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OFFON

RANI THERAPEUTICS HOLDINGS, INC.

(RANI)
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RANI THERAPEUTICS HOLDINGS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/16/2021 | 06:09am EST

MANAGEMENT'S DISCUSSION AND ANALYSIS OF


                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited interim condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, and our final prospectus filed with the Securities and Exchange Commission ("SEC") pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, dated August 2, 2021 (the "Prospectus"). Some of the information contained in this discussion and analysis or set forth elsewhere in this document, includes forward looking statements that involve risks, uncertainties, and assumptions. You should carefully read the "Special Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this document for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

The following discussion contains references to calendar year 2020 and the nine months ended September 30, 2020 and September 30, 2021, which represents the condensed consolidated financial results of Rani Therapeutics Holdings, Inc. (the "Company") and its subsidiaries for the year ended December 31, 2020 and the nine months ended September 30, 2020 and 2021, respectively. Unless we state otherwise or the context otherwise requires, the terms "we," "us," "our," and "Rani" and similar references refers to the Company and its consolidated subsidiaries.

Overview

We are a clinical stage biotherapeutics company advancing technologies to enable the development of orally administered biologics. We have developed the RaniPill capsule, which is our novel, proprietary and patented platform technology, intended to replace subcutaneous or IV injection of biologics with oral dosing. The RaniPill capsule is an orally ingestible pill approximately the size of a "000" capsule (or similar to the size of a standard fish oil or calcium pill) that is designed to automatically administer a precise therapeutic dose of medication upon deployment in the small intestine. To date, we have successfully conducted several preclinical and clinical studies to evaluate safety, tolerability and bioavailability using the RaniPill capsule. Our development efforts have enabled us to construct an extensive intellectual property portfolio that we believe provides us a competitive advantage. Our pipeline includes five core product candidate programs. Additionally, we envision complementing these core programs with robust partnering activities to maximize the value inherent in the RaniPill capsule.

Since our inception in 2012, we have devoted the majority of our resources to research and development, manufacturing automation and scaleup, and establishing our intellectual property portfolio. To date, we have financed our operations primarily through an initial public offering ("IPO"), private placements of our preferred units and the issuance of convertible promissory notes, with aggregate gross proceeds of $282.4 million, as well as revenue generated from evaluation agreements. We expect that our cash and cash equivalents of $129.7 million as of September 30, 2021 will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next twelve months.

We do not have any products approved for sale, and we have not yet generated any revenue from sales of a commercial product. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend on the successful development of the RaniPill capsule, which we expect will take a number of years. Given our stage of development, we have not yet established a commercial organization or distribution capabilities, and we have no experience as a company in marketing drugs or a drug-delivery platform. When, and if, any of our product candidates are approved for commercialization, we plan to develop a commercialization infrastructure for those products in the United States, Europe, Asia, and potentially in certain other key markets. We may also rely on partnerships to provide commercialization infrastructure, including sales, marketing, and commercial distribution.

Since our inception, we have incurred significant losses and negative cash flows from operations. Our net losses were $28.7 million and $39.8 million for the three and nine months ended September 30, 2021, respectively, of which $3.1 million was attributable to Rani Therapeutics Holdings, Inc. for the three and nine months ended September 30, 2021. As of September 30, 2021, we had an accumulated deficit of $3.1 million. We expect to continue to incur significant losses for the foreseeable future, and our net losses may fluctuate significantly from period to period, depending on the timing of and expenditures on our planned research and development activities. Until such time as we can generate sufficient revenue from commercial product sales, if ever, we expect to finance our operations through a combination of equity offerings and debt financings, or other capital sources, which may include strategic collaborations or other arrangements with third parties. We may be unable to raise additional funds or to enter into such agreements or arrangements on favorable terms, or at all. If we are unable to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose.


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Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and financial markets in the United States and worldwide, such as those resulting from the ongoing COVID-19 pandemic. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from commercial product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and may be forced to reduce or terminate our operations.

As is common with biotechnology companies, we rely on third-party suppliers for the supply of raw materials and active pharmaceutical ingredients ("APIs") required for the production of our product candidates. In addition, we work with third parties to manufacture and develop biologics for inclusion in the RaniPill capsule. Design work, prototyping and pilot manufacturing are performed in-house, and we have utilized third-party engineering firms to assist with the design of manufacturing lines that support our supply of the RaniPill capsule. Certain of our suppliers of components and materials are single source suppliers. We believe our vertically integrated manufacturing strategy will offer significant advantages, including rapid product iteration, control over our product quality and the ability to rapidly scale our manufacturing capacity. This capability also allows us to develop future generations of products while maintaining the confidentiality of our intellectual property. Our vertically integrated manufacturing strategy will result in material future capital outlays and fixed costs related to constructing and operating a manufacturing facility. We have and plan to continue to invest in automated manufacturing production lines for the RaniPill capsule. Those assets deemed to have an alternative future use have been capitalized as property and equipment while those projects related to our assets determined to not have an alternative future use have been expensed as research and development costs.

