Document
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________

FORM 10-Q
_____________________

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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: 001-38536
_____________________

XERIS PHARMACEUTICALS, INC.

(Exact name of the registrant as specified in its charter)
_____________________
 
Delaware
 
20-3352427
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
180 N. LaSalle Street, Suite 1600
Chicago, Illinois
 
60601
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
(844) 445-5704
(Registrant's telephone number, including area code)
_____________________
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, par value $0.0001 per share
XERS
The 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   þ     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   þ     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 þ
Smaller reporting company þ
 
 
 
Emerging growth company þ
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   þ
 
As of July 31, 2019, the registrant had 26,987,351 shares of common stock, par value $0.0001 per share, outstanding.
 
 
 
 



XERIS PHARMACEUTICALS, INC.
FORM 10-Q

INDEX

 
 
 
 
Page
 
 
 
 
 
 
 
 
Part I. Financial Information
 
 
 
 
 
 
 
 
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
 
 
 
Condensed Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018
 
 
 
 
 
 
 
 
 
 
Condensed Statements of Operations and Comprehensive Loss (unaudited) for the three-month
   and six-month periods ended June 30, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
Condensed Statements of Stockholders' Equity (Deficit) (unaudited) for the three-month and
   six-month periods ended June 30, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
Condensed Statements of Cash Flows (unaudited) for the six-month periods ended
   June 30, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Financial Statements
 
 
 
 
 
 
 
 
 
Item 2. Management's Discussion and Analysis of Financial Condition
     and Results of Operations
 
 
 
 
 
 
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
 
 
 
 
Item 4. Controls and Procedures
 
 
 
 
 
 
 
 
Part II. Other Information
 
 
 
 
 
 
 
 
 
Item 1. Legal Proceedings
 
 
 
 
 
 
 
 
 
Item 1A. Risk Factors
 
 
 
 
 
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
 
 
 
 
 
Item 5. Other Information
 
 
 
 
 
 
 
 
 
Item 6. Exhibits
 
 
 
 
 
 
 
 
Signatures
 



2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

XERIS PHARMACEUTICALS, INC.
Condensed Balance Sheets
(in thousands, except share and par value)
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
66,669

 
$
45,716

Short-term investments
57,841

 
66,917

Accounts receivable, net
826

 
2,869

Prepaid expenses and other current assets
813

 
2,397

Total current assets
126,149

 
117,899

Property and equipment, net
7,677

 
2,034

Other assets
68

 
95

Total assets
$
133,894

 
$
120,028

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,840

 
$
866

Accrued expenses
15,609

 
8,214

Current portion of long-term debt
3,000

 

Warrant liabilities
403

 
860

Deferred grant awards
156

 
232

Total current liabilities
21,008

 
10,172

Long-term debt, net of unamortized deferred costs
29,403

 
31,890

Other long-term liabilities
8,692

 
2,560

Total liabilities
59,103

 
44,622

 
 
 
 
Commitments and Contingencies (Note 8)


 


 
 
 
 
Stockholders’ Equity:
 
 
 
Preferred stock—par value $0.0001, 10,000,000 shares authorized and no shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

 

Common stock—par value $0.0001, 150,000,000 shares authorized as of June 30, 2019 and December 31, 2018, respectively; 26,934,673 and 20,808,366 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
3

 
2

Additional paid in capital
255,047

 
196,121

Accumulated deficit
(180,327
)
 
(120,665
)
Accumulated other comprehensive gain (loss)
68

 
(52
)
Total stockholders’ equity
74,791

 
75,406

Total liabilities and stockholders’ equity
$
133,894

 
$
120,028

The accompanying notes are an integral part of the condensed financial statements.

3


XERIS PHARMACEUTICALS, INC.
Condensed Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data; unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Grant income
$
314

 
$
819

 
$
529

 
$
1,029

Service revenue
6

 

 
39

 
53

Cost of revenue
23

 

 
23

 
42

Gross profit
297

 
819

 
545

 
1,040

Operating expenses:
 
 
 
 
 
 
 
Research and development
19,333

 
8,677

 
32,500

 
17,389

Selling, general and administrative
15,024

 
4,499

 
27,542

 
7,738

Expense from operations
34,357

 
13,176

 
60,042

 
25,127

Loss from operations
(34,060
)

(12,357
)
 
(59,497
)
 
(24,087
)
Other income (expense):
 
 
 
 
 
 
 
Interest and other income
845

 
238

 
1,516

 
334

Interest expense
(1,062
)
 
(562
)
 
(2,125
)
 
(753
)
Change in fair value of warrants
(108
)
 
(306
)
 
444

 
(388
)
Total other income (expense)
(325
)
 
(630
)
 
(165
)
 
(807
)
Net loss
$
(34,385
)
 
$
(12,987
)
 
$
(59,662
)
 
$
(24,894
)
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Unrealized gains on short-term investments
69

 

 
120

 

Comprehensive loss
$
(34,316
)
 
$
(12,987
)
 
$
(59,542
)
 
$
(24,894
)
 
 
 
 
 
 
 
 
Net loss per common share - basic and diluted
$
(1.28
)
 
$
(3.07
)
 
$
(2.36
)
 
$
(7.76
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding,
   basic and diluted
26,889,398

 
4,231,054

 
25,234,489

 
3,205,998

The accompanying notes are an integral part of the condensed financial statements.



4


XERIS PHARMACEUTICALS, INC.
Condensed Statements of Stockholders’ Equity (Deficit)
(in thousands, except share data; unaudited)


 
 
Common Stock
 
Additional
Paid In
Capital
 
Accumulated Other Comprehensive
Gain (Loss)
 
Accumulated
Deficit
 
Total
 
 
Shares
 
Amount
 
Balance, December 31, 2017
 
2,159,068

 
$
1

 
$
2,754

 
$

 
$
(60,585
)
 
$
(57,830
)
Net loss
 

 

 

 

 
(11,906
)
 
(11,906
)
Exercise and vesting of stock-based awards
 
39,510

 

 
51

 

 

 
51

Stock-based compensation
 

 

 
244

 

 

 
244

Balance, March 31, 2018
 
2,198,578

 
$
1

 
$
3,049

 
$

 
$
(72,491
)
 
$
(69,441
)
Net loss
 

 

 

 

 
(12,987
)
 
(12,987
)
Issuance of common stock upon Initial
   Public Offering, net of cost of $9,323
 
6,555,000

 

 
89,002

 

 

 
89,002

Conversion of convertible preferred stock
   into common stock
 
11,837,073

 
1

 
102,292

 

 

 
102,293

Exercise and vesting of stock-based awards
 
97,806

 

 
109

 

 

 
109

Stock-based compensation
 

 

 
361

 

 

 
361

Balance, June 30, 2018
 
20,688,457

 
$
2

 
$
194,813

 
$

 
$
(85,478
)
 
$
109,337

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 


 
 
 


 
 
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid In
Capital
 
Accumulated Other Comprehensive
Gain (Loss)
 
Accumulated
Deficit
 
Total
 
 
Shares
 
Amount
 
Balance, December 31, 2018
 
20,808,366

 
$
2

 
$
196,121

 
$
(52
)
 
$
(120,665
)
 
$
75,406

Net loss
 

 

 

 

 
(25,277
)
 
(25,277
)
Issuance of common stock upon public
   offering, net of cost of $4,338
 
5,996,775

 
1

 
55,631

 

 

 
55,632

Exercise and vesting of stock-based awards
 
72,797

 

 
128

 

 

 
128

Exercise of warrants
 
2,271

 

 
13

 

 

 
13

Stock-based compensation
 

 

 
1,147

 

 

 
1,147

Other comprehensive gain
 

 

 

 
51

 

 
51

Balance, March 31, 2019
 
26,880,209

 
$
3

 
$
253,040

 
$
(1
)
 
$
(145,942
)
 
$
107,100

Net loss
 

 

 

 

 
(34,385
)
 
(34,385
)
Exercise and vesting of stock-based awards
 
30,235

 

 
70

 

 

 
70

Stock-based compensation
 

 

 
1,701

 

 

 
1,701

Issuance of common stock through
   employee stock purchase plan
 
24,229

 

 
236

 

 

 
236

Other comprehensive gain
 

 

 

 
69

 

 
69

Balance, June 30, 2019
 
26,934,673

 
$
3

 
$
255,047

 
$
68

 
$
(180,327
)
 
$
74,791

The accompanying notes are an integral part of the condensed financial statements.




5


XERIS PHARMACEUTICALS, INC.
Condensed Statements of Cash Flows
(in thousands; unaudited)

 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
     Net loss
$
(59,662
)
 
$
(24,894
)
     Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
            Depreciation and amortization
359

 
141

            Amortization of short-term investments
(451
)
 

            Amortization of debt issuance costs
513

 
156

            Stock-based compensation
2,848

 
605

            Change in fair value of warrants
(444
)
 
388

            Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,043

 
134

Prepaid expenses and other current assets
1,584

 
(629
)
Other assets
27

 
69

Accounts payable
974

 
(1,420
)
Accrued expenses
7,571

 
3,261

Deferred grant awards
(76
)
 
50

Deferred rent
492

 
112

Other liabilities
31

 

Net cash used by operating activities
(44,191
)
 
(22,027
)
Cash flows from investing activities:
 
 
 
     Capital expenditures
(494
)
 
(489
)
     Purchases of short-term investments
(46,260
)
 

     Sales and maturities of short-term investments
55,908

 

Net cash provided (used) by investing activities
9,154

 
(489
)
Cash flows from financing activities:
 
 
 
     Proceeds from Initial Public Offering

 
98,325

     Payments for Initial Public Offering costs

 
(7,588
)
     Proceeds from the issuance of common stock from public offering
59,970

 

     Payments of public offering costs
(4,338
)
 

     Proceeds from sale of Series C Preferred Stock

 
4,438

     Payments of Series C Preferred Stock offering costs

 
(24
)
     Proceeds from issuance of long-term debt

 
20,000

     Payments of debt issuance costs

 
(238
)
     Purchases from employee stock purchase plan
236

 

     Proceeds from exercise of stock awards
122

 
86

Net cash provided by financing activities
55,990

 
114,999

Increase in cash and cash equivalents
20,953

 
92,483

Cash and cash equivalents, beginning of period
45,716

 
42,045

Cash and cash equivalents, end of period
$
66,669

 
$
134,528

 
 
 
 
Supplemental schedule of cash flow information:
 
 
 
            Cash paid for interest
$
1,638

 
$
451

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
            Tenant improvement allowance
$
5,508

 
$

            Deferred Initial Public Offering costs within accrued expenses
$

 
$
1,735

            Accrued debt issuance costs
$
2,325

 
$
1,425

            Allocation of debt costs to warrants
$

 
$
326

            Vesting of early exercised awards
$
76

 
$
75

The accompanying notes are an integral part of the condensed financial statements.

6


XERIS PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
June 30, 2019
(unaudited)





Note 1. Organization and Nature of the Business

Nature of business

Xeris Pharmaceuticals, Inc. ("Xeris" or the "Company") is a specialty pharmaceutical company that was incorporated in Delaware in 2005. Xeris is dedicated to the development of ready-to-use injectable and infusible drug formulations that address important unmet medical needs, are easier to use by patients, caregivers and health practitioners, and reduce costs for payors and the healthcare system.

