TRICIDA, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, include forward-looking statements that involve risks and uncertainties. Investors in our securities should review Part I, Item 1A. "Risk Factors" for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Our goal is to slow the progression of chronic kidney disease, or CKD, in patients with metabolic acidosis and CKD. We are a pharmaceutical company focused on the development and commercialization of our investigational drug candidate, veverimer (also known as TRC101), a non-absorbed, orally-administered polymer designed to treat metabolic acidosis and slow CKD progression by binding and removing acid from the gastrointestinal tract. Metabolic acidosis is a serious condition commonly caused by CKD and is believed to accelerate the progression of kidney deterioration. It can also lead to bone loss, muscle wasting and impaired physical function. Metabolic acidosis in patients with CKD is typically a chronic disease and, as such, requires long-term treatment to mitigate its deleterious consequences. We are currently conducting a renal outcomes clinical trial, VALOR-CKD (also known as TRCA-303), to determine if veverimer slows CKD progression in patients with metabolic acidosis and CKD. Our VALOR-CKD trial is a randomized, double-blind, placebo-controlled, time-to-event trial. The primary endpoint of the VALOR-CKD trial is the time to first occurrence of any event in the composite of renal death, end-stage renal disease, or ESRD, or a confirmed ? 40% reduction in estimated glomerular filtration rate, or eGFR, which is also known as DD40. The VALOR-CKD trial is a multi-national trial that is being conducted in over 200 sites worldwide. Enrollment of patients in the VALOR-CKD trial was completed at the end of 2021 with 1,480 subjects randomized. We currently anticipate that VALOR-CKD trial will be terminated early, through an administrative stop, to occur in the second quarter of 2022, with continued accrual of primary endpoint events into the third quarter of 2022. The reporting of top-line results from the VALOR-CKD trial is anticipated to occur early in the fourth quarter of 2022. There are currently no therapies approved by theU.S. Food and Drug Administration , or FDA, to slow progression of kidney disease by correcting chronic metabolic acidosis in patients with CKD. We estimate that metabolic acidosis affects approximately 4.3 million patients with CKD inthe United States , and we believe that slowing the progression of CKD in patients with metabolic acidosis and CKD represents a significant unmet medical need and market opportunity. In addition, considering that acid retention is thought to occur in patients with CKD prior to clinical diagnosis of metabolic acidosis (serum bicarbonate less than 22 mEq/L), we believe there may be potential to pursue a development pathway for veverimer which, with additional data, could expand the market opportunity beyond metabolic acidosis to include patients with CKD and eubicarbonatemic acidosis, or latent acidosis, who may also benefit from a therapy that aids in acid removal. Veverimer is a non-absorbed, low-swelling, spherical polymer bead that is approximately 100 micrometers in diameter. It is a single, high molecular weight, crosslinked polyamine molecule. The size of veverimer prevents systemic absorption from the GI tract. The high degree of cross-linking within veverimer limits swelling and the overall volume in the GI tract, with the goal of facilitating good GI tolerability. The high amine content of veverimer provides proton binding capacity of approximately 10 mEq/gram of polymer. The size exclusion built into the three-dimensional structure of the polymer enables preferential binding of chloride versus larger inorganic and organic anions, including phosphate, citrate, fatty acids and bile acids. This size exclusion mechanism allows a majority of the binding capacity to be used for hydrochloric acid binding. Veverimer is an in-house discovered, new chemical entity. We have a broad intellectual property estate that we believe will provide patent protection for veverimer until at least 2038 inthe United States , at least 2035 inAustralia ,Europe ,Hong Kong ,Israel ,Japan ,Mexico andRussia , and at least 2034 inSouth Korea and certain other markets. Veverimer drug substance manufacturing is conducted for us byPatheon Austria GmbH & Co KG , or Patheon, in their Linz,Austria facility. At this time, we believe we have sufficient drug substance and access to sufficient drug product manufacturing capacity to supply the anticipated demand of our ongoing VALOR-CKD trial through conclusion of the trial. We are in regular communication with Patheon andPCI Pharma Services , our drug product 96 -------------------------------------------------------------------------------- manufacturer and, to our knowledge, there have not been business disruptions at these sites due to COVID-19 affecting the production of veverimer drug substance and drug product. At this time, we have not experienced any material disruption in the distribution network for veverimer, including the provision of raw materials, the shipping of drug substance and drug product and the provision of clinical trial supplies to trial participants, other than inUkraine . We have no products approved for marketing, and we have not generated any revenue from product sales or other arrangements. From our inception in 2013 throughDecember 31, 2021 , we have primarily funded our operations through the sale of$152.4 million of convertible preferred stock, net proceeds of$237.7 million from our initial public offering, or IPO, onJuly 2, 2018 , net proceeds of$217.9 million from our underwritten public offering onApril 8, 2019 , net proceeds of$193.3 million from the issuance of$200.0 million aggregate principal amount of 3.50% convertible senior notes due 2027, or the Convertible Senior Notes, onMay 22, 2020 , net proceeds of$41.5 million from our Registered Direct Equity Financing onNovember 15, 