10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2022

OR

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

Commission File Number 001-36075

 

EVOKE PHARMA, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8447886

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

 

 

420 Stevens Avenue, Suite 370, Solana Beach, CA

 

92075

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (858) 345-1494

 

 

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

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock,
par value $0.0001 per share

EVOK

The Nasdaq Capital Market

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

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

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

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

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

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

As of November 4, 2022, the registrant had 3,343,070 shares of common stock outstanding.

 

 

 


 

Evoke pharma, inc.

Form 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

1

 

Item 1. Financial Statements

 

1

 

Condensed Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021

 

1

 

Condensed Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (Unaudited)

 

2

 

Condensed Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (Unaudited)

 

3

 

Condensed Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (Unaudited)

 

4

 

Notes to Condensed Financial Statements (Unaudited)

 

5

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

13

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

21

 

Item 4. Controls and Procedures

 

21

 

PART II. OTHER INFORMATION

 

21

 

Item 1. Legal Proceedings

 

21

 

Item 1A. Risk Factors

 

22

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

23

 

Item 3. Defaults Upon Senior Securities

 

23

 

Item 4. Mine Safety Disclosures

 

23

 

Item 5. Other Information

 

23

 

Item 6. Exhibits

 

24

 

SIGNATURES

 

25

 

 

 

 

i


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Evoke Pharma, Inc.

Condensed Balance Sheets

 

 

September 30,
2022

 

 

December 31,
2021

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,350,024

 

 

$

9,144,710

 

Accounts receivable, net

 

 

674,970

 

 

 

295,193

 

Prepaid expenses

 

 

 

 

923,746

 

Inventory

 

 

220,304

 

 

 

185,534

 

Other current assets

 

 

11,551

 

 

 

11,551

 

Total current assets

 

 

13,256,849

 

 

 

10,560,734

 

Operating lease right-of-use asset

 

 

153,671

 

 

 

12,428

 

Total assets

 

$

13,410,520

 

 

$

10,573,162

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,020,690

 

 

$

874,028

 

Accrued compensation

 

 

716,993

 

 

 

519,317

 

Operating lease liability

 

 

140,300

 

 

 

12,428

 

Total current liabilities

 

 

1,877,983

 

 

 

1,405,773

 

Long-term liabilities

 

 

 

 

 

 

Operating lease liability, non-current

 

 

13,371

 

 

 

 

Note payable

 

 

5,000,000

 

 

 

5,000,000

 

Accrued interest payable

 

 

986,268

 

 

 

612,295

 

Total long-term liabilities

 

 

5,999,639

 

 

 

5,612,295

 

Total liabilities

 

 

7,877,622

 

 

 

7,018,068

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock, $0.0001 par value; authorized shares - 50,000,000;
  issued and outstanding shares -
3,343,070 and 2,721,373
  at September 30, 2022 and December 31, 2021, respectively

 

 

334

 

 

 

272

 

Additional paid-in capital

 

 

119,376,486

 

 

 

110,977,835

 

Accumulated deficit

 

 

(113,843,922

)

 

 

(107,423,013

)

Total stockholders' equity

 

 

5,532,898

 

 

 

3,555,094

 

Total liabilities and stockholders' equity

 

$

13,410,520

 

 

$

10,573,162

 

 

 

 

See accompanying notes to these unaudited condensed financial statements.

 

 

1


 

Evoke Pharma, Inc.

Condensed Statements of Operations

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

832,100

 

 

$

930,449

 

 

$

1,712,275

 

 

$

1,257,505

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

89,775

 

 

 

58,435

 

 

 

180,310

 

 

 

191,439

 

Research and development

 

 

40,388

 

 

 

81,699

 

 

 

273,582

 

 

 

554,753

 

Selling, general and administrative

 

 

2,614,488

 

 

 

2,635,161

 

 

 

7,334,738

 

 

 

7,115,605

 

Total operating expenses

 

 

2,744,651

 

 

 

2,775,295

 

 

 

7,788,630

 

 

 

7,861,797

 

Loss from operations

 

 

(1,912,551

)

 

 

(1,844,846

)

 

 

(6,076,355

)

 

 

(6,604,292

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness of paycheck protection loan and accrued
         interest

 

 

 

 

 

 

 

 

 

 

 

105,130

 

Interest income

 

 

24,714

 

 

 

1,421

 

 

 

29,419

 

 

 

7,596

 

Interest expense

 

 

(126,027

)

 

 

(126,027

)

 

 

(373,973

)

 

 

(374,024

)

Total other income (expense)

 

 

(101,313

)

 

 

(124,606

)

 

 

(344,554

)

 

 

(261,298

)

Net loss

 

$

(2,013,864

)

 

$

(1,969,452

)

 

$

(6,420,909

)

 

$

(6,865,590

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(0.60

)

 

$

(0.73

)

 

$

(2.09

)

 

$

(2.57

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic and
     diluted net loss per share

 

 

3,343,070

 

 

 

2,711,871

 

 

 

3,077,145

 

 

 

2,669,070

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to these unaudited condensed financial statements.

