This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Pear's actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the "Risk Factors" section included in Part II, Item 1A of this Form 10-Q. All references to years, unless otherwise noted, refer to our fiscal years, which end on December 31. For purposes of this section, all references to "we," "us," "our," "Pear," or the "Company" refer to Pear Therapeutics, Inc. and its consolidated subsidiaries. The following discussion and analysis should also be read in conjunction with the accompanying consolidated financial statements included in Part I, Item 1 of this Form 10-Q. This section of this Form 10-Q generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.
Insight
Pear is a commercial-stage healthcare company pioneering a new class of drugs, called PDTs, that use software to treat disease. Our vision is to advance healthcare through the widespread use of PDTs.
Recent global trends are converging to highlight a significant unmet need for new and innovative solutions for the treatment of diseases. We believe our PDTs are well suited to satisfy this growing unmet need for the treatment of diseases, including addiction and insomnia. Pear is a leader in the PDT industry. Our marketed PDTs, reSET, reSET-O, and Somryst, were among the first three PDTs authorized by FDA. We believe PDTs have the potential to improve clinical outcomes, facilitate improved care coordination, improve practice efficiency, and provide data tracking over time.
Two of our FDA-cleared PDTs are for the treatment of addiction, which currently affects more than 20 million people in the United States. Our first product, reSET, is indicated for the treatment of substance use disorder (“SUD”) as monotherapy. Our second product, reSET-O, is indicated for the treatment of opioid use disorder (“OUD”) in combination with buprenorphine.
Our third product, Somryst, is indicated for the treatment of chronic insomnia, which currently affects more than approximately 30 million people in the United States.
Operating segments
We operate our business in a single segment and as one reporting unit, which is how our chief operating decision maker (who is our president and chief executive officer) reviews financial performance and allocates resources.
Factors Affecting Our Performance and Results of Operations
We believe that our performance and future success depend on many factors that present significant opportunities for us, but also pose risks and challenges, including those discussed more fully under the heading "Risk Factors" in Part II, Item 1A of this Form 10-Q.
Key business indicators
We monitor key non-financial operational performance measures to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. Metrics include the following:
A. Total prescriptions in a given period are (a) the imputed number of prescriptions based on revenue recognized under access agreements, plus (b) the number of prescriptions written for which it is not charged under access agreements.
B. The fill rate in a given period is (a) the number of prescriptions for which either a patient begins treatment or there is a contractual obligation to pay and revenue has been recognized, divided by (b ) the total prescriptions. (The total number of prescriptions multiplied by the fill rate equals the prescriptions filled.)
Pear Therapeutics, Inc.| Form 10-Q |Page 24 -------------------------------------------------------------------------------- C.Payment Rate in a given period is (a) the number of prescriptions for which the company receives payment divided by (b) Fulfilled Prescriptions. (Fulfilled Prescriptions times Payment Rate equals Paid Prescriptions.)
D. The average selling price, or ASP, during a given period is the average price received by the company per scenario for which the company receives payment.
Key operating performance indicator Q1 2022 Actual
Total Prescriptions >9,200
Fulfillment Rate 57%
Payment Rate 50%
Average Selling Price (ASP) $1,353
Product Revenue
We generate product revenue from the sale of our three FDA-authorized PDTs:
reSET, reSET-O, and Somryst. We began our efforts to self-commercialize reSET
and reSET-O in Q4 2019 and Somryst in Q4 2020. Through at least 2023, sales of
our existing products are not expected to reduce our continued net losses.
We enter into agreements with health care providers and payers, and state and
local governments, to provide prescriptions which provide for volume-based
discounts and other discounts, and in certain circumstances, value-based rebates
("Access Agreements"). We also enter into arrangements with health care
providers and payers that provide for government-mandated and/or privately
negotiated rebates and discounts with respect to the purchase of our product. A
portion of the product revenue is recognized when the products are made
available to the customer (under Access Agreements) or when a prescription is
fulfilled, and a portion of the product revenue related to the clinician's
access to our proprietary clinician dashboard is deferred and recognized ratably
over the prescription duration or the remaining term of the contract if
purchased under an Access Agreement.
