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Table of Contents
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 June 30, 2020
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 001-36570
___________________________
ZOSANO PHARMA CORPORATION
(Exact name of registrant as specified in its charter)
____________________________
Delaware 45-4488360
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
34790 Ardentech Court
Fremont, CA 94555
(Address of principal executive offices) (Zip Code)
(510) 745-1200
(Registrant’s telephone number, including area code)
___________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueZSANThe Nasdaq Stock 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  x    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  x    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 filerAccelerated filer
Non-accelerated filerSmaller 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  x

As of August 5, 2020, the registrant had a total of 68,583,356 shares of its common stock, $0.0001 par value per share, outstanding.


Table of Contents
Zosano Pharma Corporation
Quarterly Report on Form 10-Q
INDEX
 
Page
1

Table of Contents


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ZOSANO PHARMA CORPORATION
CONDENSED BALANCE SHEETS
(in thousands, except par value and share amounts)
June 30,
2020
December 31,
2019
(unaudited)
 
ASSETS
Current assets:
Cash and cash equivalents
$10,547  $6,316  
Prepaid expenses and other current assets
699  497  
Total current assets
11,246  6,813  
Restricted cash
455  455  
Property and equipment, net
30,712  24,636  
Operating lease right-of-use assets
5,296  5,763  
Other long-term assets
3  3  
Total assets
$47,712  $37,670  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$4,809  $4,356  
Accrued compensation
2,754  2,015  
Build-to-suit obligation, current portion
3,085  4,554  
Operating lease liabilities, current portion
1,228  1,140  
Paycheck Protection Program loan, current portion725    
Other accrued liabilities
3,945  4,172  
Total current liabilities
16,546  16,237  
Build-to-suit obligation, long-term portion, net of debt issuance costs and discount
6,509  6,095  
Operating lease liabilities, long-term portion
5,297  5,931  
Paycheck Protection Program loan, long-term portion888    
Other liabilities
8  15  
Total liabilities
29,248  28,278  
Commitments and contingencies (note 7)


Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued and outstanding as of June 30, 2020 and December 31, 2019
    
Common stock, $0.0001 par value; 250,000,000 shares authorized; 57,245,251 and 23,503,214 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
6  2  
Additional paid-in capital
333,863  308,211  
Accumulated deficit
(315,405) (298,821) 
Total stockholders’ equity
18,464  9,392  
Total liabilities and stockholders’ equity
$47,712  $37,670  
The accompanying notes are an integral part of these condensed financial statements.
2

Table of Contents
ZOSANO PHARMA CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended June 30,Six Months Ended June 30,
 
2020201920202019
Revenue
$  $  $  $  
Operating expenses:
Research and development
4,932  6,640  10,446  13,256  
General and administrative
2,766  2,767  5,848  5,638  
Total operating expenses
7,698  9,407  16,294  18,894  
Loss from operations
(7,698) (9,407) (16,294) (18,894) 
Other income (expense):
Interest income
5  82  15  162  
Interest expense
(190) (35) (396) (76) 
Other income (expense), net(12)   91  22  
Loss before provision for income taxes
(7,895) (9,360) (16,584) (18,786) 
Provision for income taxes
        
Net loss
$(7,895) $(9,360) $(16,584) $(18,786) 
Unrealized gain (loss) on marketable securities, net of tax
  (1)   5  
Comprehensive loss
$(7,895) $(9,361) $(16,584) $(18,781) 
Net loss per common share – basic and diluted
$(0.14) $(0.55) $(0.36) $(1.30) 
Weighted-average shares used in computing net loss per common share – basic and diluted
54,927,408  16,868,643  45,596,713  14,434,365  
The accompanying notes are an integral part of these condensed financial statements.
3

