Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this report.
Overview
Jaguar Health, Inc. (“Jaguar” or the “Company”) is a commercial stage pharmaceuticals company focused on developing novel, plant-based, non-opioid, and sustainably derived prescription medicines for people and animals with GI distress, including chronic, debilitating diarrhea. Jaguar Animal Health is a tradename of Jaguar Health. Our wholly owned subsidiary, Napo Pharmaceuticals, Inc. (“Napo”), focuses on developing and commercializing proprietary plant-based human pharmaceuticals for the global marketplace from plants or plant products used traditionally in rainforest areas. Napo’s marketed drug Mytesi (crofelemer 125 mg delayed-release tablets) is a first-in-class oral botanical drug product approved by the U.S. Food and Drug Administration (“FDA”) for the symptomatic relief of noninfectious diarrhea in adults with HIV/AIDS on antiretroviral therapy. To date, this is the only oral plant-based botanical prescription medicine approved under the FDA’s Botanical Guidance. Jaguar Animal Health’s Canalevia-CA1 (crofelemer delayed-release tablets) drug is the first and only oral plant-based prescription product that is FDA conditionally approved to treat chemotherapy-induced diarrhea (CID) in dogs. Canalevia-CA1 is a canine-specific formulation of crofelemer. Napo Therapeutics S.p.A., Napo’s majority owned Italian subsidiary, focuses on expanding crofelemer access in Europe.
Jaguar, formerly known as Jaguar Animal Health, Inc., was founded in San Francisco, California as a Delaware corporation on June 6, 2013 (inception). The Company was a majority-owned subsidiary of Napo until the close of the Company's initial public offering on May 18, 2015. The Company was formed to develop and commercialize first-in-class prescription and non-prescription products for companion and production animals and horses. The Company's first non-prescription commercial products, Neonorm Calf and Neonorm Foal, were launched in 2014 and 2016, respectively.
On July 31, 2017, Jaguar completed a merger with Napo pursuant to the Agreement and Plan of Merger dated March 31, 2017, by and among Jaguar, Napo, Napo Acquisition Corporation (“Merger Sub”), and Napo's representative (the “Merger Agreement”). In accordance with the terms of the Merger Agreement, upon the completion of the merger, Merger Sub merged with and into Napo, with Napo surviving as the wholly-owned subsidiary (the “Merger” or “Napo Merger”). Immediately following the Merger, Jaguar changed its name from “Jaguar Animal Health, Inc.” to “Jaguar Health, Inc.” Napo now operates as a wholly-owned subsidiary of Jaguar focused on human health including the ongoing development of crofelemer and commercialization of Mytesi.
On March 15, 2021, Jaguar established Napo EU S.p.A (which changed its name in December 2021 to “Napo Therapeutics”) based in Milan, Italy as a subsidiary of Napo. Napo Therapeutics’ mission is to provide access to crofelemer in Europe to address significant rare/orphan disease indications, including, initially, two key orphan target indications: Short bowel syndrome with intestinal failure (SBS-IF), and congenital diarrheal disorders (CDD). On November 3, 2021, Napo Therapeutics merged with Dragon SPAC S.p.A. (“Dragon SPAC”).
Most of the activities of the Company are focused on the commercialization of Mytesi and Canalevia-CA1 and the ongoing clinical development of crofelemer for the prophylaxis of diarrhea in adult patients receiving targeted cancer therapy. In the field of animal health, we are continuing limited activities related to developing and commercializing first in class gastrointestinal products for dogs, dairy calves, foals, and high value horses.
We believe Jaguar is poised to realize a number of synergistic, value adding benefits—an expanded pipeline of potential blockbuster human follow on indications of crofelemer, and a second generation anti secretory agent—upon which to build global partnerships. Jaguar, through Napo, holds global unencumbered rights for crofelemer, Mytesi, and Canalevia-CA1. Additionally, several of the drug product opportunities in Jaguar’s crofelemer pipeline are backed Phase 2 and proof of concept evidence from human clinical trials.