COVID-19 Pandemic

Since it was reported to have surfaced in late 2019, COVID-19 has spread across the world and has been declared a pandemic by the World Health Organization. Efforts to contain the spread of COVID-19 have intensified and governments around the world, including in the United States, Europe and Asia, have implemented precautions such as travel restrictions, social distancing requirements, and stay-at-home orders. As a result, the current COVID-19 pandemic has presented a substantial global public health and economic challenge and is affecting our employees and business operations, as well as contributing to significant volatility and negative pressure on the U.S. economy and in financial markets. The COVID-19 pandemic has and may continue to impact the Company's third-party manufacturers and suppliers, which could disrupt its supply chain or the availability or cost of materials. The effects of the public health directives and the Company's work-from-home policies may negatively impact productivity, disrupt its business, and delay clinical programs and timelines and future clinical trials, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on the Company's ability to conduct business in the ordinary course. These and similar, and perhaps more severe, disruptions in the Company's operations could negatively impact business, results of operations and financial condition, including its ability to obtain financing.

We have initiated, and may take additional, temporary precautionary measures intended to help ensure our employees' well-being and minimize business disruption. For the safety of our employees and their families, we have temporarily reduced the presence of our employees in our office and continue to rely on third parties to conduct many of the experiments and preclinical studies for our research programs. Certain third-party service providers have also experienced shutdowns or other business disruptions. The extent to which the COVID-19 pandemic may affect our business, operations and development timelines and plans, including the resulting impact on expenditures and capital needs, remains uncertain.

Organizational Transactions

The Company was incorporated in April 2021 and formed for the purpose of facilitating the initial public offering ("IPO") in order to carry on the Company's business. In connection with the IPO, the Company became a holding company and its principal asset is the Class A common units ("Class A Units") of Rani Therapeutics, LLC ("Rani LLC") that it owns. As the sole managing member of Rani LLC, the Company operates and controls all of Rani LLC's operations, and through Rani LLC and its subsidiary, conducts all of Rani LLC's business and the financial results of Rani LLC and its consolidated subsidiary will be included in the consolidated financial statements of the Company.

Rani LLC has been, and after the IPO continues to be, treated as a pass-through entity for U.S. federal and state income tax purposes and accordingly has not been subject to U.S. federal or state income tax. The wholly owned subsidiary of Rani LLC, Rani Management Services, Inc. ("RMS"), which was incorporated in 2019, is taxed as a corporation for U.S. federal and most applicable state, local income tax and foreign tax purposes. As a result of its ownership of interests in Rani LLC ("LLC Interests"), the Company is subject to U.S. federal, state and local income taxes with respect to its allocable share of any taxable income of Rani LLC and will be taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur expenses related to our operations and we are required to make payments under the Tax Receivable Agreement with certain of the individuals and entities that continue to hold interests in Rani LLC after the IPO (the "Continuing LLC Owners"). Due to the uncertainty of various factors, we cannot


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estimate the likely tax benefits we will realize as a result of LLC Interests exchanges, and the resulting amounts we will likely pay out to the Continuing LLC Owners pursuant to the Tax Receivable Agreement; however, we estimate that such payments may be substantial in the event we are profitable.

Components of Results of Operations

Contract Revenue

To date, we have not generated any revenue from commercial product sales and do not expect to generate any revenue from the sale of commercial products in the foreseeable future. Our only revenue has been derived from the evaluation agreements, which are recorded as contract revenue. As of September 30, 2021, we had no active evaluation agreements, and therefore we expect that our revenue for the next several years will be derived from any new agreements that we may enter into in the future.

Our ability to generate commercial product revenue and to become profitable will depend upon our ability to successfully develop, obtain regulatory approval and commercialize the capsule. Because of the numerous risks and uncertainties associated with product development and regulatory approval, we are unable to predict the amount, timing or whether we will be able to obtain commercial product revenue.

Operating Expenses

Our operating expenses consisted of research and development expenses and general and administrative expenses.

Research and Development Expense

Research and development expense consists primarily of direct and indirect costs incurred in connection with our research and development activities to commercialize the RaniPill capsule. These expenses include:

External expenses, consisting of:

• expenses associated with contract research organizations ("CROs"), for managing and conducting clinical trials;

• expenses associated with laboratory supplies, drug material for clinical trials, developing and manufacturing of the RaniPill capsule and other materials;

• expenses associated with preclinical studies performed by third parties; and

• expenses associated with consulting, legal fees for patent matters, advisors, and other external expenses.

Internal expenses, consisting of:

• expenses including salaries, bonuses, equity-based compensation and benefits for personnel engaged in research and development functions;

• expenses associated with service and repair of equipment, equipment depreciation, and allocated facility costs for research and development; and

• other research and development costs related to compliance with quality and regulatory requirements.

We expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses. Nonrefundable advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered. Until future commercialization is considered probable and the future economic benefit is expected to be realized, we do not capitalize pre-launch inventory costs.

Costs of property and equipment related to scaling-up our manufacturing capacity for clinical trials and to support commercialization are capitalized as property and equipment unless the related asset does not have an alternative future use.


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The historical focus of our research and development has been on the RaniPill delivery platform and not tracked costs on a project-by-project basis associated with different drug compounds.

At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, the RaniPill capsule. We expect our research and development expenses to increase significantly in the foreseeable future as we continue to invest in research and development activities related to developing the RaniPill capsule, as our product candidates advance into later stages of development, as we begin to conduct larger clinical trials, as we seek regulatory approvals for the RaniPill capsule upon successful completion of clinical trials, and incur expenses associated with hiring additional personnel to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, the successful development of the RaniPill capsule is highly uncertain, and we may never succeed in achieving regulatory approval for the RaniPill capsule.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related costs (including salaries, bonuses, equity-based compensation, and benefits) for personnel in executive, finance, accounting, legal, corporate and business development, and other administrative functions. General and administrative expenses also include legal fees relating to corporate matters, professional fees paid for accounting, auditing, consulting, tax, and administrative consulting services, insurance costs, travel expenses, marketing expenses, and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

We anticipate that our general and administrative expenses will increase significantly in the foreseeable future as additional administrative personnel and services are required to manage and support the development of the RaniPill capsule. We also anticipate that we will incur increased expenses associated with operating as a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs, and investor and public relations costs.

Other Income (Expense), Net

Other income (expense), net primarily consists of interest income on our cash and cash equivalents and income (expense) associated with re-measurements of the estimated fair value of preferred unit warrants and loss on the extinguishment of debt.


Relationship with InCube Labs

Services Agreements

In January 2019, we entered into a one year service agreement with InCube Labs, LLC ("ICL"), the majority holder of the Company's common units and a related party. This agreement was amended in January 2020 to extend the period for an additional year and expired in December 2020. We are presently operating under a service agreement with ICL executed in June 2021, retroactive to January 1, 2021. We or ICL may terminate services under the service agreement upon 60 days' notice to the other party, except for occupancy which requires six months' notice. The service agreement specifies the scope of services to be provided by ICL as well as the methods for determining the costs of services for the year ended December 31, 2021. Costs are billed on a monthly basis and based upon the hours incurred by ICL employees working on our behalf as well as allocations of expenses based upon our utilization of ICL's facilities and equipment.

In June 2021, RMS entered into the RMS-ICL Service Agreement effective January 1, 2021, pursuant to which ICL agreed to rent a specified portion of its facility to RMS. Additionally, RMS and ICL agreed to provide personnel services to the other upon requests based on rates specified in the agreement. The RMS-ICL Service Agreement has a 12-month term and will automatically renew for successive 12-month periods unless terminated. For the nine months ended September 30, 2021 and 2020, RMS charged ICL $0.3 million and $0.5 million for services performed, respectively, and such amounts charged were recorded as a reduction to research and development expense in the condensed consolidated statement of operations and comprehensive loss.

Our eligible employees are permitted to participate in ICL's 401(k) Plan ("401(k) Plan"). Participation in the 401(k) Plan is offered for the benefit of our employees, including our named executive officers, who satisfy certain eligibility requirements.

As of September 30, 2021, all of our facilities are owned by an entity affiliated with one of our directors, who is also the owner of ICL. We pay for the use of these facilities through the service agreement with ICL.


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The table below details the amounts charged by ICL for services and rent, net of the amount that RMS charged ICL, which is included in the condensed consolidated statements of operations and comprehensive loss (in thousands):


                                Three Months Ended           Nine Months Ended
                                   September 30,               September 30,
                               2021            2020          2021           2020

Research and development $ 222 $ (22 ) $ 377 $ 98 General and administrative 149

             174           516          625
Total                        $     371       $     152     $     893       $  723



Equity-Based Compensation

In connection with the IPO and Organizational Transactions, the Company effectuated an exchange of all outstanding Profits Interests into Class A Units including certain Profits Interests related to ICL and its affiliates ("ICL Holders"). Upon the IPO and Organizational Transactions, the performance condition was met for all Profits Interest no longer subject to a service based vesting condition resulting in the recognition of compensation cost associated with these awards. ICL Holders of 919,282 Class A Units exchanged 854,807 such units for the Company's Class A common stock, the remaining 64,475 Class A Units of Rani LLC continue to be outstanding and are exchangeable for the Company's Class A common stock at the option of the ICL Holders.