Since its inception, the Company has devoted substantially all of its efforts to research and development, regulatory and technical activities. The Company has financed its operations through the issuance of its common stock, convertible preferred stock and other equity instruments, debt financing and grant funding from the National Institutes of Health ("NIH") and other philanthropic organizations.

The Company has not generated any revenue from product sales. The Company has incurred operating losses since inception and has an accumulated deficit of $180.3 million as of June 30, 2019. The Company expects to continue to incur net losses for the next several years. Based on the Company’s current operating plans and existing working capital at June 30, 2019, the Company believes cash resources are sufficient to sustain operations and capital expenditure requirements for at least the next 12 months. The Company is subject to a number of risks similar to other specialty pharmaceutical companies, including, but not limited to, successful development and commercialization of its drug candidates, the development of new technological innovations by its competitors, protection of intellectual property and market acceptance of the Company’s products.

Basis of presentation

These condensed financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), including those for interim financial information, and with the instructions for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (the "SEC"). Accordingly, such financial statements do not include all of the information and note disclosures required by GAAP for complete financial statements.

In the opinion of management, the accompanying financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial position and its results of operations and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results that may be expected for any future period. The accompanying financial statements should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2018 included in the Company's Annual Report on Form 10-K filed with the SEC on March 6, 2019.

Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”).


7


XERIS PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
June 30, 2019
(unaudited)




Note 2. Summary of Significant Accounting Policies

Refer to the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of the Company's accounting policies.

New accounting pronouncements

Recently issued accounting pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of their classification. Leases will be classified as either operating or finance leases under the new guidance. Operating leases will result in straight-line expense in the income statement, similar to current operating leases, and finance leases will result in more expense being recognized in the earlier years of the lease term, similar to current capital leases. As an emerging growth company, ASU 2016-02 will be effective for the Company on January 1, 2020. The Company is currently evaluating the impact the adoption of this new standard will have on the financial statements and related disclosures; however, since the Company is a lessee to certain leases for property whose terms exceed twelve months, it expects to report assets and liabilities related to these leases on the financial statements that have not been previously reported once adopted.

Note 3. Reverse Stock Split and Public Stock Offerings

On June 8, 2018, the Company effectuated a 1-for-1.78112 reverse stock split of its outstanding common stock, which was approved by the Company’s board of directors on May 22, 2018 and by the Company’s stockholders on June 8, 2018. The reverse stock split resulted in an adjustment to the then outstanding preferred stock conversion prices to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying condensed financial statements and related notes to condensed financial statements give retroactive effect to the reverse stock split for all periods presented. The shares of common stock retained a par value of $0.0001 per share. Accordingly, stockholders’ equity reflects the reverse stock split by reclassifying from common stock to additional paid in capital an amount equal to the par value of the decreased shares resulting from the reverse stock split.

On June 25, 2018, the Company closed the initial public offering ("IPO") of its common stock pursuant to a registration statement on Form S-1, as amended. The Company sold an aggregate of 6,555,000 shares of common stock under the registration statement at an IPO price of $15.00 per share, including 855,000 shares of common stock pursuant to the exercise of the underwriters’ option to purchase additional shares. Net proceeds from the IPO were $88.9 million, after deducting underwriting discounts and commissions, as well as other IPO expenses. Upon closing the IPO, all outstanding shares of the Company's Series A, B and C convertible preferred stock were converted into 11,837,073 shares of common stock.

On February 19, 2019, the Company completed a public offering of its common stock pursuant to a registration statement on Form S-1, as amended. The Company sold an aggregate of 5,996,775 shares of common stock at a price of $10.00 per share, including 116,775 shares of common stock pursuant to the exercise of the underwriters' option to purchase additional shares. Net proceeds from the public offering were $55.6 million after deducting underwriting discounts and commissions, as well as other public offering expenses.

Note 4. Accrued Expenses

Accrued expenses consist of the following:  
(in thousands)
June 30, 2019
 
December 31, 2018
 
 
 
 
Accrued research and development costs
$
8,863

 
$
2,221

Accrued employee costs
3,449

 
4,326

Accrued marketing and selling costs
2,395

 

Accrued other costs
902

 
1,667

Accrued expenses
$
15,609

 
$
8,214



8


XERIS PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
June 30, 2019
(unaudited)




Note 5. Long-term Debt

Senior Secured Loan Facility

In February 2018, the Company entered into the Loan and Security Agreement that provides a senior secured loan facility of up to an aggregate principal amount of $45.0 million. The first tranche was $20.0 million and was drawn down in February 2018 ("Term A Loan"). The second tranche was $15.0 million and was drawn down in September 2018 ("Term B Loan"). The third tranche is $10.0 million and is available beginning upon approval of the Company’s GvokeTM New Drug Application ("NDA") by the U.S. Food & Drug Administration (”FDA”) until the earlier of September 30, 2019 or the 30th day following NDA approval by the FDA.

The interest rate under the Loan and Security Agreement is the thirty-day U.S. LIBOR rate plus 6.75%, which was 9.18% as of June 30, 2019. Payments on the Loan and Security Agreement are interest only for the first 24 months, which can be extended by an additional twelve months if the third tranche is drawn. The total term of the loan is fifty-nine months, and the principal payments will begin 24 months from the beginning of the term or, should the third tranche be drawn, 36 months from the beginning of the term.

Pursuant to the Loan and Security Agreement, the Company provided a first priority security interest in all existing and future-acquired assets, excluding intellectual property and certain other assets, owned by the Company. The Loan and Security Agreement contains a negative pledge on intellectual property owned by the Company. The Company also issued warrants to the Lenders to purchase common stock, which is further discussed in Note 7, "Warrants," of the notes to condensed financial statements.

The Loan and Security Agreement allows the Company to voluntarily prepay the outstanding amounts thereunder, but not less than $2.0 million of the outstanding principal at any time. Prior to April 1, 2020, the Company is subject to a prepayment penalty equal to 1.50% of the principal amount being prepaid. In the event the Company draws down the third tranche, the period subject to the 1.50% prepayment penalty is extended to April 1, 2021. No prepayment fee exists for prepayments made after April 1, 2020, or April 1, 2021 in the event the third tranche is issued. A final payment fee of 6.5% multiplied by the original principal amount of each tranche drawn is due upon the earlier to occur of the maturity date of the Loan and Security Agreement, the acceleration of the Loan and Security Agreement or prepayment of such borrowings and is recorded in other long-term liabilities on the condensed balance sheets. The Loan and Security Agreement includes a non-utilization fee of 2.0% multiplied by the principal amount of tranche three payable to Lenders in October 2019, if the Company elects not to draw the third tranche.

The Loan and Security Agreement also contains customary indemnification obligations and customary events of default, including, among other things, failure to fulfill certain obligations under the Loan and Security Agreement and the occurrence of a material adverse change in the Company's business, operations or condition, a material impairment of the prospect of repayment of any portion of the loan, or a material impairment in the perfection or priority of the Lenders’ lien in the collateral or in the value of such collateral. In the event of default under the Loan and Security Agreement, the Company would be required to pay interest on principal and all other due and unpaid obligations at the current rate in effect plus 5%. All such interest would be payable on demand and in cash. Further, the Lenders would be entitled to exercise their remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the Loan and Security Agreement.

The Loan and Security Agreement includes certain restrictions on, among other things, the Company’s ability to incur additional indebtedness, change the name or location of the business, merge with or acquire other entities, pay dividends or make other distributions to holders of the Company’s capital stock, make certain investments, engage in transactions with affiliates, create liens, open new deposit accounts, sell assets or pay subordinated debt.


9


XERIS PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
June 30, 2019
(unaudited)




The components of debt are as follows:
(in thousands)
June 30, 2019
 
December 31, 2018
 
 
 
 
Term A Loan
$
20,000

 
$
20,000

Term B Loan
15,000

 
15,000

Principal amount of long-term debt
35,000

 
35,000

Less: Current portion of long-term debt
(3,000
)
 

Long-term debt, net of current position
32,000

 
35,000

Less: Unamortized deferred costs
(2,597
)
 
(3,110
)
Long-term debt, net of unamortized deferred costs
$
29,403

 
$
31,890


The following table sets forth the Company’s future minimum principal payments (in thousands):
2019
$

2020
9,000

2021
12,000

2022
12,000

2023
2,000

 
$
35,000


The Company incurred total debt issuance costs of $3.7 million, which are reflected as a direct reduction to the term loan balance and are being amortized into interest expense over the life of the loan using the effective interest method. For the three and six months ended June 30, 2019, the Company recognized interest expense of $1,062,000 and $2,125,000, respectively, of which $262,000 and $513,000, respectively, was related to the amortization of debt issuance costs. For the three and six months ended June 30, 2018, the Company recognized interest expense of $562,000 and $753,000, respectively, of which $116,000 and $156,000, respectively, was related to the amortization of debt issuance costs.

Note 6. Convertible Preferred Stock

In February 2018, the Company issued an additional 707,680 shares of Series C convertible preferred stock for net proceeds of $4.4 million.

During the second quarter of 2018, a majority of the holders of the Company's convertible preferred stock elected to have their shares converted into common stock; therefore, all outstanding shares of preferred stock were converted into 11,837,073 shares of common stock at a conversion rate of 1:1.78112 upon the closing of the Company's IPO on June 25, 2018.

Prior to the conversion of the convertible preferred stock into common stock, the holders of the Company’s convertible preferred stock were entitled to receive non-cumulative dividends at the rate of 8% of the purchase price per annum in preference to any dividends to the holders of the common stock, payable as and if when declared by the Board of Directors. The holders of the convertible preferred stock also were entitled to participate pro rata in any dividends paid to the holders of the common stock on an as-converted basis. No dividends were declared by the Company’s Board of Directors.

Note 7. Warrants

In 2014 the Company issued 19,931 warrants (“2014 Warrants”) to certain investors. The 2014 Warrants allow each holder to purchase one share of common stock for $5.912. There have been 16,944 2014 Warrants exercised, and 2,987 2014 Warrants remain outstanding as of June 30, 2019.

As part of the Loan and Security Agreement discussed in Note 5, "Long-term Debt," in the notes to condensed financial statements, the Lenders received warrants equal to 3.0% of the principal borrowing amounts concurrent with the borrowing. The warrants represent a right for the lender to purchase shares of the Company’s common stock at an exercise price of $11.169 per share. The Company issued

10


XERIS PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
June 30, 2019
(unaudited)




53,720 warrants ("Term A Warrants") upon the drawdown of the Term A Loan in February 2018, and the Company issued 40,292 warrants ("Term B Warrants") upon the drawdown of the Term B Loan in September 2018. There have been no exercises of Term A Warrants or Term B Warrants, and as such all 53,720 warrants and 40,292 warrants, respectively, were outstanding as of June 30, 2019.

Because the warrants are a freestanding instrument, indexed to the Company's stock, they do not meet the criteria for equity classification. Therefore, warrants are liability classified and subject to remeasurement at each reporting period until they are exercised, expired, or otherwise settled.