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Crofelemer is a novel, first in class anti secretory agent which has a normalizing effect on electrolyte and fluid balance while acting locally in the gut, and this mechanism of action has the potential to benefit multiple disorders that cause gastrointestinal distress, including diarrhea and abdominal discomfort. Crofelemer is also in development for possible follow on indications, including prophylaxis for cancer therapy related diarrhea (“CTD”); for rare disease indications for symptomatic treatment of infants and children with congenital diarrheal disorders (“CDD”) and for adult and pediatric patients with short bowel syndrome with intestinal failure (“SBS-IF”). Crofelemer has received orphan drug designation (ODD) for short bowel syndrome (SBS) in the US and in EU. Furthermore, the drug is being evaluated for management of diarrhea and abdominal discomfort in inflammatory bowel disease (“IBD”); diarrhea-predominant irritable bowel syndrome (“IBS-D”); and for idiopathic/functional diarrhea. A second generation proprietary anti secretory agent, NP-300 (lechlemer), is undergoing preclinical development for symptomatic relief and treatment of diarrhea in patients with acute infection from cholera.
Financial Operations Overview
On a consolidated basis, we have not yet generated enough revenue to date to achieve break even or positive cash flow, and we expect to continue to incur significant research and development and other expenses. Our net loss was $52.6 million and $33.8 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had total stockholders' equity of $11.9 million, an accumulated deficit of $219.5 million, and cash of $17.1 million. We expect to continue to incur losses and experience increased expenditures for the foreseeable future as we expand our product development activities, seek necessary approvals for our product candidates, conduct species-specific formulation studies for our non-prescription products, establish API manufacturing capabilities and begin additional commercialization activities.
Revenue
Our product and collaboration revenue consists of the following:
● Revenues from the sale of our human drug Mytesi, which is sold through distributors and wholesalers.
● Revenues from the sale of our animal products branded as Neonorm Calf and Neonorm Foal. Our Neonorm and Botanical extract products are primarily sold to distributors, who then sell the products to the end customers.
● Our policy typically permits returns if the product is damaged, defective, or otherwise cannot be used when received by the customer if the product has expired. Returns are accepted for product that will expire within six months or that have expired up to one year after their expiration dates. Estimates for expected returns of expired products are based primarily on an ongoing analysis of our historical return patterns.
See “Results of Operations” below for more detailed discussion on revenues
Cost of Revenue
Cost of revenue consists of direct drug substance and drug product materials expense, direct labor, distribution fees, royalties and other related expenses associated with the sale of our products.
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Research and Development Expense
Research and development expenses consist primarily of clinical and contract manufacturing expense, personnel and related benefit expense, stock-based compensation expense, employee travel expense and reforestation expenses. Clinical and contract manufacturing expense consists primarily of costs to conduct stability, safety and efficacy studies, and manufacturing startup expenses at an outsourced API provider in Italy. It also includes expenses with a third-party provider for the transfer of the Mytesi manufacturing process, and the related feasibility and validation activities.
We typically use our employee and infrastructure resources across multiple development programs. We track outsourced development costs by prescription drug product candidate and non-prescription product but do not allocate personnel or other internal costs related to development to specific programs or development compounds.
The timing and amount of our research and development expenses will depend largely upon the outcomes of current and future trials for our prescription drug product candidates as well as the related regulatory requirements, the outcomes of current and future species-specific formulation studies for our non-prescription products, manufacturing costs and any costs associated with the advancement of our line extension programs. We cannot determine with certainty the duration and completion costs of the current or future development activities.
The duration, costs and timing of trials, formulation studies and development of our prescription drug and non-prescription products will depend on a variety of factors, including:
● the scope, rate of progress, and expense of our ongoing, as well as any additional clinical trials, formulation studies and other research and development activities;
● future clinical trial and formulation study results;
● potential changes in government regulations; and
● the timing and receipt of any regulatory approvals.
A change in the outcome of any of these variables with respect to the development of a prescription drug product candidate or non-prescription product could mean a significant change in the costs and timing associated with our development activities.
We expect research and development expense to increase due to the start-up costs associated with our clinical trials for other indications.
Sales and Marketing Expense
Sales and marketing expenses consist of personnel and related benefit expense, stock-based compensation expense, direct sales and marketing expense, employee travel expense, and management consulting expense. We currently incur sales and marketing expenses to promote Mytesi. We do not currently have any marketing or promotional expenses related to Neonorm Calf or Neonorm Foal for the years ended December 31, 2021 and 2020.
We expect sales and marketing expense to increase going forward as we focus on expanding our market access activities and commercial partnerships for the development of follow-on indications of Mytesi and crofelemer.
General and Administrative Expense
General and administrative expenses consist of personnel and related benefit expense, stock-based compensation expense, employee travel expense, legal and accounting fees, rent and facilities expense, and management consulting expense.