 

2


 

Evoke Pharma, Inc.

Condensed Statements of Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2022

 

 

2,721,373

 

 

$

272

 

 

$

110,977,835

 

 

$

(107,423,013

)

 

$

3,555,094

 

Stock-based compensation expense

 

 

 

 

 

 

381,061

 

 

 

 

 

381,061

 

Issuance of common stock, net of
       costs of $
3,548

 

 

21,783

 

 

 

2

 

 

 

171,519

 

 

 

 

 

171,521

 

Net loss

 

 

 

 

 

 

 

 

(2,173,665

)

 

 

(2,173,665

)

Balance at March 31, 2022

 

 

2,743,156

 

 

 

274

 

 

 

111,530,415

 

 

 

(109,596,678

)

 

 

1,934,011

 

Stock-based compensation expense

 

 

 

 

 

 

366,924

 

 

 

 

 

366,924

 

     Issuance of common stock net of costs of $145,445

 

 

599,914

 

 

 

60

 

 

 

7,123,395

 

 

 

 

 

7,123,455

 

Net loss

 

 

 

 

 

 

 

 

(2,233,380

)

 

 

(2,233,380

)

Balance at June 30, 2022

 

 

3,343,070

 

 

 

334

 

 

 

119,020,734

 

 

 

(111,830,058

)

 

 

7,191,010

 

Stock-based compensation expense

 

 

 

 

 

 

 

355,752

 

 

 

 

 

355,752

 

Net loss

 

 

 

 

 

 

 

 

(2,013,864

)

 

 

(2,013,864

)

Balance at September 30, 2022

 

 

3,343,070

 

 

$

334

 

 

$

119,376,486

 

 

$

(113,843,922

)

 

$

5,532,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2021

 

 

2,218,496

 

 

$

222

 

 

$

95,670,216

 

 

$

(98,885,061

)

 

$

(3,214,623

)

Stock-based compensation expense

 

 

 

 

 

 

561,348

 

 

 

 

 

561,348

 

Issuance of common stock, net of
       costs of $
1,304,846

 

 

479,166

 

 

 

48

 

 

 

13,070,106

 

 

 

 

 

13,070,154

 

Net loss

 

 

 

 

 

 

 

 

(2,605,495

)

 

 

(2,605,495

)

Balance at March 31, 2021

 

 

2,697,662

 

 

 

270

 

 

 

109,301,670

 

 

 

(101,490,556

)

 

 

7,811,384

 

Stock-based compensation expense

 

 

 

 

 

 

399,411

 

 

 

 

 

399,411

 

Issuance of common stock from
       stock option exercises

 

 

5,618

 

 

 

1

 

 

 

45,453

 

 

 

 

 

45,454

 

Net loss

 

 

 

 

 

 

 

 

(2,290,643

)

 

 

(2,290,643

)

Balance at June 30, 2021

 

 

2,703,280

 

 

 

271

 

 

 

109,746,534.00

 

 

 

(103,781,199

)

 

 

5,965,606

 

Stock-based compensation expense

 

 

 

 

 

 

463,995

 

 

 

 

 

463,995

 

Issuance of common stock, net of
       costs of $
6,421

 

 

18,091

 

 

 

2

 

 

 

313,105

 

 

 

 

 

313,107

 

Net loss

 

 

 

 

 

 

 

 

(1,969,452

)

 

 

(1,969,452

)

Balance at September 30, 2021

 

 

2,721,371

 

 

$

273

 

 

$

110,523,634

 

 

$

(105,750,651

)

 

$

4,773,256

 

See accompanying notes to these unaudited condensed financial statements.