The Company recognized losses of $(4,000), $(59,000) and $(45,000) due to the change in fair value of the warrants during the three months ended June 30, 2019 related to the 2014 Warrants, the Term A Warrants and the Term B Warrants, respectively. The Company recognized gains of $68,000, $215,000 and $161,000 due to the change in fair value of the warrants during the six months ended June 30, 2019 related to the 2014 Warrants, the Term A Warrants and the Term B Warrants, respectively. The Company recognized losses of $(133,000) and $(173,000) due to the change in fair value of the warrants during the three months ended June 30, 2018 related to the 2014 Warrants and the Term A Warrants, respectively. The Company recognized losses of $(178,000) and $(210,000) due to the change in fair value of the warrants during the six months ended June 30, 2018 related to the 2014 Warrants and the Term A Warrants, respectively.

As of June 30, 2019, the following warrants were outstanding:
 
Outstanding Warrants
 
Exercise Price per Warrant
 
Expiration
Date
 
 
 
 
 
 
2014 Warrants
2,987
 
$5.912
 
August 2020
Term A Warrants
53,720
 
$11.169
 
February 2025
Term B Warrants
40,292
 
$11.169
 
September 2025
 
96,999
 
 
 
 

Note 8. Commitments and Contingencies

The Company has non-cancellable operating leases for office space, which expire at various times through 2031. The non-cancellable office lease agreements provide for monthly lease payments, which increase during the term of each lease agreement.

In the first quarter of 2018, the Company signed a lease for office space in Chicago, Illinois. In the fourth quarter of 2018, the Company signed an amendment to this lease to occupy new space and relocated from its existing premises to this additional space in March 2019. The future minimum lease payments of the amended lease are approximately $0 in 2019, $746,000 in 2020, $1,095,000 in 2021, $1,125,000 in 2022, $1,156,000 in 2023, and $9,747,000 for 2024 and thereafter.

Total rent expense under these operating leases was approximately $556,000 and $229,000 for the three months ended June 30, 2019 and 2018, respectively, and $1,043,000 and $420,000 for the six months ended June 30, 2019 and 2018, respectively,

As of June 30, 2019, we had unused letters of credit of $1,083,000 which were issued primarily to secure leases.


Note 9. Stock Compensation Plan
 
In 2011, the Company adopted the 2011 Stock Option Issuance Plan (“2011 Plan”) and subsequently amended it to authorize the Board of Directors to grant up to 4,714,982 incentive stock option and non-qualified stock option awards.

The 2018 Stock Option and Incentive Plan ("2018 Plan") was adopted by the Board of Directors in April 2018 and approved by the Company's stockholders in June 2018 to award up to 1,822,000 shares of common stock. This plan became effective on the date immediately prior to the effectiveness of the Company's IPO registration statement. The 2018 Plan replaced the 2011 Plan as the Board of Directors determined not to make additional awards under the 2011 Plan following the closing of the IPO, which occurred in June 2018. The 2018 Plan allows the compensation committee to make equity-based and cash-based incentive awards to the Company's officers, employees, directors and other key persons (including consultants).

The 2018 Plan provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning on January 1, 2019, by 4% of the outstanding number of shares of our common stock on the immediately preceding

11


XERIS PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
June 30, 2019
(unaudited)




December 31, or such lesser number of shares as determined by the compensation committee. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company's capitalization. On January 1, 2019, the number of shares of common stock available for issuance under the 2018 Plan was automatically increased by 835,728 shares. As of June 30, 2019, there were approximately 833,000 shares of common stock available for future issuance under the 2018 Plan.

The 2018 Employee Stock Purchase Plan ("ESPP") was adopted by the Board of Directors in April 2018 and approved by the Company's stockholders in June 2018 to award up to 193,000 shares of common stock to participating employees. This plan became effective on the date immediately prior to the effectiveness of the Company's IPO registration statement. The ESPP provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2019 and each January 1 thereafter through January 1, 2028, by the least of (i) 1% of the outstanding number of shares of our common stock on the immediately preceding December 31; (ii) 386,000 shares or (iii) such lesser number of shares as determined by the ESPP administrator. On January 1, 2019, the number of shares of common stock available for issuance under the ESPP increased by 208,932 shares. The number of shares reserved under the ESPP is subject to adjustment in the event of a stock split, stock dividend or other change in capitalization. The first offering period for the ESPP began January 1, 2019 and ended June 30, 2019. As of June 30, 2019, there were approximately 378,000 shares available for issuance under the ESPP. For the six months ended June 30, 2019, the Company recognized expense of $128,000 related to the ESPP.

The Equity Inducement Plan ("Inducement Plan") was adopted by the Board of Directors in February 2019. The Inducement Plan was adopted without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. The Inducement Plan allows the Company to make stock option or restricted stock unit awards to prospective employees of the Company as an inducement to such individuals to commence employment with the Company. The Company intends to use this Inducement Plan to help it attract and retain prospective employees who are necessary to support the commercial launch of Gvoke and the expansion of the Company generally. The Company has initially reserved 750,000 shares of common stock for the issuance of awards under the Inducement Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. As of June 30, 2019, there were approximately 452,000 shares of common stock available for future issuance under the Inducement Plan.

Stock options are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock option awards typically vest over either two years or four years from the grant date and expire ten years from the grant date.

The fair value of each option is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. The expected term of options represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods during the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected stock price volatility assumption is based on the historical volatilities of a peer group of publicly traded companies as well as the historical volatility of the Company's common stock since the Company began trading subsequent to its IPO in June 2018 over the period corresponding to the expected life as of the grant date. The expected dividend yield is based on the expected annual dividend as a percentage of the market value of the Company’s ordinary shares as of the grant date. The Company uses historical data to estimate employee terminations within the valuation model.

The fair value of stock options granted was estimated with the following weighted average assumptions:
 
Six Months Ended June 30,
 
2019
 
2018
Expected term (years)
6.0

 
6.0

Risk-free interest rate
1.76
%
 
2.77
%
Expected volatility
58.50
%
 
63.22
%
Expected dividends

 

  

12


XERIS PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
June 30, 2019
(unaudited)




Stock option activity for employee awards under the 2011 Plan, 2018 Plan and Inducement Plan for the six months ended June 30, 2019 was as follows:
 
Options
 
Weighted
Average
Exercise Price  
 
Weighted
Average
Contractual 
Life (Years)  
Outstanding - January 1, 2019
3,127,308
 
$
8.06

 
8.69
Granted
1,391,380
 
12.49

 
 
Exercised and vested
(102,330)
 
1.78

 
 
Forfeited
(118,845)
 
11.99

 
 
Outstanding - June 30, 2019
4,297,513
 
$
9.45

 
8.60
Exercisable - June 30, 2019
2,260,381
 
$
4.63

 
7.40
Vested and expected to vest at June 30, 2019
4,039,662
 
$
9.49

 
8.60

The weighted average fair value of awards granted to employees during the six months ended June 30, 2019 was $6.34 per share. The total intrinsic value of options exercised during the six months ended June 30, 2019 was $1.0 million. The aggregate intrinsic value of awards vested and expected to vest as of June 30, 2019 was $16.3 million.

The Company also granted stock options to non-employees under the 2011 Plan and 2018 Plan. These awards are marked to fair value at the end of each reporting period until they vest. Stock option activity for these awards for the six months ended June 30, 2019 was as follows:  
 
Options
 
Weighted
Average
Exercise Price  
 
Weighted
Average
Contractual 
Life (Years)  
Outstanding - January 1, 2019
3,392
 
$
1.55

 
2.00
Granted
12,500
 
13.88

 
 
Exercised and vested
(702)
 
1.55

 
 
Outstanding - June 30, 2019
15,190
 
$
11.70

 
8.25
Exercisable - June 30, 2019
0
 
$
0.00

 
0.00
Vested and expected to vest at June 30, 2019
14,278
 
$
11.70

 
8.25

The aggregate intrinsic value of non-employee awards vested and expected to vest at June 30, 2019 was $25,000. The aggregate intrinsic value of awards exercisable as of June 30, 2019 was $0. The company recognized expense associated with these awards of $4,000 and $50,000 for the three months ended June 30, 2019 and 2018, respectively. The company recognized expense associated with these awards of $8,000 and $57,000 for the six months ended June 30, 2019 and 2018, respectively.

Restricted stock unit ("RSU") awards for the six months ended June 30, 2019 were as follows:
 
Units
Unvested balance - January 1, 2019
0
Granted
125,000
Unvested balance - June 30, 2019
125,000

Restricted stock unit awards are measured based on the fair market value of the underlying stock on the date of grant and recognized as expense on a straight-line basis over the employee’s requisite service period (generally the vesting period). As of June 30, 2019 there was $1.3 million of unrecognized stock-based compensation expense related to RSUs, which is expected to be recognized over the weighted-average remaining vesting period of 3.5 years.

13


XERIS PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
June 30, 2019
(unaudited)




The following table summarizes the reporting of total stock-based compensation expense resulting from employee and non-employee stock options:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Research and development
$
300

 
$
161

 
$
495

 
$
282

Selling, general and administrative
1,401

 
200

 
2,353

 
323

Total stock-based compensation expense
$
1,701

 
$
361

 
$
2,848

 
$
605


At June 30, 2019, there was a total of $16.4 million of unrecognized stock-based compensation expense related to stock options that is expected to be recognized over a weighted average period of 2.91 years.
     
Note 10. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:

Level 1: Measured using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Measured using quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Measured based on prices or valuation models that required inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity).

Fair value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values stated below takes into account the market for its financial assets and liabilities, the associated credit risk and other factors as required. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.


14


XERIS PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
June 30, 2019
(unaudited)




The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value as of June 30, 2019 and December 31, 2018:
(in thousands)
 
Total as of
June 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
 

 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
 
     Money market funds
 
$
66,669

 
$
66,669

 
$

 
$

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
     U.S. government securities
 
$
41,321

 
$
41,321

 
$

 
$

     Corporate securities
 
4,988

 

 
4,988

 

     Agency securities
 
10,334

 

 
10,334

 

     Commercial paper
 
1,198

 
1,198

 

 

        Total short-term investments
 
$
57,841

 
$
42,519

 
$
15,322

 
$

 
 
 
 
 
 
 
 
 
Other Current Liabilities
 
 
 
 
 
 
 
 
Warrant liabilities
 
$
403

 
$

 
$

 
$
403


(in thousands)
 
Total as of
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
 
     Money market funds
 
$
45,716

 
$
45,716

 
$

 
$

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
     U.S. government securities
 
$
38,737

 
$
38,737

 
$

 
$

     Corporate securities
 
15,066

 

 
15,066

 

     Agency securities
 
11,931

 

 
11,931

 

     Commercial paper
 
1,183

 
1,183

 

 

        Total short-term investments
 
$
66,917

 
$
39,920

 
$
26,997

 
$

 
 
 
 
 
 
 
 
 
Other Current Liabilities
 
 
 
 
 
 
 
 
Warrant liabilities
 
$
860

 
$

 
$

 
$
860


The fair value of the Company’s warrant liabilities is based on a Black-Scholes valuation which considers the expected term of the warrants as well as the risk-free interest rate and expected volatility of the Company's common stock.

