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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 September 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 November 10, 2020, the registrant had a total of 102,066,218 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)
September 30,
2020
December 31,
2019
(unaudited)
 
ASSETS
Current assets:
Cash and cash equivalents
$43,554 $6,316 
Prepaid expenses and other current assets
615 497 
Total current assets
44,169 6,813 
Restricted cash
455 455 
Property and equipment, net
30,621 24,636 
Operating lease right-of-use assets
5,204 5,763 
Other long-term assets
3 3 
Total assets
$80,452 $37,670 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$1,972 $4,356 
Accrued compensation
1,982 2,015 
Build-to-suit obligation, current portion
4,293 4,554 
Operating lease liabilities, current portion
1,332 1,140 
Paycheck Protection Program loan, current portion201  
Other accrued liabilities
3,394 4,172 
Total current liabilities
13,174 16,237 
Build-to-suit obligation, long-term portion, net of debt issuance costs and discount
5,447 6,095 
Operating lease liabilities, long-term portion
5,058 5,931 
Paycheck Protection Program loan, long-term portion1,416  
Other liabilities
113 15 
Total liabilities
25,208 28,278 
Commitments and contingencies (note 8)


Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued and outstanding as of September 30, 2020 and December 31, 2019
  
Common stock, $0.0001 par value; 250,000,000 shares authorized; 102,066,218 and 23,503,214 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
10 2 
Additional paid-in capital
379,326 308,211 
Accumulated deficit
(324,092)(298,821)
Total stockholders’ equity
55,244 9,392 
Total liabilities and stockholders’ equity$80,452 $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 September 30,Nine Months Ended September 30,
 
2020201920202019
Revenue$ $ $ $ 
Operating expenses:
Research and development
5,824 6,486 16,270 19,742 
General and administrative
2,704 3,071 8,552 8,709 
Total operating expenses
8,528 9,557 24,822 28,451 
Loss from operations
(8,528)(9,557)(24,822)(28,451)
Other income (expense):
Interest income
2 41 17 203 
Interest expense
(165)(281)(561)(357)
Other income (expense), net4 (66)95 (44)
Loss before provision for income taxes
(8,687)(9,863)(25,271)(28,649)
Provision for income taxes
    
Net loss
$(8,687)$(9,863)$(25,271)$(28,649)
Unrealized gain on marketable securities, net of tax   5 
Comprehensive loss
$(8,687)$(9,863)$(25,271)$(28,644)
Net loss per common share – basic and diluted
$(0.11)$(0.55)$(0.45)$(1.84)
Weighted-average shares used in computing net loss per common share – basic and diluted77,883,158 17,832,092 56,437,417 15,579,387 
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 
Issuance of common stock in connection with public offering, net15,937,130 1 20,386 — — 20,387 
Issuance of common stock in connection with at-the-market offering, net11,686,795 1 12,365 — — 12,366 
Issuance of common stock upon exercise of Series C warrants10,003,038 1 6,501 — — 6,502 
Issuance of common stock upon exercise of Series E warrants7,194,004 1 5,772 — — 5,773 
Stock-based compensation— — 439 — — 439 
Net loss— — — (8,687)— (8,687)
Balance at September 30, 2020102,066,218 $10 $379,326 $(324,092)$ $55,244 
The accompanying notes are an integral part of these condensed financial statements.