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In the near term, we expect general and administrative expense to remain flat as we focus on our pipeline development and market access expansion. This will include efforts to grow the business.
Interest Expense
Interest expense consists primarily of non-cash and cash interest costs related to our borrowings.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to the consolidated financial statements, appearing elsewhere in this report.
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Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
The following table summarizes the Company’s results of operations with respect to the items set forth in such table for the years ended December 31, 2021 and 2020 together with the change in such items in dollars and as a percentage.
Year Ended
December 31,
(in thousands)
2021
2020
Variance
Variance %
Product revenue
$
4,335
$
9,385
$
(5,050)
(53.8)
%
Total revenue
4,335
9,385
(5,050)
(53.8)
%
Operating Expenses
Cost of product revenue
2,333
3,280
(947)
(28.9)
%
Research and development
15,079
6,413
8,666
135.1
%
Sales and marketing
8,894
6,609
2,285
34.6
%
General and administrative
17,103
14,387
2,716
18.9
%
Series 3 warrants inducement expense
1,462
3,696
(2,234)
(60.4)
%
ELOC warrants inducement expense
172
—
172
100.0
%
Series B convertible preferred stock inducement expense
—
1,647
(1,647)
(100.0)
%
Total operating expenses
45,043
36,032
9,011
25.0
%
Loss from operations
(40,708)
(26,647)
(14,061)
52.8
%
Interest expense
(8,421)
(2,792)
(5,629)
201.6
%
Loss on extinguishment of debt and exchange of Series D perpetual preferred stock
(753)
(1,864)
1,111
(59.6)
%
Change in fair value of financial instruments and hybrid instrument designated at Fair Value Option
(1,953)
(2,696)
743
(27.6)
%
Other expense, net
(765)
190
(955)
(502.6)
%
Loss before income tax
(52,600)
(33,809)
(18,791)
55.6
%
Income tax expense
—
—
—
100.0
%
Net loss and comprehensive loss
(52,600)
(33,809)
(18,791)
55.6
%
Deemed dividend attributable to Series C perpetual preferred stock
—
(2,521)
2,521
(100)
%
Deemed dividend attributable to accretion of Series A redeemable convertible preferred stock
—
(1,332)
1,332
(100)
%
Deemed dividend attributable to Series 1, Series 2 and Bridge warrant holders
—
(856)
856
(100)
%
Stock dividend attributable to Series C perpetual preferred stock
—
(130)
130
(100)
%
Adjusted net loss and comprehensive loss
$
(52,600)
$
(38,648)
$
(13,952)
36.1
%
Net loss attributable to noncontrolling interest
$
(5)
$
—
$
(5)
100
%
Net loss attributable to common shareholders
$
(52,595)
$
(38,648)
$
(13,947)
36.1
%
Revenue
Product revenue
We transitioned from selling to the wholesalers that resell the product to retail pharmacies to the closed Specialty Pharmacy distribution networks throughout the year 2021 and we fully transitioned in the fourth quarter of the same year. The transition caused a one-time inventory draw-down of approximately 1,300 bottles of Mytesi across
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our third-party logistics warehouse, wholesalers, distributors, and retail stores. This significantly contributed to the decrease of $4.8 million of Mytesi gross revenue for the year 2021 compared to 2020.
Medicaid and AIDS Drug Assistance Program (“ADAP”) rebates accounted for $3.5 million and $1.7 million for the year ended December 31, 2021 and 2020, respectively, an increase of $1.7 million primarily due to the WAC increase implemented by the Company in April 2020 which resulted in higher government rebates from Medicaid, ADAP, public health services programs, and includes approximately $800,000 in chargebacks from the State of California. Sales discounts were $6.2 million and $7.0 million for the year ended December 31, 2021 and 2020, respectively, a decrease of $778,000. We expect the wholesaler fees to decline in line with our switch to the closed Specialty Pharmacy distribution network.