2021 and net borrowing of$72.1 million after fees of$2.9 million under the Loan and Security Agreement, or Term Loan, entered into with Hercules Capital Inc., or Hercules, onFebruary 28, 2018 . We have incurred losses in each year since our inception in 2013. Our net losses were$176.6 million and$264.8 million for the years endedDecember 31, 2021 and 2020, respectively. As ofDecember 31, 2021 , we had an accumulated deficit of$810.4 million . Substantially all of our operating losses resulted from expenses incurred in connection with advancing veverimer through development activities and general and administrative costs associated with pre-commercialization activities and administrative functions. Our business operations and those of our business partners, vendors, government regulators and other third parties may be affected by global or regional events, such as the on-going COVID-19 outbreak and the Russian invasion ofUkraine . At this time, COVID-19 has not materially impacted our current financial resources or our outlook. Our VALOR-CKD trial has sixteen sites located inUkraine , which include approximately 15% of the patients randomized in the trial. Actions taken by theRussian Federation , beginning inFebruary 2022 , inUkraine and surrounding areas may have a material adverse effect on our ability to adequately conduct VALOR-CKD clinical trial procedures and maintain compliance with the trial protocol inUkraine , due to the prioritization of hospital resources away from clinical trials, reallocation or evacuation of site staff and subjects, or as a result of government-imposed curfews, warfare, violence or other governmental action or events that restrict movement. We may not be able to access sites for monitoring and we may not be able to obtain data from affected sites going forward. We could also experience disruptions in our supply chain or limits to our ability to obtain sufficient investigational materials inUkraine and surrounding regions. If our access to VALOR-CKD trial sites and data were to experience significant disruption due to these risks or for other reasons, it could have a material adverse effect on the VALOR-CKD trial and our financial runway. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our expenses will continue in connection with our ongoing activities as we:
•conduct clinical studies of veverimer, including the ongoing VALOR-CKD trial;
•continue to optimize the manufacturing processes and manufacture drug substance and drug product to support the ongoing VALOR-CKD trial and the commercial launch, if approved;
•increase our research and development efforts;
•create additional infrastructure to support our product development;
•seek regulatory approval for veverimer, including any activities necessary for the resubmission of the NDA for veverimer;
•maintain, expand and protect our intellectual property portfolio; and
•maintain operational, financial and management information systems to support ongoing operations, including operating as a public company.
We do not expect to generate any revenue from product sales until we
successfully complete development and obtain regulatory approval for veverimer.
If we obtain regulatory approval for veverimer, we expect to incur significant
commercialization expenses related to product sales, marketing, manufacturing
and distribution. Accordingly, we will seek to fund our operations through
available cash from our prior equity offerings and the Convertible Senior Note
issuance, and, as necessary, through additional public or private equity or debt
financings
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-------------------------------------------------------------------------------- or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and ability to develop veverimer. We believe that our existing cash, cash equivalents and investments are not likely to be sufficient to fund our operations through the second quarter of 2023.
Components of Our Results of Operations
Research and Development Expense
Research and development expense consists primarily of costs associated with the development of veverimer and includes salaries, bonuses, benefits, travel and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions; expenses incurred under agreements with CROs, investigative sites and consultants that conduct our nonclinical and clinical studies; manufacturing processes optimization and the cost of manufacturing drug substance for commercial and clinical use as well as drug product to support the ongoing VALOR-CKD trial; payments to consultants engaged in the development of veverimer, including stock-based compensation, travel and other expenses; costs related to compliance with quality and regulatory requirements; research and development facility-related expenses, which include direct and allocated expenses, and other related costs. Research and development expense is charged to operations as incurred when these expenditures relate to our research and development efforts and have no alternative future uses. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. All of our research and development expense to date has been incurred in connection with veverimer. We expect our research and development expense to increase for the foreseeable future as we optimize our manufacturing processes and advance veverimer through clinical development, including our ongoing VALOR-CKD trial. The process of conducting clinical studies necessary to obtain regulatory approval is costly and time consuming and the successful development of veverimer is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when, and to what extent, we will generate revenue from commercialization and sale of veverimer, if approved. Therefore, we are unable to estimate with any certainty the costs we will incur in the continued development of veverimer. The degree of success, timelines and cost of development can differ materially from expectations. We may never succeed in achieving regulatory approval for veverimer.