Table of Contents
ZOSANO PHARMA CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
(unaudited)
 Common StockAdditional
Paid-In Capital
  Accumulated  
Deficit
Accumulated
Other
  Comprehensive Income (Loss)
Total
Stockholders’
  Equity  
 SharesAmount
Balance at January 1, 202023,503,214  $2  $308,211  $(298,821) $  $9,392  
Issuance of common stock and Series E warrants in connection with registered direct offering, net11,903,506  1  10,210  —  —  10,211  
Issuance of common stock, Series C and Series D pre-funded warrants, in connection with public offering, net11,992,307  2  8,262  —  —  8,264  
Issuance of common stock upon exercise of Series D pre-funded warrants2,161,539  —  —  —  —  —  
Issuance of common stock upon exercise of Series C warrants2,649,723  —  1,722  —  —  1,722  
Issuance of common stock in connection with at-the-market offering, net2,151,346  —  2,706  —  —  2,706  
Stock-based compensation—  —  364  —  —  364  
Net loss—  —  —  (8,689) —  (8,689) 
Balance at March 31, 202054,361,635  $5  $331,475  $(307,510) $  $23,970  
Issuance of common stock in connection with at-the-market offering, net1,550,231  1  1,160  —  —  1,161  
Issuance of common stock upon exercise of Series C warrants1,333,385  —  867  —  —  867  
Stock-based compensation—  —  361  —  —  361  
Net loss—  —  —  (7,895) —  (7,895) 
Balance at June 30, 202057,245,251  $6  $333,863  $(315,405) $  $18,464  
 
 Common StockAdditional
Paid-In Capital
  Accumulated  
Deficit
Accumulated
Other
  Comprehensive Income (Loss)
Total
Stockholders’
  Equity  
 SharesAmount
Balance at January 1, 201911,973,039  $1  $279,946  $(261,232) $(5) $18,710  
Stock-based compensation—  —  361  —  —  361  
Unrealized gain on marketable securities—  —  —  —  6  6  
Net loss—  —  —  (9,426) —  (9,426) 
Balance at March 31, 201911,973,039  $1  $280,307  $(270,658) $1  $9,651  
Issuance of common stock in connection with public offering5,750,000  1  18,330  —  —  18,331  
Stock-based compensation—  —  386  —  —  386  
Unrealized loss on marketable securities—  —  —  —  (1) (1) 
Net loss—  —  —  (9,360) —  (9,360) 
Balance at June 30, 201917,723,039  $2  $299,023  $(280,018) $  $19,007  
The accompanying notes are an integral part of these condensed financial statements.