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ZOSANO PHARMA CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY, continued
(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, 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 
Issuance of common stock in connection with at-the-market offering507,764 — 812 — — 812 
Stock-based compensation— — 423 — — 423 
Net loss— — — (9,863)— (9,863)
Balance at September 30, 201918,230,803 $2 $300,258 $(289,881)$ $10,379 
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)
 Nine Months Ended September 30,
 20202019
Cash flows from operating activities:
Net loss$(25,271)$(28,649)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation1,164 1,170 
Change in operating lease right-of-use assets712 619 
Depreciation and amortization993 518 
Effective interest on financing obligations207 208 
Other 61 
Change in operating assets and liabilities:
Prepaid expenses and other assets(179)(554)
Accounts payable(1,915)1,086 
Accrued compensation and other accrued liabilities(312)(1,108)
Operating lease liabilities(835)(701)
Net cash used in operating activities(25,436)(27,350)
Cash flows from investing activities:
Proceeds from maturities of marketable securities 17,400 
Purchases of marketable securities (3,476)
Purchases of property and equipment(7,711)(10,939)
Net cash (used in) provided by investing activities(7,711)2,985 
Cash flows from financing activities:
Proceeds from public offering of securities, net of commissions and offering costs20,728 18,331 
Proceeds from issuance of securities in connection with at-the-market offering program, net of commissions and offering costs16,266 919 
Proceeds from registered direct offering of securities, net of commissions and offering costs10,135  
Proceeds from exercise of Series C warrants9,091  
Proceeds from public offering of securities and exercise of pre-funded Series D warrants, net of commissions and offering costs8,264  
Proceeds from exercise of Series E warrants5,773  
Proceeds from Paycheck Protection Program loan1,610  
Proceeds from build-to-suit obligation, net of issuance costs 4,550 
Principal payments on financing obligations(1,482)(2,083)
Net cash provided by financing activities70,385 21,717 
Net increase (decrease) in cash, cash equivalents and restricted cash37,238 (2,648)
Cash, cash equivalents and restricted cash at beginning of period6,771 9,595 
Cash, cash equivalents and restricted cash at end of period$44,009 $6,947 
Supplemental cash flow information:
Cash paid for interest$738 $580 
Cash paid for taxes$12 $1 
Non-cash investing and financing activities:
Acquisition of property and equipment under accounts payable and other accrued liabilities$3,237 $3,571 
Capitalized effective interest$353 $410 
Unpaid offering costs$425 $107 
Asset retirement obligation $97 $ 
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 ("System").
The Company filed a 505(b)(2) New Drug Application (“NDA”) for Qtrypta™ (M207) (“Qtrypta”) with the U.S. Food and Drug Administration (“FDA”) on December 20, 2019, and on October 20, 2020, the Company received a Complete Response Letter (“CRL”) from FDA for the NDA. The CRL cited inconsistent zolmitriptan exposure levels observed across clinical pharmacology studies, which had been previously identified in the FDA’s discipline review letter received by the Company in September. Specifically, the CRL noted differences in zolmitriptan exposures observed between subjects receiving different lots of Qtrypta in the Company’s trials and inadequate pharmacokinetic bridging between the lots that made interpretation of some safety data unclear. The CRL referenced unexpected high plasma concentrations of zolmitriptan observed in five study subjects enrolled in the Company’s pharmacokinetic studies. The FDA recommended that the Company conduct a repeat bioequivalence study between three of the lots used during development. The NDA included data on a total of 774 subjects across 5 trials who were administered or dosed with Qtrypta. The CRL noted that additional product quality validation data, which were planned to be submitted following approval, if received, were required to be submitted with the application. In addition, the CRL mentioned that due to U.S. Government and/or Agency-wide restrictions on travel, inspections of the Company’s contract manufacturing facilities were not able to be conducted but would be required before the application may be approved.

The Company does not anticipate realizing product revenues until FDA approves the NDA and the Company begins commercializing Qtrypta, which events may never occur.
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 nine months ended September 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 September 30, 2020, had an accumulated deficit of $324.1 million. As of September 30, 2020, the Company had $43.6 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.
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On August 31, 2020, the Company entered into an underwriting agreement with BTIG, LLC (“BTIG”) pursuant to which the Company issued and sold 15,937,130 shares of its common stock to BTIG at a price of $1.304 per share. The offering closed on September 3, 2020. The Company received net proceeds of approximately $20.4 million after deducting estimated expenses payable by the Company in connection with the offering. 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 August 31, 2020.
On June 8, 2020, the Company entered into a sales agreement with BTIG, as sales agent, to establish an at-the-market offering program (“2020 ATM”), 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 September 30, 2020, the Company issued and sold 11,686,795 shares of its common stock at an average price of $1.09 per share under the 2020 ATM program with aggregate net proceeds of approximately $12.4 million after BTIG's commission and estimated offering expenses of approximately $360,000. During the nine months ended September 30, 2020, the Company issued and sold 13,237,026 shares of its common stock at an average price of $1.07 per share under the 2020 ATM program with aggregate net proceeds of approximately $13.5 million after BTIG's commission and estimated offering expenses of approximately $660,000. 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, extended 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. Principal payments recommenced on 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.