Due to the Company’s arrangements, including elements of variable consideration, gross product sales are reduced in order to reflect the expected consideration to arrive at net product sales. Deductions to reduce gross product sales to net product sales for the years ended December 31, 2021 and 2020 are as follows:
Year Ended
December 31,
(in thousands)
2021
2020
Variance
Variance %
Gross product sales
Mytesi
$
15,657
$
20,434
$
(4,777)
(23.4)
%
Neonorm
62
77
(15)
(19.5)
%
Total gross product sales
15,719
20,511
(4,792)
(23.4)
%
Medicaid rebates
(3,484)
(1,738)
(1,746)
100.5
%
Sales discounts
(6,268)
(7,046)
778
(11.0)
%
Sales returns
(104)
(273)
169
(61.9)
%
Wholesaler fee
(1,528)
(2,069)
541
(26.1)
%
Net product sales
$
4,335
$
9,385
$
(5,050)
(53.8)
%
Our gross product revenues were $15.7 million and $20.5 million for the year ended December 31, 2021 and 2020, respectively. These periods reflect revenue from the sale of our human drug Mytesi and our animal products branded as Neonorm Calf and Neonorm Foal. This contributed to the decrease of $4.8 million of Mytesi gross revenue for the year 2021 compared to 2020.
Our Neonorm product revenues were $62,000 and $77,000 for the year ended December 31, 2021 and 2020, respectively. Sales and marketing expenses for Neonorm products are not significant during 2021 and none during the same period in 2020.
Cost of Product Revenue
Year Ended
December 31,
(in thousands)
2021
2020
Variance
Variance %
Cost of Product Revenue
Material cost
$
998
$
1,800
$
(802)
(44.6)
%
Direct labor
996
724
272
37.6
%
Distribution fees
199
430
(231)
(53.7)
%
Other
140
326
(186)
(57.1)
%
Total
$
2,333
$
3,280
$
(947)
(28.9)
%
The change in cost of product revenue of $947,000 for the year ended December 31, 2021 compared to 2020 was primarily due to:
● Material costs decreased $802,000 from $1.8 million for the year ended December 31, 2020 to $998,000 in 2021, largely attributable to lower sales resulting in less cost of materials for bottles sold and to non-
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recurring write-off of non-conforming inventory in the year ended December 31, 2020. There was no write-off in 2021.
● Distribution fees decreased $231,000 from $430,000 for the year ended December 31, 2020 to $199,000 in 2021 in line with our transition from Title model to Specialty Pharmacy distribution network.
● Other costs decreased $186,000 from $326,000 for the year ended December 31, 2020 to $140,000 in 2021 mainly consisting of $118,000 less in write-offs of non-conforming inventory, and a decrease in equipment maintenance of $9,000 in 2020.
● Direct labor increased $272,000 from $724,000 for the year ended December 31, 2020 to $996,000 in 2021, due to increased resources in manufacturing.
Research and Development Expense
The following table presents the components of research and development (“R&D”) expense for the years ended December 31, 2021 and 2020:
Year Ended
December 31,
(in thousands)
2021
2020
Variance
Variance %
Research and Development:
Clinical and contract manufacturing
$
6,257
$
1,674
$
4,583
273.8
%
Personnel and related benefits
3,954
1,771
2,183
123.3
%
Stock-based compensation
1,319
749
570
76.1
%
Materials expense and tree planting
361
94
267
284.0
%
Travel, other expenses
40
45
(5)
(11.1)
%
Other
3,148
2,080
1,068
51.3
%
Total
$
15,079
$
6,413
$
8,666
135.1
%
The change in R&D expense of $8.7 million for the year ended December 31, 2021 compared to 2020 was primarily due to:
● Clinical and contract manufacturing expenses increased $4.6 million from $1.7 million for the year ended December 31, 2020 to $6.3 million in 2021 largely due to increased clinical trial activities related to the start-up of CTD and other indications, additional CMC manufacturing, consulting and contractors’ expenses, and cholera/lechlemer research expenses.
● Personnel and related benefits increased $2.2 million from $1.8 million for the year ended December 31, 2020 to $4.0 million in 2021 due to increased resources, salary increases in April 2021 and an increase in bonus.
● Other expenses increased $1.1 million from $2.1 million for the year ended December 31, 2020 to $3.1 million in 2021 mainly consisting of consulting, formulation and regulatory fees. Consulting expenses increased due to increase in clinical trial consultants while direct R&D testing costs also increased due to an increase in R&D work.
● Stock-based compensation increased $570,000 from $749,000 for the year ended December 31, 2020 to $1.3 million in 2021 primarily due to new options granted in April 2021.
● Material expense and tree planting increased $267,000 from $94,000 for the year ended December 31, 2020 to $361,000 in 2021 due to increased clinical trials.
