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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission file number: 001-37500

 

Chiasma, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

76-0722250

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

140 Kendrick Street, Building C East

Needham, Massachusetts 02494

(Address of principal executive office) (Zip Code)

(617) 928-5300

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

CHMA

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  

As of April 30, 2021, there were 57,894,177 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding.

 

 


 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. These statements include all matters that are not related to present facts or current conditions or that are not historical facts, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth. The words “anticipate,” “believe,” “could,” “continue,” “should,” “predict,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “will,” “would,” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, but are not limited to, statements about:

 

our commercialization efforts of MYCAPSSA in the United States, including our launch, plans with respect our customer-facing team, the nature and success of our ongoing and planned commercialization activities and strategy, our pricing of MYCAPSSA, and related assumptions;

 

our views as to potential future results of our commercialization efforts in the United States with respect to MYCAPSSA, including our expectations with respect to the scope, level and availability of reimbursement by private and government payors;

 

our development of octreotide capsules for the treatment of acromegaly;

 

our efforts to potentially obtain regulatory approval of octreotide capsules in the European Union based on the results of the MPOWERED Phase 3 clinical trial;

 

our expectations regarding our continued pursuit of the FDA’s review and approval of our prior approval supplement for an additional commercial supplier of active pharmaceutical ingredient for MYCAPSSA;

 

our ability to obtain supply of sufficient amounts of octreotide capsules to support our commercialization efforts in the United States and clinical trials;

 

the therapeutic benefits, effectiveness and safety of octreotide capsules;

 

our estimates of the size and characteristics of the markets that may be addressed by octreotide capsules;

 

the commercial success and market acceptance of MYCAPSSA or any future product candidates that are approved for marketing in the United States or other countries;

 

our ability to generate revenue;

 

the safety and efficacy of therapeutics marketed by our competitors that are targeted to indications which octreotide capsules have been developed to treat;

 

our ability to develop octreotide capsules for diseases other than acromegaly;

 

our ability to leverage our Transient Permeability Enhancer, or TPE, platform to develop and commercialize novel oral product candidates incorporating peptides that are currently only available in injectable or other non-absorbable forms;

 

the possibility that competing products or technologies may make MYCAPSSA, other product candidates we may develop and commercialize or our TPE technology obsolete;

 

our ability to secure collaborators to license, manufacture, market and sell octreotide capsules or any products for which we receive regulatory approval in the future;

 

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

our product development and operational plans generally;

2


 

 

 

the impact of the COVID-19 pandemic on our commercialization efforts of MYCAPSSA, regulatory submissions and potential approvals, and our business generally; and

 

our estimates and expectations regarding our capital requirements, cash and expense levels and liquidity sources.

These forward-looking statements are not exhaustive. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and our prior filings with the U.S. Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us”, “our” and “Chiasma” refer to Chiasma, Inc. and our subsidiaries. We own various U.S. federal trademark registrations and applications, and unregistered trademarks and service marks, including “Chiasma,” “TPE”, “MYCAPSSA” and our corporate logo. Other trademarks or service marks that may appear in this Quarterly Report on Form 10-Q are the property of their respective holders. For convenience, we do not use the ® and ™ symbols in each instance in which one of our trademarks appears throughout this Quarterly Report on Form 10-Q, but this should not be construed as any indication that we will not assert, to the fullest extent under applicable law, our rights thereto. We do not intend to use or display other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

3


 

Chiasma, Inc.

INDEX

 

 

 

Page

 

 

 

 

PART I – FINANCIAL INFORMATION

5

 

 

 

Item 1.

Financial Statements (Unaudited)

5

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

5

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020

6

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2021 and 2020

7

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2020

8

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020

10

 

 

 

 

Notes to Condensed Consolidated Financial Statements

11

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

 

PART II – OTHER INFORMATION

32

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

82

 

 

 

Item 6.

Exhibits

83

 

 

 

 

Signatures

84

 

 

 

 

4


 

 

PART I — FINANCIAL INFORMATION

Item  1.