The Company has determined that the warrant liabilities' fair values are Level 3 items within the fair value hierarchy. The following table presents the changes in the warrant liabilities:
(in thousands)
 
Balance at December 31, 2018
$
860

Exercise of warrants
(13)

Change in fair value of warrants
(444)

Balance at June 30, 2019
$
403


There were no transfers between any of the levels of the fair value hierarchy during the six months ended June 30, 2019.

15


XERIS PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
June 30, 2019
(unaudited)





Note 11. Short-Term Investments

The Company classifies its investments in debt securities as short-term investments and available-for-sale. Debt securities are comprised of highly liquid investments with minimum “A” rated securities and, as of June 30, 2019, consist of U.S. Treasury and agency bonds and corporate entity commercial paper and securities with maturities of more than three months but less than one year at the date of purchase. Debt securities as of June 30, 2019 had an average remaining maturity of 0.39 years. The debt securities are reported at fair value with unrealized gains or losses recorded in accumulated other comprehensive gain (loss) in the condensed balance sheets. Any differences between the cost and fair value of investments are represented by unrealized gains or losses. Refer to Note 10, "Fair Value Measurements," of the notes to condensed financial statements for information related to the fair value measurements and valuation methods utilized.

The following table represents the Company’s available-for-sale short-term investments by major security type as of June 30, 2019:
(in thousands)
 
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Total
Fair Value
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
     Agency securities
 
$
10,330

 
$
4

 
$

 
$
10,334

     Commercial paper
 
1,198

 

 

 
1,198

     Corporate securities
 
4,981

 
7

 

 
4,988

     U.S. government securities
 
41,263

 
59

 
(1
)
 
41,321

        Total short-term investments
 
$
57,772

 
$
70

 
$
(1
)
 
$
57,841

 
 
 
 
 
 
 
 
 

The Company reviews available-for-sale investments for other-than-temporary impairment loss quarterly. The Company considers factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For debt securities, we also consider whether (i) it is more likely than not that the Company will be required to sell the debt securities before recovery of their amortized cost basis and (ii) the amortized cost basis cannot be recovered as a result of credit losses. During the quarter ended June 30, 2019, the Company did not recognize any other-than-temporary impairment losses. All marketable securities with unrealized losses have been in a loss position for less than twelve months.

Note 12. Net Loss Per Common Share

Basic and diluted net loss per common share is determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period. For all periods presented, the outstanding shares of preferred stock, warrants, stock option awards and restricted stock units have been excluded from the calculation because their effects would be anti-dilutive. Therefore, the weighted average common shares outstanding used to calculate both basic and diluted loss per common share are the same.

The following potentially dilutive securities were excluded from the computation of diluted weighted average common shares outstanding due to their anti-dilutive effect:
 
As of June 30,
 
2019
 
2018
Vested and unvested stock options
4,312,703

 
2,541,262

Restricted stock units
125,000

 

Warrants
96,999

 
73,651

 
4,534,702

 
2,614,913



16


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statements for Forward-Looking Information

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and with the audited financial statements and the notes to those financial statements included in the Annual Report on Form 10-K filed on March 6, 2019 with the U.S. Securities and Exchange Commission. In addition to financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. All statements in this document other than statements of historical fact are, or could be, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "will," "would," "may," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," and terms of similar meaning are also generally intended to identify forward-looking statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including, without limitation, the regulatory approval of our product candidates, our ability to market and sell our products, if approved, and other factors discussed in Item 1A of Part II of this Quarterly Report on Form 10-Q. Any forward-looking statements contained herein speak only as of the date hereof, and Xeris expressly disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Unless otherwise indicated, references to "Xeris," the "Company," "we," "our" and "us" in this Quarterly Report on Form 10-Q refer to Xeris Pharmaceuticals, Inc.
We are a specialty pharmaceutical company leveraging our novel non-aqueous formulation technology platforms, XeriSolTM and XeriJectTM, to develop and commercialize ready-to-use, injectable and infusible drug formulations. We have developed a ready-to-use, room-temperature stable liquid glucagon formulation that, unlike any currently available products, can be administered without any preparation or reconstitution. Our lead product candidate, GvokeTM, delivers ready-to-use glucagon via a commercially available auto-injector or pre-filled syringe for the treatment of severe hypoglycemia, a potentially life-threatening condition, in people with diabetes. In the United States, we have completed three Phase 3 clinical trials for our Gvoke New Drug Application, or NDA, which we submitted in August 2018 to the U.S. Food & Drug Administration, or the FDA. The FDA set June 10, 2019 as the Prescription Drug User Fee Act, or PDUFA, action goal date for our NDA, which was extended to September 10, 2019. If our NDA is approved at that time, we believe we will have the first ready-to-use, room-temperature stable liquid glucagon formulation that can be administered without any preparation or reconstitution. Additionally, based on our interactions with the European Medicines Agency, or EMA, regarding our development path in Europe, we completed a requisite Phase 3 trial to support our European Marketing Authorization Application, or MAA, which we plan to submit in the second half of 2019. We also are applying our novel ready-to-use, room-temperature stable liquid glucagon formulation for the management of hypoglycemia associated with additional intermittent and chronic conditions with significant unmet medical need. In addition, we are applying our technology platforms to convert other commercially available drugs into ready-to-use, room-temperature stable liquid formulations to address the needs in multiple therapeutic areas and conditions, including epilepsy and diabetes.

We have begun building our commercial organization, including individuals in operations and marketing, in preparation for a commercial launch of Gvoke in the United States in the second half of 2019. Outside the United States we plan to pursue development and commercialization partnerships. We currently contract with third parties for the manufacture, assembly, testing, packaging, storage and distribution of our products.

Since our inception in 2005, we have devoted substantially all of our resources to research and development initiatives, undertaking preclinical studies of our product candidates, conducting clinical trials of our most advanced product candidates, organizing and staffing our company and raising capital. We do not have any products approved for sale and have not generated any revenue from product sales.

We have funded our operations to date primarily with proceeds from the sale of preferred and common stock, debt financing and grant awards received from the National Institutes of Health ("NIH") and other philanthropic organizations. In particular, we have received cash proceeds of $104.9 million from sales of our preferred stock, $98.3 million from our June 2018 initial public offering ("IPO") of our common stock, $35.0 million from drawdowns of the Loan and Security Agreement, $12.9 million from grant awards from the NIH and other philanthropic organizations, and $60.0 million from our February 2019 public offering. In the February 2019 public offering, we sold an aggregate of 5,996,775 shares of our common stock at a price of $10.00 per share, including 116,775 shares sold pursuant to the underwriters’ option to purchase additional shares of common stock. Net proceeds from this public offering were $55.6 million after deducting underwriting discounts and commissions as well as other public offering expenses. The Loan and Security Agreement includes an additional $10.0 million that will be available beginning upon approval of our Gvoke NDA by the FDA until the earlier of September 30, 2019 or the 30th day following NDA approval by the FDA.


17


For the three months ended June 30, 2019 and 2018, we reported net losses of $34.4 million and $13.0 million, respectively. For the six months ended June 30, 2019 and 2018, we reported net losses of $59.7 million and $24.9 million, respectively. We have not been profitable since inception, and, as of June 30, 2019, our accumulated deficit was $180.3 million. In the near term, we expect to continue to incur significant expenses, operating losses and net losses as we:

<    prepare for a potential commercial launch of Gvoke, including hiring our sales force;
<    continue our research and development efforts;
<    seek regulatory approval for new product candidates and product enhancements;
<    hire and retain additional personnel and add operational, financial and management information systems; and
<    continue to operate as a public company.

We do not expect to generate significant product revenue unless or until we obtain marketing approval of, and begin to sell, our product candidates. We expect to continue to seek public equity and debt financing to meet our capital requirements. There can be no assurance that such funding may be available to us on acceptable terms, or at all, or that we will be able to commercialize our product candidates. In addition, we may not be profitable even if we commercialize any of our product candidates.

Components of our Results of Operations

Revenue and Cost of Revenue

Grant income is derived from grants that we received from the NIH and other philanthropic organizations to help bring necessary drugs to the marketplace where there are currently unmet needs. As of June 30, 2019, we are eligible to receive $0.9 million in grants from the NIH and other philanthropic organizations that will help fund our ongoing clinical development for intermittent and chronic glucagon programs as well as our auto-injectable diazepam program for the treatment of epileptic seizures. These awards will be recognized as grant income when we have performed the services as outlined in the grant agreements.

Service revenue is derived from the feasibility studies we perform for third parties to determine whether our XeriSol and XeriJect technologies may enhance the formulation of such parties’ proprietary drugs.

Cost of revenue includes employees’ time, materials and overhead applied to the feasibility studies.

Research and Development Expenses

Research and development expenses consist of expenses incurred in connection with the discovery and development of our product candidates. We recognize research and development expenses as incurred. Research and development expenses that are paid in advance of performance are capitalized until services are provided or goods are delivered. Research and development expenses include:

<
manufacturing scale-up expenses, the cost of acquiring and manufacturing preclinical and clinical trial materials, including manufacturing validation batches, and manufacturing costs for Gvoke in advance of regulatory approval;
<
expenses incurred under agreements with contract research organizations, or CROs, as well as investigative sites and consultants that conduct our preclinical studies and clinical trials;
<    employee-related expenses, which include salaries, benefits and stock-based compensation;
<    laboratory materials and supplies used to support our research activities;
<    allocated expenses for facility-related costs;
<    outsourced product development services; and
<    expenses relating to regulatory activities, including filing fees paid to regulatory agencies.

Research and development activities are central to our business model. We expect to continue to incur significant research and development expenses as we conduct new clinical trials, prepare regulatory filings for our product candidates, and add headcount to support these efforts. In particular, we expect to continue to incur significant research and development expenses in the near term as we (i) complete development and registration of Gvoke in the United States and Europe; (ii) progress our intermittent and chronic glucagon programs for Post-Bariatric Hypoglycemia, Congenital Hyperinsulinism, Hypoglycemia-Associated Autonomic Failure, and Exercise-Induced Hypoglycemia; (iii) advance device development partnering efforts; (iv) continue clinical development for our ready-to-use diazepam rescue pen, including the initiation of a Phase 2 clinical trial; (v) conduct preclinical and clinical work for our Pramlintide-Insulin program; and (vi) continue to advance other pipeline candidates. Our research and development expenses may vary significantly over time due to uncertainties relating to the terms and timing of regulatory approvals and unexpected results of our clinical trials.


18


Selling, General and Administrative Expenses

Selling, general and administrative expenses consist principally of compensation and related personnel costs and stock-based compensation, marketing and selling expenses, professional fees and facility costs not otherwise included in research and development. We expect selling and marketing costs to increase significantly as we prepare for the expected commercial launch of Gvoke in the United States, if approved, including the build out of a sales force in the second half of 2019.

As a public reporting company, we have incurred greater expenses, including increased payroll, legal and compliance, accounting, insurance and investor relations costs. We expect some of these costs to continue to increase in conjunction with our anticipated growth as a public reporting company.

