregate (i) 4,225,053 shares of our common stock and accompanying warrants to purchase an aggregate of 8,450,106 shares of our common stock, and (ii) pre-funded warrants to purchase up to an aggregate of 4,926,069 shares of our common stock and accompanying warrants to purchase an aggregate of 9,852,138 shares of our common stock.

Each pre-funded warrant had an exercise price of $0.001 per share, became exercisable immediately upon issuance and was exercisable until exercised in full.

As of February 10, 2022, all of the pre-funded warrants had been exercised.

The accompanying common stock warrants have an exercise price of $1.37 per share and became exercisable immediately upon issuance.

Equity Purchase Agreement

On June 18, 2021, we entered into the LPC Purchase Agreement with Lincoln Park for an equity line financing.

The LPC Purchase Agreement provides that, subject to the terms and conditions set forth therein, we have the right, but not the obligation, to sell to Lincoln Park and Lincoln Park is obligated to purchase up to $15.0 million of shares of common stock at our sole discretion, over a 24-month period commencing on July 23, 2021.

We filed a registration statement on Form S-1 covering the resale of shares of common stock that are issued to Lincoln Park under the LPC Purchase Agreement, which was declared effective on July 14, 2021.

As part of the LPC Purchase Agreement, we issued 170,088 shares of our common

stock to Lincoln Park as consideration for its commitment to purchase shares of our common stock under the LPC Purchase Agreement.

Under the terms of the October 2021 Private Placements, we agreed to not issue or sell additional shares under the LPC Purchase Agreement on or prior to April 6, 2023.

As of December 31, 2021, we had cash and cash equivalents of $36.8 million.

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

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

Year Ended December 31,

Twelve Months Ended December 31,

Net cash used in operating activities

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Net cash provided by financing activities

Net cash increase (decrease)

Net decrease in cash and cash equivalents

Operating Activities

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.

During the year ended December 31, 2021, operating activities used $28.9 million of net cash, resulting from our net loss of $33.9 million, partially offset by changes in our operating assets and liabilities of $1.5 million and non-cash charges of $3.5 million.

Changes in our operating assets and liabilities for the year ended December 31, 2021 consisted of a $0.3 million decrease in prepaid expenses and other current assets, a $0.8 million increase in accounts payable and a $0.3 million decrease in accrued expenses.

The decrease in prepaid expenses and other current assets was primarily due to the return of a deposit associated with the completion for one of our clinical trials.

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.

The decrease in accrued expenses and other liabilities was primarily due to decreased accruals related to non-income-based taxes and accrued consulting and professional fees partially offset by increased accruals for research, development and clinical trial work performed by our CROs.

The non-cash charges for the year ended December 31, 2021 consisted primarily of stock-based compensation expense of $2.5 million, $0.6 million of accretion/accrual of term loan discounts and debt issuance costs and $0.4 million of other expense associated with the value of the shares of our common stock that we issued to Lincoln Park as consideration for Lincoln Park’s commitment to purchase shares of our common stock under the LPC Purchase Agreement.

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 and our Phase 2 CANAL trial.

Changes in our operating assets and liabilities for the year ended December 31, 2020 consisted of a $0.7 million decrease in prepaid expenses and other current assets, a $0.4 million increase in accounts payable and a $0.1 million decrease in accrued expenses.

The decrease in prepaid expenses and other current assets was due to a refund of prepayments made to one of our vendors, which we received in the first quarter of 2020 and the application of such prepaid amounts to clinical trial activity in 2020 offset by additional prepayments made to one of our vendors, which were paid back to us in the first quarter of 2021.

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 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.

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, 2021, net cash provided by financing activities was $20.8 million, primarily consisting of net cash proceeds from our October 2021 Private Placements of $13.7 million and cash proceeds of $7.5 million, net of commissions, from sales of our common stock under the ATM Sales Agreement, partially offset by payments of offering costs of $0.4 million and payments of financing costs of $0.1 million associated with the First Amendment to the SVB Loan Agreement.

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 cash proceeds of $3.1 million, net of commissions, from sales of our common stock under the ATM Sales Agreement.

Funding Requirements

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.

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 believe we will need to conduct to support the submission of an NDA to the FDA and MAA s to the EMA and MHRA for Haduvio for the treatment of pruritus associated with prurigo nodularis, our ongoing Phase 2 CANAL trial and our next clinical trial that we intend to design to be a Phase 2b/3 trial as well as any additional clinical trials required to support the submission of an NDA to the FDA and MAAs to the EMA and MHRA for Haduvio for the treatment of chronic cough associated with IPF.