General and Administrative Expense
General and administrative expense consists primarily of salaries, bonuses, benefits, travel, stock-based compensation expense and facility-related expenses for personnel in finance and administrative functions. General and administrative expense also includes professional fees for legal, patent, consulting, accounting and audit services, pre-commercial preparation, medical affairs costs and recruiting services for the potential launch of veverimer and other related costs. Restructuring Costs OnSeptember 10, 2020 , the Compensation Committee of the Board of Directors approved theTricida, Inc. 2020 Reduction in Force Severance Benefit Plan, or 2020 Restructuring Plan. OnSeptember 18, 2020 , we implemented a restructuring, or Third Quarter 2020 Restructuring, under the 2020 Restructuring Plan to streamline the organization and preserve capital that included the elimination of approximately 21.5% of our workforce and other cost reductions. Restructuring costs of$2.4 million and$0.3 million were recorded in general and administrative expense and research and development expense, respectively, in our statements of operations and comprehensive loss for the year endedDecember 31, 2020 . 98
-------------------------------------------------------------------------------- OnOctober 25, 2020 , our Board of Directors approved and onOctober 28, 2020 , we implemented a restructuring under the 2020 Restructuring Plan, or Fourth Quarter 2020 Restructuring, to reduce operating costs and better align our workforce with the needs of our business following the completion of the Type A meeting with the FDA inOctober 2020 . The Fourth Quarter 2020 Restructuring resulted in the elimination of approximately 60.0% of our workforce and included one-time termination severance payments and other employee-related costs, and exit costs including contract termination costs and accelerated depreciation of capitalized software. Restructuring costs of$10.2 million and$0.9 million were recorded in general and administrative expense and research and development expense, respectively, in our statements of operations and comprehensive loss for the year endedDecember 31, 2020 . Restructuring costs of$0.1 million recorded in accrued expenses and other current liabilities as ofDecember 31, 2021 , relate to fixed service contract costs expected to be paid in the first half of 2022.
Expenses related to restructuring activities are recorded in operating expenses as part of research and development expense and general and administrative expense as appropriate.
Results of Operations
The following table presents our results of operations for the years endedDecember 31, 2021 and 2020. Years Ended December 31, 2021 vs. 2020 (in thousands) 2021 2020 $ % Operating expenses: Research and development$ 115,364 $ 148,417 $ (33,053) (22) % General and administrative 37,590 102,983 (65,393) (63) % Total operating expenses 152,954 251,400 (98,446) (39) % Loss from operations (152,954) (251,400) 98,446 (39) % Other income (expense), net 114 5,016 (4,902) (98) % Interest expense (17,602) (18,407) 805 (4) % Loss on early extinguishment of Term Loan (6,124) - (6,124) N/M Net loss$ (176,566) $ (264,791) $ 88,225 (33) % N/M = Not meaningful
Research and Development Expense
The following table presents our research and development expense for the years
ended
Years Ended December 31, 2021 vs. 2020
(in thousands) 2021 2020 $ %
Clinical development costs $ 88,700 $ 119,027 $ (30,327) (25) %
Personnel and related costs 12,318 15,270 (2,952) (19) %
Stock-based compensation expense 10,763 10,966 (203) (2) %
Other research and development costs 3,583 3,154 429 14 %
Total research and development expense $ 115,364 $ 148,417 $ (33,053) (22) %
Research and development expense decreased by $33.1 million for the year ended
December 31, 2021 compared with the year ended December 31, 2020 . The decrease
was due to activities in connection with our veverimer clinical development
program, resulting in a decrease in clinical development costs of $30.3 million
related to our manufacturing processes optimization and drug substance
manufacturing costs related to our VALOR-CKD trial; a decrease in personnel and
related costs of $3.0 million related to the workforce reduction following the
Third Quarter 2020 Restructuring and the Fourth Quarter 2020 Restructuring,
partially offset by an increase in bonus expense; a decrease in stock-based
compensation expense of $0.2 million related to performance awards granted in
August 2019 and awards fully vested in 2020, partially offset by annual awards
granted in January 2021 ; partially offset by an increase in other research and
development costs of $0.4 million due to facilities related costs.