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Sales and Marketing Expense
The following table presents the components of sales and marketing (“S&M”) expense for the years ended December 31, 2021 and 2020:
Year Ended
December 31,
(in thousands)
2021
2020
Variance
Variance %
Sales and Marketing:
Personnel and related benefits
$
3,916
$
3,323
$
593
17.8
%
Direct marketing fees and expense
3,415
2,187
1,228
56.1
%
Stock-based compensation
319
220
99
45.0
%
Other
1,244
879
365
41.5
%
Total
$
8,894
$
6,609
$
2,285
34.6
%
The change in S&M expense of $2.3 million for the year ended December 31, 2021 compared to 2020 was primarily due to:
● Direct marketing fees and expense increased $1.2 million from $2.2 million for the year ended December 31, 2020 to $3.4 million in 2021 due to an increase in marketing programs for Mytesi related to the expanding market access through specialty pharmacy channels.
● Personnel and related benefits increased $593,000 from $3.3 million for the year ended December 31, 2020 to $3.9 million in 2021 due to the addition of four new personnel within Commercial Operations, increase in bonus, and salary increases in April 2021.
● Other expenses increased $365,000 from $879,000 for the year ended December 31, 2020 to $1.2 million in 2021 largely due to additional marketing consulting costs.
General and Administrative Expense
The following table presents the components of general and administrative (“G&A”) expense for the years ended December 31, 2021 and 2020:
Year Ended
December 31,
(in thousands)
2021
2020
Variance
Variance %
General and Administrative:
Personnel and related benefits
$
3,390
$
1,845
$
1,545
83.7
%
Stock-based compensation
2,336
1,855
481
25.9
%
Legal services
2,303
2,449
(146)
(6.0)
%
Public company expense
2,270
1,179
1,091
92.5
%
Audit, tax and accounting services
982
706
276
39.1
%
Third-party consulting services
859
845
14
1.7
%
Rent and lease expense
282
690
(408)
(59.1)
%
Travel, other expenses
197
38
159
418.4
%
Other
4,484
4,780
(296)
(6.2)
%
Total
$
17,103
$
14,387
$
2,716
18.9
%
The change in G&A expenses of $2.7 million for the year ended December 31, 2021 compared to 2020 was due primarily to:
● Personnel and related benefits increased $1.5 million from $1.8 million for the year ended December 31, 2020 to $3.4 million in 2021 due to new hires and increase in bonus.
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● Public company expenses increased $1.1 million from $1.2 million for the year ended December 31, 2020 to $2.3 million in 2021 largely attributable to the investor relations and communications consulting expenses, and expenses for the annual shareholder meeting.
● Stock-based compensation expense increased $481,000 from $1.9 million for the year ended December 31, 2020 to $2.3 million in 2021 primarily due to higher expense incurred for options granted with immediate vesting to existing employees.
● Audit, tax and accounting services fees increased $276,000 from $706,000 for the year ended December 31, 2020 to $982,000 in 2021, mostly due to the increased audit fees related to complex debt and equity transactions.
● Travel, other expenses increased $159,000 from $38,000 for the year ended December 31, 2020 to $197,000 in 2021 due to other corporate and investor relations activities.
● Rent and lease expense decreased $408,000 from $690,000 for the year ended December 31, 2020 to $282,000 in 2021 as a result of the transfer to a lower-cost facility and the occupancy of less space.
● Other general and administrative expenses decreased $296,000 from $4.8 million for the year ended December 31, 2020 to $4.5 million in 2021 largely due to decreased consulting expenses in 2021. There was a non-recurring charge of $1.0 million for the Atlas trial delay penalty incurred in the year ended December 31, 2020.
● Legal services decreased $146,000 from $2.4 million for the year ended December 31, 2020 to $2.3 million in 2021 primarily due to a decrease in fees related to legal proceedings and other regulatory filings.
Series 3 Warrants Inducement Expense
The decrease in the Series 3 Warrants inducement expense of $2.2 million is due to the following:
● In January 2021, the Company issued 135,416 Series 3 Warrants to a certain investor for the exercise of 135,416 Bridge Note Warrants in accordance with the May 2020 Modification of the 2019 Bridge Note Warrants and Inducement Offer. These Series 3 Warrants were valued at $1.5 million using the Black-Scholes-Merton option pricing model on the issuance date.