Generally, regulatory authorities require two adequate and well-controlled studies for approval.

We also expect to incur substantial expenditures in the foreseeable future related to the costs of commercialization activities, including manufacturing capabilities, for Haduvio and other development activities.

In addition, we have incurred and may continue to incur additional expenses as a result of the COVID-19 pandemic 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.

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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 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 scope, progress, timing, costs and results of clinical trials of Haduvio, including our ongoing Phase 2b/3 PRISM trial and our ongoing Phase 2 CANAL trial, as well as any future product candidates;

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 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 costs of commercialization activities for Haduvio for the treatment of pruritus associated with prurigo nodularis or for the treatment of chronic cough in patients with IPF 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 the treatment of chronic cough in patients with IPF 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 the treatment of chronic cough in patients with IPF or for any future product candidates and the terms and timing of any collaboration agreement that we may establish for the development and any commercialization of such product candidates;

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

our potential obligation to make milestone payments to Endo, which would become due upon the successful completion of the first Phase 3 clinical trial of a licensed product candidate, the marketing approval of a licensed product in the United States and to pay mid-single digit royalties on the net sales of the product;

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

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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 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.

our ability to continue as a going concern;

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

We believe that our existing cash and cash equivalents, including the proceeds from our October 2021 Private Placements, will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2022, without giving effect to the rights of SVB under the SVB Loan Agreement if we fail to achieve either of the Milestone Conditions or fail to maintain at least $20.0 million in unrestricted and unencumbered cash in our accounts with SVB at any time prior to the satisfaction of the Milestone Conditions.

If we fail to achieve any of the Milestone Conditions or to maintain the minimum cash requirement and SVB cash collateralizes the amounts then owed to SVB under the SVB Loan Agreement or uses such amounts to prepay the SVB Term Loan, the period for which we will be able to fund our operating expenses and capital expenditure requirements will be significantly shorter.

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 and financing may not be available to us on acceptable terms, on a timely basis or at all.

Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

We do not have any committed external source of funds.

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

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

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

We are also bound by certain contractual terms and obligations that may limit or otherwise impact our ability to raise additional funding in the near-term including, but not limited to, provisions in the October 2021 Private Placements prohibiting us from obtaining additional financing through a variable rate transaction such as an equity line of credit.

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.

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Our determination of the fair value of stock options on the date of grant utilizes the Black-Scholes option pricing model for stock options with time-based vesting and is impacted by our common stock price as well as changes in assumptions regarding a number of complex and subjective variables.

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.

These variables include the 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.

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.

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Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.

The following assumptions were used to calculate the fair value of awards granted during the periods indicated:

Year Ended December 31,

Risk-free interest rate

Expected volatility

Expected dividend yield

Expected life of options (in years)

We will continue to use judgment in evaluating the expected volatility, expected terms and interest rates utilized for our stock-based compensation expense calculations on a prospective basis.

Stock-based compensation expense, is reflected in the statements of operations and comprehensive loss as follows (in thousands):

Year Ended December 31,

Research and development expense

General and administrative expense

As of December 31, 2020, total unrecognized stock-based compensation was $4.4 million, which is expected to be recognized over the remaining vesting period of 2.5 years.

The intrinsic value of all outstanding stock options as of December 31, 2020 was approximately $0.2 million based on a common stock fair value of $2.42 per share, which was the closing price of our common stock on the Nasdaq Global Market on December 31, 2020.

Common Stock Valuations

Prior to our IPO in May 2019, the estimated fair value of the common stock underlying our stock options was determined at each grant date by our board of directors, with input from management.

All options to purchase shares of our common stock were intended to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant.

In the absence of a public trading market for our common stock prior to our IPO in May 2019, on each grant date, we developed an estimate of the fair value of our common stock based on the information known to us on the date of grant, upon a review of any recent events and their potential impact on the estimated fair value per share of the common stock, and in part on input from an independent third-party valuation.

As is provided for in Section 409A of the Internal Revenue Code of 1986, as amended, or the Code, we generally relied on our valuations for up to twelve months unless we had experienced a material event that would have affected the estimated fair value of our common stock.

Our valuations of our common stock prior to our IPO in May 2019 were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid.

The methodology to determine the fair value of our common stock included estimating the fair value of the enterprise using a market approach, which estimates the fair value of the company by including an estimation of the value of the business based on guideline public companies under a number of different scenarios.

