IPI LEGACY LIQUIDATION CO You should read the following management's discussion and analysis of financial condition and results of operations in conjunction with our consolidated financial statements and notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. This discussion and analysis and other parts of this report contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the section of this Annual Report on Form 10-K titled "Risk Factors" and elsewhere in this report. You should carefully read the "Risk Factors" to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section of this report titled "Special Note Regarding Forward-Looking Statements."
Overview
We are a commercial-stage biopharmaceutical company with a mission to develop
transformative therapies for people suffering from diseases with high unmet
medical needs, with an initial focus on diseases of the central nervous system,
or CNS. Our company was founded on the premise that the upper nasal space can be
an optimal treatment entry point for CNS and other diseases where rapid vascular
absorption can result in superior clinical outcomes. Our strategy is to pair our
proprietary Precision Olfactory Delivery, or POD, upper nasal delivery
technology with well-established therapeutics or other therapeutics where rapid
vascular absorption is preferred to drive therapeutic benefit, improve patient
outcomes, reduce drug development risk and expand the commercial opportunity
within our target diseases. On
We have retained all development and commercial rights to Trudhesa. Given the
concentrated prescriber base of our target market for Trudhesa, we independently
launched in
On
67
--------------------------------------------------------------------------------
Prior to
Through
Recent Developments
Recovery of Drug Application Fee
In
Open Market Sales Agreement
In
Oaktree Financing and Revenue Interest Financing
On
Concurrently on
The inclusion of a going concern explanatory paragraph in the report of our
independent registered public accounting firm on our accompanying financial
statements for the fiscal year ended
68
--------------------------------------------------------------------------------
Financial Operations Overview
Product Revenues, Net
We began to recognize revenue from product sales, net of discounts and other adjustments, in September of 2021 in conjunction with the launch of Trudhesa. We will continue to evaluate trends related to revenue momentum for Trudhesa. At launch we implemented our "bridge and co-pay savings" program which we believe provides an affordability solution for patients that enables higher physician prescribing. The program only provides assistance to commercially insured patients. Our data suggests these programs are playing an important role in supporting demand for Trudhesa.
Cost of Goods Sold
Cost of goods sold includes direct and indirect costs related to the manufacturing and distribution of Trudhesa, including third-party manufacturing costs, packaging services, and freight-in.
Operating Expenses
Research and Development
Research and development costs are expensed as incurred. Research and development expenses consist primarily of salaries, benefits and other staff-related costs, including associated stock-based compensation, laboratory supplies, nonclinical and clinical studies and trials, manufacturing, costs for any future product candidates and POD devices to support our studies and trials, to design new versions of PODs, vendor validation and quality control preparation and fees paid to other entities that conduct certain research and development activities on our behalf. We consider regulatory approval of any future product candidates to be uncertain, and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. We expense manufacturing costs as incurred to research and development expense for any future product candidates prior to regulatory approval. If, and when, regulatory approval of a product is obtained, we begin to capitalize manufacturing costs related to the approved product into inventory.
We accrue for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from our external service providers. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and the services are performed. In addition, we account for fully refundable research and development tax credits, based on 43.5% of qualified research and development expenditures of our Australian subsidiary, as an offset to research and development expenses.
Prior to our strategic reprioritization in
Selling, General and Administrative
Our selling, general and administrative expenses consist primarily of
employee-related expenses, including salaries, benefits, travel and stock-based
compensation for our personnel in executive, finance and accounting, human
resources, and other administrative functions, as well as fees paid for
accounting, legal and tax services, consulting fees and facilities costs not
otherwise included in research and development expenses. With the approval of
Trudhesa in
69
--------------------------------------------------------------------------------
Other (Expense) Income, Net
Other (expense) income, net, consists of interest earned on our cash, interest expense on our borrowings, and changes in the fair value of our stock warrant liabilities, derivatives, redeemable convertible preferred stock warrant liabilities and convertible notes, and loss on extinguishment of debt.