General and Administrative Expense
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The following table presents our general and administrative expense for the
years ended
Years Ended December 31, 2021 vs. 2020
(in thousands) 2021 2020 $ %
Personnel and related costs $ 9,571 $ 35,587 $ (26,016) (73) %
Stock-based compensation expense 15,119 17,332 (2,213) (13) %
Other general and administrative costs 12,900 50,064 (37,164) (74) %
Total general and administration expense $ 37,590 $ 102,983 $ (65,393) (63) %
General and administrative expense decreased by $65.4 million for the year ended
December 31, 2021 compared with the year ended December 31, 2020 . The decrease
was due to a decrease in pre-commercialization and associated administrative
activities in connection with our veverimer clinical development program,
resulting in decreased personnel and related costs of $26.0 million due to the
workforce reduction following the Third Quarter 2020 Restructuring and the
Fourth Quarter 2020 Restructuring, partially offset by an increase in bonus
expense; a decrease in stock-based compensation expense of $2.2 million related
to the workforce reduction and performance awards granted in August 2019 ,
partially offset by higher costs related to annual awards granted in January
2021 ; and a decrease in other general and administrative costs of $37.2 million ,
primarily related to pre-commercialization activities, medical affairs
activities, recruiting, legal and training costs.
Non-Operating Income (Expense)
The following table presents our non-operating income (expense) for the years
ended
Years Ended December 31, 2021 vs. 2020
(in thousands) 2021 2020 $ %
Other income (expense), net $ 114 $ 5,016 $ (4,902) (98) %
Interest expense (17,602) (18,407) 805 (4) %
Loss on early extinguishment of Term Loan (6,124) - (6,124) N/M
N/M = Not meaningful
Other income (expense), net decreased by $4.9 million for the year ended
December 31, 2021 compared with the year ended December 31, 2020 due to
decreased interest income from investments, changes in compound derivative
liability and realized foreign exchange losses in the current year as compared
to foreign exchange gains in the prior year. Interest expense decreased $0.8
million for the year ended December 31, 2021 compared with the year ended
December 31, 2020 due to the repayment of the Term Loan in March 2021 , partially
offset by a full year of interest expense on the Convertible Senior Notes issued
in May 2020 . The loss on early extinguishment of Term Loan was recognized in
March 2021 on repayment of the Term Loan.
Liquidity and Capital Resources
Sources of Liquidity
From our inception in 2013 throughDecember 31, 2021 , we have primarily funded our operations through the sale of$152.4 million of convertible preferred stock, net proceeds of$237.7 million from our IPO onJuly 2, 2018 , net proceeds of$217.9 million from our underwritten public offering onApril 8, 2019 , net proceeds of$193.3 million from the issuance of Convertible Senior Notes onMay 22, 2020 , net proceeds of$41.5 million from our Registered Direct Equity Financing onNovember 15, 2021 and net borrowing of$72.1 million under the Term Loan. As ofDecember 31, 2021 , we had cash, cash equivalents and short-term and long-term investments of$150.6 million .
OnFebruary 28, 2018 , we entered into the Term Loan with Hercules. Over time, we borrowed$75.0 million under the Term Loan. OnMarch 12, 2021 , we repaid the outstanding principal of$75.0 million and fees in the amount of$8.3 million to Hercules under the Term Loan. We recognized a loss on early debt extinguishment of$6.1 million for the year endedDecember 31, 2021 .
Convertible Senior Notes
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On May 22, 2020 , we issued $200.0 million aggregate principal amount of 3.50%
convertible senior notes due 2027, or Convertible Senior Notes, pursuant to an
indenture, dated as of May 22, 2020 , or the Indenture, between us and U.S. Bank
National Association , as trustee, or the Trustee. The offering and sale of the
Convertible Senior Notes were made by us to the initial purchasers in reliance
on the exemption from registration provided by Section 4(a)(2) of the Securities
Act of 1933, as amended, or the Securities Act, for resale by the initial
purchasers to qualified institutional buyers (as defined in the Securities Act)
pursuant to the exemption from registration provided by Rule 144A under the
Securities Act. The issuance includes the exercise in full by the initial
purchasers of their option to purchase an additional $25.0 million aggregate
principal amount of Convertible Senior Notes. Net proceeds from the offering
were $193.3 million after deducting underwriting discounts and commissions and
other offering costs of approximately $6.7 million .