 

3


 

Evoke Pharma, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

Net loss

 

$

(6,420,909

)

 

$

(6,865,590

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Forgiveness of paycheck protection loan and accrued interest

 

 

 

 

 

(105,130

)

Stock-based compensation expense

 

 

1,103,737

 

 

 

1,424,754

 

Non-cash lease expense

 

 

12,428

 

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(379,777

)

 

 

(198,855

)

Prepaid expenses, inventory and other assets

 

 

888,976

 

 

 

1,055,913

 

Accounts payable and other current liabilities

 

 

146,662

 

 

 

(835,632

)

Accrued compensation

 

 

197,676

 

 

 

(205,442

)

Accrued interest expense

 

 

373,973

 

 

 

374,236

 

Operating lease liabilities

 

 

(12,428

)

 

 

 

Milestone payable

 

 

 

 

 

(5,000,000

)

Net cash used in operating activities

 

 

(4,089,662

)

 

 

(10,355,746

)

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

 

 

 

14,375,000

 

Payment of common stock offering costs

 

 

 

 

 

(1,304,846

)

Proceeds from issuance of common stock from ATM

 

 

7,443,969

 

 

 

319,528

 

Payment of common stock offering costs from ATM

 

 

(148,993

)

 

 

(6,421

)

Proceeds from issuance of common stock from exercise of stock options

 

 

 

 

 

45,454

 

Net cash provided by financing activities

 

 

7,294,976

 

 

 

13,428,715

 

Net increase in cash and cash equivalents

 

 

3,205,314

 

 

 

3,072,969

 

Cash and cash equivalents at beginning of period

 

 

9,144,710

 

 

 

8,068,939

 

Cash and cash equivalents at end of period

 

$

12,350,024

 

 

$

11,141,908

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

Operating lease right-of-use assets obtained in exchange for operating lease liabilities

 

$

153,671

 

 

$

 

Forgiveness of paycheck protection loan and accrued interest

 

$

 

 

$

105,130

 

 

See accompanying notes to these unaudited condensed financial statements.

 

 

4


 

Evoke Pharma, Inc.

Notes to Condensed Financial Statements

(Unaudited)

 

1. Organization and Basis of Presentation

Evoke Pharma, Inc. (the “Company”) was incorporated under the laws of the state of Delaware in January 2007. The Company is a specialty pharmaceutical company focused primarily on the development and commercialization of drugs to treat gastroenterological disorders and disease.

Since its inception, the Company has devoted its efforts to developing its sole product, Gimoti® (metoclopramide) nasal spray, the first and only nasally-administered product indicated for the relief of symptoms in adults with acute and recurrent diabetic gastroparesis. On June 19, 2020, the Company received approval from the U.S. Food and Drug Administration (“FDA”) for its 505(b)(2) New Drug Application (“NDA”) for Gimoti. The Company launched U.S. commercial sales of Gimoti in October 2020 through its commercial partner Eversana Life Science Services, LLC (“Eversana”).

The Company’s activities are subject to the significant risks and uncertainties associated with any specialty pharmaceutical company that has launched its first commercial product, including market acceptance of the product and the potential need to obtain additional funding for its operations.

Going Concern

The financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring losses and negative cash flows from operations since inception and expects to continue to incur net losses for the foreseeable future until such time, if ever, that it can generate significant revenues from the sale of Gimoti. As of September 30, 2022, the Company had approximately $12.4 million in cash and cash equivalents. The Company anticipates that it will continue to incur losses from operations due to commercialization activities, including manufacturing Gimoti, conducting the post-marketing commitment single-dose pharmacokinetics (“PK”) clinical trial of Gimoti to characterize dose proportionality of a lower dose strength of Gimoti, and for other general and administrative costs to support the Company’s operations. As a result, the Company believes that there is substantial doubt about its ability to continue as a going concern for one year after the date these financial statements are issued. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.

The Company’s net losses may fluctuate significantly from quarter to quarter and year to year. The Company anticipates that it will be required to raise additional funds through debt, equity or other forms of financing, such as potential collaboration arrangements, to fund future operations and continue as a going concern.

There can be no assurance that additional financing will be available when needed or on acceptable terms. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, and/or suspend or curtail commercialization activities. Any of these actions could materially harm the Company’s business, results of operations, financial condition and future prospects. There can be no assurance that the Company will be able to successfully commercialize Gimoti. Because the Company’s business is entirely dependent on the success of Gimoti, if the Company is unable to secure additional financing, successfully commercialize Gimoti or identify and execute on strategic alternatives for Gimoti, the Company will be required to curtail all of its activities and may be required to liquidate, dissolve or otherwise wind down its operations.

Impact of COVID-19

The Company began its commercial sales of Gimoti with Eversana in October 2020. Due to the COVID-19 pandemic, the Company experienced disruptions to its sales activities, including its efforts to reach physicians and customers. For example, Eversana’s commercialization efforts at the time the Company launched Gimoti were adversely affected by operational restrictions imposed on its sales force from quarantines, travel restrictions and bans, and other governmental restrictions related to COVID-19. As a result of these restrictions, Eversana’s sales force was restricted from conducting in-person interactions with certain physicians and customers and was restricted to conducting Gimoti educational and promotional activities virtually in certain circumstances, which impacted Eversana’s ability to more actively market Gimoti. Starting in the fourth quarter of 2021, certain physician offices began to allow more frequent in-person interactions, which has helped to increase the educational and promotional activities of the sales force. The Company anticipates that it and Eversana will continue to be impacted by the COVID-19 pandemic to some extent.

