# Liquidia Corp (LQDA) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Liquidia Corp's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1819576/000155837022003850/lqda-20211231x10k.htm
Accession: 0001558370-22-003850
Filing date: 2022-03-17
Report date: 2021-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/LQDA/
All MD&A years: /company/LQDA/mda/
Next year: /company/LQDA/mda/fy2022/ (FY 2022)

Overview

We are a biopharmaceutical company focused on the development, manufacturing and commercialization of products that address unmet patient needs, with current focus directed towards the treatment of pulmonary hypertension (PH). We operate as a single entity through our two wholly owned operating subsidiaries, Liquidia Technologies and Liquidia PAH (formerly known as RareGen).

We generate revenue pursuant to a Promotion Agreement between Liquidia PAH and Sandoz Inc. (“Sandoz”) sharing profit derived from the sale of the first-to-file fully substitutable generic treprostinil injection (“Treprostinil Injection”) in the United States. Liquidia PAH has the exclusive rights to conduct commercial activities to encourage the appropriate use of Treprostinil Injection. We employ a targeted sales force calling on physicians and hospital pharmacies in the treatment of pulmonary arterial hypertension (“PAH”), as well as key stakeholders involved in the distribution and reimbursement of Treprostinil Injection. Strategically, we believe that our commercial presence in the field will enable an efficient base to expand from for the launch of YUTREPIA upon approval, leveraging existing relationships and further validating our reputation as a company committed to supporting PAH patients.

We conduct research, development and manufacturing of novel products by applying our proprietary PRINT® technology, a particle engineering platform, to enable precise production of uniform drug particles designed to improve the safety, efficacy and performance of a wide range of therapies. We have development experience in inhaled therapies, vaccines, biologics, and ophthalmic implants, among others.

Since our inception, we have incurred significant operating losses. Our net loss was $34.6 million and $59.8 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $309.6 million. We expect to incur significant expenses and operating losses for the foreseeable future as we advance product candidates through clinical trials, seek regulatory approval and pursue commercialization of any approved

66

Table of Contents

product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we may incur expenses in connection with the in-license or acquisition of additional product candidates.

Product Pipeline

Our lead product candidate is YUTREPIA for the treatment of PAH. YUTREPIA, is an inhaled dry powder formulation of treprostinil designed to improve the therapeutic profile of treprostinil by enhancing deep lung delivery and achieving higher dose levels than current inhaled therapies while using a convenient, easy-to-use dry-powder inhaler (“DPI”). We received tentative approval of our New Drug Application (“NDA”) for YUTREPIA in November 2021.

Recent Events

Roger Jeff’s Appointment as Chief Executive Officer

Effective January 3, 2022 (the “Jeffs Effective Date”), Roger A. Jeffs, Ph.D. was appointed as our Chief Executive Officer, succeeding Damian deGoa, the former Chief Executive Officer. Dr. Jeffs will also continue to serve as a director on the Board.

In connection with Dr. Jeffs’ appointment, on the Jeffs Effective Date, the Company and Dr. Jeffs entered into an executive employment agreement (the “Jeffs Employment Agreement”) pursuant to which Dr. Jeffs is entitled to an annual base salary of $650,000 and is eligible to receive a discretionary annual cash bonus of up to 50% of his annualized base salary. Dr. Jeffs is also entitled to a quarterly bonus, beginning in 2023 through the end of the last calendar quarter in 2025, equal in the aggregate to the difference (only if positive) between the per share closing price of a share of common stock, $0.001 par value per share, of the Company (“Common Stock”) on the date which the Second Tranche Option (as defined below) is granted minus the per share closing price of Common Stock on the Jeffs Effective Date multiplied by 931,745.

On the Jeffs Effective Date, pursuant to the Jeffs Employment Agreement, Dr. Jeffs was granted a nonstatutory stock option entitling the purchase up to 1,682,827 shares (the “Sign-On Option”) of Common Stock, with an exercise price per share equal to the closing price of a share of Common Stock on the date of grant. Subject to the terms and conditions of the Jeffs Employment Agreement, Dr. Jeffs is also entitled to a grant of a nonstatutory stock option to purchase up to 931,745 shares (the “Second Tranche Option” and together with the Sign-On Option, the “Options”) of Common Stock, with an exercise price per share equal to the closing price of share of Common Stock on the date of grant. The Options shall (i) be granted under and subject to the terms of the Company’s 2020 Long-Term Incentive Plan (the “Plan”) and a form of nonstatutory stock option grant agreement, and (ii) be subject to the following vesting schedule: 25% of the grant will become vested and exercisable on the first anniversary of the Jeffs Effective Date, and the remaining portion of the grant will become vested and exercisable, as applicable, in equal monthly installments over the following thirty-six (36) months, subject to Dr. Jeffs’ continuous employment with the Company on each such vesting date. Notwithstanding the foregoing, in the event of a Change in Control (as defined in the Plan) then 100% of the unvested portion of the Options shall become vested and exercisable as of the closing date of such Change in Control, provided that Dr. Jeffs is actively employed with the Company on such date.

Amended and Restated Loan and Security Agreement

On January 7, 2022 (the “A&R SVB Effective Date”), we entered into an Amended and Restated Loan and Security Agreement with SVB and SVB Innovation Credit Fund VIII, L.P. (“Innovation”) (the “A&R SVB LSA”), which provides us with up to $40.0 million in term loans of which $20.0 million was funded on the A&R SVB Effective Date. The prior SVB LSA had provided up to $20.5 million in term loans of which $10.5 million had been funded as of December 31, 2021 and the A&R SVB Effective Date.

Under the terms of the A&R SVB LSA, SVB will make loans available in three tranches. Proceeds from the first tranche of $20.0 million were used to retire the loans outstanding under the prior SVB LSA and added $9.5 million of cash to the Company’s balance sheet. The first tranche also provides the option of drawing an additional $5.0 million at the

67

Table of Contents

Company’s discretion through December 31, 2022. A second tranche of $7.5 million is available to fund immediately upon receipt of final and unconditional approval for YUTREPIA by December 31, 2022. The third tranche of $7.5 million will be available through August 31, 2023, upon generating trailing six-month net product sales of YUTREPIA of $27.5 million by June 30, 2023. The debt facility will mature on December 1, 2025 and will consist of interest-only payments through December 31, 2023, unless the third tranche milestone is achieved, in which case interest-only payments will continue through December 31, 2024. The outstanding principal amount of the term loans shall accrue interest at a floating rate per annum equal to the greater of (1) seven and one-quarter of one percent (7.25%) and (2) the rate of interest per annum from time to time published in the money rates section of The Wall Street Journal plus four percent (4.0%).

As with the prior SVB LSA, the A&R SVB LSA contains customary affirmative and negative covenants, including but not limited to certain financial covenants, protection of intellectual property rights, the disposition of certain assets, and material adverse changes.

As an inducement to enter into the A&R SVB LSA, the Company issued to each of SVB, Innovation, and Innovation Credit Fund VIII-A L.P. (“Innovation Credit”) certain warrants to purchase shares of the Company’s common stock pursuant to the Warrant to Purchase Stock agreements by and between the Company and each recipient (collectively, the “SVB Warrants”). The grant of warrants under the respective SVB Warrants provided (i) SVB with the initial right to obtain 125,000 shares of the Company’s stock at an exercise price of $5.14 a share, and there is an opportunity for SVB to obtain up to 50,000 more warrants based on certain loans that may be made under the A&R SVB LSA, (ii) Innovation with the initial right to obtain 62,500 shares of the Company’s stock at an exercise price of $5.14 a share, and there is an opportunity for Innovation to obtain up to 25,000 more warrants based on certain loans that may be made under the Loan Agreement, and (iii) Innovation Credit with the initial right to obtain 62,500 shares of the Company’s stock at an exercise price of $5.14 a share, and there is an opportunity for Innovation Credit to obtain up to 25,000 more warrants based on certain loans that may be made under the Loan Agreement. The SVB Warrants provide an option for a cashless exercise.

​

2022 Inducement Plan

On January 25, 2022, the Board approved the adoption of the Company’s 2022 Inducement Plan (the “2022 Inducement Plan”). The 2022 Inducement Plan was recommended for approval by the Compensation Committee of the Board (the “Compensation Committee”), and subsequently approved and adopted by the Board without stockholder approval pursuant to Rule 5635(c)(4) of the rules and regulations of The Nasdaq Stock Market, LLC (the “Nasdaq Listing Rules”).

The Board has reserved 310,000 shares of the Company's common stock for issuance pursuant to equity awards granted under the 2022 Inducement Plan, and the 2022 Inducement Plan will be administered by the Compensation Committee. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, equity awards under the 2022 Inducement Plan may only be made to an employee who has not previously been an employee or member of the Board (or any subsidiary of the Company), or following a bona fide period of non-employment by the Company (or a subsidiary of the Company), if he or she is granted such equity awards in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her entering into employment with the Company or such subsidiary.

Components of Statements of Operations

Revenue

We primarily generate revenue pursuant to the Promotion Agreement, under which we share in the profit derived from the sale of Treprostinil Injection in the United States. Liquidia PAH has the exclusive rights to conduct commercial activities to encourage the appropriate use of Treprostinil Injection. On May 21, 2021 Liquidia PAH’s manufacturing partner, Chengdu Shifeng Medical Technologies LTD (“Chengdu”) began selling the RG 3ml Medication Cartridge, which may be used to supply medications to PAH patients. Following this clearance, we expect unit sales of Treprostinil Injection to increase, however, due to a reduction in the contractual profit split percentage from 80% to 50% as a result

68

Table of Contents

of achievement of predetermined cumulative sales thresholds revenues are expected to grow at a slower pace than unit sales.

Cost of Revenue

Cost of revenue consists of (i) the cost of employing a targeted sales force calling on physicians and hospital pharmacies involved in the treatment of PAH, as well as key stakeholders involved in the distribution and reimbursement of Treprostinil Injection and (ii) a portion of the amortization of the intangible asset associated with the Promotion Agreement. We amortize the Promotion Agreement in a manner consistent with our recognition of the related revenue.

Research and Development Expenses

Research and development expense consists of expenses incurred in connection with the development of our product candidates. We expense research and development costs as incurred. These expenses include:

[[GREPCENT_TABLE]]
[["","\u25cf","expenses incurred under agreements with CROs as well as investigative sites and consultants that conduct our clinical trials and preclinical studies;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","manufacturing process development and scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial materials and commercial materials, including manufacturing validation batches;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","outsourced professional scientific development services;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","employee-related expenses, which include salaries, benefits and stock-based compensation for personnel in research and development functions;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","expenses relating to regulatory activities, including filing fees paid to regulatory agencies;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","laboratory materials and supplies used to support our research activities; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","allocated expenses for utilities and other facility-related costs."]]
[[/GREPCENT_TABLE]]

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. In the near term we expect our research and development expenses to remain consistent with the year ended December 31, 2021, however, levels of research and development spending are highly dependent upon the selection and progression of product candidates. The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

[[GREPCENT_TABLE]]
[["","\u25cf","the number of clinical sites included in the trials;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the length of time required to enroll suitable patients;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the number of patients that ultimately participate in the trials;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the number of doses patients receive;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the duration of patient follow-up; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the results of our clinical trials."]]
[[/GREPCENT_TABLE]]

69

Table of Contents

Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals. We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, or our ability to manufacture and supply product, we could be required to expend significant additional financial resources and time on the completion of clinical development. Drug commercialization will take several years and millions of dollars in development costs.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, administrative, finance and legal functions, including stock-based compensation. Other general and administrative expenses include facility-related costs, patent filing and prosecution costs and professional fees for marketing, legal, auditing and tax services and insurance costs. We anticipate an increase in payroll and expense as a result of our preparation for commercial operations, especially as it relates to sales and marketing.

Other Income (Expense)

Other income (expense) is comprised primarily of interest income and expense. Interest income consists of interest earned on our cash deposits. Interest expense consists of interest charges on leases and debt. These charges include monthly recurring interest on such obligations in addition to non-cash charges. Non-cash charges include loss on extinguishment, interest accretion, expensing of debt issuance costs and amortization of discounts on long-term debt to interest expense.

Comparison of the Years Ended December 31, 2021 and 2020

The following table summarizes our results of operations:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","$","\u200b","%"],["\u200b","","2021","","2020","","Change","","Change"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Revenue","\u200b","$","12,854","\u200b","$","740","\u200b","$","12,114","\u200b","1,637.0","%"],["Costs and expenses:","\u200b","","\u200b","\u200b","","\u200b","\u200b","\u200b","","\u200b","","\u200b"],["Cost of revenue","\u200b","","3,023","\u200b","","238","\u200b","\u200b","2,785","\u200b","1,170.2","%"],["Research and development","\u200b","","20,517","\u200b","","32,222","\u200b","\u200b","(11,705)","\u200b","(36.3)","%"],["General and administrative","\u200b","","23,111","\u200b","","27,369","\u200b","\u200b","(4,258)","\u200b","(15.6)","%"],["Total costs and expenses","\u200b","","46,651","\u200b","","59,829","\u200b","\u200b","(13,178)","\u200b","(22.0)","%"],["Loss from operations","\u200b","","(33,797)","\u200b","","(59,089)","\u200b","\u200b","25,292","\u200b","(42.8)","%"],["Other income (expense):","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest income","\u200b","","33","\u200b","","184","\u200b","\u200b","(151)","\u200b","(82.1)","%"],["Interest expense","\u200b","","(815)","\u200b","","(858)","\u200b","\u200b","43","\u200b","(5.0)","%"],["Total other expense, net","\u200b","\u200b","(782)","\u200b","\u200b","(674)","\u200b","\u200b","(108)","\u200b","16.0","%"],["Net loss and comprehensive loss","\u200b","$","(34,579)","\u200b","$","(59,763)","\u200b","$","25,184","\u200b","(42.1)","%"]]
[[/GREPCENT_TABLE]]

​

Revenue

Revenue was $12.9 million for the year ended December 31, 2021, compared with $0.7 million for the year ended December 31, 2020. 2021 includes a full year of revenue related to the Promotion Agreement following the acquisition of Liquidia PAH in November 2020.

70

Table of Contents

Cost of Revenue

Cost of revenue was $3.0 million for the year ended December 31, 2021, compared with $0.2 million for the year ended December 31, 2020. 2021 includes a full year of Cost of revenue related to the Promotion Agreement following the acquisition of Liquidia PAH in November 2020.

Research and Development Expenses

Research and development expenses were $20.5 million for the year ended December 31, 2021 compared with $32.2 million for the year ended December 31, 2020, a decrease of $11.7 million or 36.3%. The decrease primarily related to lower expenses from our YUTREPIA clinical program, which was substantially completed prior to filing the NDA in April 2020, and lower employee and consulting expenses. During the year ended December 31, 2021, we incurred $6.6 million related to YUTREPIA compared to $17.4 million during the year ended December 31, 2020. Research and development expenses for the years ended December 31, 2021 and 2020 also included $7.6 million and $10.6 million in consulting and personnel costs, respectively. This decrease of $3.0 million was driven by lower headcount. These decreases were offset by a $0.8 million increase in stock-based compensation to $1.9 million for the year ended December 31, 2021 compared with $1.1 million for the year ended December 31, 2020 driven by the accelerated vesting of equity awards upon tentative FDA approval of YUTREPIA in November 2021.

General and Administrative Expenses

General and administrative expenses were $23.1 million for the year ended December 31, 2021, compared with $27.4 million for the year ended December 31, 2020. The decrease of $4.3 million, or 15.6%, was due to a $9.1 million decrease in consulting expenses and professional fees associated with corporate activities, a $1.1 million decrease in personnel expenses, and a $0.5 million decrease in commercial and marketing expenses. These decreases were offset by a $5.1 million increase in legal fees related to our ongoing YUTREPIA-related litigation and a $2.0 million increase in stock-based compensation expenses driven by the accelerated vesting of equity awards upon tentative FDA approval of YUTREPIA in November 2021.

Liquidity and Capital Resources

Sources of Liquidity

As of December 31, 2021 and 2020, our cash and cash equivalents were $57.5 million and $65.3 million, respectively.

We have financed our growth and operations through a combination of funds generated from revenues, the issuance of convertible preferred stock and common stock, finance leases, bank borrowings and the issuance of convertible notes. Our principal uses of cash have been for working capital requirements and capital expenditures. As of December 31, 2021, we had a cash balance of $57.5 million, stockholders’ equity of $65.3 million and an accumulated deficit of $309.6 million.

In February 2021, we entered into a Loan and Security Agreement with Silicon Valley Bank, the proceeds of which were used to pay off the approximately $9.4 million in outstanding principal and interest under previously bank borrowings. In January 2022, we entered into an Amended and Restated Loan and Security Agreement with Silicon Valley Bank and SVB Innovation Credit Fund VIII, L.P. We received a 24-month interest-only period and also have access to additional tranches of capital, pending achievement of certain milestones. See “Recent Events” for further information.

In April 2021, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with certain institutional, accredited investors (the “Purchasers”) for the sale by us in a private placement (the “Private Placement”) of an aggregate of 8,626,037 shares (the “Private Placement Shares”) of our common stock, at a purchase price of $2.52 per Private Placement Share. The gross proceeds from the sale of the Private Placement Shares were $21.7 million.

​

71

Table of Contents

In July 2020, we closed an underwritten public offering of 9,375,000 shares of our common stock at a price of $8.00 per share. The gross proceeds from the offering were $75.0 million and net proceeds were approximately $70.3 million, after deducting underwriting discounts and commissions and other offering expenses.

​

In August 2019, we entered into a sales agreement (the “ATM Agreement”) with Jefferies to issue and sell shares of our common stock, having an aggregate offering price of up to $40.0 million, from time to time during the term of the ATM Agreement, through an “at-the-market” equity offering program at our sole discretion, under which Jefferies acted as our agent and/or principal. We paid Jefferies a commission equal to 3.0% of the gross proceeds of any common stock sold through Jefferies under the ATM Agreement. During the year ended December 31, 2020, we sold 131,425 shares of our common stock for net proceeds of $0.7 million, after deducting underwriting discounts and other offering expenses under the ATM Agreement.

Future Funding Requirements

Prior to the potential FDA approval of YUTREPIA and until such time as we can generate significant revenues from its sale, if ever, we anticipate we will incur net losses and negative cash flows. We plan to focus in the near-term on preparations for the commercial launch of YUTREPIA, continuing sales of Treprostinil Injection, expanding our corporate infrastructure and continuing to invest in research and development efforts to explore additional product candidates. We may not be able to complete the development and initiate commercialization of these programs if, among others, our clinical trials are not successful or if the FDA does not approve our product candidates arising out of our current clinical trials when we expect, or at all.

Our primary uses of capital are, and we expect will continue to be, compensation and related personnel expenses, clinical costs, manufacturing process development, external research and development services, laboratory and related supplies, legal and other regulatory expenses, administrative and overhead costs and debt service. We also expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution as we prepare to potentially receive regulatory approval. Our future funding requirements will be heavily determined by the resources needed to support development of our product candidates. Additionally, as a publicly traded company we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules adopted by the SEC and Nasdaq Stock Market LLC (“Nasdaq”) require public companies to implement specified corporate governance practices.

We believe based on our current operating plan and available borrowings under the A&R SVB LSA, excluding any potential contingent borrowings from the A&R SVB LSA and future YUTREPIA product revenue, that cash and cash equivalents will be sufficient to fund operations and remain in compliance with our minimum cash covenant of $27.5 million pursuant to the A&R SVB LSA into the fourth quarter of 2022. Increases in market share for Treprostinil Injection and potential YUTREPIA revenues following a successful launch if YUTREPIA receives final FDA approval, have the potential to improve our cashflow going forward. We have based these estimates on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we expect. We expect that we may require additional capital to pursue in-licenses or acquisitions of other product candidates. Additional funds may not be available on a timely basis, on favorable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy. If we are unable to generate significant revenues from the sale of YUTREPIA or unable to raise sufficient additional capital, we will need to substantially curtail our planned operations and the pursuit of our growth strategy.

We may raise additional capital through licensing activities, other business arrangements or the sale of equity or convertible debt securities. In such an event, the ownership of our existing shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights associated with holdings of our common stock.

72

Table of Contents

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceuticals, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including:

[[GREPCENT_TABLE]]
[["","\u25cf","the number and characteristics of the product candidates we pursue;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical studies and clinical trials;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the cost of manufacturing our product candidates and any product we successfully commercialize;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future product candidates, if any."]]
[[/GREPCENT_TABLE]]

See “Risk Factors” for additional risks associated with our substantial capital requirements.

Cash Flows

The following table summarizes our sources and uses of cash:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended"],["\u200b","\u200b","December 31,"],["\u200b","","2021","","2020"],["\u200b","\u200b","(in thousands)"],["Net cash provided by (used in):","\u200b","\u200b","","\u200b","\u200b"],["Operating activities","\u200b","$","(34,036)","\u200b","$","(54,145)"],["Investing activities","\u200b","","(107)","\u200b","","248"],["Financing activities","\u200b","","26,320","\u200b","","63,417"],["Net increase (decrease) in cash and cash equivalents","\u200b","$","(7,823)","\u200b","$","9,520"]]
[[/GREPCENT_TABLE]]

​

Operating Activities

Net cash used in operating activities decreased $20.1 million to $34.0 million for the year ended December 31, 2021, from $54.1 million for the year ended December 31, 2020. The decrease was mainly due to an increase in revenue and a decrease in research and development expenses during the year ended December 31, 2021 compared with the year ended December 31, 2020. For the year ended December 31, 2021, the net cash used in operating activities of $34.0 million was comprised of operating cash outflows before working capital changes of $21.6 million and net working capital outflows of $12.4 million. For the year ended December 31, 2020, the net cash used in operating activities of $54.1 million was comprised of operating cash outflows before working capital changes of $52.4 million and net working capital outflows of $1.7 million.

Investing Activities

Net cash used in investing activities was $0.1 million for the year ended December 31, 2021 consisting of property, plant and equipment purchases. Net cash provided by was $0.2 million for the year ended December 31, 2020 consisting of

73

Table of Contents

$1.0 million acquired from the acquisition of Liquidia PAH as well as $0.8 million in property, plant and equipment purchases.

Financing activities

Net cash provided by financing activities was $26.3 million for the year ended December 31, 2021 compared with $63.4 million provided by financing activities for the year ended December 31, 2020. During the year ended December 31, 2021, we received $21.7 million net proceeds from the Private Placement which closed on April 13, 2021, as well as $5.0 million in litigation financing deployments, which will be paid directly to attorneys involved in the UTC/Smiths Medical Litigation in the following quarter. The ongoing costs of the UTC/Smiths Medical Litigation are included as operating outflows. During the year ended December 31, 2020, we received $70.3 million from the public offering of common stock in July 2020 and $0.7 million from the sale of our common stock under our ATM facility, which was offset by $5.6 million in principal payments on our long-term debt, $1.6 million for expenses related to our sale of Private Placement Shares that closed in December 2019 and $1.1 million in principal payments on our finance leases.

Contractual Obligations and Commitments

In March 2012, the Company entered into an agreement, as amended, with Chasm Technologies, Inc. for manufacturing consulting services related to the Company’s manufacturing capabilities during the term of the agreement. The Company agreed to pay future contingent milestones and royalties on net sales totaling no more than $1,500,000, none of which has been earned as of December 31, 2021.

We enter into contracts in the normal course of business with contract service providers to assist in the performance of our research and development and manufacturing activities. Subject to required notice periods and our obligations under binding purchase orders, we can elect to discontinue the work under these agreements at any time. In addition, we have entered into a multi-year agreement with LGM Pharma, LLC (“LGM”) to produce active pharmaceutical ingredients for YUTREPIA. Under our manufacturing agreement with LGM, we are required to provide rolling forecasts, a portion of which will be considered a binding, firm order, subject to an annual minimum purchase commitment of $3.1 million for the term of the agreement. The agreement expires five years from the first marketing authorization approval of YUTREPIA. This minimum commitment was waived for the year ended December 31, 2022.

We have operating lease obligations including rental amounts due on leases of certain laboratory, manufacturing and office space and equipment under the terms of non-cancelable operating leases. These leases expire at various times through October 2026. Minimum operating lease payments are $1.2 million in 2022, $1.3 million in 2023, $1.3 million in 2024, $1.4 million in 2025 and $1.2 million in 2026.

We lease specialized laboratory equipment under finance leases expiring in 2022. Minimum finance lease payments are $0.3 million in 2022, $0.2 million in 2023, and $0.1 million in 2024.

We from time-to-time are subject to claims and litigation in the normal course of business, none of which we believe represent a risk of material loss or exposure.

We also have employment agreements with certain employees which require the funding of a specific level of payments, if certain events, such as a change in control or termination without cause, occur.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements includes a summary of the significant accounting policies we used to prepare our consolidated financial statements. We have discussed the selection and disclosure of our critical accounting

74

Table of Contents

policies and estimates with our Audit Committee. The following is a review of our most significant policies and estimates.

Goodwill and Long-Lived Assets

Goodwill

Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. We acquired goodwill in the Merger Transaction of $3,903,282 which primarily represents the Liquidia PAH assembled workforce. On an annual basis and at various times throughout the year if impairment indicators are present, we make a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If we determine that the fair value of the reporting unit is less than its carrying amount, we will perform a quantitative analysis; otherwise, no further evaluation is necessary. As of December 31, 2021, we determined there was no impairment of goodwill (see Note 2 to the consolidated financial statements for the Goodwill accounting policy).

Long-Lived Assets

We review long-lived assets, including definite-life intangible assets, for realizability on an ongoing basis. Changes in depreciation and amortization, generally accelerated depreciation and variable amortization, are determined and recorded when estimates of the remaining useful lives or residual values of long-term assets change. We also review for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. In those circumstances, we perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for asset impairment, we group assets and liabilities at the lowest level for which cash flows are separately identifiable. Any impairment loss is calculated as the excess of the asset’s carrying value over its estimated fair value. Fair value is estimated based on the discounted cash flows for the asset group over the remaining useful life or based on the expected cash proceeds for the asset less costs of disposal. Any impairment losses would be recorded in the consolidated statements of operations. To date, no such impairments have occurred.

Revenue Recognition from Promotion Agreements

We recognize revenue in accordance with Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of Topic 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

In order to identify the performance obligations in a contract with a customer, we assess the promised goods or services in the contract and identify each promised good or service that is distinct. If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.

Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We evaluate any non-cash consideration, consideration payable to the customer, and whether consideration contains a significant financing element in determining the transaction price.

Revenue is measured based on consideration specified in a contract with a customer. We recognize revenue when we satisfy a performance obligation by transferring control over a service to a customer.

75

Table of Contents

On August 1, 2018, we partnered with Sandoz in a Promotion Agreement (the “Promotion Agreement”) to launch the first-to-file generic of Treprostinil Injection for the treatment of patients with PAH. Under the Promotion Agreement, we provide certain promotional and nonpromotional activities on an exclusive basis for the product in the United States of America for the treatment of PAH, in exchange for a share of Sandoz’s “Net Profits”, as defined within the Promotion Agreement. In addition, we paid Sandoz $20 million at the inception of the Promotion Agreement, in consideration for the right to conduct the promotional activities for the product. In exchange for our services, we are entitled to receive a portion of net profits based on specified profit levels associated with the product.

We determined that certain activities within the contract are within the scope of Accounting Standards Codification (“ASC”) 808, Collaborative Arrangements. The commercialization of the product is a joint operating activity where we will provide promotional activities for Sandoz’s intellectual property and Sandoz will be responsible for items such as supply of the product, distribution to customers, managing sales, returns, and regulatory matters, and protection of patents. Both parties are active participants, each carrying out its assigned responsibilities, and participating in the joint operating activity and will share in the risks and rewards of the commercialization through the profit-sharing arrangement.

In addition, we determined that the services provided under the Promotion Agreement fall within the scope of Topic 606. While this is our first income-generating contract, the promotional activities we perform are one of the services we expect to provide as part of our ordinary activities, and we are receiving consideration for this service from Sandoz in the form of a share of net profits. We have one combined performance obligation under the Promotion Agreement, which is to perform promotional and non-promotional activities to encourage the appropriate use of the product in accordance with the product labeling and applicable law. As such, and in accordance with ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606, we account for the entire Agreement under Topic 606.

Commitments and Contingencies

We have certain commitments and contingencies including litigation and related costs as well as potential royalties for previous manufacturing consulting services rendered. We account for such commitments and contingencies under ASC 450, Contingencies. We review known commitments and contingencies on a quarterly basis and review for possible additional commitments and contingencies. We record liabilities for those matters if and when circumstances present loss contingencies that are both probable and estimable and would exceed the current amounts established on the balance sheet. When loss contingencies are not both probable and estimable, we do not record additional liabilities on the balance sheet.

JOBS Act

As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

Subject to certain conditions, as an emerging growth company, we rely on certain of these exemptions, including without limitation:

[[GREPCENT_TABLE]]
[["","\u25cf","reduced disclosure about our executive compensation arrangements;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","no advisory votes on executive compensation or golden parachute arrangements; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting."]]
[[/GREPCENT_TABLE]]

76

Table of Contents

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of 2023; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We may choose to take advantage of some but not all of these exemptions. Accordingly, the information contained herein may be different from the information you receive from other public companies in which you hold stock.

Smaller Reporting Company

As a “smaller reporting company,” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in addition to providing reduced disclosure about our executive compensation arrangements and business developments, among other reduced disclosure requirements available to smaller reporting companies, we present only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure. Accordingly, the information contained herein may be different from the information you receive from other public companies in which you hold stock.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

​