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ZOSANO PHARMA CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months Ended June 30,
 20202019
Cash flows from operating activities:
Net loss$(16,584) $(18,786) 
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation725  747  
Change in operating lease right-of-use assets467  399  
Depreciation and amortization517  361  
Effective interest on financing obligations413  442  
Capitalized effective interest(263) (386) 
Accretion of interest on marketable securities
  (42) 
Other  28  
Change in operating assets and liabilities:
Prepaid expenses and other assets(225) (657) 
Accounts payable(1,480) 635  
Accrued compensation and other accrued liabilities533  (904) 
Operating lease liabilities(546) (451) 
Net cash used in operating activities(16,443) (18,614) 
Cash flows from investing activities:
Proceeds from maturities of marketable securities  13,900  
Purchases of marketable securities  (3,476) 
Purchases of property and equipment(4,707) (6,213) 
Net cash (used in) provided by investing activities(4,707) 4,211  
Cash flows from financing activities:
Proceeds from registered direct offering of securities, net of commissions and offering costs10,222    
Proceeds from public offering of securities and exercise of pre-funded Series D warrants, net of commissions and offering costs8,441    
Proceeds from public offering of securities, net of commissions and offering costs  18,472  
Proceeds from issuance of securities in connection with at-the-market offering program, net of commissions and offering costs3,996    
Proceeds from exercise of Series C warrants2,589    
Proceeds from Paycheck Protection Program loan1,610    
Proceeds from build-to-suit obligation, net of issuance costs  2,277  
Principal payments on financing obligations(1,477) (1,234) 
Net cash provided by financing activities25,381  19,515  
Net increase in cash, cash equivalents and restricted cash4,231  5,112  
Cash, cash equivalents and restricted cash at beginning of period6,771  9,595  
Cash, cash equivalents and restricted cash at end of period$11,002  $14,707  
Supplemental cash flow information:
Cash paid for interest$499  $365  
Cash paid for taxes$12  $1  
Non-cash investing and financing activities:
Acquisition of property and equipment under accounts payable and other accrued liabilities$6,044  $5,795  
Unpaid offering costs$445  $142  
Right-of-use assets acquired under finance lease obligations$  $22  
The accompanying notes are an integral part of these condensed financial statements.
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Zosano Pharma Corporation
Notes to Condensed Financial Statements
(unaudited)
1. Organization and Basis of Presentation
The Company
Zosano Pharma Corporation (the “Company”) is a clinical-stage biopharmaceutical company focused on providing rapid systemic administration of therapeutics and other bioactive molecules to patients using its proprietary transdermal microneedle system.
Basis of Presentation
The accompanying condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Regulation S-X. They do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any other subsequent period. These financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2019, included in the Company’s annual report on Form 10-K and filed with the United States Securities and Exchange Commission (“SEC”) on March 13, 2020.
Use of Estimates
The preparation of the accompanying condensed financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the condensed financial statements, and the reported amounts of expenses during the periods reported. Actual results could differ from those estimates.
Liquidity and Substantial Doubt in Going Concern
Since inception, the Company has incurred recurring operating losses and negative cash flows from operating activities, and as of June 30, 2020, had an accumulated deficit of $315.4 million. As of June 30, 2020, the Company had approximately $10.5 million in cash and cash equivalents. Presently, the Company does not have sufficient cash and cash equivalents to enable it to fund its anticipated level of operations and meet its obligations as they become due within twelve months following the date of issuance of this Quarterly Report on Form 10-Q. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective by the SEC on April 16, 2020. This shelf registration statement provides the Company with the ability to issue common stock and other securities as described in the registration statement from time to time up to an aggregate amount of $74.5 million.
On June 8, 2020, the Company entered into a sales agreement with BTIG, LLC, as sales agent (“BTIG”), to establish an at-the-market ("ATM") offering program, under which the Company is permitted to offer and sell, from time to time, shares of common stock having a maximum aggregate offering price of up to $20.0 million. The Company is required to pay BTIG a commission of 3% of the gross proceeds from the sale of shares and also agreed to provide BTIG with customary indemnification rights. During the quarter ended June 30, 2020, the Company issued and sold 1,550,231 shares of its common stock at an average price of $0.91 per share under the ATM program. The aggregate net proceeds were approximately $1.2 million after BTIG's commission of $42,000 and estimated offering expenses. During the period from July 1, 2020 through August 5, 2020, the Company issued and sold 9,266,951 shares of its common stock at an average price of $0.91 per share under the ATM program. The aggregate net proceeds were approximately $8.2 million after BTIG's commission of $253,000. The shares were sold pursuant to the Company’s effective shelf registration statement, the base prospectus filed as part of such registration statement and the prospectus supplement dated June 8, 2020.
On May 27, 2020, the Company entered into the First Amendment to Lease Documents (the “Trinity Amendment”) with Trinity Funding 1, LLC (“Trinity”), which, among other things, extends the term of each lease schedule from a 36-month term to a 42-month term by providing for an interest-only period from May 2020 through October 2020, with principal payments recommencing November 1, 2020. Additionally, the Trinity Amendment removed all end-of-term options other than the option to purchase the equipment at 12% of equipment cost at the end of each 42-month-term.
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On April 21, 2020, the Company executed a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $1.6 million under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (“PPP”) was established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and the maintenance of its payroll levels. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.
On March 4, 2020, the Company entered into a securities purchase agreement with certain institutional investors for the issuance and sale in a registered direct offering (the "March 2020 Offering") of (i) 11,903,506 shares of the Company's common stock and (ii) Series E Warrants to purchase up to a total of 11,903,506 shares of common stock at an offering price of $0.9275 per share and accompanying warrant. The Series E Warrants have an exercise price of $0.8025 per share, are immediately exercisable and will expire five years from the date of issuance. The aggregate net proceeds from the offering were approximately $10.2 million, after deducting the placement agent fees and other offering expenses. During the period from July 1, 2020 through August 5, 2020, Series E Warrants to purchase 350,000 shares of common stock have been exercised at an exercise price of $0.8025 per share for aggregate proceeds of approximately $281,000.