If our development efforts for our PDT product candidates are successful and
result in regulatory marketing authorization, we may generate revenue in the
future from product sales or payment from collaboration or license agreements
that we may enter into with third parties or any combination thereof. We cannot
predict if, when, or to what extent we will generate revenue from the
commercialization and sale of our product candidates.
Product revenues from our three existing FDA-cleared PDTs, as well as potential future product candidates, are and will be impacted by many factors, including the following variables: patient and clinician adoption of PDTs, pricing, reimbursement , contingency management and mixing product.
Patient and Clinician Adoption of PDTs - To continue to grow our business, we
will need to execute on our current business strategy of achieving and
maintaining broad market acceptance of our PDTs by patients and physicians.
Market acceptance and adoption of our PDTs depends on educating people with
chronic conditions, as well as self-insured employers, commercial and government
payors, health plans and physicians, and other government entities, as to the
distinct features, therapeutic benefits, cost savings, and other advantages of
our PDTs as compared to competitive products or other currently available
methodologies. We have a market access team focused educating payors on the
clinical outcomes and value proposition of our products and to seek to secure
favorable coverage policies and to maximize the covered lives that have
reimbursement for our products by expanding approvals with IDNs, PBMs, and other
payers. If we are not successful in demonstrating to existing or potential
patients and prescribers the benefits of our products, or if we are not able to
achieve the support of patients, healthcare providers, and payors for our
products, our sales may decline, or we may fail to increase our revenue.
Pricing - In the future, we expect to grow the number of commercially available
PDTs in our product portfolio, offering a broad range of PDTs spanning multiple
price points. PDTs may be subject to competition which may impact our pricing,
and in addition, our products may be subject to legislative prescription-pricing
practices. Further, we continue to collect additional data to enhance product
performance and bolster health economics and outcomes research ("HEOR") and
associated cost savings for payors.
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Reimbursement - Pear's payor strategy focuses across all major payor channels,
including employers, Integrated Delivery Networks ("IDNs"), pharmacy benefit
managers ("PBMs"), commercial payors, and government payors, including Medicaid
and Medicare. We expect to increase our number of payors, and the pricing for
such payors may vary as net prices for our products may be reduced by mandatory
discounts or rebates required by government healthcare programs or private
payors and can be subject to customary discounts and rebates. In addition, some
of our products may be subject to certain customer incentive programs. Even if
coverage is provided, the approved reimbursement amount may not be high enough
to allow us to establish or maintain pricing sufficient to achieve
profitability. In the future, as our market access team educates payors on the
clinical attributes of our products we expect our products to secure favorable
coverage policies and to maximize the covered lives that have reimbursement for
our products.
Contingency Management – Costs related to clinically validated rewards that patients earn when they reach their treatment goals under our reSET and reSET-O PDTs are recorded as counterpart revenue.
Product Mix - Sales of certain products have, or are expected to have, higher gross margins than others. As a result, our financial performance depends, in part, on the mix of products we sell during a given period.
Product revenue cost
Cost of product revenue consists primarily of costs that are closely correlated or directly related to the delivery of the Company's products, including pharmacy costs, royalties paid under license agreements related to our commercialized products, amortization of milestone payments capitalized related to commercialized products, hosting costs, and personnel-related costs, including salaries and bonuses, employee benefits, and stock-based compensation attributable to employees in a particular function. We expect the cost of product revenue to increase as we further commercialize our products and increase the volume of prescriptions filled.
Research and development costs
As of March 31, 2022, we have multiple product candidates in our pipeline, and we have incurred and will continue to incur significant research and development, or R&D, costs for their development. Developing PDTs requires a significant investment of resources over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. We have chosen to leverage our platform to initially focus on advancing our PDTs in the area of psychiatry. We expect our R&D expenses will increase substantially as we continue to invest in the development of our pipeline of product candidates, future clinical development activities, and testing of our product candidates.