Consolidated Results of Operations
Comparison of the Years Ended
The following tables summarize our results of operations for the periods
presented.
Year Ended December 31,
2022 2021 Change
(in thousands)
Product revenue, net $ 12,652 $ 668 $ 11,984
Cost of goods sold 6,495 691 5,804
Gross profit (loss) 6,157 (23 ) 6,180
Operating expenses:
Research and development 11,456 20,563 (9,107 )
Selling, general and administrative 77,885 50,900 26,985
Total operating expenses 89,341 71,463 17,878
Loss from operations (83,184 ) (71,486 ) (11,698 )
Other (expense) income, net (23,128 ) (5,048 ) (18,080 )
Loss before income taxes (106,312 ) (76,534 ) (29,778 )
Provision for income taxes - 2 (2 )
Net loss and comprehensive loss (106,312 ) (76,536 ) (29,776 )
Accretion on redeemable convertible preferred
stock - (129 ) 129
Net loss attributable to common stockholders
Product revenue, net
We recorded net product revenue in 2021 following FDA approval of Trudhesa in
Cost of goods sold
Cost of goods sold of
Prior to receiving FDA approval for Trudhesa in
70
--------------------------------------------------------------------------------
Research and Development
Research and development expenses were
The following table summarizes the period-over-period change in research and development expenses by historical product candidate for the periods indicated:
Year Ended December 31,
2022 2021 Change
(in thousands)
Program-specific costs:
Trudhesa $ (454 ) $ 7,785 $ (8,239 )
INP105 3,202 2,728 474
Other programs 8 28 (20 )
Total program-specific costs 2,756 10,541 (7,785 )
Non program-specific costs:
Personnel-related $ 8,033 $ 9,686 $ (1,653 )
Internal, overhead and other expenses 667 336 331
Total non program-specific costs 8,700 10,022 (1,322 )
Total research and development expenses
Selling, General and Administrative
Selling, general and administrative expenses were
Other (Expense) Income, Net
Other (expense) income, net was an expense of
Liquidity and Capital Resources
Sources of Liquidity
71
--------------------------------------------------------------------------------
Since our inception, we have incurred significant operating losses and negative
cash flows from our operations. Through
We have an effective shelf registration statement on Form S-3 filed with the
Based upon our current operating plan, we estimate that our cash and cash
equivalents as of
Our loan agreement with Oaktree includes covenants requiring us to provide an
audit opinion on our annual financial statements that is not subject to any
"going concern" or like qualification or exception. On
Recent Debt Financings
Oaktree Facility
On
We are required to make quarterly interest-only payments until the fourth anniversary of the Closing Date, after which we are required to make quarterly amortizing payments, with the remaining balance of the principal plus accrued and unpaid interest due at maturity. Prepayments of the loan, in whole or in part, will subject to early prepayment fee which declines each year until the fourth anniversary date of the Closing Date, after which no prepayment fee is required. We are
72
--------------------------------------------------------------------------------
also required to pay an exit fee upon any payment or prepayment equal to 2.0% of
the aggregate principal amount of the loans funded under the Senior Credit
Agreement. The Senior Credit Agreement contains customary representations,
warranties and events of default. If we default under our Senior Credit
Agreement, the lenders may accelerate all of our repayment obligations and take
control of our pledged assets. The lenders could declare us in default under its
debt obligation upon the occurrence of any event that the lenders interpret as
having a material adverse effect as defined under the Senior Credit Agreement
and the Revenue Interest Financing Agreement, thereby requiring us to repay the
loans immediately or to attempt to reverse the lenders' declaration through
negotiation or litigation. Among other loan covenant requirements, the Senior
Credit Agreement also requires us to provide an audit opinion of our annual
financial statements not subject to any "going concern" or like qualification or
exception or explanatory paragraph of going concern footnote, however, any such
audit report shall not be considered qualified due to the inclusion of an
explanatory paragraph paragraph in the audit opinion based on the impending
maturity date of any indebtedness within twelve months from the date of issuance
of these financial statements, the prospective breach of any financial covenant
hereunder or liquidity issues due to ordinary course liabilities. On
A portion of the loan proceeds were used to repay in full the
Revenue Interest Financing Agreement
On
The Purchaser's rights to receive the Revenue Interests shall terminate on the date on which the Purchasers have received payments equal to 175% of the funded portion of the Investment Amount including the aggregate of all payments made to the Purchasers as of such date, unless the RIF is earlier terminated. If the Purchasers have not received payments equal to the 175% of the funded portion of the Investment Amount by the nine-year anniversary of the initial closing date, among other things, we shall pay the Purchasers an amount equal to the funded portion of the Investment Amount plus a specific annual rate of return less payments previously received.