On February 14, 2020, the Company closed an underwritten offering (the "February 2020 Offering") for the issuance and sale of (i) 10,146,154 Class A Units, each consisting of one share of common stock and one Series C Warrant to purchase one share of common stock, at a public offering price of $0.65 per Class A Unit, and (ii) 2,161,539 Class B Units, each consisting of one Series D Pre-Funded Warrant to purchase one share of common stock and one Series C Warrant to purchase one share of common stock, at a public offering price of $0.6499 per Class B Unit. The Series C Warrants have an exercise price of $0.65 per share, are immediately exercisable and will expire five years from the date of issuance. The Series D Pre-Funded Warrants had an exercise price of $0.0001 per share and were fully exercised in connection with the closing of the offering. The Company granted the underwriter a 30-day option to purchase up to an additional 1,846,153 shares of common stock and/or additional Series C Warrants to purchase up to 1,846,153 shares of common stock. The underwriter fully exercised its option to purchase the shares and the Series C Warrants. The aggregate net proceeds from the offering were $8.3 million after deducting underwriting commissions and other offering expenses. As of June 30, 2020, 3,983,108 shares of common stock have been issued pursuant to the exercise of the Series C Warrants at an exercise price of $0.65 per share for aggregate proceeds of $2.6 million. During the period from July 1, 2020 through August 5, 2020, Series C Warrants to purchase 5,571,154 shares of common stock have been exercised at an exercise price of $0.65 per share for aggregate proceeds of approximately $3.6 million.
The Company plans to raise additional funding through equity or debt financings, licensing or collaboration agreements, or strategic alliances with pharmaceutical partners, or any combination of the above. However, there are no assurances that additional funding will be obtained and that the Company will succeed in its future operations. The Company’s inability to obtain required funding in the near future or its inability to obtain funding on favorable terms will have a material adverse effect on its operations and strategic development plan for future growth. If the Company cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and it may have to cease operations.
The Company will continue to evaluate its timelines, strategic needs, and working capital requirements. There can be no assurance that if the Company attempts to raise additional capital, it will be successful in doing so on terms acceptable to the Company, or at all. Further, there can be no assurance that it will be able to gain access and/or be able to execute on securing new sources of funding, new development opportunities, successfully obtain regulatory approvals for and commercialize new products, achieve significant product revenues from its products (if approved), or achieve or sustain profitability in the future.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. Due to the COVID-19 pandemic, there has been uncertainty in the global financial markets and economic conditions. The Company is closely monitoring the impact of the COVID-19 pandemic on its business, including how it will impact its employees, clinical trials and third-party service providers who perform critical services for the Company's business. In addition, the impact of the COVID-19 pandemic on the global financial markets and economic conditions could impact the Company's ability to raise capital through an equity financing, debt financing, a license or collaboration or a combination of such sources of capital, and as a result, its ability to continue as a going concern. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations and financial condition will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it. As of the date of issuance of this Quarterly Report on Form 10-Q, management is not aware of any specific event or circumstances that would require an update to its estimates or a revision of the carrying value of its assets or liabilities. These estimates may change, as new events occur, and additional information is obtained.
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On March 27, 2020, the CARES Act was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company analyzed the provisions of the CARES Act and determined there was no significant impact on the Company's provision for income taxes for the three and six months ended June 30, 2020.
2. Summary of Significant Accounting Policies
Significant Accounting Policies
The Company’s significant accounting policies are included in Note 2. Summary of Significant Accounting Policies to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.
As of June 30, 2020, and December 31, 2019, the Company had restricted cash of approximately $0.5 million consisting of deposits of $0.3 million to secure its building lease until the end of the lease term, a deposit of approximately $0.1 million to a utility provider and $35,000 to secure corporate purchasing cards.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets and as presented as cash, cash equivalents and restricted cash in the statements of cash flows:
June 30, 2020June 30, 2019
(unaudited; in thousands)
Cash and cash equivalents
$10,547  $14,252  
Restricted cash
455  455  
Total
$11,002  $14,707  
Marketable Securities
Marketable securities generally consist of debt securities with original maturities greater than 90 days and remaining maturities of less than one year. Marketable securities with an original maturity greater than one year, if any, would be considered long-term investments. All of the Company's investments are classified as available-for-sale and carried at fair value based upon quoted market price. The change in unrealized gains and losses related to fixed maturity debt securities is reported as a separate component of comprehensive loss in the statements of operations and comprehensive loss and as a separate component of stockholders' equity on the balance sheets. Interest income includes interest, dividends, amortization and accretion of purchase premiums and discounts and realized gains and losses on sales of securities, if any. The cost of securities sold is based on the specific-identification method.
The Company monitors its investment portfolio for potential impairment on a quarterly basis. If the carrying amount of an investment in available-for-sale debt securities exceeds its fair value and the decline in value is determined to be other-than-temporary, an allowance is recorded in the amount that the carrying amount of the security exceeds its fair value and a loss is recognized in operating results for the amount of such decline. If the carrying amount of an investment in marketable securities, other than available-for-sale debt securities, exceeds its fair value and the decline in value is determined to be other-than-temporary, the carrying amount of the security is reduced to fair value and a loss is recognized in operating results for the amount of such decline. In order to determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors, the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, and its intent and ability to hold the security to maturity or expected recovery.
Fair Value Instruments
The Company records its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities.
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Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying values of certain assets and liabilities of the Company, such as cash and cash equivalents and accounts payable approximate fair value due to their relatively short maturities. The carrying value of the Company’s short-term financial obligations approximates their fair value as the terms of the borrowing are consistent with current market rates and the duration to maturity is short. The carrying value of the Company's long-term financial obligations approximates fair value because interest rates approximate market rates that the Company could obtain for debt with similar terms and maturities.
Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, common stock warrants, stock options and restricted stock units ("RSUs") are considered to be potential dilutive securities but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.
The following outstanding common stock equivalents were excluded from the computations of diluted net loss per common share for the periods presented as the effect of including such securities would be antidilutive:
June 30, 2020June 30, 2019
(unaudited)
Warrants to purchase common stock22,345,150  274,524  
Options to purchase common stock2,685,487  1,765,742  
Restricted Stock Units343,442    
Total25,374,079  2,040,266  
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-05, Financial Instruments - Credit Losses, Targeted Transition Relief in May 2019, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments in April 2019, and ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses in November 2018. This new guidance is intended to present credit losses on available-for-sale debt securities as an allowance rather than as a write-down. Entities are required to apply the standards' provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company adopted ASU 2019-05, ASU 2019-04 and ASU 2018-19 effective January 1, 2020. The adoption of this guidance did not have an impact on the Company's financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangible - Goodwill and Other - Internal-Use Software (Subtopic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted ASU 2018-15, Subtopic 350-40 effective January 1, 2020 on a prospective basis. The adoption of this guidance did not have a material impact on the Company's financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The new guidance modifies the disclosure requirements on fair value measurements. The Company adopted Topic 820 effective January 1, 2020 on a modified retrospective basis. The adoption of this guidance did not have a material impact on the Company's financial statement disclosures.
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Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This new guidance simplifies the accounting for income taxes by removing certain exceptions to general principles, clarifying requirements and including amendments to improve consistent application of the guidance. The guidance specifically removes the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, such as discontinued operations or other comprehensive income. The guidance also requires an entity to recognize a franchise tax that is partially based on income as an income-based tax and to account for any other amounts incurred as a non-income based tax. The guidance is effective for the Company beginning January 1, 2021 using a prospective approach. Early adoption is permitted. The Company is evaluating the effect of implementation on its financial statements and disclosures.
3. Cash Equivalents and Investments in Marketable Securities
The following table summarizes the Company's cash equivalents and investments in marketable securities measured at fair value on a recurring basis as of June 30, 2020:
Fair Value Measurements
Total
Quoted prices in active market
Level 1
Significant other observable inputs
Level 2
Significant unobservable inputs
Level 3
(unaudited; in thousands)
Money market funds classified as cash equivalents$7,915  $7,915  $  $  
The Company did not hold any cash equivalents and investments in marketable securities as of December 31, 2019.
4. Balance Sheet Components
The following table summarizes the Company’s prepaid expenses and other current assets for each of the periods presented:
June 30, 2020December 31, 2019
(unaudited; in thousands)(in thousands)
Prepaid insurance$275  $49  
Prepaid software, subscriptions and deferred implementation costs172  61  
Prepaid services167  316  
Deferred offering costs77  65  
Other8  6  
Total
$699  $497  
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The following table summarizes the Company’s property and equipment for each of the periods presented:
June 30, 2020December 31, 2019
(unaudited; in thousands)(in thousands)
Leasehold improvements$24,114  $16,932  
Manufacturing equipment14,220  12,173  
Laboratory and office equipment1,617  1,585  
Right-of-use laboratory and office equipment25  25  
Computer equipment and software138  138  
Right-of-use computer equipment and software29  29  
Construction-in-progress17,909  20,602  
Property and equipment at cost58,052  51,484  
Less: accumulated depreciation property and equipment(27,305) (26,821) 
Less: accumulated amortization right-of-use assets(35) (27) 
Total$30,712  $24,636  
As of June 30, 2020, construction-in-progress included $14.3 million of an asset relating to the build-to-suit arrangement for construction of the Company's commercial coating and primary packaging system, of which capitalized construction period interest was $2.0 million (See Note 6. Debt Financing).
The following table summarizes the Company's depreciation and amortization expense for each of the periods presented:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
(unaudited; in thousands)
(unaudited; in thousands)
Depreciation and amortization expense$345  $197  $517  $361  
The following table summarizes the Company’s other accrued liabilities for each of the periods presented:
June 30, 2020December 31, 2019
(unaudited; in thousands)(in thousands)
Construction-in-progress obligations$3,372  $3,422  
Professional service fees184  206  
Contract manufacturing92  250  
Accrued taxes16  27  
Pre-clinical and clinical studies11  43  
Other270  224  
Total$3,945  $4,172  
5. Leases
Operating Leases
The Company has a non-cancelable operating lease for office, research and development, and manufacturing facilities in Fremont, California through August 31, 2024, with an option to further extend the lease for an additional 60 months subject to certain terms and conditions. The operating lease right-of-use asset and associated lease liability do not consider the option to extend the term after August 31, 2024, as the Company is not reasonably certain of exercising the extension option. The Company entered into a three year, non-cancelable lease for telephone equipment in January 2018.
Per the terms of the agreements, the Company does not have any residual value guarantees, restrictions or covenants. In calculating the present value of the lease payments, the Company utilized its incremental borrowing rate, as the rates implicit in the leases were not readily determinable. The Company accounts for lease and non-lease components separately. The building
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lease includes non-lease components (i.e. common area maintenance) which are charged and paid separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and lease liability but reflected in operating expense in the period incurred.
Finance Leases
The Company leases certain equipment under non-cancelable agreements which expire between 2021 and 2022.
The following table summarizes the components of lease costs for each of the periods presented:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
(unaudited; in thousands)
(unaudited; in thousands)
Operating lease costs$422  $410  $844  $820  
Finance lease costs:
Amortization of finance lease right-of-use assets4  4  8  19  
Interest on finance lease obligations2  3  4  12  
Total$428  $417  $856  $851  