The following table summarizes the components of equity-based compensation expense recorded in the condensed consolidated statement of operations and comprehensive loss related to awards granted to employees of ICL and its affiliates by the Company (in thousands):



                                Three Months Ended           Nine Months Ended
                                  September 30,                September 30,
                                 2021           2020          2021           2020
Research and development     $        644           -     $        644           -
General and administrative          2,947           -            2,947           -
Total                        $      3,591           -     $      3,591           -




Financing activity

From inception to December 31, 2017, we advanced funds to ICL, and ICL made payments directly to certain vendors on behalf of us. We have reimbursed ICL for all such payments at cost on a monthly basis. In June 2017, we converted the outstanding advances of $6.6 million to ICL into notes receivable. The notes provided for interest at 1.97% compounded annually, loan fees of 2.75% and were payable upon demand to us any time after January 1, 2024. During 2020, we received $1.0 million in payments for interest and repayment of principal on the ICL notes receivable. During the nine months ended September 30, 2020, payments for interest and repayment of principal on the ICL note receivable was insignificant. During the nine months ended September 30, 2021, we received $1.7 million for interest and principal on the ICL notes receivable. As of December 31, 2020, $1.7 million of the notes were outstanding. The outstanding balance, including all accrued interest, was fully repaid in March 2021.

In December 2020, we amended the terms of certain expired warrants to purchase Series B units (the "Series B Warrants"), issued to InCube Ventures II, LP ("ICV II"), a related party and entity affiliated with ICL, by extending its exercise period for an additional two years. In December 2020, ICV II elected to cashless exercise all of their Series B Warrants and Rani LLC issued 51,341 Series B units.

Exclusive License Agreement

In June 2021, we and ICL entered into an Amended and Restated Exclusive License Agreement which replaces the 2012 Exclusive License Agreement, as amended in 2013, and terminates the Intellectual Property Agreement, as amended in June 2013. Under the Amended and Restated License Agreement, we will have a fully paid, exclusive license under certain scheduled patents related to optional features of the device and certain other scheduled patents to exploit products covered by those patents in the field of oral delivery of sensors, small molecule drugs or biologic drugs including, any peptide, antibody, protein, cell therapy, gene therapy or vaccine. We will cover patent-related expenses and, after a certain period, we will have the right to acquire four specified U.S. patent families from ICL by making a one-time payment of $0.3 million to ICL for each U.S. patent family that the Company desires to acquire, up to $1.0 million in the aggregate. This payment will not become an obligation until the fifth anniversary of the Amended and Restated Exclusive License Agreement. The Amended and Restated Exclusive License Agreement will terminate when there are no remaining valid claims of the patents licensed under the Amended and Restated Exclusive License Agreement. Additionally, we


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may terminate the Amended and Restated Exclusive License Agreement in its entirety or as to any particular licensed patent upon notification to ICL of such intent to terminate.

Non-Exclusive License Agreement between Rani and ICL ("Non-Exclusive License Agreement")

In June 2021, we entered into the Non-Exclusive License Agreement with ICL a related party, pursuant to which we granted ICL a non-exclusive, fully-paid license under specified patents that were assigned from ICL to the Company. Additionally, we agreed not to license these patents to a third party in a specific field outside the field of oral delivery of sensors, small molecule drugs or biologic drugs including, any peptide, antibody, protein, cell therapy, gene therapy or vaccine, if ICL can prove that it or its sublicensee has been in active development of a product covered by such patents in that specific field. ICL may grant sublicenses under this license to third parties only with our prior approval. The Non-Exclusive License Agreement will continue in perpetuity unless terminated.

Intellectual Property Agreement with Mir Imran (the "Mir Agreement")

In June 2021, we entered into the Mir Agreement, pursuant to which we and Mir Imran agreed that we would own all intellectual property conceived (a) using any of our people, equipment, or facilities or (b) that is within the field of oral delivery of sensors, small molecule drugs or biologic drugs including, any peptide, antibody, protein, cell therapy, gene therapy or vaccine. Neither us nor Mir Imran may assign the Mir Agreement to any third party without the prior written consent of the other party. The initial term of the Mir Agreement is three years, which can be extended upon mutual consent of the parties. The Mir Agreement may be terminated by either party for any reason within the initial three year term upon providing three months' notice to the other party.

Tax Receivable Agreement

Certain parties to the TRA, entered into in August 2021 pursuant to the IPO and Organizational Transactions, are related parties of the Company. The TRA provides that the Company pay to such entities and individuals 85% of the amount of tax benefits, if any, it is deemed to realize from exchanges of Paired Interests.

Registration Rights Agreement

In connection with the IPO, we entered into a Registration Rights Agreement with the Continuing LLC Owners, including ICL. The Registration Rights Agreement provides the Continuing LLC Owners certain registration rights whereby, at any time following the IPO and the expiration of any related lock-up period, the Continuing LLC Owners can require us to register under the Securities Act shares of Class A common stock issuable to them upon, at our election, redemption or exchange of their LLC Interests, and the Former LLC Owners can require us to register under the Securities Act of 1933, as amended (the "Securities Act"), the shares of Class A common stock issued to them in connection with the Organizational Transactions. The Registration Rights Agreement also provides for piggyback registration rights for the Continuing LLC Owners.