Other Income (Expense)

Other income (expense) consists primarily of interest expense related to our Loan and Security Agreement, interest income earned on short-term deposits and investments, and the change in the fair value of our warrants.

Results of Operations

The following table summarizes our results of operations for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
2019
 
2018
 
$ Change
 
2019
 
2018
 
$ Change
 
 
 
 
Grant income
$
314

 
$
819

 
$
(505
)
 
$
529

 
$
1,029

 
$
(500
)
Service revenue
6

 

 
6

 
39

 
53

 
(14
)
Cost of revenue
23

 

 
23

 
23

 
42

 
(19
)
        Gross profit
297

 
819

 
(522
)
 
545

 
1,040

 
(495
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
     Research and development
19,333

 
8,677

 
10,656

 
32,500

 
17,389

 
15,111

     Selling, general and administrative
15,024

 
4,499

 
10,525

 
27,542

 
7,738

 
19,804

        Expense from operations
34,357

 
13,176

 
21,181

 
60,042

 
25,127

 
34,915

        Loss from operations
(34,060
)
 
(12,357
)
 
(21,703
)
 
(59,497
)
 
(24,087
)
 
(35,410
)
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
     Interest and other income
845

 
238

 
607

 
1,516

 
334

 
1,182

     Interest expense
(1,062
)
 
(562
)
 
(500
)
 
(2,125
)
 
(753
)
 
(1,372
)
     Change in fair value of warrants
(108
)
 
(306
)
 
198

 
444

 
(388
)
 
832

         Total other income (expense)
(325
)
 
(630
)
 
305

 
(165
)
 
(807
)
 
642

         Net loss
$
(34,385
)
 
$
(12,987
)
 
$
(21,398
)
 
$
(59,662
)
 
$
(24,894
)
 
$
(34,768
)




19


Research and Development Expenses

The following table summarizes our research and development expenses by expense category for the three and six months ended June 30, 2019 and 2018:  
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
2019
 
2018
 
$ Change
 
2019
 
2018
 
$ Change
 
 
 
 
 
 
 
 
 
 
Clinical and preclinical studies
$
4,726

 
$
2,165

 
$
2,561

 
$
9,251

 
$
6,038

 
$
3,213

Pharmaceutical process development
11,593

 
4,415

 
7,178

 
17,448

 
7,866

 
9,582

Compensation and related personnel costs
2,714

 
1,936

 
778

 
5,306

 
3,203

 
2,103

Stock-based compensation
300

 
161

 
139

 
495

 
282

 
213

     Total research and development
        expenses
$
19,333

 
$
8,677

 
$
10,656

 
$
32,500

 
$
17,389

 
$
15,111


The following table summarizes our research and development expenses by program for the three and six months ended June 30, 2019 and 2018:  
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
2019
 
2018
 
$ Change
 
2019
 
2018
 
$ Change
 
 
 
 
 
 
 
 
 
 
Gvoke
$
10,652

 
$
3,942

 
$
6,710

 
$
16,950

 
$
9,032

 
$
7,918

Other ready-to-use glucagon programs
2,347

 
773

 
1,574

 
4,640

 
1,770

 
2,870

Additional pipeline programs
1,977

 
528

 
1,449

 
2,643

 
930

 
1,713

Overhead (personnel, facilities and other
   expenses)
4,357

 
3,434

 
923

 
8,267

 
5,657

 
2,610

     Total research and development
        expenses
$
19,333

 
$
8,677

 
$
10,656

 
$
32,500

 
$
17,389

 
$
15,111

 
Research and development expenses increased $10.7 million for the three months ended June 30, 2019 in comparison to the three months ended June 30, 2018. The increase was primarily driven by manufacturing costs for Gvoke prior to FDA approval of $8.2 million and increased expenses associated with our clinical and preclinical trials of $2.6 million.

Research and development expenses increased $15.1 million for the six months ended June 30, 2019 in comparison to the six months ended June 30, 2018. The increase was primarily driven by manufacturing costs for Gvoke prior to FDA approval of $10.6 million, increased expenses associated with our clinical and preclinical trials of $3.2 million; and increased personnel expenses due to additional headcount and other employee-related costs of $2.3 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $10.5 million for the three months ended June 30, 2019 in comparison to the three months ended June 30, 2018. The increase was primarily driven by increases in marketing and selling expenses of $4.7 million, an increase in compensation and related personnel costs of $3.4 million and stock-based compensation expense of $1.1 million due to additional headcount to support commercialization efforts of Gvoke, and increased administrative and legal costs as a result of being a public company of $1.3 million.
 
Selling, general and administrative expenses increased $19.8 million for the six months ended June 30, 2019 in comparison to the six months ended June 30, 2018. The increase was primarily driven by increases in marketing and selling expenses of $9.1 million, an increase in compensation and related personnel costs of $6.9 million and stock-based compensation expense of $1.9 million due to additional headcount to support commercialization efforts of Gvoke, and increased administrative and legal costs as a result of being a public company of $1.9 million.



20


Other Income (Expense)

For the three and six months ended June 30, 2019, interest expense increased $0.5 million and $1.4 million in comparison to the three and six months ended June 30, 2018, respectively, as a result of increased borrowing levels and higher average interest rates. For the three and six months ended June 30, 2019, interest and other income increased $0.6 million and $1.2 million in comparison to the three and six months ended June 30, 2018, respectively, as a result of an increase in cash equivalents and short-term investments related to net proceeds from public equity offerings and debt financing and higher interest rates. In addition, the change in fair value of warrants increased by $0.2 million and $0.8 million for the three and six months ended June 30, 2019 when compared to the three and six months ended June 30, 2018, respectively.

Liquidity and Capital Resources

Our primary uses of cash are to fund research and development of our products, other operating expenses and working capital requirements. Historically, we have funded our operations primarily through private placements of convertible preferred stock, issuance of common stock and debt, and grants awarded from the NIH and other philanthropic organizations. In June 2018, we completed our IPO of 6,555,000 shares of our common stock at a price of $15.00 per share for aggregate net proceeds of $88.9 million after deducting underwriting discounts and commissions as well as other public offering expenses. On February 19, 2019, we completed a public offering and sold an aggregate of 5,996,775 shares of common stock at a price of $10.00 per share, including 116,775 shares of common stock pursuant to the exercise of the underwriters' option to purchase additional shares. Net proceeds from this public offering were $55.6 million after deducting underwriting discounts and commissions as well as other public offering expenses. As of June 30, 2019, we have $0.9 million in awarded unused grants that can be utilized to offset program costs for several of our intermittent and chronic glucagon programs as well as our diazepam program, in accordance with the grant agreements.

Capital Resources and Funding Requirements

We have incurred operating losses since inception, and we have an accumulated deficit of $180.3 million at June 30, 2019. We believe that our cash and cash equivalents and short-term investments, expected revenue from sales of Gvoke, and expected additional borrowing capacity will enable us to sustain operations and capital expenditure requirements through at least the first quarter of 2022. We expect to incur substantial additional expenditures in the near term to support our ongoing activities and the expected commercial launch of Gvoke. Additionally, we expect to incur additional costs as a result of operating as a public company. We expect to continue to incur net losses for the next several years. Our ability to fund our product development and clinical operations, including completion of our planned Phase 2 and Phase 3 clinical trials, as well as commercialization of our product candidates will depend on the amount and timing of cash received from planned financings. Our future capital requirements will depend on many factors, including:

<    the costs, timing and outcome of regulatory review of our Gvoke;
<    the costs, timing and outcomes of clinical trials and regulatory reviews associated with our product candidates;
<    the costs of commercialization activities, including product marketing, sales and distribution;
<
the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;
<    the emergence of competing technologies and products and other adverse marketing developments;
<    the effect on our product development activities of actions taken by the FDA or other regulatory authorities;
<    our degree of success in commercializing Gvoke, if approved; and
<    the number and types of future products we develop and commercialize.

Until we obtain regulatory approval to market our product candidates, if ever, we cannot generate revenues from sales of our products. Even if we are able to sell our products, we may not generate a sufficient amount of product revenues to fund our cash requirements. Accordingly, we may need to obtain additional financing in the future which may include public or private debt and equity financings. There can be no assurance that such funding may be available to us on acceptable terms, or at all, or that we will be able to successfully commercialize our product candidates. The issuance of equity securities may result in dilution to stockholders. If we raise additional funds through the issuance of debt, which may have rights, preferences and privileges senior to those of our common stockholders, the terms of the debt could impose significant restrictions on our operations. The failure to raise funds as and when needed could have a negative impact on our financial condition and ability to pursue our business strategies. If additional funding is not secured when required, we may need to delay or curtail our operations until such funding is received, which would have a material adverse impact on our business prospects and results of operations.


21


Cash Flows
 
Six Months Ended
June 30,
(in thousands)
2019
 
2018
 
 
Net cash used by operating activities
$
(44,191
)
 
$
(22,027
)
Net cash provided (used) by investing activities
9,154

 
(489
)
Net cash provided by financing activities
55,990

 
114,999

Increase in cash and cash equivalents
$
20,953

 
$
92,483

 
The increase in cash used in operating activities for the six-month period ended June 30, 2019 was primarily driven by increased spending in research and development and selling, general and administrative operating expenses. For a discussion regarding the increase in spending, refer to "Results of Operations" included in Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

Cash provided by investing activities for the six-month period ended June 30, 2019 was primarily due to net sales of short-term investments, partially offset by capital expenditures.

Cash provided by financing activities for the six-month period ended June 30, 2019 was primarily due to the net proceeds from the public offering of our common stock of $55.6 million. In the six-month period ended June 30, 2018, cash provided by financing activities was primarily due to net proceeds from the initial public offering of our common stock of $90.7 million, net proceeds from the issuance of long-term debt of $19.8 million and the sale of Series C Preferred Stock of $4.4 million.

Off-Balance Sheet Arrangements

As of June 30, 2019, we had unused letters of credit of $1,083,000 that are primarily used to secure leases.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

Our management’s discussion and analysis of our financial condition and results of operations on our financial statements have been prepared in accordance with generally accepted accounting principles, or GAAP, in the United States. The preparation of these financial statements requires us to make estimates 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 revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including, among others, those related to clinical trial expenses and stock-based compensation. We base our estimates on historical experience and on various other factors we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies," in the notes to condensed financial statements.

New Accounting Standards

Refer to Note 2, "Summary of Significant Accounting Policies," of the notes to condensed financial statements, for a description of recent accounting pronouncements applicable to our financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks have not changed materially from those disclosed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2018.


22


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act") and, based on such evaluation, our principal executive officer and principal financial officer have concluded that the disclosure controls and procedures were effective as of June 30, 2019 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the U.S. Securities and Exchange Commission's ("SEC") rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


23


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings. From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of this report, we do not believe we are party to any claim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

ITEM 1A. RISK FACTORS

Risks Related to our Financial Position and Need for Financing

As a company, we have a limited operating history and no history of commercializing pharmaceutical products and have incurred significant losses since inception. We expect to incur losses over the next several years and may not be able to achieve or sustain revenues or profitability in the future.