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 the Company's payroll levels. The Company applied for forgiveness of the $1.6 million loan amount and accrued interest on October 4, 2020, however, 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 quarter ended September 30, 2020, Series E Warrants to purchase 7,194,004 shares of common stock were exercised at an exercise price of $0.8025 per share for aggregate proceeds of approximately $5.8 million.
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. During the quarter ended September 30, 2020, Series C Warrants to purchase 10,003,038 shares of common stock were exercised at an exercise price of $0.65 per share for aggregate proceeds of approximately $6.5 million. During the nine months ended September 30, 2020, Series C Warrants to purchase 13,986,146 shares of common stock were exercised at an exercise price of $0.65 per share for aggregate proceeds of approximately $9.1 million.
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On August 19, 2019, the Company entered into a sales agreement with BTIG, LLC, as sales agent (“BTIG”), to establish an at-the-market offering program ("2019 ATM"), under which the Company was permitted to offer and sell, from time to time, shares of common stock having a maximum aggregate offering price of up to $15.0 million. The Company was 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 March 31, 2020, the Company issued and sold 2,151,346 shares of its common stock at an average price of $1.30 per share under the 2019 ATM program. The aggregate net proceeds were approximately $2.7 million after BTIG's commission of $84,000 and other offering expenses. On March 4, 2020, the Company delivered notice of termination of the sales agreement to BTIG. The Company did not incur any penalties as a result of its termination of the sales agreement.
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.
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 nine months ended September 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 September 30, 2020, and December 31, 2019, the Company had restricted cash of approximately $0.5 million primarily consisting of deposits of $0.3 million to secure its building lease until the end of the lease term and a deposit of approximately $0.1 million to a utility provider.
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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:
September 30, 2020September 30, 2019
(unaudited; in thousands)
Cash and cash equivalents$43,554 $6,492 
Restricted cash455 455 
Total$44,009 $6,947 
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 of Financial 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.
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.
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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:
September 30, 2020September 30, 2019
(unaudited)
Warrants to purchase common stock5,148,108 274,524 
Options to purchase common stock2,673,444 1,865,978 
RSUs342,317  
Total8,163,869 2,140,502 
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements

In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-18 Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606, which (1) clarifies that certain transactions between collaborative arrangement participants should be accounted for under ASC Topic 606, Revenue from Contracts with Customers (Topic 606), when the collaborative arrangement participant is a customer in the context of a unit of account, (2) adds unit-of-account guidance in Topic 808 to align with Topic 606 when an entity is assessing whether the collaborative arrangement, or a part of the arrangement, is within the scope of Topic 606, (3) precludes presenting transactions together with revenue when those transactions involve collaborative arrangement participants that are not directly related to third parties and are not customers. The Company adopted ASU 2018-18 in the third quarter of 2020. The adoption of ASU 2018-18 did not have a material impact on the Company's condensed financial statements.

The FASB issued 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 intra period 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.    Master Services Agreement with Eversana
On August 6, 2020, the Company entered into a master services agreement (the “Eversana Agreement”) with Eversana Life Science Services, LLC (“Eversana”) for the commercialization of Qtrypta in the United States, if approved by the FDA. Under the terms of the Eversana Agreement, Eversana and the Company will cooperate to conduct activities over the term of the Eversana Agreement. The Company maintains ownership of the Qtrypta NDA as well as all legal, regulatory and manufacturing responsibilities for Qtrypta. Eversana receives an exclusive right to conduct agreed commercialization activities and will utilize its internal sales organization along with its other commercial capabilities for market access, marketing, distribution and patient support services for Qtrypta. Eversana will receive reimbursement of certain commercialization costs pursuant to a commercialization budget estimated at approximately $250.0 million and a low double digit to mid-teen percentage of product profits when Company net sales of Qtrypta surpass certain costs incurred by the parties pursuant to the commercialization budget.
The term of the Eversana Agreement is five years following the date, if any, that the FDA approves the NDA. Upon expiration or termination of the Eversana Agreement, the Company will retain all profits from product sales consummated after expiration or termination and assume all future corresponding commercialization responsibilities. The Company may terminate the Eversana Agreement if Eversana fails to provide pre-commercial or commercial plans and budgets by specified dates, if the Company decides to discontinue development or commercialization efforts for Qtrypta in the United States (subject to a termination payment if such termination occurs within a specified time period), or upon a change of control of the Company. Either party may terminate the Eversana Agreement if FDA approval is not received by July 31, 2021, if net profits are not realized within a specified time period following commercial launch, for material breach of the Eversana Agreement by the other party that is not cured within a defined time period, for insolvency of the other party, if Qtrypta is subject to a safety recall in the United States or if Qtrypta is not commercially launched within a specified time period after FDA approval of the NDA (other than by reason of the terminating party’s failure to perform its obligations under the Eversana Agreement).