R&D expenses consist of costs incurred in the performance of R&D activities, which include:
•expenses incurred in developing our potato pipeline;
•costs related to licensing agreements with third parties, including development and regulatory milestones;
•personnel expenses, including salaries, bonuses, benefits and stock-based compensation for employees engaged in R&D functions;
•cost of clinical trials;
•expenses incurred in connection with the discovery and development of our PDTs, including in connection with agreements with third parties, such as consultants;
• expenses incurred under agreements with consultants who supplement our internal capabilities, including software development; and
•installations, depreciation and other expenses, which include direct and earmarked expenses, such as rent and maintenance of installations, insurance and other operating costs for space and costs directly related to R&D functions.
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Each of our product candidates involves technical, clinical, regulatory and business risks, including those more fully described under the heading “Risk Factors” in Part II, Item 1A of this Form 10-Q.
We expense R&D costs as incurred and do not track the costs at a project level. Advance payments made for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses. The prepaid amounts are expensed as the benefits are consumed. In the early phases of development, our R&D costs are often devoted to product platform and proof-of-concept studies that are not necessarily allocable to a specific product.
Selling, general and administrative expenses
Selling, general, and administrative, or SG&A, expenses consist primarily of compensation for personnel, including stock-based compensation related to commercial, marketing, executive, finance and accounting, information technology, corporate and business development, and human resource functions. Other SG&A expenses include marketing initiatives, market research, and analysis, conferences and trade shows, travel expenses, professional services fees (including legal, patent, accounting, audit, tax, and consulting fees), insurance costs, amortization of internal-use software, general corporate expenses, and allocated facilities-related expenses, including rent and maintenance of facilities. We expect SG&A expenses to continue to increase in absolute dollars as we increase potential customers' awareness and our sales and marketing functions to support existing products and future product launches. In addition, the Company expects to increase expenditures to expand our infrastructure to both drive and support the anticipated growth of the Company as well as additional expenses related to legal, accounting, information technology, investor and public relations, regulatory, and tax-related services associated with maintaining compliance with Nasdaq and SEC requirements, director and officer insurance costs, and other expenses associated with being a public company and implementing additional controls over financial reporting.
Interest and other income (expenses), net
Interest expense includes interest due under our Credit Agreement with Perceptive Credit Holdings III, LP, as administrative agent for the lenders, which were refer to as the Perceptive Credit Facility, and accretion of the debt discount on the Perceptive Credit Facility as well as the change in the fair value of our derivative liabilities and earn-out liabilities that occurred during the period. In addition, it includes the accretion of the interest of the seller financing in connection with the Waypoint asset acquired in November 2021. See Note 9 in the accompanying notes to the consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information. Interest income consists of interest earned on cash balances held in interest-bearing accounts. We expect our interest income will fluctuate based on the timing and ability to raise additional funds as well as the amount of expenditures for our commercial products and R&D for our product candidates and ongoing business operations. Financial Highlights
Year-on-year product revenue increased significantly, primarily due to an increase in sales, primarily of reSET and reSET-O, of approximately 8x year-on-year the other.
We incurred a net loss of $23.9 million and $24.4 million for the three months
ended March 31, 2022 and 2021, respectively, representing a period-over-period
decrease of $0.5 million or 2.2%. This decrease was primarily due to a change in
the fair value of the earn-out liabilities of $14.6 million for the three months
ended March 31, 2022, and a $2.1 million decrease in loss on issuance of
convertible preferred stock. In addition, we had a $9.8 million increase in
personnel-related expenses, primarily related to new hires as we expanded from
an average of approximately 175 people in the three months ended March 31, 2021,
to an average of approximately 300 people for the three months ended March 31,
2022, and as we prepared to become a public company. Further, we had a $1.8
million increase in costs related to being a public company, a $1.2 million
increase in marketing-related expenses, and a $0.9 million increase in
professional fees.
To date, we have funded our operations primarily with proceeds from sales of
convertible preferred stock, proceeds as a result of the Business Combination,
payments received in connection with collaboration and license
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agreements, product sales, and proceeds from borrowings under various credit
facilities. Since our inception, we have received gross cash proceeds of $175.3
million as a result of the business combination (see Note 3 in the accompanying
notes to the consolidated financial statements included in Part I, Item 1 of
this Form 10-Q), gross cash proceeds of $268.2 million from sales of our
convertible preferred stock, and currently have $30.0 million of debt
outstanding under the Perceptive Credit Facility.