Financial Statements

Chiasma, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

(in thousands except share and per share data)

 

Assets

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,576

 

 

$

15,462

 

Marketable securities

 

 

90,457

 

 

 

119,959

 

Accounts receivable

 

 

1,015

 

 

 

538

 

Inventory

 

 

14,381

 

 

 

10,955

 

Prepaid expenses and other current assets

 

 

6,603

 

 

 

6,444

 

Total current assets

 

 

137,032

 

 

 

153,358

 

Property and equipment, net

 

 

487

 

 

 

534

 

Other assets

 

 

1,744

 

 

 

1,883

 

Restricted cash

 

 

20,272

 

 

 

20,563

 

Total assets

 

$

159,535

 

 

$

176,338

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,356

 

 

$

4,240

 

Accrued expenses

 

 

10,338

 

 

 

11,858

 

Other current liabilities

 

 

625

 

 

 

633

 

Total current liabilities

 

 

17,319

 

 

 

16,731

 

Deferred royalty obligation

 

 

73,368

 

 

 

63,548

 

Long-term liabilities

 

 

6,160

 

 

 

4,274

 

Total liabilities

 

 

96,847

 

 

 

84,553

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; authorized 125,000,000 shares at

March 31, 2021 and December 31, 2020; issued and outstanding

57,843,577 shares at March 31, 2021 and 57,815,596 shares at December 31, 2020

 

 

578

 

 

 

578

 

Preferred stock, $0.01 par value; authorized 5,000,000 shares; none outstanding

 

 

 

 

 

 

Additional paid-in capital

 

 

440,371

 

 

 

438,920

 

Accumulated other comprehensive income

 

 

 

 

 

 

Accumulated deficit

 

 

(378,261

)

 

 

(347,713

)

Total stockholders’ equity

 

 

62,688

 

 

 

91,785

 

Total liabilities and stockholders' equity

 

$

159,535

 

 

$

176,338

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

5


 

Chiasma, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands except share and per share data)

 

Product revenue, net

 

$

1,924

 

 

$

 

Cost of goods sold

 

 

67

 

 

 

 

Gross profit

 

 

1,857

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

15,698

 

 

 

7,582

 

Research and development

 

 

4,199

 

 

 

8,125

 

Total operating expenses

 

 

19,897

 

 

 

15,707

 

Loss from operations

 

 

(18,040

)

 

 

(15,707

)

Interest and other income (loss), net

 

 

(9,583

)

 

 

398

 

Interest expense

 

 

(2,873

)

 

 

 

Loss before income taxes

 

 

(30,496

)

 

 

(15,309

)

Provision for income taxes

 

 

52

 

 

 

77

 

Net loss

 

 

(30,548

)

 

 

(15,386

)

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

(0.49

)

 

$

(0.36

)

Diluted

 

$

(0.49

)

 

$

(0.36

)

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

62,831,141

 

 

 

42,187,694

 

Diluted

 

 

62,831,141

 

 

 

42,187,694

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

6


 

Chiasma, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Net loss

 

$

(30,548

)

 

$

(15,386

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized loss on available for sale securities, net

 

 

 

 

 

(34

)

Total other comprehensive loss:

 

 

 

 

 

(34

)

Comprehensive loss

 

$

(30,548

)

 

$

(15,420

)

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

7


 

 

Chiasma, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

 

 

(in thousands except share data)

 

Balance, December 31, 2020

 

 

57,815,596

 

 

$

578

 

 

$

438,920

 

 

$

 

 

$

(347,713

)

 

$

91,785

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,400

 

 

 

 

 

 

 

 

 

1,400

 

Exercise of stock options

 

 

27,981

 

 

 

 

 

 

51

 

 

 

 

 

 

 

 

 

51

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,548

)

 

 

(30,548

)

Balance, March 31, 2021

 

 

57,843,577

 

 

$

578

 

 

$

440,371

 

 

$

 

 

$

(378,261

)

 

$

62,688

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

8


 

Chiasma, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

 

 

(in thousands except share data)

 

Balance, December 31, 2019

 

 

42,078,416

 

 

$

421

 

 

$

358,245

 

 

$

37

 

 

$

(272,934

)

 

$

85,769

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,162

 

 

 

 

 

 

 

 

 

1,162

 

Exercise of stock options

 

 

186,925

 

 

 

2

 

 

 

230

 

 

 

 

 

 

 

 

 

232

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

 

 

 

(34

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,386

)

 

 

(15,386

)

Balance, March 31, 2020

 

 

42,265,341

 

 

$

423

 

 

$

359,637

 

 

$

3

 

 

$

(288,320

)

 

$

71,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

9


 

 

Chiasma, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)  

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(30,548

)

 

$

(15,386

)

Adjustments to reconcile net loss to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

51

 

 

 

26

 

Stock-based compensation

 

 

1,372

 

 

 

1,162

 

Accretion on marketable securities, net

 

 

82

 

 

 

(65

)

Non-cash lease expense

 

 

137

 

 

 

121

 

Amortization of debt discount and issuance costs

 

 

160

 

 

 

 

Change in fair value of embedded derivative liability

 

 

9,660

 

 

 

 

Provision (benefit) for deferred income taxes

 

 

3

 

 

 

(24

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(477

)

 

 

 

Inventory

 

 

(3,398

)

 

 

 

Prepaid expenses and other current assets

 

 

(159

)

 

 

(1,298

)

Accounts payable and accrued expenses

 

 

596

 

 

 

2,924

 

Other assets

 

 

(1

)

 

 

(19

)

Other current and long-term liabilities

 

 

1,878

 

 

 

(31

)

Net cash used in operating activities

 

 

(20,644

)

 

 

(12,590

)

Investing Activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(19,012

)

 

 

(8,927

)

Maturities of marketable securities

 

 

48,432

 

 

 

36,771

 

Purchases of property and equipment

 

 

(4

)

 

 

(282

)

Net cash provided by investing activities

 

 

29,416

 

 

 

27,562

 

Financing Activities:

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

51

 

 

 

232

 

Payments of short-term borrowing

 

 

 

 

 

(504

)

Net cash provided by (used in) financing activities

 

 

51

 

 

 

(272

)

Net increase in cash, cash equivalents and restricted cash

 

 

8,823

 

 

 

14,700

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

36,025

 

 

 

27,855

 

Cash, cash equivalents and restricted cash, end of period

 

$

44,848

 

 

$

42,555

 

Reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,576

 

 

$

42,555

 

Restricted cash

 

 

20,272

 

 

 

 

Total cash, cash equivalents and restricted cash

 

$

44,848

 

 

$

42,555

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest on deferred royalty obligation

 

$

118

 

 

$

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

10


 

CHIASMA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

1.

Description of Business and Summary of Significant Accounting Policies

Chiasma, Inc. is a commercial-stage biopharmaceutical company incorporated in 2001 under the laws of the State of Delaware. Chiasma, Inc. is headquartered in Massachusetts and has two wholly owned subsidiaries; Chiasma (Israel) Ltd., and Chiasma Securities Corp, collectively referred to as “the Company,” “we,” “us,” “our” or “Chiasma”. We are focused on developing and commercializing oral therapies to improve the lives of patients who face challenges associated with their existing treatments for rare and serious chronic disease. Employing our proprietary Transient Permeability Enhancer (“TPE”) technology platform, we seek to develop oral medications that are currently available only as injections. On June 26, 2020, we received approval from the U.S. Food and Drug Administration (“FDA”) of our oral octreotide capsules product candidate, MYCAPSSA, for long-term maintenance treatment in acromegaly patients who have responded to and tolerated treatment with octreotide or lanreotide. We commenced our U.S. commercial launch of MYCAPSSA in September 2020.

Acromegaly is a rare and debilitating condition that results in the body’s production of excess growth hormone. Octreotide is an analog of somatostatin, a natural inhibitor of growth hormone secretion. Octreotide capsules have been granted orphan designation in the United States and the European Union for the treatment of acromegaly. We retain worldwide rights to develop and commercialize octreotide capsules.

We conducted an international Phase 3 clinical trial, referred to as MPOWERED, of oral octreotide capsules for the maintenance treatment of adult patients with acromegaly to support regulatory approval in the European Union by the European Medicines Agency (“EMA”). The MPOWERED trial was a global, randomized, open-label and active-controlled 15-month trial initially designed to enroll up to 150 patients. The EMA requested that a minimum of 80 patients who are responders to octreotide capsules per the protocol following the six-month run-in phase be randomized to either remain on octreotide capsules or return to injectable somatostatin receptor ligands (octreotide or lanreotide), and then followed for an additional nine months. In November 2020, we announced positive topline results from the MPOWERED trial, including that the study met its primary non-inferiority endpoint. Based on the positive data from the MPOWERED trial, we expect to submit a marketing authorization application (“MAA”) to the EMA, in mid-2021 seeking marketing approval of MYCAPSSA capsules as a maintenance therapy for adult patients with acromegaly in the European Union.

On May 4, 2021, we entered into an agreement with Amryt Pharma plc (“Amryt”), pursuant to which, if all of the conditions to closing are satisfied or waived, we will become a wholly-owned subsidiary of Amryt (“the Merger Agreement” and such transaction, “the Merger”). The Merger Agreement was approved by our board of directors (the “Board”), and the Board resolved to recommend approval of the Merger Agreement to our shareholders. The closing of the Merger is subject to approval of our shareholders and the satisfaction of customary closing conditions. In connection with the execution of the Merger Agreement, our largest stockholder, who owns approximately 10% of the outstanding shares of our common stock has entered into a voting and transaction support agreement with Amryt, pursuant to which it has agreed, among other things, and subject to the terms and conditions of the agreements, to vote in favor of the Merger.

Subject to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of our common stock issued and outstanding immediately prior to the Effective Time shall automatically be canceled and converted (without interest but subject to any withholding required under applicable law) into the right to receive 0.396 of an American Depositary Share of Amryt, or Parent ADS, with each Parent ADS representing five ordinary shares of Amryt.

Subject to approval by our shareholders and the shareholders of Amryt, the transaction is expected to close in the third quarter of 2021.

We have incurred substantial operating losses since inception, and we expect our operating losses and negative operating cash flows to continue for the foreseeable future. We are heavily dependent on the commercial success of MYCAPSSA in the United States and the regulatory approval and subsequent commercial success of MYCAPSSA in the European Union, both of which may never occur. We plan to invest in our U.S. commercial launch and the manufacturing of octreotide capsules for market consumption including manufacturing scale-up activities, and transitioning the open label extension portions of both our international Phase 3 CHIASMA OPTIMAL clinical trial of octreotide capsules in acromegaly and our international Phase 3 MPOWERED clinical trial of octreotide capsules in acromegaly for patients outside of the United States to an Expanded Access Program, where applicable, as well as

11


 

continue the MACRO Registry. In addition, we plan to prepare and submit a MAA to the EMA seeking potential regulatory approval of octreotide capsules as a treatment for acromegaly in the European Union. We expect our existing cash, cash equivalents and marketable securities to fund our operations for at least one year after the date these condensed consolidated financial statements are issued.

Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure. We plan to continue to fund our losses from operations and capital funding needs from existing balances of cash, cash equivalents and marketable securities and potentially through additional equity financings. We may also opportunistically consider license and collaboration agreements or other strategic transactions with potential partners or financing opportunities to the extent such sources are identified and available. If our anticipated U.S. revenues are insufficient to fund our operations to attaining and sustaining profitability, additional financing may be required. Such financing, if required, may not be available on a timely basis on terms acceptable to us, or at all. If we are not able to secure adequate additional funding when required, we may be forced to make reductions in spending, extend payment terms with suppliers, suspend or curtail our commercialization and development activities, or it may negatively impact our ability to adequately fund or delay our potential commercial preparations or launch readiness outside the United States if our planned MAA for MYCAPSSA is approved by the EMA. Any of these actions could materially harm our business, results of operations and future prospects. Failure to successfully commercialize octreotide capsules in acromegaly will prevent us from achieving profitability and positive cash flows, which could raise significant concerns about our continued viability as a business.

Basis of Presentation

 

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”) for annual financial statements have been condensed or omitted. The information included in this quarterly report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP. In the opinion of management, we have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as our audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. Interim results are not necessarily indicative of results for a full year or for any other subsequent interim period.

Cash Equivalents

Cash equivalents consist of highly liquid instruments that mature within three months or less from the date of purchase.

Marketable Securities

 

Our investments primarily consist of commercial paper and corporate and government debt securities. These marketable securities are classified as available-for-sale, and as such, are reported at fair value on our condensed consolidated balance sheets. Unrealized holding gains and losses are reported within accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, together with interest on securities, are included in interest and other income, net, on our condensed consolidated statements of operations.

 

If a decline in the fair value of a marketable security below our cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. The cost of securities sold is based on the specific identification method.

Accounts Receivable

Our accounts receivable consist of amounts due from our customers for sales of MYCAPSSA and which have standard payments terms. We extend credit to our customers based on our evaluation of their financial condition. Accounts receivable are stated at amounts due net of applicable prompt pay discounts and other adjustments. We assess the need for an allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due and the customer’s ability to pay its obligation. Based on a review of these factors, as of March 31, 2021, we determined that an allowance for doubtful accounts was not required.

12


 

Concentrations of credit risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents and marketable securities, and accounts receivable. During the three months ended March 31, 2021, one customer comprised greater than 90% of our accounts receivable and product revenues.

We routinely maintain deposits in financial institutions in excess of government insured limits. Management believes that we are not exposed to significant credit risk as our deposits are held at financial institutions that management believes to be of high credit quality and we have not experienced any significant losses in these deposits. We regularly invest excess operating cash in deposits with major financial institutions and money market funds and in notes issued by the U.S. government, as well as in fixed income investments and U.S. bond funds, both of which can be readily purchased and sold using established markets. We believe that the market risk arising from our holdings of these financial instruments is mitigated based on the fact that many of these securities are either government backed or of high credit rating.

 

Inventory

 

Prior to FDA approval of MYCAPSSA, all costs related to the manufacturing of MYCAPSSA that could potentially be available to support the planned U.S. commercial launch were charged to research and development expense in the period incurred. Generally, inventory may be capitalized if it is probable that future revenues will be generated from the sale of the inventory and that these revenues will exceed the cost of the inventory. Through the FDA approval date of MYCAPSSA, we expensed all of our manufacturing costs due to the high risk inherent in drug development and uncertainty as to whether MYCAPSSA would be approved. We began to capitalize our manufacturing-related costs to inventory starting July 1, 2020.

 

We capitalize the costs to manufacture our products incurred after regulatory approval when, based on our judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. In connection therewith, we value our inventories at the lower of cost or estimated net realizable value. We determine the cost of our inventories, which includes amounts related to active pharmaceutical ingredient (“API”), and other raw materials, third party manufacturing costs and other overhead costs, on a first-in, first-out basis. Inventories that may be used for either research and development or commercial sale are classified as inventory until the material is consumed or otherwise allocated for research and development. If the material is intended to be used for research and development, it is expensed as research and development once that determination is made.

 

On a quarterly basis, we review inventory quantities on hand and analyze the provision for excess and obsolete inventory based primarily on remaining product shelf life and our estimated sales forecast which is based on anticipated future demand. We build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance, and patient usage. Our estimates of future product demand may prove to be imprecise and changes in estimates will result in a change to the provision required for excess and obsolete inventory. Accordingly, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and results of operations.

Deferred Royalty Obligation

 

We treat the deferred royalty obligation, as discussed further in Note 7, as a debt obligation, amortized under the effective interest rate method over the estimated life of the agreement. We recognize interest expense thereon using the effective rate, which is based on our current estimates of future revenues over the life of the arrangement. In connection therewith, we periodically assess our expected revenues using internal projections, impute interest on the carrying value of the deferred royalty obligation, and record interest expense using the effective interest rate. To the extent our estimates of future revenues are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, we will account for any such changes by adjusting the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of our deferred royalty obligation between short- and long-term. The assumptions used in determining the expected repayment term of the deferred royalty obligation and amortization period of the issuance costs requires that we make estimates that could impact the short-term and long-term classification of such costs, as well as the period over which such costs will be amortized.

 

Revenue Recognition

 

In accordance with accounting guidance for revenue recognition, we recognize revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine to be within

13


 

the scope of such guidance, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services that we transfer to the customer. For a further discussion of accounting for net product revenue see Note 2.

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes during the reporting period. We base these estimates and assumptions on historical experience when available, and on various factors that we believe to be reasonable under the specific circumstances. Significant estimates relied upon in preparing the accompanying condensed consolidated financial statements include, but are not limited to, recognition of product revenues, accounting for stock-based compensation, income taxes, the fair value of embedded derivatives and our deferred royalty obligation and accounting for certain accruals and reserves. We assess the above estimates on an ongoing basis; however, actual results could materially differ from those estimates.

2. Product Revenue, Net

We began selling MYCAPSSA in September 2020. We currently sell MYCAPSSA in the United States to a limited number of specialty pharmacies, which dispense the product directly to patients. We recognize revenue when the customer obtains control of the product, which occurs at a point in time, when delivery of the product has occurred.

Revenue Reserves for Variable Consideration

Revenue from sales of MYCAPSSA are recorded at the net sales price, which is the amount of consideration we expect to receive in exchange for transferring the product to a customer (“transaction price”). This transaction price for product sales includes variable consideration for which reserves are established and which may result from discounts, returns, chargebacks, rebates, co-pay or co-insurance assistance and other allowances that are offered within contracts with our customer and payors. We estimate the amount of variable consideration that should be included in the transaction price under the expected value method for all sales deductions other than trade discounts, which are estimated under the most likely amount method. These provisions represent our best estimate of the amount of consideration to which we are entitled. Actual amounts of consideration ultimately received may differ from these estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such changes in estimates become known.

Trade Discounts and Specialty Pharmacy Fees: we provide customary discounts to certain customers for prompt payment, the terms for which are explicitly stated in our contract with such customer. We record these discounts as a reduction of revenue with a corresponding reduction to accounts receivable. In addition, we also pay fees for data and distribution services from our specialty pharmacy. We have determined that such fees are not for a distinct good or service and, accordingly, are being recorded as a reduction of product revenue and a component of accrued expenses.

340B Discounts: Under the 340B Drug Discount Program, certain eligible healthcare organizations and covered entities purchase drugs at significantly reduced prices. We currently sell to these entities directly, and as such, our invoices are issued at this discounted price at the time of sale; therefore, no reserve is required for these discounts.

Government and Payor Rebates: We are subject to discount obligations under state Medicaid programs, Medicare, and other government programs. Additionally, in the future we may contract with various private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of MYCAPSSA. Provisions for both government and payor rebates are based on the estimated amount of rebates and incentives to be claimed on the related sales from the period. These reserves are recorded in the same period in which the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued expenses in our condensed consolidated balance sheet. For Medicare, we must also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates currently consists of estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in distribution channel inventories at the end of the reporting period.

14


 

Other Incentives/Patient Assistance Programs: We offer voluntary patient assistance programs such as co-pay and co-insurance assistance. These programs are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments and co-insurance required by payors. The calculation of the accrual for co-pay and co-insurance assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue.

Product Returns: We offer customers a limited right of return for unopened damaged or defective product, and, under certain circumstances, for unopened product for a limited time before its expiration date. We estimate the amount of product revenues that may be returned by customers and record this estimate as a reduction of revenue in the period in which the related product revenue is recognized. We currently estimate our provision for sales returns based on our expectations and adjust the transaction price with such estimate at the time of sale to our customer. Once sufficient history has been collected for product returns, we will utilize that history to inform our estimate assumption.