In addition, under the Eversana Agreement, following FDA approval of the NDA, Eversana has agreed to provide a revolving credit facility of up to $5.0 million (the “Credit Facility”) to the Company pursuant to a loan agreement to be entered into between Eversana and the Company on a subsequent date. The loan will bear interest at an annual rate equal to 10.0%, to be paid monthly, and the Company will be able to prepay any amounts borrowed under the Credit Facility at any time without penalty or premium. The Credit Facility will be secured by substantially all of the Company’s assets, subject to prior liens and security interests.
The Company is accounting for the Eversana Agreement as a collaborative arrangement. As of September 30, 2020, no material accruals, expenses, payments, or revenues were recorded by the Company in connection with the Eversana Agreement.
4.    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 September 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$38,417 $38,417 $ $ 
The Company did not hold any cash equivalents and investments in marketable securities as of December 31, 2019.
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5.    Balance Sheet Components
The following table summarizes the Company’s prepaid expenses and other current assets for each of the periods presented:
September 30, 2020December 31, 2019
(unaudited; in thousands)(in thousands)
Prepaid insurance$289 $49 
Prepaid services144 316 
Prepaid software, subscriptions and deferred implementation costs133 61 
Deferred offering costs48 65 
Other1 6 
Total
$615 $497 
The following table summarizes the Company’s property and equipment for each of the periods presented:
September 30, 2020December 31, 2019
(unaudited; in thousands)(in thousands)
Leasehold improvements$24,212 $16,932 
Manufacturing equipment14,532 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-progress17,885 20,602 
Property and equipment at cost58,438 51,484 
Less: accumulated depreciation property and equipment(27,778)(26,821)
Less: accumulated amortization right-of-use assets(39)(27)
Total$30,621 $24,636 
As of September 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 $2.2 million (See Note 7. Debt Financing).
The following table summarizes the Company's depreciation and amortization expense for each of the periods presented:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(unaudited; in thousands)
(unaudited; in thousands)
Depreciation and amortization expense$476 $157 $993 $518 
The following table summarizes the Company’s other accrued liabilities for each of the periods presented:
September 30, 2020December 31, 2019
(unaudited; in thousands)(in thousands)
Construction-in-progress obligations$2,962 $3,422 
Professional service fees239 206 
Pre-clinical and clinical studies16 43 
Contract manufacturing13 250 
Accrued taxes 27 
Other164 224 
Total$3,394 $4,172 
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6.    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 estimates its incremental borrowing rate based on qualitative factors including company specific credit offers, lease term, general economics and the interest rate environment. The Company accounts for lease and non-lease components separately. The building 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.
As of September 30, 2020, the Company had operating leases for manufacturing space at two of its contract manufacturing organizations ("CMOs"). The operating leases are embedded in agreements with these CMOs that include lease and non-lease components. The Company accounts for lease and non-lease components separately and determined the lease and non-lease components of the agreements based upon estimates of relative standalone prices and a residual estimation approach for components that are highly variable or uncertain and where standalone prices were not readily available or estimable. These agreements have initial terms and options to extend that are dependent upon FDA approval of the Company's NDA for Qtrypta. Both agreements have cancellation clauses if the FDA does not approve the NDA for Qtrypta. As the Company does not currently have an intention to cancel the agreements prior to an FDA approval decision, the Company has recorded right-of-use assets and lease liabilities at the present value of the amount in each CMO agreement that was identified as an embedded operating lease. The lease term does not extend past the estimated date of an FDA approval decision, as it is not reasonably certain that the Company would not exercise the cancellation options in the event that Qtrypta was not approved. 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 estimates its incremental borrowing rate based on qualitative factors including company specific credit offers, lease term, general economics and the interest rate environment. Prior to September 30, 2020, any embedded leases within these agreements were not considered long-term and were not separately disclosed as lease commitments, but included as commitments to CMOs in the commitments and contingencies footnote of the financial statements. The establishment of the embedded leases resulted in $153,000 of right-of-use assets and associated lease liabilities and was reflected as a non-cash operating activity in the statement of cash flows as of September 30, 2020.