 

 

5


 

The COVID-19 pandemic has not significantly disrupted the operations of the Company’s third-party suppliers and manufacturers or delayed the Company’s manufacturing timelines of Gimoti, but may negatively impact the Company’s ability to successfully commercialize Gimoti and generate product sales in the future. Further, the COVID-19 pandemic and related mitigation measures have also had an adverse impact on global economic conditions which could have an adverse effect on the Company’s future business and financial condition, including impairing its ability to raise capital when needed.

In March 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted in response to the COVID-19 pandemic. In April 2020, the Company applied for and was approved for a Small Business Administration (“SBA”) loan under the Paycheck Protection Program, established by the CARES Act. On May 1, 2020, the Company received the loan proceeds of approximately $104,000. In January 2021, the Company received notice that its loan and accrued interest were forgiven by the SBA.

Notice of Delisting and Reverse Stock Split

On December 29, 2021, the Company received a letter from Nasdaq indicating that, for the last thirty consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Capital Market.

In accordance with Nasdaq listing rules, the Company was provided an initial period of 180 calendar days, or until June 27, 2022, to regain compliance. The letter stated that Nasdaq will provide written notification that the Company has achieved compliance with its rules if at any time before June 27, 2022 the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of ten consecutive business days. The Nasdaq letter had no immediate effect on the listing or trading of the Company’s common stock and the common stock continued to trade on The Nasdaq Capital Market.

On April 27, 2022, the Company’s stockholders granted the board of directors the authority to effect a reverse stock split of the Company’s outstanding common stock. On May 23, 2022 the Company effected a 1-for-12 reverse stock split of the shares of the Company’s common stock (the “Reverse Stock Split”). The par value and the authorized shares of the common stock were not adjusted as a result of the Reverse Stock Split. All of the Company’s issued and outstanding common stock, warrants to purchase common stock, and options to purchase common stock have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.

On June 7, 2022, the Company received notice from Nasdaq stating that the closing price of the Company’s common stock had been at $1.00 per share or greater for the prior ten consecutive business days and that the Company had regained compliance with the minimum $1.00 per share requirement.

2. Summary of Significant Accounting Policies

The accompanying condensed balance sheet as of December 31, 2021, which has been derived from audited financial statements, and the unaudited interim condensed financial statements, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position and its results of operations and its cash flows for the periods presented. These statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s financial statements and accompanying notes for the year ended December 31, 2021, which are contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2022. The results for interim periods are not necessarily indicative of the results expected for the full fiscal year or any other interim period.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Contract Research Organizations and Consultants

The Company relies on contract research organizations (“CROs”) and consultants to assist with ongoing regulatory activities. If the CROs and consultants are unable to continue their support, this could adversely affect the Company’s operations.

In addition, the Company relies on third-party manufacturers for the production of Gimoti. If the third-party manufacturers are unable to continue manufacturing Gimoti, or if the Company loses one of its sole source suppliers used in its manufacturing processes, the Company may not be able to meet any development needs or commercial supply demand for Gimoti, and the development and/or commercialization of Gimoti could be materially and adversely affected.

The Company also relies on a dedicated third-party sales team to sell Gimoti. If such third-party organization is unable to continue serving as a dedicated sales team, the commercialization of Gimoti could be materially and adversely affected.

6


 

Accounts Receivable

Accounts receivable are recorded net of allowance for doubtful accounts. Estimates for allowances for doubtful accounts are determined based on existing contractual obligations and historical payment patterns. The allowance for doubtful accounts was zero at September 30, 2022 and December 31, 2021 and no bad debt expense was recorded for the three and nine months ended September 30, 2022 and 2021.

Inventory

The Company does not own or operate manufacturing facilities for the production of Gimoti, nor does it plan to develop its own manufacturing operations in the foreseeable future. The Company depends on third-party contract manufacturers for all of its required raw materials, drug substance and finished product for its commercial manufacturing. The Company has agreements with Cosma S.p.A. to supply metoclopramide for the manufacture of Gimoti, and with Thermo Fisher Scientific Inc., through its subsidiary Patheon UK Limited, for the manufacturing of Gimoti. The Company currently utilizes third-party consultants, which it engages on an as-needed, hourly basis, to manage the manufacturing contractors.