Under the RIF, we have an option, or the Call Option, to repurchase future Revenue Interests at any time until the third anniversary of the Closing Date upon advance written notice. Additionally, the Purchasers have an option, or the Put Option, to terminate the RIF and to require us to repurchase future Revenue Interests upon enumerated events such as a bankruptcy event, a material adverse effect including an event of default under the Senior Credit Agreement (such as a breach of the minimum liquidity covenant) or a change of control. If the Put Option or the Call Option are exercised, the required repurchase price is an amount equal to (i) as of any date before the one-year anniversary of the Effective Date, an amount equal to (a) 1.25 multiplied by (b) the Investment Amount, (ii) as of any date on or after the one-year anniversary of the Closing Date and before the two-year anniversary of the Closing Date, an amount equal to (a) 1.40 multiplied by (b) the
73
--------------------------------------------------------------------------------
Investment Amount, (iii) as of any date on or after the two-year anniversary of the Closing Date and before the three-year anniversary of the Closing Date, an amount equal to (a) 1.55 multiplied by (b) the Investment Amount, and (iv) as of any date on or after the three-year anniversary of the Closing Date, an amount equal to (a) 1.75 multiplied by (b) the Investment Amount, in each case net of the sum of any payments received by the Purchasers prior to such Put Option Closing Date or Call Option Closing Date, as applicable.
If the Purchasers have not received 100% of the Investment Amount by
Cash Flows
Year Ended December 31,
2022 2021
(in thousands)
Net cash provided by (used in):
Cash used in operating activities
(1,377 ) (408 )
Cash provided by financing activities 67,461 147,889
Net increase (decrease) in cash $ (27,558 ) $ 81,117 Cash Flows From Operating Activities
For 2022, cash used in operating activities was
For 2021, cash used in operating activities was
Cash Flows From Investing Activities
For 2022 and 2021, cash used in investing activities of
Cash Flows From Financing Activities
74
--------------------------------------------------------------------------------
For 2022, cash provided by financing activities was
For 2021, cash provided by financing activities was
Funding Requirements
We use our cash to fund operating expenses, including research and development
expenditures and commercialization expenses for Trudhesa. We incur significant
commercialization expenses for product sales, marketing and outsourced
manufacturing with respect to Trudhesa. On
Even in light of the reduction in workforce, we expect to continue to incur significant expenses and operating losses for the foreseeable future. As a result, until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs primarily through equity financings.
The timing and amount of our operating expenditures will depend largely on:
•
the costs and timing of commercialization activities, including product manufacturing, marketing, sales and distribution for Trudhesa, or any future product candidates for which we receive marketing approval;
•
the number and development requirements of any future product candidates that we may pursue;
•
the costs associated with building out our operations;
•
the revenue, if any, received from commercial sales of any future product candidates for which we receive marketing approval;
•
our ability to establish strategic collaborations;
•
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
•
the risk/benefit profile, cost and reimbursement policies with respect to any future product candidates, if approved, and existing and potential future therapies that compete with any future product candidates; and
•
the costs associated with being a public company.
If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders' rights.