● In May 2020, concurrent with the May 2020 modification of the exercise price of the Series 1, Series 2 and Bridge Warrants and inducement offer, the Company issued unregistered Series 3 warrants to purchase 2,890,284 shares of common stock. These Series 3 warrants were valued at $3.7 million using the Black-Scholes-Merton option pricing model on the issuance date.
ELOC Warrants Inducement Expense
In April 2021, in consideration for Oasis Capital’s entry into the amendment to the March 2020 Equity Line of Credit, the Company issued Oasis Capital a common stock purchase warrant exercisable for 33,333 shares of common stock with an exercise price per share equal to $5.61 on the date of the amendment. These warrants were valued at $172,000 on the issuance date.
Series B Convertible Preferred Stock Inducement Expense
On March 24, 2020, the Company entered into a Warrant Exercise and Preferred Stock Amendment Agreement with a holder of its Series 2 warrants previously issued in the Company’s registered public offering on July 23, 2019, pursuant to which the holder agreed to exercise in cash its warrants to purchase an aggregate of 416,666
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shares of common stock, at a reduced exercise price of $1.57 per share for gross proceeds to the Company of approximately $653,000. As a further inducement to enter into the Amendment Agreement, the Company agreed to reduce the conversion price of the Company’s Series B Convertible Preferred Stock from $6.00 to $1.34. The modification of the conversion price of the Series B Convertible Preferred shares was qualitatively considered an extinguishment and the Company followed the guidance in ASC 260-10-S99-2 and recorded an expense of $1.6 million and derecognizing the Series B Convertible Preferred shares.
Interest Expense, net
Interest expense increased $5.6 million from $2.8 million for the year ended December 31, 2020 to $8.4 million in 2021 primarily due to additional interest expense incurred on royalty interest agreements.
Loss on Extinguishment of Debt and Exchange of Series D Perpetual Preferred Stock
The loss on extinguishment of debt and conversion of Series D Perpetual Preferred Stock decreased $1.1 million from $1.9 million for the year ended December 31, 2020 to $753,000 in 2021 is due to the following:
● During 2020, the Company recorded a $560,000 extinguishment loss from exchanges of the outstanding Exchange Note 1 for shares of the Company’s common stock; and
● In December 2020, the Company recorded a $1.3 million loss from exchanges of Series D Perpetual Preferred Stock for shares of the Company’s common stock.
● In January 2021, the Company recorded a $753,000 loss from the exchange of the outstanding balance of Exchange Note 2 for the Company’s shares common stock.
Change in Fair Value of Financial Instruments and Hybrid Instrument Designated at FVO
Change in fair value of financial instruments decreased $743,000 from a loss of $2.7 million for the year ended December 31, 2020 to a loss of $2.0 million in 2021 primarily due to fair value adjustments in liability classified warrants and notes payable designated at FVO.
Deemed Dividend Attributable to Series C Perpetual Preferred Stock
The Company recorded a deemed dividend of $2.5 million for the year ended December 31, 2020 that resulted from the series of exchanges of Series C Perpetual Preferred Stock in October and December 2020.
Deemed Dividend Attributable to Accretion of Series A Redeemable Convertible Preferred Stock
The Company recorded a deemed dividend charge of $1.3 million for the year ended December 31, 2020 for the accretion of the redemption amount and carrying value of the Series A Convertible Preferred Stock.
Deemed Dividend Attributable to Series 1, Series 2 and Bridge Warrant Holders
The Company recorded a deemed dividend of $856,000 for the year ended December 31, 2020 that resulted from the modification of the Series 1, Series 2 and Bridge Warrants in May 2020.
Stock Dividend Attributable to Series C Perpetual Preferred Stock
The Company recorded a $130,000 stock dividend attributable to the Series C Perpetual Preferred Stock for the year ended December 31, 2020. The Series C Perpetual Preferred shares were entitled to receive 10% cumulative stock dividends, to be payable in arrears on a monthly basis for 24 consecutive months. Dividends payable on the
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Series C Perpetual Preferred shares shall be payable through the Company’s issuance of Series C Perpetual Preferred share by delivering to each record holder the calculated number of payment-in-kind dividend shares.