Recent Events
Trade suit
On December 3, 2021, we consummated a business combination, pursuant to the
terms of the Business Combination Agreement dated June 21, 2021. Upon the
consummation of the Business Combination, Oz Merger Sub, a newly formed
subsidiary of THMA, merged with and into Pear, with Pear surviving. THMA, was
renamed Pear Therapeutics, Inc (collectively, "Pear") and Pear Therapeutics,
Inc. was renamed Pear Therapeutics (US), Inc. ("Legacy Pear"). Legacy Pear is
deemed the accounting predecessor and the post-company successor SEC registrant,
which means Legacy Pear financial statements for previous periods will be
disclosed in this Form 10-Q. Future period reports filed with the SEC will
include Pear Therapeutics, Inc. and its subsidiaries.
The Business Combination was accounted for as a reverse recapitalization. Under
this method of accounting, THMA was treated as the acquired company for
financial statement reporting purposes. The most significant change in the
post-combination company's reported financial position and results was an
increase in cash of $175.0 million. We paid $32.8 million in transaction costs
relating to the business combination. We recorded a liability related to the
Public Warrants and the Private Placement Warrants of $16.5 million and $95.4
million related to the earn-out shares that holders of Legacy Pear Common Shares
and Legacy Pear Preferred Shares prior on the Closing Date who received the
contingent right to receive up to 12,395,625 additional shares of Class A common
stock (the "Earn-Out Shares") upon the achievement of certain earn-out targets.
As a consequence of the Business Combination, we became the successor to an
SEC-registered and Nasdaq-listed company and we have hired additional personnel
and implemented procedures and processes to address public company regulatory
requirements and customary practices. We expect to incur additional annual
expenses as a public company for, among other things, directors' and officers'
liability insurance, director fees, and additional internal and external
accounting and legal and administrative resources, including increased audit and
legal fees.
Economic conditions (impact of COVID-19)
In March 2020, the World Health Organization declared the global outbreak of
COVID-19 to be a pandemic. The pandemic has significantly impacted the economic
conditions in the US, as federal, state and local governments react to the
public health crisis, creating significant uncertainties in the US economy. The
downstream impact of various lockdown orders and related economic pullback
affect our business and our customers to varying degrees. We are closely
monitoring the impact of COVID-19 on all aspects of its business, including how
it will impact its customers, patients, employees, suppliers, vendors, and
business partners. We are unable to predict the specific impact that COVID-19
may have on its business, financial position, and operations moving forward due
to the numerous uncertainties. Any estimates made herein may change as new
events occur and additional information is obtained, and actual results could
differ materially from any estimates made herein under different assumptions or
conditions.
For further details see the information under the heading "Risk Factors" in Part
II, Item 1A in this Form 10-Q. Pear is unable to predict the full impact that
the COVID-19 pandemic will have on its future results of operations, liquidity,
and financial condition due to numerous uncertainties, including the duration of
the pandemic and the actions that may be taken by government authorities across
the US. However, COVID-19 is not expected to result in any significant changes
in costs going forward. As a result of COVID -19 pandemic we shifted our
workforce to a hybrid model in which employees in one of our three offices work
both remotely and onsite, and we anticipate we will continue to use this model
going forward. In addition, our workforce has deep domain knowledge across a
range of healthcare, technology, and general business, which was partially
achieved by having certain of our employees working remotely across the US. Pear
will continue to monitor the performance of its business and assess the impacts
of COVID-19.