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our management's discussion and analysis of our financial condition and
consolidated results of operations is based on our consolidated financial
statements, which have been prepared in accordance with
75
--------------------------------------------------------------------------------
accounting principles, or GAAP. The preparation of these consolidated 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 consolidated financial statements, as well as the reported revenue generated, and reported expenses incurred during the reporting periods. Our estimates are based on our 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 carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 "Summary of Significant Accounting Policies" in the notes to our financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements
Revenue Recognition
We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.
Product Revenue, Net
Subsequent to its regulatory approval in the
Revenue from product sales is recognized when the customer obtains control of our product, which occurs upon transfer of title to the customer. We classify payments to customers or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative expenses in our consolidated statements of operations. Payments to customers or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below. Taxes collected from the customer relating to product sales and remitted to governmental authorities are excluded from revenue. Because our payment terms are generally forty-five days, we conclude there is not a significant financing component because the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less. We expense incremental costs of obtaining a contract as and when incurred since the expected amortization period of the asset that we would have recognized is one year or less.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price, or the transaction price, which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, co-pay assistance, chargebacks, rebates and other allowances that are offered within contracts between us and our customer, health care providers and other indirect customers relating to the sale of Trudhesa. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable or a current liability. Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results
76
--------------------------------------------------------------------------------
in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
The following are the components of variable consideration related to product revenue:
•
Product Returns: Customers have limited return rights related to the product's damage or defect. We estimate the amount of product sales that may be returned and record the estimate as a reduction of revenue and a refund liability in the period the related product revenue is recognized. Based on the distribution model for Trudhesa and the price of Trudhesa, we believe there will be minimal returns.
•
Other incentives: Other incentives include co-payment assistance we provide to patients with commercial insurance that have coverage and reside in states that allow co-payment assistance, as well as assistance in the form of a "bridge" program to help start a patient on a new therapy, especially in cases where payers may have barriers (e.g. prior authorizations and appeals) in place before agreeing to pay for a new drug. Under the bridge program the customer distributes the product free of cost to eligible individuals for a period of time. The volume of program utilization under the bridge and co-pay assistance programs is estimated by the Company at the time of sale to the customer. The calculation of the accrual for these programs 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. The estimate is recorded as a reduction of revenue in the same period the related revenue is recognized.
•
Managed care rebates: We are subject to rebates with certain commercial payers. We record these rebates as an accrual on our consolidated balance sheet in the same period we recognize the related revenue. We estimate our managed care rebates based on our estimated payer mix and the applicable contractual rebate rate.
•
Chargebacks: We estimate obligations resulting from contractual commitments with
the government and other entities to sell products to qualified healthcare
providers and patients at prices lower than the list prices charged to our
customers. The government and other entities charge us for the difference
between what they pay for the product and the selling price to our customers. We
record reserves for these chargebacks related to product sold to our customers
during the reporting period, as well as our estimate of product that remains in
the distribution channel at the end of the reporting period that we expect will
be sold to qualified healthcare providers and patients in future periods. As of
•
Government rebates: We are subject to discount obligations under government
programs, including Medicaid programs, Medicare and Tricare in the
Accounts Receivable, net
Our trade accounts receivable consists of amounts due from customers in the
Inventory
Prior to receiving approval from the FDA in
77
--------------------------------------------------------------------------------
to capitalize inventory related costs that were incurred subsequent to FDA approval. we value our inventories at the lower-of-cost or net realizable value and determine the cost of our inventories, which includes costs related to products held for sale in the ordinary course of business, products in process of production for such sale and items to be currently consumed in the production of goods to be available for sale, on a first-in, first-out (FIFO) basis. Due to the nature of our supply chain process, inventory that is owned by us, is physically stored at third-party warehouses, logistics providers and contract manufacturers. Determining net realizable value of inventories involves significant judgments, including projecting future average selling prices and future sales volumes. To project average selling prices and sales volumes, we review recent sales volumes, prescription volumes, existing customer orders, general economic trends, and other information. When these analyses reflect estimated net realizable values below our manufacturing costs, we record a charge to cost of goods sold in advance of when inventories are actually sold. Differences in forecasted average selling prices used in calculating lower of cost or net realizable value adjustments can result in significant changes in the estimated net realizable value of product inventories and accordingly the amount of write-down recorded.