Our Convertible Senior Notes are senior unsecured obligations, and interest is
payable semi-annually in arrears on May 15 and November 15 of each year,
beginning on November 15, 2020 . The Convertible Senior Notes mature on May 15,
2027 , unless earlier repurchased, redeemed or converted and are not redeemable
prior to May 20, 2024 . We may redeem for cash all or any portion of the
Convertible Senior Notes, at our option, on or after May 20, 2024 and on or
before the 40th scheduled trading day immediately prior to the maturity date, if
the last reported sale price of our common stock has been at least 130% of the
conversion price then in effect for at least 20 trading days (whether or not
consecutive), including the trading day immediately preceding the date on which
we provide notice of redemption, during any 30 consecutive trading day period
ending on, and including, the trading day immediately preceding the date on
which we provide notice of redemption at a redemption price equal to 100% of the
principal amount of the Convertible Senior Notes to be redeemed, plus accrued
and unpaid interest to, but excluding, the redemption date. We are not required
to provide and no sinking fund is provided for the Convertible Senior Notes.
The Convertible Senior Notes are convertible into cash, shares of our common
stock or a combination of cash and shares of our common stock at our election at
an initial conversion rate of 30.0978 shares of our common stock per $1,000
principal amount of the Convertible Senior Notes, which is equivalent to an
initial conversion price of approximately $33.23 per share of our common stock.
The conversion rate is subject to customary adjustments for certain events as
described in the Indenture. It is our current intent to settle conversions
through combination settlement, which involves repayment of the principal
portion in cash and any excess of the conversion value over the principal amount
in shares of its common stock. As of December 31, 2021 , the "if-converted value"
did not exceed the remaining principal amount of the Convertible Senior Notes.
Holders may convert their Convertible Senior Notes, at their option, prior to
the close of business on the business day immediately preceding February 15,
2027 , only under the following circumstances:
•during any fiscal quarter commencing after the calendar quarter ending on
September 30, 2020 , if the last reported sale price of our common stock for at
least 20 trading days (whether or not consecutive) during a period of 30
consecutive trading days ending on, and including, the last trading day of the
immediately preceding calendar quarter is greater than or equal to 130% of the
conversion price on each applicable trading day;
•during the five consecutive business day period immediately following any ten
consecutive trading day period, or the Measurement Period, in which the trading
price per $1,000 principal amount of the Convertible Senior Notes, as determined
following a request by a holder of notes in accordance with certain procedures
described in the Indenture, for each trading day of the Measurement Period was
less than 98% of the product of the last reported sales price of our common
stock and the conversion rate on each such trading day;
•upon the occurrence of certain corporate events or distributions of our common stock, as described in the Indenture;
•after our issuance of a notice of redemption; or
•at any time from, and including,
If we undergo a fundamental change, as described in the Indenture, subject to
certain conditions, holders may require us to repurchase for cash all or any
portion of their Convertible Senior Notes. The fundamental change repurchase
price is equal to 100% of the principal amount of the Convertible Senior Notes
to be repurchased, plus accrued and unpaid interest up to, but excluding, the
fundamental change repurchase date. In addition, following
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certain corporate events that occur prior to the maturity date or if we deliver
a notice of redemption, we will increase, in certain circumstances, the
conversion rate for a holder who elects to convert its Convertible Senior Notes
in connection with such a corporate event or notice of redemption, as the case
may be.
The Convertible Senior Notes are our senior unsecured obligations and rank
senior in right of payment to any of our indebtedness that is expressly
subordinated in right of payment to the Convertible Senior Notes; equal in right
of payment to any of our unsecured indebtedness that is not so subordinated;
effectively subordinated in right of payment to any of our secured indebtedness,
if any, to the extent of the value of the assets securing such indebtedness; and
structurally subordinated to all indebtedness and other liabilities (including
trade payables) of our future subsidiaries, if any.