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 September 30,Nine Months Ended September 30,
2020201920202019
(unaudited; in thousands)
(unaudited; in thousands)
Operating lease costs$422 $422 $1,266 $1,250 
Finance lease costs:
Amortization of finance lease right-of-use assets4 4 12 23 
Interest on finance lease obligations2 3 6 15 
Total$428 $429 $1,284 $1,288 
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The following table summarizes cash payments for leases for each of the periods presented:
Nine Months Ended September 30,
20202019
(unaudited; in thousands)
Operating cash flows from operating leases - cash paid for operating leases$1,388 $1,332 
Operating cash flows from finance leases - cash paid for interest$6 $9 
Financing cash flows from finance leases - cash paid for principal$12 $10 
The following table summarizes the lease terms and discount rates for the Company's leases as of September 30, 2020:
Operating leasesFinance leases
(unaudited)
Weighted-average remaining lease term (in years)3.961.22
Weighted average discount rate11 %26 %
The following table summarizes the maturities of the Company's lease liabilities for each year ending December 31, as of September 30, 2020:
Operating leasesFinance leases
(unaudited; in thousands)
Remainder of 2020$490 $7 
20211,981 14 
20222,045 3 
20232,017  
20241,372  
Total undiscounted cash flows7,905 24 
Less: amount representing interest(1,515)(4)
Present value of lease liabilities$6,390 $20 
Current portion$1,332 $14 
Long-term portion5,058 6 
Total$6,390 $20 
7.    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.
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The Trinity Amendment, among other things, extended each individual drawdown term from 36 months to 42 months by providing for an interest-only period from May 2020 through October 2020. Principal payments recommenced 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 September 30, 2020, the Company had an aggregate commercial coating and primary packaging system construction-in-progress balance of $14.3 million that included $2.2 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.
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 September 30, 2020.
The following table summarizes the debt obligations as of September 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 $600 $(28)$(170)$160 $20 9.43 %24.38 %04/01/22
12/11/182,800 1,566 336 (22)(73)90 13 9.68 %18.25 %07/01/22
06/06/192,300 1,654 276 (31)(100)74 14 9.93 %18.08 %01/01/23
09/13/192,300 1,831 276 (38)(126)74 16 9.93 %18.04 %04/01/23
11/27/191,600 1,354 192 (31)(104)52 12 9.93 %18.16 %06/01/23
Total$14,000 $8,783 $1,680 $(150)$(573)$450 $75 
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The following table summarizes the Company's build-to-suit obligation as of September 30, 2020 (unaudited; in thousands):
Build-to-suit obligation principal amount$8,783 
Build-to-suit obligation Purchase Option Fees at present value1,530 
Less: unamortized Purchase Option Fees(441)
unamortized fair value of free-standing warrants(46)
unamortized debt discount(81)
unamortized debt issuance costs(5)
Build-to-suit obligation, net of debt issuance costs and discount$9,740 
Build-to-suit obligation, current portion$4,293 
Build-to-suit obligation, long-term portion, net of debt issuance costs and discount5,447 
Build-to-suit obligation, net of debt issuance costs and discount$9,740 
The following table summarizes the future minimum payments on the Company’s build-to-suit obligation for each year ending December 31, including payment of principal, interest and Purchase Option Fees as of September 30, 2020:
PrincipalInterestPurchase Option Fee
(unaudited; in thousands)
Remainder of 2020$753 $222 $ 
20214,779 618  
20222,979 189 936 
2023272 8 744 
Total $8,783 $1,037 $1,680 
The following table summarizes interest incurred on the Company's build-to-suit obligation for each of the periods presented:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(unaudited; in thousands)
(unaudited; in thousands)
Build-to-suit obligation, cash interest expense$225 $210 $705 $556 
Build-to-suit obligation, effective interest expense147 159 560 545 
Less: build-to-suit obligation, interest capitalized(217)(109)(746)(841)
Build-to-suit obligation interest expense$155 $260 $519 $260 
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PPP Loan
On April 21, 2020, the Company executed a PPP Note evidencing a PPP Loan in the amount of $1.6 million. The PPP was established under the CARES Act and is administered by the Small Business Association ("SBA"). The Loan was made through Silicon Valley Bank (the “Lender”).