Liquidity and Capital Resources
Sources of Liquidity
We have incurred net losses since our inception. For the years ended December 31, 2021 and 2020, we had net losses of $52.6 million and $33.8 million, respectively, and we expect to incur additional losses in the near-term future. At December 31, 2021, we had an accumulated deficit of $219.5 million. To date, we have generated only limited revenue, and we may never achieve revenue sufficient to offset our expenses. The Company expects to incur substantial losses and negative cash flows in future periods. Further, the Company’s future operations, which include the satisfaction of current obligations, are dependent on the success of the Company’s ongoing development and commercialization efforts, as well as securing of additional financing and generating positive cash flows from operations. There is no assurance that the Company will have adequate cash balances to maintain its operations.
We had cash of $17.1 million as of December 31, 2021 to fund our operating plan through one year from the issuance of these consolidated financial statements.
Although the Company plans to finance its operations and cash flow needs through equity and/or debt financing, collaboration arrangements with other entities, license royalty agreements, as well as revenue from future product sales, the Company does not believe its current cash balances are sufficient to funds its operating plan through one year from the issuance of these consolidated financial statements. The Company has an immediate need to raise cash. There can be no assurance that additional funding will be available to the Company on acceptable terms, or on a timely basis, if at all, or that the Company will generate sufficient cash from operations to adequately fund operating needs. If the Company is unable to obtain an adequate level of financing needed for the long-term development and commercialization of our products, the Company will need to curtail planned activities and reduce costs. Doing so will likely have an adverse effect on our ability to execute our business plan; accordingly, there is substantial doubt about the ability of the Company to continue in existence as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
We have funded our operations primarily through the issuance of equity and debt financing, in addition to sales of commercial products. Cash provided by financing activities in 2021 are as follows:
● During January 2021, an aggregate of 416,664 shares of common stock was issued upon the exercise of the December 2019 PIPE Financing Warrants for total proceeds of $975,000.
● On January 13, 2021, the Company entered into a securities purchase agreement, pursuant to which the Company agreed to issue and sell, in a registered public offering an aggregate of 1,479,290 shares of common stock, at an offering price of $10.14 per share for net proceeds of approximately $13.5 million.
● On January 19, 2021, the Company entered into a note purchase agreement with Streeterville Capital, LLC (“Streeterville”), pursuant to which the Company issued a secured promissory note in the aggregate principal amount of $6.2 million for an aggregate purchase price of $6.0 million.
● During January and February 2021, the Company issued an aggregate of 669,850 shares under the ATM Agreement for total net proceeds of $5.4 million.
● On March 8, 2021, the Company entered into a Royalty Purchase Agreement with Streeterville, pursuant to which the Company sold a royalty interest entitling Streeterville to $10.0 million and any interest, fees, and charges as royalty repayment amount for an aggregate purchase price of $5.0 million. Interest will accrue on the royalty repayment amount at a rate of 5% per annum, compounding quarterly, and will increase to 10% per annum, compounding quarterly on the 12-month anniversary of the closing date.
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● Between January to March 2021, an aggregate of 1,383,524 shares of common stock were issued upon the exercise of Series 1, Series 2 and Bridge Note Warrants for total proceeds of $2.0 million.
● On April 29, 2021, the Company entered into a securities purchase agreement, pursuant to which the Company agreed to issue and sell, in a registered public offering an aggregate of 2,549,000 shares of common stock at an offering price of $4.23 per share for gross proceeds of approximately $10.8 million before deducting placement agent fees and related offering expenses of $948,000.
● On September 13, 2021, the Company entered into a securities purchase agreement (the “September 2021 PIPE Financing”) with certain investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement an aggregate of 309,242 unregistered shares of the Company’s common stock for an aggregate purchase price of approximately $776,000 or $2.51 per share.
● On December 10, 2021, the Company entered into another ATM Agreement (“December 2021 ATM Agreement”) with Ladenburg, pursuant to which the Company may offer and sell, from time to time through Ladenburg, shares of common stock having an aggregate offering price of up to $15.0 million. As of December 31, 2021, the Company has issued 2,261,596 shares under the December 2021 ATM Agreement for a total net proceeds of $3.2 million.
We expect our expenditures will continue to increase as we continue our efforts to develop our products and continue development of our pipeline in the near term. We may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. We may also not be successful in entering into partnerships that include payment of upfront licensing fees for our products and product candidates for markets outside the United States, where appropriate. If we do not generate upfront fees from any anticipated arrangements, it would have a negative effect on our operating plan. We still plan to finance our operations and capital funding needs through equity and/or debt financing as well as revenue from future product sales. However, there can be no assurance that additional funding will be available to us on acceptable terms on a timely basis, if at all, or that we will generate sufficient cash from operations to adequately fund operating needs or ultimately achieve profitability. If we are unable to obtain an adequate level of financing needed for the long-term development and commercialization of our products, we will need to curtail planned activities and reduce costs. Doing so will likely have an adverse effect on our ability to execute on our business plan.