The Indenture contains customary events of default with respect to the
Convertible Senior Notes and provides that upon certain events of default
occurring and continuing, the trustee may, and the trustee at the request of
holders of at least 25% in principal amount of the Convertible Senior Notes
shall declare all principal and accrued and unpaid interest, if any, of the
Convertible Senior Notes to be due and payable. In case of certain events of
bankruptcy, insolvency or reorganization, involving us or a significant
subsidiary, all of the principal of and accrued and unpaid interest on the
Convertible Senior Notes will automatically become due and payable.
Registered Direct Equity Financing
OnNovember 15, 2021 , we entered into a securities purchase agreement with several investors and one of our officers, or Registered Direct Equity Financing, and issued 4,666,667 shares of common stock, together with 2,333,333 pre-funded warrants at a combined offering price of$6.00 per share in a private placement. The pre-funded warrants are immediately exercisable at a nominal exercise price of$0.001 . The Registered Direct Equity Financing also included the issuance of warrants to purchase 7,000,000 shares of common stock at an exercise price of$11.00 that are exercisable on or afterMay 15, 2022 . Net proceeds were approximately$41.5 million , after deducting offering costs of$0.5 million . The Pre-Funded Warrants have an expiration date of the earliest of (i)November 15, 2026 , (ii) the date the Pre-Funded Warrant is exercised in full and (iii) immediately prior to the consummation of a fundamental transaction. The Common Warrants are exercisable commencing onMay 15, 2022 until its expiration date, which will be the earliest of: (a) the third anniversary of the date of issuance, (b) immediately prior to the closing of certain fundamental transactions or (c) five business days after written notice following certain events, including (i) submission of the new drug application for veverimer with theU.S. Food and Drug Administration (FDA), or (ii) six weeks following the issuance of a press release reporting the results of the primary analysis of the VALOR-CKD trial, (aa) the completion of a common stock financing resulting in not less than$75.0 million in gross proceeds at an offering price of not less than$13.50 per share, or (bb) the volume weighted average share price of our common stock is greater than$15.00 per share with certain multiple-day trading volume requirements. Funding Requirements We have incurred losses and negative cash flows from operations since our inception in 2013 and anticipate that we will continue to incur net losses for the foreseeable future. As ofDecember 31, 2021 , we had an accumulated deficit of$810.4 million . Based on our cash, cash equivalents and investments as ofDecember 31, 2021 , we believe we have sufficient capital to continue funding our operations through the first quarter of 2023. However, our existing cash, cash equivalents and investments are not likely to be sufficient to fund our operations through the second quarter of 2023 as we expect to incur additional losses in the future to conduct research and development and to conduct pre-commercialization activities and recognize that we will need to raise additional capital to fully implement our business plan.
Such future capital requirements are difficult to forecast and will depend on many factors, including:
•the progress, outcome and results of our ongoing VALOR-CKD trial;
•the impact of termination of our VALOR-CKD trial;
•the costs and timing of resubmission of our NDA and, as necessary, our success in addressing the deficiencies identified by the FDA in the CRL and issues raised in the ADL related to our NDA for veverimer;
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--------------------------------------------------------------------------------•our ability to obtain approval of our NDA for veverimer from the FDA under either traditional approval or the Accelerated Approval Program, if at all;
•the findings of the FDA during their routine inspections of our facility and the facilities of our contract manufacturers and clinical trial sites during the NDA review process and our ability to promptly and adequately address any such findings;
•the revenue, if any, received from commercial sales of veverimer should we receive regulatory approval;
•our ability to maintain and enforce our intellectual property rights and defend any intellectual property-related claims;
•the costs, timing and success of the scale-up and optimization of the process of manufacturing veverimer, and our minimum and maximum commitments under the Manufacturing and Commercial Supply Agreement we entered into with Patheon onOctober 4, 2019 , as the same may be amended from time to time; •the costs, timing and success of future commercialization activities, including product manufacturing, marketing, sales and distribution, for veverimer if we receive regulatory approval and do not partner for commercialization;
•the cost of fulfilling our minimum contractual obligations to our suppliers and vendors; and
•the extent to which we acquire or in-license other products and technologies.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic partnerships and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. If we raise additional funds through collaborations, strategic partnerships or licensing arrangements with third parties, we may have to relinquish valuable rights to veverimer, associated intellectual property, our other technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. However, there can be no assurance that we will be successful in securing additional funding at levels sufficient to fund our operations or on terms acceptable to us. If we are unsuccessful in our efforts to raise additional financing, we could be required to significantly reduce operating expenses and delay, reduce the scope of or eliminate some of our development programs or our future commercialization efforts, out-license intellectual property rights to our investigational drug candidates and sell unsecured assets, cease operations altogether or a combination of the above, any of which may have a material adverse effect on our business, results of operations, financial condition and/or our ability to fund our scheduled obligations on a timely basis or at all. Cash Flows The following table summarizes the net cash flow activity for the years endedDecember 31, 2021 and 2020. Years Ended December 31, (in thousands) 2021 2020 Net cash provided by (used in): Operating activities$ (140,056) $ (231,187) Investing activities 64,218 140,277 Financing activities (40,906) 210,193