The assumptions used to determine the estimated fair value of our common stock were based on numerous objective and subjective factors, combined with management judgment, including external market conditions affecting the pharmaceutical and biotechnology industry and trends within the industry;

our stage of development;

the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

the prices at which we sold shares of our convertible preferred stock;

our financial condition and operating results, including our levels of available capital resources;

the progress of our research and development efforts, our stage of development and business strategy;

equity market conditions affecting comparable public companies;

market conditions;

and the lack of marketability of our common stock.

The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date.

In accordance with the Practice Aid, we considered the following methods:

Option Pricing Method, or OPM —The OPM treats common stock and convertible preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes.

Under this method, the common stock has value only if the funds available for distribution to stockholders exceed the value of the liquidation preferences at the time of a liquidity event, such as a strategic sale or merger.

The common stock is modeled as a call option on the underlying equity value at a predetermined exercise price.

In the model, the exercise price is based on a comparison with the total equity value rather than, as in the case of a regular call option, a comparison with a per share stock price.

Thus, common stock is considered to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the convertible preferred stock liquidation preference is paid.

The OPM uses the Black-Scholes option-pricing model to price the call options.

This model defines the securities’ fair values as functions of the current fair value of a company and uses assumptions, such as the anticipated timing of a potential liquidity event and the estimated volatility of the equity securities.

Probability Weighted Expected Return Method, or PWERM —Under the PWERM methodology, the fair value of common stock is estimated based upon an analysis of future values for the company, assuming various outcomes.

The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock.

The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock.

Hybrid Method —The hybrid method is a PWERM where the equity value in one of the scenarios is calculated using an OPM.

In the hybrid method used by us, we considered an IPO, as the other potential future liquidity event.

The equity value for the IPO scenario was determined using the guideline public company, or GPC, method under the market approach.

The relative probability of the IPO scenario was determined based on an analysis of market conditions at the time and our expectations as to the timing and likely prospects of the IPO at each valuation date.

In our application of the GPC method, we considered publicly traded companies in the biopharmaceutical industry that had a similar profile to ours as well as recently completed IPOs as indicators of our estimated future value in an IPO.

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

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.

The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.

Subsequent to the completion of our IPO in May 2019, the fair value of our common stock has been determined based on the closing price of our common stock as reported on the date of grant on the primary stock exchange on which our common stock is traded.

We provide for income taxes under the asset and liability method.

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Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate.

As of each balance sheet date,

unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate.

The recognition and measurement of tax benefits requires significant judgment.

Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

As of December 31, 2020, our total deferred tax assets were $42.8 million.

Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance.

The deferred tax assets were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards;

which totaled approximately $137.6 million at December 31, 2020.

Due to our Series A preferred stock financing in December 2012 and the shares we issued in connection with our IPO in May 2019, we were subject to an “ownership change” under Section 382 of the Code.

As a result, our ability to use $91.3 million of these NOL carryforwards is limited.

We may experience further ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control.

If a further ownership change occurred, our ability to use our NOL carryforwards might be further limited.

We determine the accounting classification of warrants that are issued, as either liability or equity, by first assessing whether the warrants meet liability classification in accordance with ASC 480, Distinguishing Liabilities from Equity , and then in accordance with ASC 815, Derivatives and Hedging , depending on the specific terms of the warrant agreement.

Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate the issuer to settle the warrants or the underlying shares by paying cash or other assets, or must or may require settlement by issuing a variable number of shares.

If warrants do not meet liability classification under ASC 480, we assess the requirements under ASC 815, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature.

If the warrants do not require liability classification under ASC 815, in order to conclude equity classification, we assess whether the warrants are indexed to our common stock and whether the warrants are classified as equity under ASC 815 or other applicable GAAP.

After all relevant assessments are made, we conclude whether the warrants are classified as liability or equity.

Liability classified warrants are required to be accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded in the statements of operations as a gain or loss.

For equity classified warrants, no changes in fair value are recognized after the issuance date.

Fair Value Measurements

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.

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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.

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

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

See Note 12 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for discussion regarding our commitments and contingent commitments.

JOBS Act Accounting Election

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Recently Adopted Accounting Pronouncements

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

On January 1, 2021, we adopted Accounting Standards Update No.

2019-12 Income Taxes (Topic 740) , which simplifies the accounting for income taxes.

The adoption of the new guidance did not materially affect our Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

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

There have been no new pronouncements issued during the year ended December 31, 2021 , which could be expected to materially impact our C onsolidated F inancial S tatements.

Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Financial Statements and Supplementary Data.

The financial statements required to be filed pursuant to this Item 8 are appended to this report.

An index of those financial statements is found in Item 15 of Part IV of this Annual Report on Form 10-K.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

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