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Operating results
The table and discussion below present the results for the periods indicated:
Three Months Ended March 31, $ %
(in thousands, except percentages) 2022 2021 Change Change
Revenue
Product revenue $ 2,749 $ 300 $ 2,449 * Collaboration and license revenue - 76 (76) (100) % Total revenues 2,749 376 2,373 631 % Cost and operating expenses: Cost of product revenue 1,481 738 743 101 % Research and development 13,264 7,490 5,774 77 % Selling, general, and administrative 22,745 13,299 9,446 71 % Total cost and operating expenses 37,490 21,527 15,963 74 % Loss from operations (34,741) (21,151) (13,590) 64 % Other income (expenses): Interest and other (expense) income, net (1,016) (1,026) 10 (1) % Change in estimated fair value of earn-out liability 14,627 - 14,627 * Change in estimated fair value of warrant liabilities (2,729) (163) (2,566) * Loss on issuance of legacy convertible preferred stock - (2,053) 2,053 (100) % Total other income (expense) 10,882 (3,242) 14,124 (436) % Net loss $ (23,859) $ (24,393) $ 534 (2) %
__________________
* Percentage change not significant.
Product revenue-Product revenue for the three months ended March 31, 2022, was $2.7 million, an increase of $2.4 million compared to the prior year primarily driven by increased sales of reSET and reSET-O under Access Agreements.
Collaboration and licensing revenue – There was no collaboration and licensing revenue for the three months ended March 31, 2022compared to $0.1 million for the three months ended March 31, 2021.
Cost of product revenue-Cost of product revenue for the three months ended March 31, 2022, was approximately $1.5 million, an increase of approximately $0.7 million compared to the prior year primarily due to increased product revenue as discussed above.
Due to our increased marketing efforts, we have seen an increase in our pharmacy costs, minimum royalties related to licensing agreements for marketed products, and hosting costs for our PDTs.
Research and development-R&D expenses were $13.3 million and $7.5 million for
the three months ended March 31, 2022 and 2021, respectively. The increase of
$5.8 million was primarily due to an increase of $4.5 million of
personnel-related costs as we continued shifting our software development work
from external to internal resources, and coinciding with an increase in average
R&D headcount from 83 for the three months ended March 31, 2021, to 141 for the
three months ended March 31, 2022.
Selling, general, and administrative-SG&A expenses were $22.7 million and $13.3
million for the three months ended March 31, 2022 and 2021, respectively. The
increase of $9.4 million was primarily due to further building out of our
commercial operations, which resulted in the following increases:
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•$4.7 million in personnel-related costs as a result of an increase in average
headcount from approximately 86 for the three months ended March 31, 2021, to
approximately 149 for the three months ended March 31, 2022, primarily in the
commercial team;
•$1.8 million in public company fees, including insurance for our directors and officers;
•$1.2 million in marketing and advertising costs as a result of targeted media and market awareness, education and advocacy initiatives;
•$0.9 million in professional fees, including increases in legal and accounting fees;
•$0.4 million of amortization expense, primarily related to the amortization of software used in our patient support center;
Interest and other (expense) income, net-Interest and other income (expense), net was an expense of $1.0 million for the three months ended March 31, 2022 and 2021. Change in fair value of earn-out liabilities-For the three months ended March 31, 2022, we recognized a $14.6 million gain as a result of the change in fair value of the earn-out liabilities. Change in fair value of warrant liabilities-We recognized a $0.2 million loss for the three months ended March 31, 2021 related to the Legacy Pear Warrants, which were exercised in 2021 prior to the Business Combination. For the three months ended March 31, 2022, we recognized a loss of $2.7 million related to the Public Warrants and the Private Placement Warrants, which were issued by THMA prior to the Business Combination. Loss on issuance of legacy convertible preferred stock-In February 2021, we issued shares of Legacy Pear Series D-1 Preferred Stock. The shares were recorded at their estimated fair market value on the date of issuance. In connection with the Legacy Pear Series D-1 Preferred Stock, we recorded a loss of $2.1 million for the three months ended March 31, 2021, which represents the amount by which the estimated fair value of the shares exceeded the sale price, net of issuance costs. Income tax-We did not incur income tax expenses for the three months ended March 31, 2022 and 2021. Given our lack of prior earnings history, we have a full valuation allowance primarily related to our net operating loss and R&D credit carryforwards that we do not consider more likely than not to be realized.