The following table summarizes cash payments for leases for each of the periods presented:
Six Months Ended June 30,
20202019
(unaudited; in thousands)
Operating cash flows from operating leases - cash paid for operating leases$922  $872  
Operating cash flows from finance leases - cash paid for interest$4  $6  
Financing cash flows from finance leases - cash paid for principal$8  $6  

The following table summarizes the lease terms and discount rates for the Company's leases as of June 30, 2020:
Operating leasesFinance leases
(unaudited)
Weighted-average remaining lease term (in years)4.251.40
Weighted average discount rate11 %27 %
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The following table summarizes the Company's annual scheduled lease payments for each year ending December 31, as of June 30, 2020:
Operating leasesFinance leases
(unaudited; in thousands)
Remainder of 2020$939  $13  
20211,909  14  
20221,961  3  
20232,017    
20241,372    
Total undiscounted cash flows8,198  30  
Less: amount representing interest(1,673) (6) 
Present value of lease liabilities$6,525  $24  
Current portion$1,228  $16  
Long-term portion5,297  8  
Total$6,525  $24  
6. Debt Financing
Build-to-Suit Obligation with Trinity

In September 2018, the Company entered into a build-to-suit arrangement with Trinity Capital Fund III, L.P. (the "Agreement”) in order to obtain financing for the third-party construction of the Company's commercial coating and primary packaging system (the "Equipment"). Under the Agreement, Trinity (as successor in interest to Trinity Capital Fund III, L.P.) made available to the Company $14.0 million for equipment costs and associated soft costs ("Total Cost"), with an initial drawdown of $5.0 million and additional drawdowns in increments of not less than $0.5 million. Under the Agreement, each individual drawdown represents a separate financing arrangement with its own term and stated interest rate. Each drawdown is non-cancelable, with no prepayment options. In consideration of the financing arrangement, as collateral, the Company granted Trinity a first-priority lien and security interest in substantially all of the Company's assets. On May 27, 2020, the Company entered into the Trinity Amendment.