Net increase (decrease) in cash and cash equivalents
Cash Used in Operating Activities
During the year endedDecember 31, 2021 , cash used in operating activities was$140.1 million , which consisted of a net loss of$176.6 million , adjusted by non-cash charges of$42.6 million and changes in cash used in operating assets and liabilities of$6.1 million . The non-cash charges consisted primarily of stock-based compensation of$25.9 million , accretion of Term Loan and Convertible Senior Notes of$9.4 million , loss on early extinguishment of Term Loan of$6.1 million , non-cash operating lease costs of$0.6 million , net amortization of 103 -------------------------------------------------------------------------------- premiums and accretion of discounts on investments of$0.5 million and depreciation and amortization of$0.4 million , partially offset by changes in compound derivative liability of$0.2 million . The changes in cash used in operating assets and liabilities were primarily due to a decrease in accrued expenses and other current liabilities of$12.1 million and an increase in prepaid expenses and other assets of$0.5 million , partially offset by an increase in accounts payable of$6.5 million . During the year endedDecember 31, 2020 , cash used in operating activities was$231.2 million , which consisted of a net loss of$264.8 million , adjusted by non-cash charges of$38.2 million and changes in cash used in our operating assets and liabilities of$4.6 million . The non-cash charges consisted primarily of stock-based compensation of$28.3 million , accretion of Term Loan and Convertible Senior Notes of$8.3 million , depreciation and amortization of$0.9 million , non-cash operating lease costs of$0.8 million and non-cash restructuring costs of$0.7 million , partially offset by changes in compound derivative liability of$0.8 million . The changes in cash used in our operating assets and liabilities were primarily due to a decrease in accrued expenses and other current liabilities of$2.4 million and decrease in accounts payable of$2.4 million , partially offset by a decrease in prepaid expenses and other assets of$0.2 million .
Cash Provided by Investing Activities
Net cash provided by investing activities was$64.2 million and$140.3 million for the years endedDecember 31, 2021 and 2020, respectively. The net cash provided by investing activities during the year endedDecember 31, 2021 was primarily due to proceeds from maturities of investments of$244.7 million , partially offset by purchases of investments of$180.3 million and purchases of property and equipment of$0.1 million . The net cash provided by investing activities during the year endedDecember 31, 2020 was primarily due to maturities of investments of$429.6 million and proceeds from sale of investments of$41.7 million , partially offset by purchases of investments of$329.4 million and purchases of property and equipment of$1.6 million .
Cash Provided by (Used in) Financing Activities
Net cash used in financing activities was$40.9 million for the year endedDecember 31, 2021 . Net cash provided by financing activities was$210.2 million for the year endedDecember 31, 2020 . The net cash used in financing activities during the year endedDecember 31, 2021 was primarily due to cash paid for early extinguishment of the Term Loan of$83.3 million , partially offset by net proceeds from equity offering of$41.6 million and proceeds from the issuance of common stock under equity incentive plans of$0.8 million . Net cash provided by financing activities during the year endedDecember 31, 2020 was primarily due to net proceeds from the issuance of Convertible Senior Notes of$193.3 million , Term Loan funding, net of issuance costs, of$15.0 million and proceeds from the issuance of common stock under equity incentive plans of$2.0 million .
Contractual Obligations
We have contractual obligations relating to our manufacturing and service contracts, Convertible Senior Notes, lease obligations and other research and development activities. We also enter into other contracts in the normal course of business with CROs, contract development and manufacturing organizations and other service providers and vendors. These contracts generally provide for termination on short notice and are cancelable contracts. Based on our cash, cash equivalents and investments as ofDecember 31, 2021 , we believe we have sufficient capital to continue meeting our contractual obligations through the first quarter of 2023. However, our existing cash, cash equivalents and investment are not likely to be sufficient to meet our contractual obligations through the second quarter of 2023, as we expect to incur additional losses in the future to conduct research and development activities and to conduct pre-commercialization activities and recognize that we will need to raise additional capital to fully implement our business plan.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles inthe United States . The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the 104
-------------------------------------------------------------------------------- carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ significantly from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note 2. "Summary of Significant Accounting Policies" to our financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies related to (i) research and development expenses and (ii) stock-based compensation involve significant judgments and estimates used in the preparation of our financial statements.