Rani LLC Agreement

The Company operates its business through Rani LLC and its subsidiary. In connection with the IPO, the Company and the Continuing LLC Owners, including ICL, entered into the Rani LLC Agreement. The operations of Rani LLC, and the rights and obligations of the holders of LLC Interests, are set forth in the Rani LLC Agreement. As a Continuing LLC Owner, ICL is entitled to exchange, subject to the terms of the Rani LLC Agreement, Paired Interests for Class A common stock of the Company; provided that, at the Company's election, the Company may effect a direct exchange of such Class A common stock or make a cash payment equal to a volume weighted average market price of one share of Class A common stock for each Paired Interest redeemed. No exchanges with ICL of Paired Interests occurred during the three and nine months ended September 30, 2021.

Future Public Company Expenses

As a result of the IPO, we expect our operating expenses to increase. We expect our accounting, legal and personnel-related expenses and directors' and officers' insurance costs reported within general and administrative to increase as we establish more comprehensive compliance and governance functions, maintain and review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act of 2002 and prepare and distribute periodic reports as required by the rules and regulations of the SEC. As a result, our historical results of operations may not be indicative of our results of operations in future periods.


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Results of Operations

Comparison of the three months ended September 30, 2021 and 2020

The following table summarizes our results of operations (in thousands):



                                                         Three Months Ended September 30,
                                                            2021                   2020
Contract revenue                                      $               -       $           108
Operating expenses
Research and development                                         11,959                 2,090
General and administrative                                       15,822                   845
Total operating expenses                              $          27,781       $         2,935
Loss from operations                                            (27,781 )              (2,827 )
Other income (expense), net
Interest income                                                      13                    13
Loss on extinguishment of debt                                     (700 )                   -
Interest expense and other, net                                    (110 )                 (64 )
Change in estimated fair value of preferred unit
warrant                                                             (85 )                   -
Loss before income taxes                                        (28,663 )              (2,878 )
Income tax expense                                                  (37 )                  (5 )
Net loss and comprehensive loss                       $         (28,700 )     $        (2,883 )
Net loss attributable to non-controlling interest               (25,558 )              (2,883 )
Net loss attributable to Rani Therapeutics
Holdings, Inc.                                        $          (3,142 )     $             -


Contract Revenue

Contract revenue was $0.1 million for the three months ended September 30, 2020, which was attributable to our evaluation agreement with Takeda. In May 2021, we received notice from Takeda as to their intent to terminate the contract for convenience and as such we did not have any revenues for the three months ended September 30, 2021.

Research and Development Expenses


The following table reflects our research and development costs by nature of
expense (in thousands):



                                                            Three Months Ended
                                                               September 30,
                                                             2021          2020

Payroll, equity-based compensation and related benefits $ 10,039 $ 1,334 Facilities, materials and supplies

                              1,005         542
Third-party services                                              812         180
Other                                                             103          34
Total                                                     $    11,959     $ 2,090

Research and development expenses were $12.0 million for the three months ended September 30, 2021, compared to $2.1 million for the three months ended September 30, 2020. The change in research and development expense was attributed to an increase of $1.9 million in salaries and related benefit costs due to higher headcount, the equity-based compensation increased by $6.6 million attributed to the vesting and recognition of the Profits Interests expense in connection with the IPO and Organizational Transactions, and additional compensation as a result of a modification of certain Profits Interests, and increase in laboratory supplies of $0.4 million and third-party services of $0.6 million as a result of increasing research and development activities at the Company.

General and Administrative Expenses

General and administrative expenses were $15.8 million for the three months ended September 30, 2021, compared to $0.8 million for the three months ended September 30, 2020. During the three months ended September 30, 2021, the equity-based compensation increased by $12.1 million attributed to the vesting and recognition of the Profits Interests expense in connection with the IPO and Organizational Transactions, and additional compensation as a result of a modification of certain Profits Interests, professional and consulting services expense increased by $1.1 million primarily due to the costs associated with preparing to operate


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as a public company, salaries and related benefits increased by $1.2 million due to higher headcount, and facility costs increased $0.5 million to support the increase in headcount.

Other Income (Expense), Net

Other expense, net, was $0.9 million for the three months ended September 30, 2021, which related to $0.7 million of loss on the extinguishment of debt in July 2021, $0.1 million of interest expense on the debt, and $0.1 million due to the increase in the estimated fair value of the Series E preferred unit warrants prior to their conversion. Other expense, net, for the three months ended September 30, 2020 was primarily comprised of interest expense on the debt which was entered into in the third quarter of 2020.