Subsequent to FDA approval, the Company began manufacturing Gimoti for commercialization and began capitalizing inventory at that time. The Company’s inventory consisted of approximately $150,000 of raw materials at September 30, 2022 and December 31, 2021, and approximately $71,000 and $35,000 of finished goods inventory at September 30, 2022 and December 31, 2021, respectively. Inventories are stated at the lower of cost (first-in first-out basis) or net realizable value. Inventory at December 31, 2021 was written down by $30,000 due to establishing a reserve for obsolescence, and this inventory was subsequently destroyed. The new cost basis and its value is not to be subsequently increased based upon changes in underlying facts and circumstances. The Company’s raw materials inventory is held at its third-party suppliers and its work-in-process and finished goods inventory is held at its manufacturer and at Eversana. The Company records such inventory as consigned inventory.

Revenue Recognition

The Company’s ability to generate revenue and become profitable depends on its ability to successfully commercialize Gimoti, which was launched in the United States through prescription in October 2020 through the Company’s commercial partner Eversana. If the Company or Eversana fail to successfully grow and maintain sales of Gimoti, the Company may never generate significant revenues and its results of operations and financial position will be adversely affected.

In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, the Company recognizes revenue when a customer obtains control of promised goods in an amount that reflects the consideration the Company expects to receive in exchange for the goods provided. Customer control is determined upon the customer’s physical receipt of the product. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: identify the contracts with the customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) it satisfies a performance obligation. At contract inception, the Company assesses the goods promised within each contract and determines those that are performance obligations and assesses whether each promised good is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when the customer obtains control of the product.

Product sales are recorded at the transaction price, which may include variable considerations for co-payment assistance to commercially insured patients meeting certain eligibility requirements, as well as to uninsured patients. Co-payment assistance is recorded as an offset to gross revenue at the time revenue from the product sale is recognized based on expected and actual program participation. Co-pay liabilities are estimated using prescribing data available from customers. Actual amounts of consideration ultimately received may materially differ from the Company’s estimates. If actual results in the future vary from estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. Liabilities for co-pay assistance of approximately $54,000 and $44,000 at September 30, 2022 and December 31, 2021, respectively, are classified as accounts payable and accrued expenses in the balance sheets.

Stock-Based Compensation

Stock-based compensation expense for stock option grants and employee stock purchases under the Company’s Employee Stock Purchase Plan (the “ESPP”) is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the employee’s requisite service period, except awards with a performance condition. Awards with a performance condition commence vesting when the satisfaction of the performance condition is probable. The estimation of stock option and ESPP fair value requires management to make estimates and judgments about, among other things, employee exercise behavior, forfeiture rates and volatility of the Company’s common stock. The judgments directly affect the amount of compensation expense that will be recognized.

The Company grants stock options to purchase common stock to employees and members of the board of directors with exercise prices equal to the Company’s closing market price on the date the stock options are granted. The risk-free interest rate assumption was based

7


 

on the yield of an applicable rate for U.S. Treasury instruments with maturities similar to those of the expected term of the award being valued. The weighted average expected term of options and employee stock purchases was calculated using the simplified method as prescribed by accounting guidance for stock-based compensation. This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, the estimated volatility was calculated based upon the Company’s historical volatility, supplemented, as necessary, with historical volatility of comparable companies in the biotechnology industry whose share prices are publicly available for a sufficient period of time. The assumed dividend yield was based on the Company never paying cash dividends and having no expectation of paying cash dividends in the foreseeable future. The Company accounts for forfeitures as the forfeitures occur.

Research and Development Expenses

Research and development costs are expensed as incurred and primarily include compensation and related benefits, stock-based compensation expense, costs paid to third-party contractors for product development activities and drug product materials, and technology acquisition milestones. The Company will expense the clinical, regulatory and manufacturing costs related to the post-marketing commitment to conduct a single dose PK clinical trial of Gimoti to characterize dose proportionality of a lower dose strength of Gimoti, as well as other costs that may occur for any additional clinical trials the Company may pursue to expand the indication of Gimoti.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common stock outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common stock and common stock equivalents outstanding for the period determined using the treasury-stock method. Dilutive common stock equivalents are comprised of warrants to purchase common stock, and options to purchase common stock under the Company’s equity incentive plan.

The following table sets forth the outstanding potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to do so would be anti-dilutive for the three and nine months ended September 30, 2022 and 2021:

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Warrants to purchase common stock

 

 

 

 

 

139,972

 

 

 

 

 

 

139,972

 

Common stock options

 

 

491,851

 

 

 

429,194

 

 

 

491,851

 

 

 

429,194

 

Total excluded securities

 

 

491,851