We are a clinical-stage pharmaceutical company with a limited operating history. Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We have not generated any product revenues and have financed our operations primarily through private placements of our preferred stock, borrowings under the Loan and Security Agreement that we entered into with Oxford Finance LLC and Silicon Valley Bank, our initial public offering in June 2018, or our IPO, and our public offering in February 2019. We do not expect to generate any product revenues unless one or more of our product candidates receives regulatory approval and is commercialized. We have not yet demonstrated an ability to obtain marketing approvals, manufacture a commercial-scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies prior to regulatory approval of any product candidates, especially pharmaceutical companies such as ours. Any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully commercializing pharmaceutical products. We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business objectives. We will need to transition from a company with a development focus to a company capable of supporting commercial activities. We may not be successful in such a transition. We expect our financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Accordingly, you should not rely upon the results of any quarterly or annual periods as indications of future operating performance.

We have incurred significant losses in every fiscal year since inception. For the six months ended June 30, 2019 and 2018, we reported a net loss of $59.7 million and $24.9 million, respectively. In addition, our accumulated deficit as of June 30, 2019 was $180.3 million. Substantially all our operating losses have resulted from costs incurred in connection with research and development of our product candidates and clinical and regulatory initiatives to obtain approvals for our product candidates.

We expect to continue to incur significant operating expenses as we continue to build our commercial infrastructure, develop, enhance and commercialize new products and incur additional operational and reporting costs associated with being a public company. In particular, we anticipate that we will continue to incur significant expenses as we:
 
<
 
continue our research and development efforts;
 
<
 
seek regulatory approval for new product candidates and product enhancements;
 
<
 
build commercial infrastructure to support sales and marketing for our product candidates;
 
<
 
hire and retain additional personnel and add operational, financial and management information systems; and
 
<
 
continue to operate as a public company.

All of our product candidates are still in development and none have been approved for sale. We submitted a New Drug Application, or NDA, for Gvoke to the U.S. Food and Drug Administration, or FDA, in August 2018. The FDA extended from June 10, 2019 until September 10, 2019 the initial Prescription Drug User Fee Act, or PDUFA, action goal date for our NDA. However, the FDA may not approve Gvoke. Our ability to generate revenue from our product candidates and to transition to profitability and generate positive cash flows is uncertain and depends on the successful development and commercialization of our product candidates. Successful development and commercialization will require achievement of key milestones, including completing clinical trials of our product candidates that are under clinical development, obtaining marketing approval for our product candidates, manufacturing, marketing and selling those

24


products for which we, or any of our future collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of revenues, and if or when we might achieve profitability. We and any future collaborators may never succeed in these activities and, even if we or any future collaborators do, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

Our failure to become and remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. If we continue to suffer losses as we have in the past, investors may not receive any return on their investment and may lose their entire investment.

We have not generated any revenue from our product candidates, including Gvoke, and may never be profitable.

Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any revenue from any of our product candidates. We do not expect to generate significant revenue unless or until we obtain marketing approval of, and begin to sell, our product candidates. We do not expect to commercialize any of our product candidates until the second half of 2019, if ever. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:
 
<
 
obtain marketing approval for our product candidates, including Gvoke;
 
<
 
obtain commercial quantities of our product candidates, if approved, at acceptable cost levels;
 
<
 
commercialize our product candidates, if approved, by developing our own sales force for commercialization in the United States or in other key territories by entering into partnership or co-promotion arrangements with third parties;
 
<
 
set an acceptable price for our product candidates, if approved;
 
<
 
obtain and maintain third-party coverage and adequate reimbursement for our product candidates, if approved; and
 
<
 
achieve an adequate level of market acceptance of our product candidates, if approved, in the medical community and with third-party payors, including placement in accepted clinical guidelines for the conditions for which our product candidates are intended to target.

If any of our product candidates are approved for commercial sale, we expect to incur significant sales and marketing costs as we prepare for its commercialization. Even if we receive marketing approval and expend these costs, our product candidates may not be commercially successful. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate product revenue, we will not become profitable and may be unable to continue operations without continued funding.

We may require additional capital to sustain our business, and this capital may cause dilution to our stockholders and might not be available on terms favorable to us, or at all, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.

Pharmaceutical development is a time consuming, expensive and uncertain process that takes years to complete. In addition, if any of our product candidates are approved, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we may need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce or eliminate our research and development programs. We will be required to expend significant funds in order to commercialize Gvoke, as well as any of our other product candidates that receive marketing approval.

We may be required to obtain further funding through public equity offerings, debt financings, royalty-based financing arrangements, collaborations and licensing arrangements or other sources. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing obtained by us would be senior to our common stock, would likely cause us to incur interest expense, and could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may increase our expenses and make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions and in-licensing opportunities. We may also be required to secure any such debt obligations with some or all of our assets. For example, our Loan and Security Agreement is secured by substantially all of our existing property and assets other than our intellectual property assets, subject to certain exceptions. Our Loan and Security Agreement also contains a negative pledge on intellectual property owned by us, pursuant to which we have agreed not to encumber any of our intellectual property.

If we raise additional funds through collaborations or marketing, distribution or licensing, or royalty-based financing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. Securing financing could require a substantial amount of time and attention from our management

25


and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development and commercialization, if approved, of our product candidates. It is also possible that we may allocate significant amounts of capital toward solutions or technologies for which market demand is lower than anticipated and, as a result, abandon such efforts. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Any of these negative developments could have a material adverse effect on our business, operating results, financial condition and common stock price.

We may not have cash available to us in an amount sufficient to enable us to make interest or principal payments on our indebtedness when due.

Our Loan and Security Agreement provides for term loans of up to an aggregate of $45.0 million, of which $20.0 million was borrowed upon signing. Following submission of an NDA for Gvoke, we drew down an additional $15.0 million in September 2018. We become eligible to draw the remaining $10.0 million if we receive approval of our Gvoke NDA by the FDA before September 30, 2019, and then only available to be drawn until the earlier of September 30, 2019 or the 30th day following NDA approval by the FDA.

All obligations under our Loan and Security Agreement are secured by substantially all of our existing property and assets other than our intellectual property assets, subject to certain exceptions. This debt financing may create additional financial risk for us, particularly if our business or prevailing financial market conditions are not conducive to paying off or refinancing our outstanding debt obligations at maturity.

Failure to satisfy our current and future debt obligations under our Loan and Security Agreement could result in an event of default and, as a result, our lenders could accelerate all of the amounts due. Events of default include our failure to comply with customary affirmative covenants as well as our breach of customary negative covenants in the Loan and Security Agreement. Affirmative covenants include the maintenance of a minimum cash balance equal to the outstanding obligations plus $5.0 million in the event that we maintain one or more permitted accounts at other institutions. Negative covenants include prohibition on the payment of dividends and distributions, certain mergers and change of control events, and restrictions on the incurrence of additional debt. In addition, the occurrence of material adverse changes in the company’s business, including its prospect of repayment of its obligations, could result in an event of default. In the event of an acceleration of amounts due under our Loan and Security Agreement as a result of an event of default, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness while still pursuing our current business strategy. In addition, our lenders could seek to enforce their security interests in any collateral securing such indebtedness.

Risks Related to the Product Development and Regulatory Approval of Our Product Candidates

We are dependent on the success of our glucagon product candidates, particularly Gvoke. We cannot be certain that Gvoke or any of our other product candidates will receive marketing approval. Without marketing approval, we will not be able to commercialize our product candidates or generate product revenues.

We have devoted a significant portion of our financial resources and business efforts to the development of Gvoke. We submitted an NDA for Gvoke in the third quarter of 2018; however, we have not received approval from regulatory authorities to market Gvoke or any other product candidate in any jurisdiction, and it is possible that neither Gvoke nor any other product candidates we may seek to develop in the future will ever obtain the appropriate regulatory approvals necessary for us to commence product sales. The FDA's decision to accept the NDA for filing and set a PDUFA date does not indicate that it has made any decision regarding approval nor does it guarantee approval by September 10, 2019, if at all. We cannot be certain that Gvoke or any of our other product candidates will receive marketing approval.

The development of a product candidate and issues relating to its approval and marketing are subject to extensive regulation by the FDA in the United States and by comparable regulatory authorities in other countries. We are not permitted to market our product candidates in the United States until we receive approval of an NDA from the FDA. The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions.

NDAs must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each desired indication. NDAs must also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and we may not be successful in obtaining approval. Gvoke is considered to be a drug-device combination product by the FDA, and its NDA will require review and coordination by the FDA’s drug and device centers prior to approval. We cannot predict whether we will obtain regulatory approval to commercialize Gvoke or any of our other product candidates, and we cannot, therefore, predict the timing of any future revenues from

26


these product candidates, if any. Any delay or setback in the regulatory approval or commercialization of any of these product candidates will adversely affect our business.

The FDA has substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. For example, the FDA:
 
<
 
could determine that we cannot rely on the Section 505(b)(2) regulatory pathway for our product candidates;
 
<
 
could determine that the information provided by us was inadequate, contained clinical deficiencies or otherwise failed to demonstrate the safety and effectiveness of Gvoke or any of our product candidates for any indication;
 
<
 
may not find the data from bioequivalence studies and/or clinical trials sufficient to support the submission of an NDA or to obtain marketing approval in the United States, including any findings that the clinical and other benefits of our product candidates outweigh their safety risks;
 
<
 
may disagree with our trial design or our interpretation of data from preclinical studies, bioequivalence studies and/or clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our trials;
 
<
 
may determine that there are unacceptable risks associated with the device component of Gvoke or that there are deficiencies with the information submitted to demonstrate the safety, effectiveness and reliability of the device component;
 
<
 
may determine that we have identified the wrong listed drug or drugs or that approval of our Section 505(b)(2) application for Gvoke or any of our other product candidates is blocked by patent or non-patent exclusivity of the listed drug or drugs or of other previously approved drugs with the same conditions of approval as those of Gvoke or any of our other product candidates (as applicable);
 
<
 
may identify deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we enter into agreements for the manufacturing of our product candidates;
 
<
 
may audit some or all of our clinical research and human factors study sites to determine the integrity of our data and may reject any or all of such data;
 
<
 
may approve our product candidates for fewer or more limited indications than we request, or may grant approval contingent on the performance of costly post-approval clinical trials;
 
<
 
may change its approval policies or adopt new regulations; or
 
<
 
may not approve the labeling claims that we believe are necessary or desirable for the successful commercialization of our product candidates.
 