Comparison of the nine months ended September 30, 2021 and 2020

The following table summarizes our results of operations (in thousands):



                                                          Nine Months Ended September 30,
                                                            2021                   2020
Contract revenue                                      $          2,717       $            252
Operating expenses
Research and development                                        19,065                  8,708
General and administrative                                      21,889                  3,144
Total operating expenses                              $         40,954       $         11,852
Loss from operations                                           (38,237 )              (11,600 )
Other income (expense), net
Interest income                                                     73                     87
Loss on extinguishment of debt                                    (700 )                    -
Interest expense and other, net                                   (467 )                  (66 )
Change in estimated fair value of preferred unit
warrant                                                           (371 )                  655
Loss before income taxes                                       (39,702 )              (10,924 )
Income tax expense                                                 (81 )                  (23 )
Net loss and comprehensive loss                       $        (39,783 )     $        (10,947 )
Net loss attributable to non-controlling interest              (36,641 )              (10,947 )
Net loss attributable to Rani Therapeutics
Holdings, Inc.                                        $         (3,142 )     $              -


Contract Revenue

Contract revenue was $2.7 million and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively, which was attributable to the evaluation agreement with Takeda. In 2021, $0.7 million of revenue related to the timing of work performed under the agreement. In May 2021, we received notice from Takeda as to their intent to terminate the contract for convenience. The termination of the contract was considered a modification of the arrangement, and the deferred revenue remaining of $2.0 million under this agreement was fully recognized in the second quarter of 2021.

Research and Development Expenses


The following table reflects our research and development costs by nature of
expense (in thousands):



                                                               Nine Months Ended September 30,
                                                                2021                     2020

Payroll, equity-based compensation and related benefits $ 15,139 $ 4,652 Facilities, materials and supplies

                                    2,541                   1,745
Third-party services                                                  1,172                   2,243
Other                                                                   213                      68
Total                                                     $          19,065         $         8,708

Research and development expenses were $19.1 million for the nine months ended September 30, 2021, compared to $8.7 million for the nine months ended September 30, 2020. The change in research and development expense was attributed to an increase of $3.4 million in salaries and related benefit costs due to higher headcount, equity-based compensation of $6.9 million attributed to the vesting and recognition of the Profits Interests expense in connection with the IPO and Organizational Transactions, and additional compensation as a result of a modification of certain Profits Interests, and an increase in laboratory supplies of $0.7 million, partially


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offset by a reduction in third-party services of $1.1 million for the development of our manufacturing processes that occurred in 2020 and did not recur in 2021.

General and Administrative Expenses

General and administrative expenses were $21.9 million for the nine months ended September 30, 2021, compared to $3.1 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, our equity-based compensation expense increased by $12.5 million attributed to the vesting and recognition of the Profits Interests expense in connection with the IPO and Organizational Transactions, and additional compensation as a result of a modification of certain Profits Interests, professional and consulting services expense increased by $3.1 million primarily due to the costs associated with preparing to operate as a public company, and our payroll and related benefits increased by $2.0 million due to higher headcount, facility costs increased $0.8 million to support the higher headcount, and travel costs increased $1.0 million.

Other Income (Expense), Net

Other expense, net was $1.5 million for the nine months ended September 30, 2021, which primarily related to $0.7 million of loss on the extinguishment of debt in July 2021, $0.5 million of interest expense on the debt, and $0.4 million due to the increase in the estimated fair value of the Series E preferred unit warrants prior to their conversion. Other income, net, for the nine months ended September 30, 2020 was primarily due to the change in estimated fair value of the Series B preferred unit warrants.

Liquidity and Capital Resources

Source of Liquidity

Since our inception in 2012, we have not generated any revenue from commercial product sales and have incurred significant operating losses and negative cash flows from operations. We have not yet commercialized any products, and we do not expect to generate revenue from sales of commercial products for several years, if at all. We anticipate that we will continue to incur net losses for the foreseeable future. Since our inception, we have devoted substantially all of our resources on organizing and staffing our company, business planning, research and development activities, including the RaniPill platform design, drug formulation, preclinical studies, clinical trials, manufacturing automation and scale up, establishing our intellectual property portfolio, and providing general and administrative support for these operations. To date, we have financed our operations primarily through an IPO, private placements of our preferred units and the issuance of convertible promissory notes, with aggregate gross proceeds of $282.4 million, as well as revenue generated from evaluation agreements. As of September 30, 2021, we had cash and cash equivalents of $129.7 million. In August 2021, we raised net proceeds of $73.6 million from the IPO.

In April 2020, we received loan proceeds in the amount of approximately $1.3 million under the Paycheck Protection Program, established pursuant to the CARES Act, with Comerica Bank as the lender (the "PPP Loan"). We have used this loan for eligible purposes, including payroll, benefits, rent and utilities. The loan bore interest at 1.0% per annum. In September 2021, the Company repaid in full the $1.3 million of principal and interest related to the PPP Loan.