Cash and capital resources
Since our inception, our primary sources of capital have been proceeds from sales of convertible preferred stock, payments received in connection with collaboration agreements, proceeds from borrowings under various credit facilities, and the Business Combination. See Note 3 in the accompanying notes to the consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information. We have three commercial products: reSET, reSET-O, and Somryst. The revenue from the sale of these products at the present time is not sufficient to cover the operating costs incurred. Our ability to achieve sufficient revenue to cover our costs is highly dependent on our PDTs achieving and maintaining broad market acceptance by patients and physicians and obtaining reimbursement from third-party payors. We have incurred recurring losses from inception and anticipate net losses and negative operating cash flows for the near future. For the three months ended March 31, 2022 and 2021, we incurred net operating losses of $23.9 million and $24.4 million, respectively. As of March 31, 2022 and December 31, 2021, we had an accumulated deficit of $271.8 million and $248.0 million, respectively. As of March 31, 2022 and December 31, 2021, we had outstanding debt of $27.2 million and $27.0 million, net of debt issuance costs, respectively. Our cash flows may fluctuate and are difficult to forecast and will depend on many factors. As of March 31, 2022 and December 31, 2021, we had cash and cash equivalents of $89.4 million and $169.6 million, respectively.
Our primary uses of capital are, and we expect to continue to be in the near future, financing operating activities, including expanding our business operations and developing our product portfolio. We have in the
Pear Therapeutics, Inc.| Form 10-Q |Page 30 --------------------------------------------------------------------------------
past and we expect in the future to capitalize labor costs related to the development of our software for internal use. We may also pursue acquisitions, investments, joint ventures and other strategic transactions.
In the future, we will need to raise additional capital to pursue our growth strategy and support continuing operations. Until such time as we can generate significant revenue to fund operations, we expect to seek additional capital from the issuance of equity, debt, or other capital transactions. If sufficient funds on acceptable terms are not available when needed, we will be required to significantly reduce our operating expenses. Further, we may be unable to increase our revenue, raise additional funds, or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates and other strategic initiatives. We are also subject to various covenants related to the Perceptive Credit Facility, and given the substantial doubt about our ability to continue as a going concern, there is a risk that we may not meet our covenants in the future. As of March 31, 2022 and December 31, 2021, we concluded that these circumstances raise substantial doubt about our ability to continue as a going concern. Cash and Cash Equivalents As of March 31, 2022, we had $89.4 million of cash and cash equivalents. Our future capital requirements may vary from those currently planned and will depend on various factors, including the timing and extent of R&D spending and spending on other strategic business initiatives, including expanding our commercial operations.
Liquidity risks
We expect to incur substantial additional expenditures in the near term to support our ongoing activities, including as a result of operating as a public company. We expect to continue to incur net losses for the foreseeable future. Our ability to fund our product development and clinical operations as well as commercialization of our product candidates will depend on the amount and timing of cash available to fund operations. Our future liquidity and capital funding requirements will depend on numerous factors, including:
•the growth of our revenues;
•the possibility of obtaining third-party reimbursement for our current products;
•the amount and timing of sales and other revenue from our product candidates, if approved, including sale price, availability of coverage, and adequate third-party payer reimbursement;
•our business activities, including sales and marketing;
•our R&D efforts;
•the emergence and effect of competing or complementary products;
•the outcome, timing and cost of meeting regulatory requirements established by the FDA or comparable foreign regulatory authorities;
•the progress, timing, scope and costs of our preclinical studies, clinical trials, potential future clinical trials and other related activities;
•the costs of commercialization activities for any of our product candidates that receive marketing authorization, including the costs and timing of establishing product sales, marketing and hosting capabilities, or entering into strategic collaborations with third parties to leverage or access these capabilities;
• cash requirements related to the development of our programs and our ability and willingness to fund their continued development;
•the cash requirements of any future discovery of product candidates;
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• our ability to retain our current employees and the need and ability to hire additional management, sales, technical and medical personnel;
•the time and cost required to respond to technological and market developments, including other products that may compete with one or more of our product candidates;
•debt service requirements;
•the extent to which we acquire or invest in businesses, products or technologies; and
•the impact of the COVID-19 pandemic.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the sale of our products or the development of product candidates. Further, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans. See the information under the heading "Risk Factors" included in Part II, Item 1A this Form 10-Q. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.