At our pre-NDA meeting with the FDA in December 2017, we presented the results from our two Phase 3 Gvoke clinical trials that had been completed as of that meeting. Our first Phase 3 clinical trial was a non-inferiority comparison of Gvoke against Eli Lilly’s glucagon determined by an increase in plasma glucose concentration from below 50.0 mg/dL to greater than 70.0 mg/dL within 30 minutes after receiving glucagon. In this trial, Gvoke did not meet a primary endpoint for noninferiority in the intent-to-treat, or ITT, population due to one response failure in excess of the pre-specified threshold of three response failures. In the same trial, two subjects were censored from the modified ITT, or mITT, population because of a clinically significant protocol violation, and the remaining subjects were used for the per-protocol analysis. In accordance with FDA and International Council for Harmonisation guidance for evaluation of non-inferiority studies, we presented a series of analyses implementing ITT, mITT, and per-protocol cohorts for all the endpoints for this clinical trial to the FDA at this pre-NDA meeting. In that meeting, the FDA agreed overall that the totality of data for Gvoke is sufficient to support NDA review. However, certain of our analyses may be viewed as post-hoc analyses, and although we believe that post-hoc analyses can provide additional information regarding results from this trial, retrospective analyses can result in the introduction of bias and may be given less weight by the FDA, including for purposes of determining whether to approve our NDA.

The FDA provided additional comments to address prior to NDA submission related to the pre-filled syringe presentation of our ready-to-use glucagon, or Gvoke PFS. Based on these comments, we conducted additional studies, the results from which were included in our Gvoke submission to the FDA.

In order to generate additional information regarding the entire treatment episode, we completed an additional non-inferiority Phase 3b clinical trial in the second quarter of 2018 comparing Gvoke to Eli Lilly’s glucagon, the results of which were included in our NDA submission. Even though we completed this Phase 3b clinical trial, the FDA or other regulatory authorities may require us to conduct additional clinical trials prior to approval.

Even if a product is approved, the FDA may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials and/or reporting as conditions of approval. Regulators of other countries and jurisdictions have their own procedures for approval of product candidates with which we must comply prior to marketing in those countries or jurisdictions.

Obtaining regulatory approval for marketing of a product candidate in one country does not ensure that we will be able to obtain regulatory approval in any other country. In addition, delays in approvals or rejections of marketing applications in the United States or other countries

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may be based upon many factors, including regulatory requests for additional analyses, reports, data, preclinical studies and clinical trials, regulatory questions regarding different interpretations of data and results, changes in regulatory policy during the period of product development and the emergence of new information regarding our product candidates or other products. Also, regulatory approval for any of our product candidates may be withdrawn.
 
We intend to utilize the 505(b)(2) pathway for the regulatory approval of certain of our product candidates, including Gvoke. If the FDA does not conclude that Gvoke or such other product candidates meet the requirements of Section 505(b)(2), final marketing approval of our product candidates by the FDA or other regulatory authorities may be delayed, limited, or denied, any of which would adversely affect our ability to generate operating revenues.

We are pursuing a regulatory pathway pursuant to Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or FDCA, for the approval of certain of our product candidates, including Gvoke, which allows us to rely on submissions of existing clinical data for the drug. Section 505(b)(2) was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Amendments, and permits the submission of an NDA where at least some of the information required for approval comes from preclinical studies or clinical trials not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The FDA interprets Section 505(b)(2) of the FDCA to permit the applicant to rely upon the FDA’s previous findings of safety and efficacy for an approved product. The FDA requires submission of information needed to support any changes to a previously approved drug, such as published data or new studies conducted by the applicant or clinical trials demonstrating safety and efficacy. The FDA could require additional information to sufficiently demonstrate safety and efficacy to support approval.

If the FDA determines that Gvoke or our other product candidates do not meet the requirements of Section 505(b)(2), we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatory approval. In March 2010, President Obama signed into law legislation creating an abbreviated pathway for approval under the Public Health Service Act, or PHS Act, of biological products that are similar to other biological products that are approved under the PHS Act. The legislation also expanded the definition of biological product to include proteins such as insulin. The new law contains transitional provisions governing protein products such as insulin, that, under certain circumstances, might permit companies to seek approval for their insulin products as biologics under the PHS Act and might require that our XeriSol pramlintide-insulin co-formulation be approved under the PHS Act rather than in a 505(b)(2) NDA. In addition, if any of our product candidates are approved under Section 505 of the FDCA as of the March 23, 2020 transition date and are then “deemed to be a license” for the biological product under section 351 of the PHS Act, we could lose certain unexpired exclusivities and this could materially harm our business. If our product candidates do not meet the requirements of Section 505(b)(2) or are otherwise ineligible for approval via the Section 505(b)(2) pathway, the time and financial resources required to obtain FDA approval for these product candidates, and the complications and risks associated with these product candidates, would likely substantially increase. Moreover, an inability to pursue the Section 505(b)(2) regulatory pathway would likely result in new competitive products reaching the market more quickly than our product candidates, which would likely materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, we cannot assure you that our product candidates will receive the requisite approvals for commercialization.

Some pharmaceutical companies and other actors have objected to the FDA’s interpretation of Section 505(b)(2) to allow reliance on the FDA’s prior findings of safety and effectiveness. If the FDA changes its interpretation of Section 505(b)(2), or if the FDA’s interpretation is successfully challenged in court, this could delay or even prevent the FDA from approving any Section 505(b)(2) application that we submit. Moreover, the FDA adopted an interpretation of the three-year exclusivity provisions whereby a 505(b)(2) application can be blocked by exclusivity even if it does not rely on the previously approved drug that has exclusivity (or any safety or effectiveness information regarding that drug). Under the FDA’s new interpretation, the approval of one or more of our product candidates may be blocked by exclusivity awarded to a previously-approved drug product that shares certain innovative features with our product candidates, even if our 505(b)(2) application does not identify the previously-approved drug product as a listed drug or rely upon any of its safety or efficacy data. Any failure to obtain regulatory approval of our product candidates would significantly limit our ability to generate revenues, and any failure to obtain such approval for all of the indications and labeling claims we deem desirable could reduce our potential revenues.

Clinical failure may occur at any stage of clinical development, and the results of our clinical trials may not support our proposed indications for our product candidates. If our clinical trials fail to demonstrate efficacy and safety to the satisfaction of the FDA or other regulatory authorities, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development of such product candidate.

We cannot be certain that existing clinical trial results will be sufficient to support regulatory approval of our product candidates. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and preclinical testing. Moreover, success in clinical trials in a particular indication does not ensure that a product candidate will be successful in other indications. A number of companies in the pharmaceutical industry have suffered significant setbacks in clinical trials, even after promising results in earlier preclinical studies or clinical trials or successful later-stage trials in other related indications. These setbacks have been caused by, among other things, preclinical

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findings made while clinical trials were underway and safety or efficacy observations made in clinical trials, including previously unreported adverse events. The results of preclinical and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical and initial clinical trials. A failure of a clinical trial to meet its predetermined endpoints would likely cause us to abandon a product candidate and may delay development of any other product candidates. Any delay in, or termination of, our clinical trials will delay the submission of the applicable NDA to the FDA, the Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, or other similar applications with other relevant foreign regulatory authorities and, ultimately, our ability to commercialize our product candidates and generate revenue.

Additional time may be required to obtain regulatory approval for our product candidates because they are combination products.

Certain of our product candidates, including Gvoke, are drug and device combination products that require coordination within the FDA and similar foreign regulatory agencies for review of their device and drug components. Medical products containing a combination of new drugs, biological products or medical devices may be regulated as “combination products” in the United States and Europe. A combination product generally is defined as a product comprised of components from two or more regulatory categories (e.g., drug/device, device/biologic, drug/biologic). Each component of a combination product is subject to the requirements established by the FDA for that type of component, whether a new drug, biologic or device. In order to facilitate pre-market review of combination products, the FDA designates one of its centers to have primary jurisdiction for the pre-market review and regulation of the overall product based upon a determination by the FDA of the primary mode of action of the combination product. Where approval of the drug and device is sought under a single application, there could be delays in the approval process due to the increased complexity of the review process and the lack of a well-established review process and criteria. The EMA has a parallel review process in place for combination products, the potential effects of which in terms of approval and timing could independently affect our ability to market our combination products in Europe.

Delays in conducting clinical trials could result in increased costs to us and delay our ability to obtain regulatory approval for our product candidates.

Any delays in conducting clinical trials and related drug development programs could materially affect our product development costs and delay regulatory approval of our product candidates. We do not know whether planned clinical trials will begin on time, will need to be redesigned, or will be completed on schedule, if at all. A clinical trial can be delayed for a variety of reasons, including:
 
<
 
delays or failures in obtaining regulatory authorization to commence a trial because of safety concerns of regulators relating to our product candidates or similar product candidates, competitive or comparator products or supportive care products or failure to follow regulatory guidelines;
 
<
 
delays or failures in obtaining clinical materials and manufacturing sufficient quantities of the product candidate for use in a trial;
 
<
 
delays or failures in reaching agreement on acceptable terms with prospective study sites or other contract research organizations, or CROs;
 
<
 
delays or failures in obtaining approval of our clinical trial protocol from an institutional review board, or IRB, to conduct a clinical trial at a prospective study site;
 
<
 
receipt by a competitor of marketing approval for a product targeting an indication that our product candidate targets, such that we are not “first to market” with our product candidate;
 
<
 
delays in recruiting or enrolling subjects to participate in a clinical trial, particularly with respect to our product candidates for certain rare indications, including those for which we have obtained, or plan to seek, orphan drug designation;
 
<
 
failure of a clinical trial or clinical investigators to be in compliance with current Good Clinical Practices, or cGCPs;
 
<
 
unforeseen safety issues;
 
<
 
inability to monitor subjects adequately during or after treatment;
 
<
 
difficulty monitoring multiple study sites;
 
<
 
the FDA requiring alterations to any of our study designs, our nonclinical strategy or our manufacturing plans;
 
<
 
failure of our third-party clinical trial managers to satisfy their contractual duties, comply with regulations, or meet expected deadlines; and
 
<
 
determination by regulators that the clinical design of a trial is not adequate.
 
Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a trial, a data safety monitoring board overseeing the clinical trial at issue, or other regulatory authorities due to a number of factors, including:

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<
 
failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
 
<
 
inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities;
 
<
 
unforeseen safety issues, including serious adverse events associated with a product candidate, or lack of effectiveness; and
 
<
 
lack of adequate funding to continue the clinical trial.
 
Further, conducting clinical trials in foreign countries, as we have done and plan to do for certain of our product candidates, presents additional risks that may delay completion of our clinical trials. These risks include the failure of enrolled patients in foreign countries to adhere to clinical protocol as a result of differences in healthcare services or cultural customs, managing additional administrative burdens associated with foreign regulatory schemes, as well as political and economic risks relevant to such foreign countries.

Our product candidates may have undesirable side effects which may delay or prevent marketing approval, or, if approval is received, require them to include safety warnings, require them to be taken off the market or otherwise limit their sales.

Undesirable side effects that may be caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. The range and potential severity of possible side effects from systemic therapies are significant. The results of future clinical trials may show that our product candidates cause undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, and result in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities, or result in marketing approval from the FDA and other regulatory authorities with restrictive label warnings. Recent developments in the pharmaceutical industry have prompted heightened government focus on safety reporting during both pre- and post-approval time periods and pharmacovigilance. Global health authorities may impose regulatory requirements to monitor safety that may burden our ability to commercialize our drug products.

To date, patients treated with our ready-to-use glucagon have experienced drug-related side effects typically observed with glucagon products, including nausea, vomiting and headaches. Results of our trials could reveal a high and unacceptable severity and prevalence of these or other side effects. It is possible that there may be side effects associated with our other product candidates’ use. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects.