The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan 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 the Company's payroll levels. The Company applied for forgiveness of the entire $1.6 million loan amount and accrued interest on October 4, 2020, utilizing the 24-week covered period allowed by the SBA. The Company submitted its forgiveness application utilizing eligible expenses incurred during a 19-week period from April 22, 2020 through September 1, 2020. The lender reviewed the application and submitted it to the SBA on October 7, 2020 from which time, the SBA has 90 days to review and make a decision on the forgiveness of the loan. No assurance is provided that forgiveness for any portion of the PPP Loan or accrued interest will be obtained.
The Paycheck Protection Flexibility Act of 2020, P.L. 116-142, extended the deferral period for loan payments to either (1) the date that the SBA remits the borrower’s loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period. The Lender has modified the Company’s first payment from November 21, 2020 to September 21, 2021 and if the loan is fully forgiven, the Company is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the Company on or before April 21, 2022, the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The Company is responsible for paying the accrued interest on any amount of the loan that is not forgiven.
The PPP Note contains customary events of default relating to, among other things, payment defaults, providing materially false and misleading representation to the SBA or Lender or breaching the terms of the PPP Note. The occurrence of an event of default may result in the immediate repayment of all amounts outstanding, collection of all amounts owing from the Company or filing suit and obtaining judgment against the Company.
8.    Commitments and Contingencies
Equipment Purchase Commitments
The Company has a remaining commitment of $4.0 million, of which $2.8 million was recorded as a current liability as of September 30, 2020, with an equipment manufacturer for the construction and purchase of a commercial coating and primary packaging system for the production of its product candidate, Qtrypta. The terms of the purchase commitment are contingent upon performance of certain milestones. The Company anticipates that the obligation will be paid within the next 9 months.
Contract Manufacturing Organizations
The Company has a technology transfer agreement and a manufacturing and supply agreement with a CMO to provide services related to the manufacture and commercialization of Qtrypta. During the term of the agreement, the CMO will provide services related to processing, packaging, labeling and storing Qtrypta, in addition to other services such as stability testing, quality control and assurance, and waste disposal.
The agreements call for annual fees of $2.0 million in 2020 escalating to $14.0 million in 2024, to be paid in equal monthly installments. Beginning in 2020, the annual fee includes the production of a defined number of units with an option to purchase additional units at a defined price. The agreement contains negotiated representations and warranties, indemnification, limitations of liability, and other provisions. The initial term of the manufacturing and supply agreement continues until the seventh anniversary of the date on which the Company receives New Drug Application approval of Qtrypta in the United States. As of September 30, 2020, the Company had recorded a right-of-use asset and associated lease liabilities at the present value of the amount of the manufacturing and supply agreement identified as an embedded operating lease (See Note 6. Leases).
The Company may terminate the agreements upon denial of regulatory approvals or if regulatory approvals are withdrawn under certain circumstances. The Company may also elect to terminate the contracts for convenience, which would result in cancellation fees in the amount of 50% of the annual fee due in the year that the contract is terminated, and costs to remove the Company's equipment and restore the CMO's facility. The Company or the CMO may terminate the agreement for the other’s uncured material breach, uncured force majeure or bankruptcy or insolvency-related events.
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The Company has non-cancelable commitments with this CMO for the construction of manufacturing space and technology transfer fees totaling $3.9 million, of which $0.5 million was a current liability on the balance sheet as of September 30, 2020.
On July 31, 2020, the Company entered into an amendment to a Business Understanding Agreement dated September 13, 2018 with a CMO (the “Amended Agreement”). Pursuant to the Amended Agreement, this CMO agreed to provide services related to the manufacture and assembly of a component (the “Product”) of Qtrypta. Under the Amended Agreement, the parties expressed their mutual intent to enter into a commercial supply agreement (“Supply Agreement”) addressing certain of the terms set forth in the Amended Agreement. The Amended Agreement provides that if the Company does not enter into a Supply Agreement with this CMO or ceases to purchase the Product from this CMO prior to reaching a minimum commitment level, then the Company would be required to pay the CMO up to $2.5 million; however, no such payment will be required in the event of this CMO’s material breach. The Company may be required to pay an additional payment of up to $