In September 2020, we entered into a secured convertible loan agreement (the "Avenue Loan Agreement") with Avenue Venture Opportunities Fund, L.P., for loan proceeds of up to $10.0 million. As of September 30, 2021, we had drawn down $3.0 million under the Avenue Loan Agreement. The Loan bore interest at a variable rate per annum equal to the sum of (i) the greater of (A) the Prime Rate and (B) three and one-quarter percent (3.25%), plus (ii) eight percent (8.00%), compounded monthly until its maturity date of September 1, 2023, at which time all outstanding principal and interest became due and payable in cash if not already converted. Our obligations under the Avenue Loan Agreement were secured by a first priority security interest in substantially all of our assets. In connection with the Avenue Loan Agreement, we issued warrants of 118,929 units of Series E preferred units (the "Series E Warrants"). The Series E Warrants were exercisable for a period of seven years from the date of grant at an exercise price of $7.1471 per unit. The loan was convertible at the option of the holder into our Series E convertible preferred units. In July 2021, we repaid in full the $3.0 million of principal and approximately $0.5 million of final payment and fees under the Avenue Loan Agreement.

In October 2020, we entered into the Fourth Amended and Restated Operating Agreement, which authorized the sale and issuance of up to 10,493,767 Series E Preferred Units. As of September 30, 2021, we had issued the total authorized amount at a price of $7.1471 for gross proceeds of $75.0 million. In conjunction with the IPO and Organizational Transactions the Series E warrants were settled with 62,877 shares of the Company's Class A common stock.

After completion of the IPO, the Company became a holding company and has no material assets other than its ownership of LLC Interests. The Company has no independent means of generating revenue. The limited liability company agreement of Rani LLC that went into effect at the closing the IPO provides that certain distributions will be made to cover the taxes of the owners of


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LLC Interests and the Company's obligations under the Tax Receivable Agreement which was entered into with certain of the Continuing LLC Owners.

Tax Receivable Agreement

We entered into a Tax Receivable Agreement with certain of the Continuing LLC Owners in August 2021 in connection with the IPO. The Tax Receivable Agreement provides for our payment to certain of the Continuing LLC Owners of 85% of the amount of tax benefits, if any, that we are deemed to realize as a result of any basis adjustments and certain other tax benefits arising from payments under the Tax Receivable Agreement. We will have in effect an election under Section 754 of the Code effective for each taxable year in which a redemption or exchange (including deemed exchange) of LLC Interests for shares of our Class A common stock or cash occurs. These Tax Receivable Agreement payments are not conditioned upon any continued ownership interest in either the Company or Rani LLC by such Continuing LLC Owners. The rights of such Continuing LLC Owners under the Tax Receivable Agreement are assignable to transferees of their LLC Interests (other than the Company as transferee pursuant to subsequent redemptions (or exchanges) of the transferred LLC Interests). We expect to benefit from the remaining 15% of tax benefits, if any, that we may realize. Due to the uncertainty of various factors, we cannot precisely quantify the tax benefits we may realize as a result of LLC Interest exchanges and the resulting amounts we may need to pay out to certain of the Continuing LLC Owners pursuant to the Tax Receivable Agreement; however, we estimate that such payments may be substantial.

As there have been no transactions which have occurred which would trigger a liability under this agreement, we have not recognized any deferred tax assets or liabilities related to this agreement as of September 30, 2021.

Future Funding Requirements

Based on our current operating plan, we estimate that our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with the development of the RaniPill capsule and because the extent to which we may enter into strategic collaborations or other arrangements with third parties for development of the RaniPill capsule is unknown, we are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates.

To date, we have not generated any commercial product revenue. We do not expect to generate any commercial product revenue unless and until we obtain regulatory approval and commercialize any of our commercial product candidates, and we do not know when, or if at all, that will occur. We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. Our primary uses of cash are to fund our operations, which consist primarily of research and development expenses related to our programs, manufacturing automation and scaleup, and general and administrative expenses. We expect our expenses to continue to increase in connection with our ongoing activities as we continue to advance the RaniPill capsule. In addition, we expect to incur additional costs operating as a public company.

We may seek to raise capital through equity offerings or debt financings, collaboration agreements, or other arrangements with other companies, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our consolidated financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:


?
the progress, costs, trial design, results of and timing of our preclinical
studies and clinical trials;
?
the progress, costs, and results of our research pipeline;
?
the willingness of the U.S. Food and Drug Administration ("FDA"), or other
regulatory authorities to accept data from our clinical trials, as well as data
from our completed and planned clinical trials and preclinical studies and other
work, as the basis for review and approval of the RaniPill capsule for various
indications;
?
the outcome, costs, and timing of seeking and obtaining FDA, and any other
regulatory approvals;
?
the number and characteristics of product candidates that we pursue;
?
our ability to manufacture sufficient quantities of the RaniPill capsules;
?
our need to expand our research and development activities;
?
the costs associated with manufacturing our product candidates, including
establishing commercial supplies and sales, marketing, and distribution
capabilities;