Financing needs
Please see the risks associated with our substantial capital requirements explained more fully under the heading "Risk Factors-We will need substantial additional funding, and if we are unable to raise capital when needed or on terms favorable to us, our business, financial condition, and results of operation could be materially and adversely affected" in Part II, Item 1A of this Form 10-Q.
Debt Financing and Covenants
Borrowings under our secured Perceptive Credit Facility were $30.0 million as of March 31, 2022 and December 31, 2021, which was used to extinguish the former SVB Term Loan and for general business purposes. The Perceptive Credit Facility matures in June 2025. We are required to pay a variable rate of interest based upon the one-month LIBOR rate plus 11.0%, subject to a LIBOR floor of 1.0%. As of March 31, 2022, the annual interest rate was 12.0%. The Company is required to make interest-only payments until May 31, 2024, after which point the Company will be required to make monthly payments of principal equal to 3.0% of the then outstanding principal until maturity on June 30, 2025. The Perceptive Credit Facility is secured by substantially all of the assets of the Company, including our intellectual property. The Perceptive Credit Facility requires the Company to (i) maintain a minimum aggregate cash balance of $5.0 million in one or more controlled accounts, and (ii) as of the last day of each fiscal quarter commencing with the fiscal quarter ending March 31, 2022, report revenues for the trailing 12-month period that exceed the amounts that range from $5.8 million for the fiscal quarter ending March 31, 2022, to $125.0 million for the fiscal quarter ending March 31, 2025. The Perceptive Credit Facility contains various affirmative and negative covenants that limit the Company's ability to engage in specified types of transactions. The Company was in compliance with the covenants under the Perceptive Credit Agreement as of March 31, 2022. See Note 7 in the accompanying notes to the consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information. In the future, we may seek to obtain other additional sources of financing, including incurring term debt or issuing equity or debt securities.
From March 31, 2022 and December 31, 2021we have had $0.4 million in an outstanding letter of credit in respect of our property leased to San Francisco, California.
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Contractual obligations, commitments and contingencies
We lease our headquarters in Boston, Massachusetts, under a non-cancelable operating lease with an expiration date of June 1, 2028. We also lease office space in San Francisco, California, under a non-cancelable operating lease that expires on July 31, 2025, and office space in Raleigh, North Carolina, under a non-cancelable operating lease that expires on May 31, 2026. We enter into agreements in the normal course of business with various vendors, which are generally cancellable upon notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including non-cancellable obligations of service providers, up to the date of cancellation. In addition, under various licensing agreements to which we are a party, we are obligated to pay annual license maintenance fees and may be required to make milestone payments and to pay royalties and other amounts to third parties. The payment obligations under these agreements are contingent upon future events, such as our achievement of specified milestones or generating product revenue, and the amount, timing and likelihood of such payments are not known. Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain milestones. These contingent milestones may not be achieved. We cannot estimate or predict when, or if, these amounts will become due. On June 17, 2021, and later amended on August 3, 2021, we entered into a non-cancelable purchase obligation for a subscription to the Palantir Foundry cloud platform, including support services, updates, and related professional services with Palantir for $9.3 million payable over three years, continuing through September 30, 2024.
See Notes 8 and 9 of the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for more information.
Cash flow
The following table provides a summary of the cash flow data for each applicable period:
Three Months Ended March 31, (in thousands) 2022 2021 Net cash used in operating activities $ (36,708) $ (20,961) Net cash provided by investing activities (43,500) 215 Net cash provided by financing activities 75 20,319
Net increase in cash, cash equivalents and restricted cash $
(80,133) $ (427) Operating Activities Net cash used in operating activities was $36.7 million for the three months ended March 31, 2022. Net cash used in operating activities consists of a net loss of $23.9 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments primarily include the change in fair value of earn-out liabilities of $14.6 million, offset by stock-based compensation of $2.9 million, the change in fair value of warrant liabilities of $2.7 million, and net changes in operating assets and liabilities (working capital) of $5.3 million. Net cash used in operating activities was $21.0 million for the three months ended March 31, 2021. Net cash used in operating activities consists of a net loss of $24.4 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments primarily include loss on the issuance of convertible preferred stock of Legacy Pear of $2.1 million and stock-based compensation expense of $0.5 million.