Stock-Based Compensation
We account for stock-based compensation expense related to stock options, restricted stock units, or RSUs, performance-based restricted stock units, or PSUs by estimating the fair value on the date of grant. The Company estimates the fair value of stock options granted to employees and non-employees using the Black-Scholes option pricing model. The fair value of RSUs and PSUs granted to employees is estimated based on the closing price of the Company's common stock on the date of grant.
Each PSU award reflects a target number of shares ("Target Shares") that may be issued to the award recipient and the units earned at the end of the performance period will be determined based on the achievement of certain revenue targets over the performance period. The PSUs also include a performance objective relating to total shareholder return ("TSR"). TSR reflects the change in the value of the Company's common stock over each performance period. Depending on the revenue achieved and the TSR during the two-year performance periods, the actual number of shares that a grant recipient receives at the end of the performance period may range from 0% to 125% of the Target Shares granted for the 2022 performance period and 0% to 150% of the Target Shares granted for the 2023 performance period.
Management assesses the probability of achieving the specified revenue targets at each reporting period based on current and expected performance of Trudhesa, In the period it becomes probable that the minimum threshold specified in the award will be achieved, we recognize expense for the proportionate share of the total fair value of the PSUs related to the vesting period that has already lapsed for the shares expected to vest and be released. The remaining fair value of the shares expected to vest and be released is expensed on a straight-line basis over the balance of the vesting period. In the event the Company determines it is no longer probable that we will achieve the minimum threshold specified in the award, we reverse all of the previously recognized compensation expense in the period such a determination is made.
The fair value of the portion of the Target Shares that relate to a relative TSR performance objective was determined using a Monte Carlo simulation analysis to estimate the total shareholder return ranking of the Company among a peer group over the remaining performance periods. See Note 9-Stock Incentive Plans to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further information.
Deferred Royalty Obligation
We account for the RIF, as discussed further in Note 6-Debt to our audited consolidated financial statements, as a deferred royalty obligation, amortized under the effective interest rate method over the estimated life of the revenue streams. 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 imputed effective interest rate. To the extent our estimates of future revenues are greater or less than previous
78
--------------------------------------------------------------------------------
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. 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.
Derivative Liabilities
In connection with the borrowings under the RIF and the Senior Credit Agreement with Oaktree, we identified certain embedded derivatives, which are recorded as liabilities on the Company's consolidated balance sheet and are remeasured to fair value at each reporting date until the derivatives are settled. Changes in the fair value of the derivative liabilities are recognized as other income (expense) in the consolidated statement of operations and comprehensive loss. The fair value of the embedded derivative liabilities associated with the term loans was estimated using a probability weighted discounted cash flow model to measure the fair value. This involves significant Level 3 inputs and assumptions including an (i) estimated probability and timing of a change in control and events of default and ii) our risk-adjusted discount rate.
The embedded derivative liability associated with our deferred royalty obligation is measured at fair value using an option pricing Monte Carlo simulation model and is netted with the deferred royalty obligation in the consolidated financial statements. The assumptions used in the option pricing Monte Carlo simulation model include:(i) the probability-weighted net sales of Trudhesa; (ii) our risk-adjusted discount rate; (iii) our cost of debt; and (iv) the probability of a change in control and event of default occurring during the term of the instrument.
Recent Accounting Pronouncements
See Note 2-Basis of Presentation and Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.
JOBS Act Accounting Election
We are an "emerging growth company," as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.
We have elected to use this extended transition period to enable us to get comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
© Edgar Online, source