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?
the costs associated with securing and establishing commercial infrastructure;
?
the costs of acquiring, licensing, or investing in businesses, product
candidates, and technologies;
?
our ability to maintain, expand, and defend the scope of our intellectual
property portfolio, including the amount and timing of any payments we may be
required to make, or that we may receive, in connection with the licensing,
filing, prosecution, defense, and enforcement of any patents or other
intellectual property rights;
?
our need and ability to retain key management and hire scientific, technical,
business, and engineering personnel;
?
the effect of competing drugs and product candidates and other market
developments;
?
the timing, receipt, and amount of sales from our potential products, if
approved;
?
our ability to establish strategic collaborations;
?
our need to implement additional internal systems and infrastructure, including
financial and reporting systems;
?
security breaches, data losses or other disruptions affecting our information
systems;
?
the economic and other terms, timing of and success of any collaboration,
licensing, or other arrangements which we may enter in the future; and
?
the effects of disruptions to and volatility in the credit and financial markets
in the United States and worldwide from the COVID-19 pandemic.

If we raise additional capital through debt financing, we may be subject to covenants that restrict our operations including limitations on our ability to incur liens or additional debt, pay dividends, make certain investments, and engage in certain merger, consolidation, or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us. If we raise funds through collaborations, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. In addition, our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.

Cash Flows


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



                                                          Nine Months Ended September 30,
                                                             2021                  2020
Net cash used in operating activities                  $        (20,796 )     $       (8,260 )
Net cash used in investing activities                              (235 )               (944 )
Net cash provided by financing activities                        77,716                4,035

Net increase (decrease) in cash and cash equivalents $ 56,685 $ (5,169 )

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2021 was $20.8 million, which was primarily attributable to a net loss and comprehensive loss of $39.8 million, partially offset by the equity-based compensation expense of $19.4 million, loss on the extinguishment of the debt of $0.7 million, non-cash depreciation and amortization of $0.4 million, and change in the estimated fair value of our preferred unit warrant liability of $0.4 million.

Additionally there was an increase of $2.5 million in prepaid expenses and other assets, a decrease in accrued expenses of $2.3 million, and a decrease in deferred revenue of $2.7 million.

Net cash used in operating activities for the nine months ended September 30, 2020 was $8.3 million, which was primarily attributable to a net loss of $10.9 million, partially offset by the change in the estimated fair value of our preferred unit warrant liability of $0.7 million, non-cash depreciation and amortization of $0.4 million, a decrease in accounts payable of $1.9 million, the payment of the related party payable balance of $1.6 million, and an increase in deferred revenue of $2.7 million.


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Investing Activities

For the nine months ended September 30, 2021, net cash used in investing activities was $0.2 million, consisting solely of purchases of property and equipment.

For the nine months ended September 30, 2020, net cash used in investing activities was $0.9 million, consisting solely of purchases of property and equipment.

Financing Activities

For the nine months ended September 30, 2021, cash provided by financing activities was approximately $77.7 million, consisting of the proceeds from the issuance of Class A common stock sold in the IPO for net proceeds of $74.2 million, the sale and issuance of 884,276 units of our Series E Preferred Units for net proceeds of $6.3 million, and $1.7 million of principal payments received from our related party notes receivable, partially offset by repayment of the PPP Loan of $1.3 million and repayment of the convertible loan of $3.3 million.

For the nine months ended September 30, 2020, cash provided by financing activities was approximately $4.0 million, consisting of proceeds from the PPP Loan of $1.3 million and proceeds from the issuance of the convertible loan for net proceeds of $2.7 million.

Critical Accounting Policies, Significant Judgments and Use of Estimates

This discussion and analysis of financial condition and results of operation is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions.

Our critical accounting policies and estimates are discussed in the Prospectus. There have been no material changes in the Company's critical accounting policies or estimates from those set forth in the Prospectus.

Off-Balance Sheet Arrangements

During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the rules of the SEC.

Recently Adopted Accounting Standards

For a description of the expected impact of recent accounting pronouncements, see "Note 2. Summary of Significant Accounting Policies" in the "Notes to Condensed Consolidated Financial Statements" contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other Information

JOBS Act Accounting Election

We are an "emerging growth company" within the meaning of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are electing to use this extended transition period and we will therefore comply with new or revised accounting standards on the earlier of (i) when they apply to private companies; or (ii) when we lose our emerging growth company status. As a result, our financial statements may not be comparable with companies that comply with public company effective dates for accounting standards. We also rely on other exemptions provided by the JOBS Act, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act unless we cease to be an emerging growth company.

We will remain an emerging growth company until the earliest of (1) December 31, 2026 (the last day of the fiscal year following the fifth anniversary of the closing of our initial public offering), (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the fiscal year in which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which would occur if


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the market value of our Class A common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

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