Investing activities
Net cash used in investing activities was $43.5 million for the three months ended March 31, 2022mainly related to the purchase of investments of
$43.0 million.
Pear Therapeutics, Inc.| Form 10-Q |Page 33 -------------------------------------------------------------------------------- Net cash provided by investing activities was $0.2 million for the three months ended March 31, 2021, and related primarily to maturities of investments of $4.0 million offset by purchases of investments of $3.0 million and purchases of property and equipment of $0.8 million.
Fundraising activities
Through March 31, 2022, Pear has financed its operations primarily through the Business Combination , the sale of Legacy Pear convertible preferred stock, payments received in connection with collaboration agreements, and borrowings under various credit facilities.
Net cash provided by financing activities was $0.1 million for the three months ended March 31, 2022and related to proceeds from the exercise of stock options.
Net cash provided by financing activities was $20.3 million for the three months ended March 31, 2021, and related to net proceeds from the issuance of Legacy Pear Series D convertible preferred stock of $19.9 million and proceeds of $0.4 million from the exercise of stock options.
Related party transactions
Certain holders of Legacy Pear Series A preferred stock had representation on the Company's then board of directors and purchased shares of Legacy Pear Series B preferred stock. Certain holders of Legacy Pear Series A and B preferred stock had representation on the Company's then board of directors and purchased shares of Legacy Pear Series C preferred stock. Certain holders of Legacy Pear Series A, B, and C preferred stock had representation on the Company's then board of directors and purchased shares of Legacy Pear Series D preferred stock. Certain holders of Legacy Pear Series A, B, C, and D preferred stock had representation on the Company's then board of directors and purchased PIPE Shares.
Emerging Growth Business Status (JOBS Act)
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. We are an "emerging growth company" as defined in Section 2(A) of the Securities Act of 1933, as amended, and have elected to take advantage of the benefits of this extended transition period. We expect to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public business entities and nonpublic business entities until the earlier of the date we (a) are no longer an emerging growth company or (b) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
Additionally, we have elected to take other exemptions and reduced reporting requirements under the JOBS Act and are not required to, among other things:
(a) provide an auditor’s attestation report on Pear’s system of internal control over financial reporting pursuant to section 404(b) of the Sarbanes-Oxley Act;
(b) provide all compensation disclosures that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act; and
(c) disclose certain elements related to executive compensation, such as the correlation between executive compensation and performance and comparisons between CEO compensation and median employee compensation.
Pear Therapeutics, Inc.| Form 10-Q |Page 34 --------------------------------------------------------------------------------
Recent accounting pronouncements
Refer to the accompanying notes to consolidated financial statements as of and for the three months ended March 31, 2022 and 2021, included in Part I, Item 1 of this Form 10-Q for more information regarding recently issued accounting pronouncements, the timing of their adoption, and its assessment, to the extent it has made one, of their potential impact on its financial condition and results of operations.
Significant Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity with US generally accepted accounting principles, or US GAAP, and the Company's discussion and analysis of its financial condition and operating results require the Company's management to make judgments, assumptions and estimates that affect the amounts reported. Management bases these estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities. Actual results may differ materially from these estimates if past experience or other assumptions do not turn out to be substantially accurate. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We monitor our estimates on an ongoing basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our condensed consolidated financial statements. We have determined that our most critical accounting policies are those relating to Legacy Pear Preferred and Common stock valuations, revenue recognition, valuation of earn-out liabilities, and stock-based compensation. There have been no significant changes to our existing critical accounting policies and significant accounting policies discussed in the Annual Report on Form 10-K for the year ended December 31, 2021.
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