The Trinity Amendment, among other things, extends each individual drawdown term from 36 months to 42 months by providing for an interest-only period from May 2020 through October 2020, with principal payments recommencing November 1, 2020. Additionally, the Trinity Amendment removed all end-of-term options other than the option to purchase the equipment at 12% of the Total Cost, which is equal to the drawdown amount (“Purchase Option Fee”), which the Company intends to exercise at the end of each 42-month-term. The transfer of title from Trinity to the Company will occur at the end of the final 42-month-term, provided that the purchase option was executed, and the Purchase Option Fee was paid in full at the end of each 42-month-term. The security interest will terminate on the earlier to occur of (i) the date that falls six (6) months after the delivery and installation of the Equipment or (ii) payment in full of all amounts owed. The Company accounted for the Trinity Amendment as a debt modification under ASC 470-50, as the amended terms were not substantially different from the terms of the Agreement.

The Company determined that it controls the Equipment during the construction period due to its involvement in and its obligations related to the construction of the Equipment. Accordingly, construction costs incurred were recorded as construction-in-progress, a component of property and equipment on the balance sheet, and the Trinity financing obligation was recorded as a build-to-suit obligation on the balance sheet. As of June 30, 2020, the Company had an aggregate commercial coating and primary packaging system construction-in-progress balance of $14.3 million that included $2.0 million of interest related to its build-to-suit obligation.
In connection with the build-to-suit arrangement, the Company issued common stock warrants (“Trinity Warrants”) for a total of 75,000 shares of common stock at an exercise price of $3.5928 per share. The Trinity Warrants will expire on September 25, 2025. Proceeds allocated to the Trinity Warrants based on their relative fair value approximated $243,000 and were recorded as a discount to the initial $5.0 million drawdown under the Trinity financing arrangement and are being amortized as interest over the term of the September 2018 drawdown.
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The Trinity build-to-suit arrangement requires compliance with various affirmative and restrictive covenants in regard to making certain investments and other restricted payments, engaging in mergers or consolidations, and the sale or transfer of certain assets. Failure to comply with any of these covenants, or pay principal, interest or other amounts when due, would constitute an event of default under the applicable agreement. The Company was in compliance with its covenants with respect to the Trinity build-to-suit arrangement as of June 30, 2020.
The following table summarizes the debt obligations as of June 30, 2020 including the amended effective interest rate and maturity dates pursuant to the terms of the Trinity Amendment:
Drawdown DateDrawdown AmountPrincipal Balance Purchase Option FeeDiscount on Purchase Option FeeUnamortized Discounts and Issuance CostsMonthly PaymentMonthly Payment (interest only period)Stated Interest RateAmended Effective Interest RateMaturity Date
(unaudited; in thousands)
09/25/18$5,000  $2,378  $