Even if any of our product candidates receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by such products:
 
<
 
regulatory authorities may require the addition of labeling statements, including “black box” warnings, contraindications or dissemination of field alerts to physicians and pharmacies;
 
<
 
we may be required to change instructions regarding the way the product is administered, conduct additional clinical trials or change the labeling of the product;
 
<
 
we may be subject to limitations on how we may promote the product;
 
<
 
sales of the product may decrease significantly;
 
<
 
regulatory authorities may require us to take our approved product off the market;
 
<
 
we may be subject to litigation or product liability claims; and
 
<
 
our reputation may suffer.

Any of these events could also prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from the sale of our products.

We have received orphan drug designation for our product candidates with respect to certain indications and intend to pursue such designation for others, but we may be unable to obtain such designation or to maintain the benefits associated with orphan drug status, including market exclusivity, even if that designation is granted.

We have received orphan drug designation from the FDA for four indications for our product candidates, which are our ready-to-use glucagon for Post-Bariatric Hypoglycemia, or PBH, and congenital hyperinsulinism, or CHI, and our ready-to-use diazepam for acute repetitive seizures and Dravet Syndrome. We have also received orphan drug designation from the EMA for Noninsulinoma Pancreatogenous Hypoglycaemia Syndrome, or NIPHS, which includes patients with PBH. We intend to pursue such designation for others in specific orphan indications in which there is an unmet medical need. Under the Orphan Drug Act of 1983, the FDA may designate

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a product candidate as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as having a patient population of fewer than 200,000 individuals in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. Orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages, and user-fee waivers. After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. Although we intend to seek orphan drug designation for certain additional indications, we may never receive such designation. Moreover, obtaining orphan drug designation for one indication does not mean we will be able to obtain such designation for another indication.

If a product that has orphan drug designation subsequently receives the first FDA approval for a particular active ingredient for the disease for which it has such designation, the product is entitled to orphan drug exclusivity. For a product that obtains orphan drug designation on the basis of a plausible hypothesis that it is clinically superior to the same drug that is already approved for the same indication, such as our diazepam for acute repetitive seizures or our ready-to-use glucagon for PBH, in order to obtain orphan drug exclusivity upon approval, clinical superiority of such product to this same drug that is already approved for the same orphan indication must be demonstrated. Orphan drug exclusivity means that the FDA may not approve any other applications, including an NDA, to market the same drug for the same indication for seven years, except in limited circumstances such as if the FDA finds that the holder of the orphan drug exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of patients with the disease or condition for which the drug was designated. Similarly, the FDA can subsequently approve a drug with the same active moiety for the same condition during the exclusivity period if the FDA concludes that the later drug is clinically superior, meaning the later drug is safer, more effective or makes a major contribution to patient care. Even with respect to the indications for which we have received orphan designation, we may not be the first to obtain marketing approval for any particular orphan indication due to the uncertainties associated with developing pharmaceutical products, and thus approval of our product candidates could be blocked for seven years if another company previously obtained approval and orphan drug exclusivity for the same drug and same condition. If we do obtain exclusive marketing rights in the United States, they may be limited if we seek approval for an indication broader than the orphan designated indication and may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to assure sufficient quantities of the product to meet the needs of the relevant patients. Further, exclusivity may not effectively protect the product from competition because different drugs with different active moieties can be approved for the same condition, the same drugs can be approved for different indications and might then be used off-label in our approved indication, and different drugs for the same condition may already be approved and commercially available.

In Europe, the period of orphan drug exclusivity is ten years, although it may be reduced to six years if, at the end of the fifth year, it is established that the criteria for orphan drug designation are no longer met, in other words, when it is shown on the basis of available evidence that the product is sufficiently profitable not to justify maintenance of market exclusivity. We have received orphan drug designation from the EMA for our ready-to-use glucagon for the treatment of CHI and NIPHS, which includes patients with PBH.
 
Our failure to successfully identify, develop and market additional product candidates could impair our ability to grow.

As part of our growth strategy, we intend to identify, develop and market additional product candidates leveraging our formulation technology platforms. We are exploring various therapeutic opportunities for our pipeline programs. We may spend several years completing our development of any particular current or future internal product candidates, and failure can occur at any stage. The product candidates to which we allocate our resources may not end up being successful. While we identified several potential applications of our ready-to-use glucagon, including Gvoke and several intermittent and chronic conditions, there is no guarantee that we will be able to utilize our formulation technology platforms to advance additional product candidates.

In the future, we may be dependent upon pharmaceutical companies, academic scientists and other researchers to sell or license product candidates, approved products or the underlying technology to us. The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or at all.


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In addition, future acquisitions may entail numerous operational and financial risks, including:
 
 
<
 
exposure to unknown liabilities;
 
<
 
disruption of our business and diversion of our management’s time and attention to develop acquired products or technologies;
 
<
 
incurrence of substantial debt, dilutive issuances of securities or depletion of cash to pay for acquisitions;
 
<
 
higher than expected acquisition and integration costs;
 
<
 
difficulty in combining the operations and personnel of any acquired businesses with our operations and personnel;
 
<
 
increased amortization expenses;
 
<
 
impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and
 
<
 
inability to motivate key employees of any acquired businesses.
 
Further, any product candidate that we identify internally or acquire would require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and other regulatory authorities.

Risks Related to the Commercialization and Marketing of our Product Candidates

Our business depends entirely on the success of our product candidates. Even if approved, our product candidates may not be accepted in the marketplace and our business may be materially harmed.

To date, we have expended significant time, resources and effort on the development of our product candidates, and a substantial portion of our resources going forward will be focused on seeking marketing approval for and planning for potential commercialization of our lead product candidate, Gvoke, in the United States. Our business and future success are substantially dependent on our ability to successfully and timely obtain regulatory approval for and commercialize Gvoke. Our other product candidates are in earlier stages of development and subject to the risks of failure inherent in developing drug products. Accordingly, our ability to generate product revenues in the immediate term will depend on our ability to successfully obtain marketing approval for and commercialize Gvoke. Any delay or setback in the regulatory approval or commercialization of any of our product candidates will adversely affect our business.
 
Even if all regulatory approvals are obtained, the commercial success of our product candidates depends on gaining market acceptance among physicians, patients, patient advocacy groups, healthcare payors and the medical community. The degree of market acceptance of our product candidates will depend on many factors, including:
 
<
 
the scope of regulatory approvals, including limitations or warnings contained in a product candidate’s regulatory-approved labeling;
 
<
 
our ability to produce, through a validated process, sufficiently large quantities of our product candidates to permit successful commercialization;
 
<
 
our ability to establish and maintain commercial manufacturing arrangements with third-party manufacturers;
 
<
 
our ability to build and maintain sales, distribution and marketing capabilities sufficient to launch commercial sales of our product candidates;
 
<
 
the acceptance in the medical community of the potential advantages of the product candidate, including with respect to our efforts to increase adoption of our product candidates such as Gvoke by patients and healthcare providers;
 
<
 
the incidence, prevalence and severity of adverse side effects of our product candidates;
 
<
 
the willingness of physicians to prescribe our product candidates and of the target patient population to try these therapies;
 
<
 
the price and cost-effectiveness of our product candidates;
 
<
 
the extent to which each product is approved for use at, or included on formularies of, hospitals and managed care organizations;
 
<
 
any negative publicity related to our or our competitors’ products or other formulations of products that we administer, including as a result of any related adverse side effects;
 
<
 
alternative treatment methods and potentially competitive products;
 
<
 
the potential advantages of the product candidate over existing and future treatment methods;
 
<
 
the strength of our sales, marketing and distribution support; and
 
<
 
the availability of sufficient third-party coverage and reimbursement.




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Additionally, if Gvoke or any of our other product candidates receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by such products, a number of potentially significant negative consequences could result, including:
 
<
 
regulatory authorities may withdraw approvals of such products, require us to take our approved product off the market or ask us to voluntarily remove the product from the market;
 
<
 
regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;
 
<
 
regulatory authorities may impose conditions under a risk evaluation and mitigation strategy, or REMS, including distribution of a medication guide to patients outlining the risks of such side effects or imposing distribution or use restrictions;
 
<
 
we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product;
 
<
 
we may be subject to limitations on how we may promote the product;
 
<
 
sales of the product may decrease significantly;
 
<
 
we may be subject to litigation or product liability claims; and
 
<
 
our reputation may suffer.

If our product candidates are approved but do not achieve an adequate level of acceptance by physicians, patients and third-party payors, we may never generate significant revenue from these products, and our business, financial condition and results of operations may be materially harmed. Even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time if new therapeutics are introduced that are more favorably received than our products or that render our products obsolete, or if significant adverse events occur. If our products do not achieve and maintain market acceptance, we will not be able to generate sufficient revenue from product sales to attain profitability.

The market opportunity for our product candidates may be smaller than we estimate.

The potential market opportunity for our product candidates is difficult to precisely estimate. Our estimates of the potential market opportunity for our product candidates include several key assumptions of the current market size and current pricing for commercially available products and are based on industry and market data obtained from industry publications, studies conducted by us, our industry knowledge, third-party research reports and other surveys. Industry publications and third-party research generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. For example, our projections for the potential size of the market for Gvoke are based on our belief that we would be able to increase the adoption of emergency glucagon products by patients and care providers. While we believe that our internal assumptions are reasonable, if any of these assumptions proves to be inaccurate, then the actual market for our product candidates, including Gvoke, could be smaller than our estimates of our potential market opportunity. If the actual market for our product candidates is smaller than we expect, our product revenue may be limited and it may be more difficult for us to achieve or maintain profitability.

Our company has limited experience marketing and selling drug products and is currently developing an internal sales organization. If we are unable to establish marketing, sales and distribution capabilities or enter into agreements with third parties to market, sell and distribute our product candidates, we may not be able to generate product revenues.

We currently do not have sufficient infrastructure for the sales, marketing or distribution of our product candidates, and the cost of establishing and maintaining such an organization may exceed the benefits of doing so. In order to commercialize our product candidates, we must expand our marketing, sales, distribution, managerial and other non-technical capabilities and/or make arrangements with third parties to perform these services. We intend to establish a sales force to market Gvoke in the United States if we obtain FDA approval. There are significant expenses and risks involved with establishing our own sales and marketing capabilities, including our ability to hire, retain and appropriately incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel, and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of our internal sales, marketing and distribution capabilities could delay any product launch, which would adversely impact the commercialization of our product candidates, including Gvoke. We are building out our commercial organization in anticipation of receiving marketing approval of Gvoke. If the expected commercial launch of Gvoke is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

We cannot be sure that we will be able to hire a sufficient number of sales representatives or that they will be effective at promoting our products that receive regulatory approval, if any. In addition, we will need to commit significant additional management and other resources to establish and grow our sales organization. We may not be able to achieve the necessary development and growth in a cost-effective manner or realize a positive return on our investment. We will also have to compete with other companies to recruit, hire, train and retain sales and marketing personnel.


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Factors that may inhibit our efforts to commercialize our products include: