Liquidia Corp

Previous wording

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information necessary to understand our condensed consolidated financial statements and highlight certain other information which, in the opinion of management, will enhance a reader’s understanding of our financial condition, changes in financial condition and results of operations. In particular, the discussion is intended to provide an analysis of significant trends and material changes in our financial position and the operating results of our business during the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. Also refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which includes detailed discussions of various items impacting our business, results of operations and financial condition.

Current wording

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information necessary to understand our condensed consolidated financial statements and highlight certain other information which, in the opinion of management, will enhance a reader’s understanding of our financial condition, changes in financial condition and results of operations. In particular, the discussion is intended to provide an analysis of significant trends and material changes in our financial position and the operating results of our business during the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023. Also refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which includes detailed discussions of various items impacting our business, results of operations and financial condition.

Previous wording

We are a biopharmaceutical company focused on the development, manufacture, and commercialization of products that address unmet patient needs, with current focus directed towards rare cardiopulmonary diseases such as pulmonary arterial hypertension (“PAH”) and pulmonary hypertension associated with interstitial lung disease (“PH-ILD”). We operate through our wholly owned operating subsidiaries, Liquidia Technologies, Inc. (“Liquidia Technologies”) and Liquidia PAH, LLC (“Liquidia PAH”), formerly known as RareGen, LLC (“RareGen”).

Current wording

We are a biopharmaceutical company focused on the development, manufacture, and commercialization of products that address unmet patient needs, with current focus directed towards rare cardiopulmonary diseases such as pulmonary arterial hypertension (“PAH”) and pulmonary hypertension associated with interstitial lung disease (“PH-ILD”). We

Previous wording

Our lead product candidate is YUTREPIA for the treatment of PAH and PH-ILD. YUTREPIA is an inhaled dry powder formulation of treprostinil designed with PRINT to improve the therapeutic profile of treprostinil by enhancing deep lung delivery while using a convenient, low effort dry-powder inhaler (“DPI”) and by achieving higher dose levels than the labeled doses of current inhaled therapies. In November 2021, the United States Food and Drug Administration (“FDA”) tentatively approved our New Drug Application (“NDA”) for YUTREPIA for the treatment of PAH. In July

Current wording

Our lead product candidate is YUTREPIA for the treatment of PAH and PH-ILD. YUTREPIA is an inhaled dry powder formulation of treprostinil designed with PRINT to improve the therapeutic profile of treprostinil by enhancing deep lung delivery while using a convenient, low effort dry-powder inhaler (“DPI”) and by achieving higher dose levels than the labeled doses of current inhaled therapies. In November 2021, the United States Food and Drug Administration (“FDA”) tentatively approved our New Drug Application (“NDA”) for YUTREPIA for the treatment of PAH. In July 2023, we filed an amendment to our NDA to add PH-ILD to the label for YUTREPIA. We are currently awaiting final action by the FDA with respect to our NDA.

Previous wording

Since inception, we have incurred significant operating losses. Our net loss was $40.9 million for the three months ended March 31, 2024 and $78.5 million and $41.0 million for the years ended December 31, 2023 and 2022, respectively. As of March 31, 2024, we had an accumulated deficit of $470.0 million. We expect to incur significant expenses and operating losses for the foreseeable future as we conduct clinical development of product candidates and seek regulatory approval and prepare for commercialization of any approved product candidates. These efforts require significant amounts of capital, adequate personnel and infrastructure, and extensive compliance-reporting capabilities. Even if our development efforts are successful, it is uncertain when, if ever, we will realize significant revenue from product sales. Additionally, the Revenue Interest Financing Agreement with HealthCare Royalty Partners IV, L.P. (“HCR”) dated January 9, 2023, as amended (the “RIFA”) contains fixed quarterly payments and minimum cash covenants that require us to maintain cash and cash equivalents in an amount at least equal to $7.5 million during the calendar year beginning on January 1, 2024 and at least equal to $15.0 million for the remainder of the payment term after the calendar year ended December 31, 2024.

Current wording

Since inception, we have incurred significant operating losses. Our net loss was $68.9 million for the six months ended June 30, 2024 and $78.5 million and $41.0 million for the years ended December 31, 2023 and 2022, respectively. As of June 30, 2024, we had an accumulated deficit of $498.0 million. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates through clinical trials, seek regulatory approval of such product candidates and pursue commercialization of any approved product candidates. These efforts require significant amounts of capital, adequate personnel and infrastructure, and extensive compliance-reporting capabilities. Even if our development efforts are successful, it is uncertain when, if ever, we will realize significant revenue from product sales. Additionally, the Revenue Interest Financing Agreement with HealthCare Royalty Partners IV, L.P. (“HCR”) dated January 9, 2023, as amended (the “RIFA”) contains fixed quarterly payments and minimum cash covenants that require us to maintain cash and cash equivalents in an amount at least equal to $7.5 million during the calendar year beginning on January 1, 2024 and at least equal to $15.0 million for the remainder of the payment term after the calendar year ended December 31, 2024.

Previous wording

Our future funding requirements will be heavily determined by the timing of the potential commercialization of YUTREPIA and the resources needed to support the development of our product candidates. We may require additional capital to fund operations as well as to pursue in-licenses or acquisitions of other product candidates. If we determine we require but are unable to obtain additional funding, we could be required to delay, reduce, or eliminate research and development programs, product portfolio expansion, or future commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations.

Current wording

Our future funding requirements will be heavily determined by the timing of the potential commercialization of YUTREPIA and the resources needed to support the development of our product candidates. We expect that we will require additional capital to fund operations as well as to pursue in-licenses or acquisitions of other product candidates. If we are unable to obtain additional funding, we could be required to delay, reduce, or eliminate research and development programs, product portfolio expansion, or future commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations.

Previous wording

Although we expect to continue to generate operating losses for the foreseeable future, we believe that based on our current operating plan, excluding any future YUTREPIA product revenue, our cash and cash equivalents will be sufficient to fund operations, capital expenditures, and RIFA quarterly fixed payment requirements and allow us to remain in compliance with our minimum cash covenants pursuant to the RIFA for at least twelve months from the issuance date of these condensed consolidated financial statements. If we have not received full FDA approval for both PAH and PH-ILD and begun product sales of YUTREPIA or are unable to access additional capital by the date of issuance of our second quarter 2024 financial statements, there could be substantial doubt about our ability to continue as a going concern as of that date. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Current wording

Based on current operating plans and excluding any contribution from YUTREPIA product sales or external financing, we will not have sufficient cash and cash equivalents to fund operating expenses and capital requirements and meet our minimum cash covenants beyond one year from the issuance of these condensed consolidated financial statements, and therefore, the Company has concluded that there is substantial doubt about its ability to continue as a going concern. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Previous wording

We primarily generate revenue pursuant to the Promotion Agreement, under which we receive a 50% 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. In May 2021, Liquidia PAH’s manufacturing partner, Chengdu Shifeng Medical Technologies LTD (“Chengdu”) began selling the RG Cartridge, which may be used to supply medications to PAH patients with the CADD-MS 3 pump manufactured by Smiths Medical ASD, Inc. We are aware of shortages of critical components of the CADD-MS 3 pump that have caused the number of CADD-MS 3 infusion pumps available for the subcutaneous administration of Treprostinil Injection to be limited. Due to this limitation in the availability of pumps, specialty pharmacies are not currently placing new patients on to subcutaneous Treprostinil Injection therapy in order to preserve the available pumps for those patients already receiving subcutaneous administration of Treprostinil Injection. In December 2022, we entered into a Device Development and Supply Agreement (the “Pump Development Agreement”) with Mainbridge Health Partners, LLC (“Mainbridge”) and Sandoz. The Pump Development Agreement provides for the cooperation between us, Sandoz and

Current wording

We primarily generate revenue pursuant to the Promotion Agreement, under which we receive a 50% 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. In May 2021, Liquidia PAH’s manufacturing partner, Chengdu Shifeng Medical Technologies LTD (“Chengdu”) began selling the RG Cartridge, which may be used to supply medications to PAH patients with the CADD-MS 3 pump manufactured by Smiths Medical ASD, Inc. We are aware of shortages of critical components of the CADD-MS 3 pump that have caused the number of CADD-MS 3 infusion pumps available for the subcutaneous administration of Treprostinil Injection to be limited. Due to this limitation in the availability of pumps, specialty pharmacies are not currently placing new patients on to subcutaneous Treprostinil Injection therapy in order to preserve the available pumps for those patients already receiving subcutaneous administration of Treprostinil Injection. In December 2022, we entered into a Device Development and Supply Agreement (the “Pump Development Agreement”) with Mainbridge Health Partners, LLC (“Mainbridge”) and Sandoz. The Pump Development Agreement provides for the cooperation between us, Sandoz and Mainbridge to develop a new pump that is suitable for the subcutaneous administration of Treprostinil Injection. Mainbridge will perform all development, validation and testing activities required for the pump and related consumables in anticipation of submitting a 510(k) clearance application for the pump to the FDA in 2025. Revenue will continue to be impacted or at risk until new components or alternative pumps are available.

Previous wording

Other income (expense) is comprised of interest income and expense and loss on extinguishment of debt. Interest income consists of interest earned on our cash equivalents. Interest expense consists of interest charges on the revenue interest financing payable, finance leases and long-term debt. These charges include monthly recurring interest on such obligations in addition to interest accretion and amortization of debt discounts and issuance costs to interest expense.

Current wording

Other income (expense) is comprised of interest income and expense and loss on extinguishment of debt. Interest income consists of interest earned on our cash equivalents. Interest expense consists of interest charges on the revenue interest

Previous wording

Three Months Ended March 31, 2024 compared with the Three Months Ended March 31, 2023

Current wording

Three and Six Months Ended June 30, 2024 compared with the Three and Six Months Ended June 30, 2023

Previous wording

The following table summarizes the results of our operations for the three months ended March 31, 2024 and 2023, together with the changes in those items in dollars and as a percentage (in thousands, except for percentages):

Current wording

The following table summarizes the results of our operations for the three and six months ended June 30, 2024 and 2023, together with the changes in those items in dollars and as a percentage (in thousands, except for percentages):

Previous wording

Revenue was $3.0 million for the three months ended March 31, 2024, compared to $4.5 million for the three months ended March 31, 2023. Revenue related primarily tothe Promotion Agreement. The decrease of $1.5 million was primarily due to favorable gross-to-net rebate adjustments recorded in the prior year and the impact of lower sales quantities in the current year as compared to the same period in the prior year.

Current wording

Revenue was $3.7 million for the three months ended June 30, 2024, compared to $4.8 million for the three months ended June 30, 2023. Revenue related primarily to the Promotion Agreement. The decrease of $1.1 million was primarily due tothe impact of lower sales quantities in the current year as compared to the same period in the prior year.

Previous wording

Research and development expenses were $10.1 million for the three months ended March 31, 2024, compared to $5.3 million for the three months ended March 31, 2023. The increase of $4.8 million or 91% was primarily due to a $2.0 million increase in personnel expenses (including stock-based compensation) related to increased headcount and a $1.7 million increase in clinical expenses related to our L606 program. Additionally, there was also a $1.3 million increase in expenses related to our YUTREPIA program driven by higher clinical and supply expenses related to our ASCENT study, which was initiated in the second half of 2023.

Current wording

Research and development expenses were $9.4 million for the three months ended June 30, 2024, compared to $17.7 million for the three months ended June 30,2023. The decrease of $8.3 million or 47% was primarily due to a $10.0 million upfront license fee due to Pharmosa for the exclusive license in North America to develop and commercialize L606 recorded during the three months ended June 30, 2023. Additionally, there was a $1.4 million decrease in expenses related to our YUTREPIA program driven by expensing prelaunch inventory costs in the prior year. These decreases were offset by a $1.7 million increase in clinical expenses related to our L606 program and a $1.5 million increase in personnel expenses (including stock-based compensation) related to increased headcount.

Previous wording

General and administrative expenses were $20.2 million for the three months ended March 31, 2024, compared to $7.8 million for the three months ended March 31, 2023. The increase of $12.4 million or 160% was primarily due to a $3.1 million increase in legal fees related to ourongoing YUTREPIA-related litigation, a $5.9 million increase in personnel expenses (including stock-based compensation), and a $2.2 million increase in commercial and consulting expenses in preparation for the potential commercialization of YUTREPIA.

Current wording

General and administrative expenses were $19.9 million for the three months ended June 30, 2024, compared to $9.2 million for the three months ended June 30, 2023. The increase of $10.7 million or 116% was primarily due toa $6.3 million increase in personnel expenses (including stock-based compensation) driven by higher headcount and expansion of our sales force in the fourth quarter of 2023, a $2.2 million increase in commercial and consulting expenses in preparation for the potential commercialization of YUTREPIA, and a $0.9 million increase in legal fees related to ourongoing YUTREPIA-related litigation.

Previous wording

Total other expense, net was $12.1 million for the three months ended March 31, 2024, compared with $2.5 million for the three months ended March 31, 2023. The increase of $9.6 million was primarily due to driven by a $9.2 million increase in loss on extinguishment of debt resulting from the Fourth Amendment to the RIFA, which was executed in January 2024, and a $1.4 million increase in interest expense attributable to the higher borrowings under the RIFA compared to the prior year. These increases were offset by a $1.0 million increase in interest income attributable to higher money market balances. The three months ended March 31, 2024 included a $11.5 million loss on extinguishment of debt related to the Fourth Amendment to the RIFA which provided the Company an additional $25.0 million in January 2024. The three months ended March 31, 2023 included a $2.3 million loss on extinguishment of debt related to repayment of our previously outstanding debt with Silicon Valley Bank in January 2023.

Current wording

Total other expense, net was $12.9 million for the six months ended June 30, 2024, compared with $3.2 million for the six months ended June 30, 2023. The increase of $9.7 million was primarily driven by a $9.2 million increase in loss on extinguishment of debt resulting from the Fourth Amendment to the RIFA, which was executed in January 2024, and a $2.6 million increase in interest expense attributable to the higher borrowings under the RIFA compared to the prior year. These increases were offset by a $2.1 million increase in interest income attributable to higher money market balances.

Previous wording

We have financed our growth and operations through a combination of funds generated from revenues, the issuance of convertible preferred stock and common stock, bank borrowings, the issuance of convertible notes, and revenue interest financing. Our principal uses of cash have been for working capital requirements and capital expenditures. As of March 31, 2024 and December 31, 2023, we had cash and cash equivalents of $157.9 million and $83.7 million, respectively. As of March 31, 2024, we had stockholders’ equity of $86.3 million and an accumulated deficit of $470.0 million.

Current wording

We have financed our growth and operations through a combination of funds generated from revenues, the issuance of convertible preferred stock and common stock, bank borrowings, the issuance of convertible notes, and revenue interest financing. Our principal uses of cash have been for working capital requirements and capital expenditures. As of June 30, 2024 and December 31, 2023, we had cash and cash equivalents of $133.1 million and $83.7 million,

Previous wording

Our primary uses of capital are, and we expect will continue to be, compensation and related personnel expenses, clinical costs, manufacturing process development costs, external research and development services, laboratory and related supplies, regulatory expenses, legal costs, administrative and overhead costs and repayments under the RIFA. We also expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution as we prepare to potentially receive regulatory approval for YUTREPIA. Our future funding requirements will be heavily determined by the timing of the potential commercialization of YUTREPIA, the indications, if any, for which YUTREPIA is approved and the resources needed to support the development of our product candidates.

Current wording

Our primary uses of capital are, and we expect will continue to be, compensation and related personnel expenses, clinical costs, manufacturing process development costs, external research and development services, laboratory and related supplies, regulatory expenses, legal costs, administrative and overhead costs and repayments under the RIFA. We also expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution as we prepare to potentially receive regulatory approval for YUTREPIA. Our future funding requirements will be heavily determined by the timing of the potential commercialization of YUTREPIA, the indications, if any, for which YUTREPIA is approved and the resources needed to support the development of our product candidates. Based on our current plans, we expect that we will require additional capital. See Note 1 to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for information regarding our ability to continue as a going concern.

Previous wording

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.

Current wording

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

Previous wording

Net cash used in operating activities increased $16.4 million to $24.9 million for the three months ended March 31, 2024 compared to $8.5 million for the three months ended March 31, 2023. The increase was primarily due to $16.5 million higher net loss adjusted for non-cash items offset by favorable working capital changes of $0.1 million.

Current wording

Net cash used in operating activities increased $33.5 million to $47.5 million for the six months ended June 30, 2024 compared to $14.0 million for the six months ended June 30, 2023. The increase was primarily due to $27.8 million higher net loss adjusted for non-cash items and unfavorable working capital changes of $5.7 million.

Previous wording

Net cash used in investing activities was $0.6 million for the three months ended March 31, 2024 compared to $0.4 million for the three months ended March 31, 2023. During both the three months ended March 31,2024 and 2023, net cash used in investing activities related to property, plant and equipment purchases.

Current wording

Net cash used in investing activities was $1.9 million for the six months ended June 30, 2024 compared to $0.6 million for the six months ended June 30, 2023. During both the six months ended June 30,2024 and 2023, net cash used in investing activities related to property, plant and equipment purchases.

Previous wording

Net cash provided by financing activities was $99.7 million during the three months ended March 31, 2024, compared to $10.0 million during the three months ended March 31, 2023. During the three months ended March 31, 2024, we received $74.9 million net proceeds from the 2024 Private Placement which closed on January 8, 2024, $25.0 million net proceeds from the RIFA, and $0.5 million from the issuance of common stock under stock incentive plans. These inflows were offset by $0.7 million in payments under the RIFA. During the three months ended March 31, 2023, we received $31.8 million net proceeds from the RIFA of which $22.2 million was used to repay our indebtedness to Silicon Valley Bank.

Current wording

Net cash provided by financing activities was $98.9 million during the six months ended June 30, 2024, compared to $9.5 million during the six months ended June 30, 2023. During the six months ended June 30, 2024, we received $74.9 million net proceeds from the 2024 Private Placement, $25.0 million net proceeds from the RIFA, and $0.5 million from the issuance of common stock under stock incentive plans. These inflows were offset by $1.7 million in payments under the RIFA. During the six months ended June 30, 2023, we received $31.8 million net proceeds from the RIFA of which $22.2 million was used to repay our indebtedness to Silicon Valley Bank.

Previous wording

In addition, we have entered into a multi-year supply agreement with LGM Pharma, LLC (“LGM”) to produce active pharmaceutical ingredients for YUTREPIA. Under our supply 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 $2.7 million for the term of the agreement. The agreement expires five years from the first marketing authorization approval of YUTREPIA.

Current wording

In addition, we have entered into a multi-year supply agreement with LGM Pharma, LLC (“LGM”) to supply active pharmaceutical ingredients for YUTREPIA. Under our supply 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 $2.7 million for the term of the agreement. The agreement expires five years from the first marketing authorization approval of YUTREPIA.

Previous wording

As of March 31, 2024, we have non-cancelable commitments for product supply and manufacturing costs of approximately $6.5 million.

Current wording

As of June 30, 2024, we have non-cancelable commitments for product supply and manufacturing costs of approximately $3.5 million.

Previous wording

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 $1.0 million in the remaining nine months of 2024, $1.4 million in 2025, and $1.2 million in 2026.

Current wording

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 $0.6 million in the remaining six months of 2024, $1.4 million in 2025, and $1.2 million in 2026.

Previous wording

As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our incurred expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our condensed consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers

Current wording

As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our incurred expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our condensed consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses are related to expenses incurred with respect to CROs, CMOs and other vendors in connection with research and development and manufacturing activities.

Previous wording

We base our expenses related to CROs and CMOs on our estimates of the services received and efforts expended pursuant to quotations and contracts with such vendors that conduct research and development and manufacturing activities on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the applicable research and development or manufacturing expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. There have been no material changes in estimates for the periods presented within this Quarterly Report on Form 10-Q.

Current wording

We base our expenses related to CROs and CMOs on our estimates of the services received and efforts expended pursuant to quotations and contracts with such vendors that conduct research and development and manufacturing activities on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the applicable research and development or manufacturing expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are

Previous wording

We capitalize prelaunch inventory prior to receiving regulatory approval if regulatory approval and subsequent commercialization of a product is probable and we also expect future economic benefit from the sales of the product to be realized. Prior to this conclusion, we expense prelaunch inventory as research and development expense in the period incurred. For prelaunch inventory that is capitalized, we consider a number of specific facts and circumstances, including the product’s historical shelf life, the product's current status in the development and regulatory approval process, results from related clinical trials, results from meetings with relevant regulatory agencies prior to the filing of regulatory applications, potential obstacles to the approval process, viability of commercialization and market trends. In late 2023, based on our assessment of the legal and regulatory process related to YUTREPIA, we concluded that we met the criteria to capitalize expenditures for prelaunch inventory. We capitalized $3.5 million of prelaunch inventory as of March 31, 2024 and none as of December 31, 2023. We do not have an allowance for inventory obsolescence as of March 31, 2024. If either regulatory approval or market acceptance post-approval of YUTREPIA do not occur at all or on a timely basis prior to the inventory shelf-life expiration, we may be required to write-off some or all prelaunch inventory, which could affect our financial condition and financial results.

Current wording

We capitalize prelaunch inventory prior to receiving regulatory approval if regulatory approval and subsequent commercialization of a product is probable and we also expect future economic benefit from the sales of the product to be realized. Prior to this conclusion, we expense prelaunch inventory as research and development expense in the period incurred. For prelaunch inventory that is capitalized, we consider a number of specific facts and circumstances, including the product’s historical shelf life, the product's current status in the development and regulatory approval process, results from related clinical trials, results from meetings with relevant regulatory agencies prior to the filing of regulatory applications, potential obstacles to the approval process, viability of commercialization and market trends. In late 2023, based on our assessment of the legal and regulatory process related to YUTREPIA, we concluded that we met the criteria to capitalize expenditures for prelaunch inventory. We capitalized $7.2 million of prelaunch inventory as of June 30, 2024 and none as of December 31, 2023. We do not have an allowance for inventory obsolescence as of June 30, 2024. If either regulatory approval or market acceptance post-approval of YUTREPIA do not occur at all or on a timely basis prior to the inventory shelf-life expiration, we may be required to write-off some or all prelaunch inventory, which could affect our financial condition and financial results.

Previous wording

than $100 million during the most recently completed fiscal year and our common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter. To the extent we take advantage of any reduced disclosure obligations, it may make it harder for investors to analyze the Company’s results of operations and financial prospectus in comparison with other public companies. Until we cease to be a smaller reporting company, the scaled-back disclosure in our SEC filings will result in less information about our company being available than for other public companies.

Current wording

We will be able to take advantage of these scaled disclosures for so long as (i) our common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and our common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter. To the extent we take advantage of any reduced disclosure obligations, it may make it harder for investors to analyze the Company’s results of operations and financial prospectus in comparison with other public companies. Until we cease to be a smaller reporting company, the scaled-back disclosure in our SEC filings will result in less information about our company being available than for other public companies.