Cash Flows for Year Ended December 31, 2021 compared to the Year Ended December 31, 2020
The following table shows a summary of cash flows for the years ended December 31, 2021 and 2020:
Year Ended December 31,
(in thousands)
2021
2020
Total cash used in operating activities
$
(34,970)
$
(15,278)
Total cash used in investing activities
(6)
(7)
Total cash provided by financing activities
43,937
19,492
Net increase in cash
$
8,961
$
4,207
Cash Used in Operating Activities
During the year ended December 31, 2021, net cash used in operating activities of $35.0 million resulted from our net loss of $52.6 million adjusted by amortization of debt issuance costs, debt discount, and non-cash interest expense of $5.2 million, stock-based compensation of $4.0 million, change in fair value of financial instruments and hybrid instruments designated at FVO of $2.0 million, depreciation and amortization expenses of $1.7 million, Series 3 and ELOC warrants inducement expenses of $1.6 million, loss on extinguishment of debt of $753,000, amortization of operating lease right-of-use assets of $94,000, derecognition of debt discount on settlement of receivables secured borrowing of $49,000, shares issued in exchange for services of $16,000, and net changes in operating assets and liabilities of $2.3 million.
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During the year ended December 31, 2020, net cash used in operating activities of $15.3 million resulted from our net loss of $33.8 million adjusted by depreciation and amortization expenses of $1.7 million, interest paid on the conversion of debt to equity of $0.6 million, a loss on extinguishment of debt and conversion of Series D Perpetual Preferred Stock of $1.9 million, a loss on recourse obligation on secured borrowing of $15,000, amortization of operating lease right-of-use assets of $553,000, expense on modifications of warrants of $86,000, inducement charge of $1.6 million on the modification of Series B Convertible Preferred Stock, stock-based compensation of $2.8 million, other stock and warrant payments of $1.1 million, amortization of debt discounts, debt issuance costs, and non-cash interest expense of $2.7 million, $2.5 million in shares issued to Atlas Sciences for settlement of the Trial Delay Fee, an increase in fair value of financial instruments of $2.7 million, and $3.7 million charge for Series 3 Warrants issued as an inducement to exercise equity-classified Series 1, Series 2 and Bridge warrants, offset by changes in operating assets and liabilities of $3.5 million.
Cash Used in Investing Activities
During the year ended December 31, 2021, cash used in investing activities was $6,000 which consisted of cash used to purchase property and equipment.
During the year ended December 31, 2020, cash used in investing activities was $7,000 which consisted of cash used to purchase property and equipment.
Cash Provided by Financing Activities
During the year ended December 31, 2021, net cash provided by financing activities of $43.9 million consisted of $23.2 million in net proceeds received from shares issued in registered public offering, $11.0 million in net proceeds received from issuance of notes payable, $8.6 million in net proceeds from shares issued in an At the Market offering, $2.0 million in net proceeds received from shares issued on conversion of Series 1, Series 2, and 2019 Bridge Note Warrants, $1.8 million in net proceeds received from shares issued in PIPE financing, $247 million noncontrolling interest, and $3,000 in net proceeds from exercise of stock options, offset by $1.8 million repayment of receivables secured borrowing, $943,000 repayment of insurance financing, $100,000 in principal payments of the notes payable and $35,000 payment of ELOC warrants offering costs.
During the year ended December 31, 2020, net cash provided by financing activities of $19.5 million consisted of $12.3 million in net proceeds received from issuances of a notes payable, $7.1 million received from borrowings secured by the Company’s trade receivables, $668,000 in net proceeds received from shares of common stock issued via a PIPE financing, $5.8 million in net proceeds received from shares of common stock issued on exercise of Series 1, Series 2, and 2019 Bridge Note warrants, and $1.3 million in net proceeds received from issuance of other shares of common stock, offset by $7.3 million in principal payments of the notes payable, secured borrowings and insurance premium borrowings, $185,000 million in issuance costs from shares issued as part of the underwriter settlement agreement, and $142,000 other payments of issuance costs.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in the use of any off-balance sheet arrangements, such as structured finance entities, special purpose entities or variable interest entities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.