Research and Development Expenses
Research and development costs are expensed as incurred. Non-refundable advance payments for goods or services that will be used or rendered for future research and development activities are recorded as a prepaid expense and recognized as an expense as the related goods are delivered or the related services are performed. As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing contracts and purchase orders, communicating with internal personnel and external service providers to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions, contract research organizations that conduct and manage clinical trials on our behalf and contract manufacturing organizations that manage drug production on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows and expense recognition. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Furthermore, all additional identified costs incurred are accrued from all outside third-party service providers. Our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting changes in estimates in any particular period. To date, there have been no material differences between our estimates and the amount actually incurred. However, due to the nature of these estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies or other research activity. We make significant judgments and estimates in determining the accrual balance in each reporting period. As actual costs become known, we adjust our accruals. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in reporting amounts that are too high or too low in any particular period. Our accrual is dependent, in part, upon the receipt of timely and accurate reporting from information provided as part of its clinical and nonclinical studies and other third-party vendors. For the years endedDecember 31, 2021 and 2020, there have been no material differences from our accrued estimated expenses to the actual clinical trial and manufacturing expenses. However, variations in the assumptions used to estimate accruals, including, but not limited to the number of patients enrolled, the rate of patient enrollment, the actual services performed, and the amount of manufactured drug substance and/or drug product, and related costs may vary from our estimates, resulting in adjustments to research and development expense in future periods. Changes in these estimates that result in material changes to our accruals could materially affect its financial position and results of operations.
Stock-Based Compensation
Stock-based compensation expense represents the grant-date fair value of awards
recognized over the requisite service period of the awards (usually the vesting
period) on a straight-line basis or by using an accelerated attribution method
for awards with a performance condition. For stock options and shares purchased
under our Employee Stock Purchase Plan, we estimate the grant-date fair value,
and the resulting stock-based compensation
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--------------------------------------------------------------------------------expense, using the Black-Scholes option-pricing model. For restricted stock units, or RSUs, the grant-date fair value is the closing price of our common stock on the date of grant as reported on The Nasdaq Global Select Market.
The Black-Scholes option-pricing model requires the derivation and use of subjective assumptions to determine the estimated fair value of stock option awards. These assumptions include:
•Expected Term-We have concluded that our stock option exercise history does not provide a reasonable basis upon which to estimate expected term, and therefore we use the simplified method for estimating the expected term of stock option grants. Under this approach, the weighted-average expected term is presumed to be the average of the vesting term and the contractual term of the option. •Expected Volatility- Beginning in the fourth fiscal quarter of 2019, expected volatility is estimated using a weighted-average historical volatility for our common stock and the historical volatility of the common stock of a representative group of comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants. Prior to the fourth fiscal quarter of 2019, since our common stock did not have significant trading history, the expected volatility was estimated based on the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty. We will continue to use comparable company information until the historical volatility of our common stock is sufficient to measure expected volatility for future option grants.
•Risk-Free Interest Rate-The risk-free interest rate is based on the
•Dividend Yield-We have not paid dividends on our common stock and do not anticipate paying dividends for the foreseeable future, and we therefore used an expected dividend yield of zero.
In addition to the Black-Scholes assumptions, we include an estimated forfeiture rate in the calculation of stock-based compensation related to stock options and RSUs based on an analysis of our actual forfeitures. We evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors at each reporting period and when we find that actual forfeitures differ materially from our estimates, we record a cumulative adjustment to stock-based compensation expense in that reporting period. Stock-based compensation expense for stock options with performance conditions is recognized over the estimated service period required to meet performance-based targets using an accelerated attribution method when achieving the performance-based targets is deemed probable. When estimating the service period we make subjective assumptions about the probability and timing of achieving these performance-based targets.
Recent Accounting Pronouncements
For details regarding recent accounting pronouncements, see Note 2. "Summary of
Significant Accounting Policies" to our financial statements included in this
Annual Report on Form 10-K.
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