The following table summarizes activity in each of the above product revenue allowances and reserve categories for the three months ended March 31, 2021:

 

 

 

Discounts and Fees

 

 

Rebates and Other Incentives

 

 

Returns

 

 

Total

 

 

 

($ in thousands)

 

Balance at December 31, 2020

 

$

16

 

 

$

130

 

 

$

1

 

 

$

147

 

Provision related to current period sales

 

 

98

 

 

 

250

 

 

 

 

 

 

348

 

Adjustment related to prior period sales

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Payments or credits made during the period

 

 

(85

)

 

 

(38

)

 

 

 

 

 

(123

)

Balance at March 31, 2021

 

$

29

 

 

$

344

 

 

$

1

 

 

$

374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3. Investments

Our investments consisted of the following as of March 31, 2021 and December 31, 2020:

 

 

 

As of March 31, 2021

 

 

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Estimated Fair

Value

 

 

 

($ in thousands)

 

Money market funds

 

$

33,519

 

 

$

 

 

$

 

 

$

33,519

 

Corporate notes

 

 

16,117

 

 

 

 

 

 

(5

)

 

 

16,112

 

Commercial paper

 

 

73,056

 

 

 

6

 

 

 

(3

)

 

 

73,059

 

U.S. treasury securities

 

 

7,547

 

 

 

2

 

 

 

 

 

 

7,549

 

Total

 

$

130,239

 

 

$

8

 

 

$

(8

)

 

$

130,239

 

 

 

 

As of December 31, 2020

 

 

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Estimated Fair

Value

 

 

 

($ in thousands)

 

Money market funds

 

$

29,392

 

 

$

 

 

$

 

 

$

29,392

 

Corporate notes

 

 

11,347

 

 

 

 

 

 

(1

)

 

 

11,346

 

Commercial paper

 

 

98,030

 

 

 

8

 

 

 

(8

)

 

 

98,030

 

U.S. treasury securities

 

 

12,582

 

 

 

1

 

 

 

 

 

 

12,583

 

Total

 

$

151,351

 

 

$

9

 

 

$

(9

)

 

$

151,351

 

 

15


 

 

As of March 31, 2021, we consider the unrealized losses in our investment portfolio to be temporary in nature and not due to credit losses. We have the ability to hold such investments until recovery of the fair value. We utilize the specific identification method in computing realized gains and losses. We had no realized gains and losses on our available-for-sale securities for the three months ended March 31, 2021 or 2020.

The fair values of our investments by classification in our condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 were as follows:

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

($ in thousands)

 

Cash and cash equivalents

 

$

19,510

 

 

$

10,829

 

Marketable securities

 

 

90,457

 

 

 

119,959

 

Restricted cash

 

 

20,272

 

 

 

20,563

 

Total

 

$

130,239

 

 

$

151,351

 

 

Cash and cash equivalents in the table above exclude cash of $5.1 million and $4.6 million as of March 31, 2021 and December 31, 2020, respectively. The contractual maturity dates of all of our investments are less than one year.

4. Fair Value Measurements of Financial Instruments

Certain assets and liabilities are reported at fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

 

 

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

 

 

 

Level 2 — Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.

 

 

 

Level 3 — Inputs that are unobservable for the asset or liability.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

16


 

The fair value measurements of our financial instruments are summarized in the table below:

 

 

 

Fair Value Measurements at March 31, 2021

 

Description

 

Quoted Prices (Unadjusted) in

Active Markets for

Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

 

 

Total

 

Financial assets

 

($ in thousands)

 

Cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

33,519

 

 

$

 

 

$

 

 

$

33,519

 

Corporate notes

 

 

 

 

 

4,263

 

 

 

 

 

 

4,263

 

Commercial paper

 

 

 

 

 

2,000

 

 

 

 

 

 

2,000

 

Total cash equivalents and restricted cash

 

$

33,519

 

 

$

6,263

 

 

$

 

 

$

39,782

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

 

 

$

7,549

 

 

$

 

 

$

7,549