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, sustainably derived prescription medicines for people and animals with gastrointestinal (“GI”) distress, including chronic, debilitating diarrhea. Jaguar Health's wholly owned subsidiary, Napo Pharmaceuticals, Inc. (“Napo”), focuses on developing and commercializing proprietary plant-based human pharmaceuticals from plants harvested responsibly from rainforest areas. Our crofelemer drug product candidate is the subject of the OnTarget study, an ongoing pivotal Phase 3 clinical trial for prophylaxis of diarrhea in adult cancer patients receiving targeted therapy. As announced, patient enrollment in OnTarget reached approximately 75% in February 2023, and target trial enrollment of 256 patients is expected to complete in the second quarter of 2023. Jaguar is the majority stockholder of Napo Therapeutics S.p.A. (“Napo Therapeutics”), an Italian corporation established by Jaguar in Milan, Italy in 2021 that focuses on expanding crofelemer access in Europe. Napo Therapeutics’ core mission is to provide access to crofelemer in Europe to address significant rare/orphan disease indications, including, initially, two key rare disease target indications: Short bowel syndrome (“SBS”) with intestinal failure and/or congenital diarrheal disorders (“CDD”). Jaguar Animal Health is a tradename of Jaguar Health.
Jaguar 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 animals.
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.
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. The Company’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.
Crofelemer was granted ODD by the U.S. FDA in February 2023 for microvillus inclusion disease (“MVID”), a rare CDD condition, and granted ODD for MVID by the European Medicines Agency (“EMA”) in October 2022. Crofelemer was granted ODD for SBS by the EMA in December 2021 and by the FDA in August 2017. The Company is currently supporting investigator-initiated proof-of-concept (“POC”) studies of crofelemer in patients with SBS with intestinal failure or CDD, focused on obtaining POC of reduction of requirements of parenteral support including parenteral nutrition and/or intravenous fluids, throughout 2023. In accordance with the guidelines of specific European Union countries, publications of POC data from these trials could support early patient access to crofelemer for SBS with intestinal failure or CDD in 2023 through programs in Europe. Early access programs are revenue generating, and reimbursable for participating patients.
Napo Therapeutics is initiating efforts to commence clinical development of crofelemer in SBS patients in support of the company’s key focus on leveraging the EMA’s accelerated conditional marketing authorization
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pathway in Europe for these rare diseases. SBS affects approximately 10,000 to 20,000 people in the U.S., according to the Crohn's & Colitis Foundation, and it is estimated that the population of SBS patients in Europe is approximately the same size. Despite limited treatment options, the global SBS market exceeded $568 million in 2019 and is expected to reach $4.6 billion by 2027, according to a report by Vision Research Reports.
Most of the activities of the Company are focused on the development and/or commercialization of Mytesi, including the ongoing clinical development of crofelemer for the prophylaxis of diarrhea in adult patients receiving targeted cancer therapy, and our prioritized clinical program centered around the approved investigator-initiated POC trial of crofelemer for SBS and CDD. Napo’s pivotal OnTarget Phase 3 clinical trial of crofelemer for prophylaxis of cancer therapy-related diarrhea (“CTD”) was initiated in October 2020 and is ongoing.
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 and foals.
Crofelemer is a novel, first-in-class anti-secretory antidiarrheal drug which has a normalizing effect on electrolyte and fluid balance in the gut, and this mechanism of action has the potential to benefit multiple disorders that cause gastrointestinal distress, including diarrhea and abdominal discomfort. Mytesi is in development for multiple possible follow-on indications, including prophylaxis of diarrhea related to targeted therapy with or without standard chemotherapy. Crofelemer delayed-release tablets are also being evaluated in diarrhea-predominant irritable bowel syndrome (“IBS-D”) and idiopathic/functional diarrhea.
Crofelemer powder for oral solution is being developed to support orphan or rare disease indications for infants and/or children with SBS and/or CDD, such as MVID.
In addition, a second-generation proprietary anti-secretory antidiarrheal drug (“NP-300”) is in development for symptomatic relief and treatment of moderate-to-severe diarrhea, with or without concomitant antimicrobial therapy, from bacterial, viral and parasitic infections including Vibrio cholerae , the bacterium that causes cholera.
In January 2023, Jaguar and Filament Health (“Filament”), with funding from One Small Planet, formed the U.S.-based joint venture Magdalena Biosciences, Inc. (“Magdalena”). Magdalena’s focus is on the development of novel, natural prescription medicines derived from plants for mental health indications including, initially, attention-deficit/hyperactivity disorder (“ADHD”) in adults. The goal of the collaboration is to extend the botanical drug development capabilities of Jaguar and Filament in order to develop pharmaceutical-grade, standardized drug candidates for mental health disorders, and to partner with a potential future licensee to develop and commercialize these novel plant-based drugs. This new venture aligns with Jaguar's mental health Entheogen Therapeutics Initiative (“ETI”) and Filament's corporate mission to develop novel, natural prescription medicines from plants. Magdalena will leverage Jaguar's proprietary medicinal plant library and Filament's proprietary drug development technology. Jaguar’s library of 2,300 highly characterized medicinal plants and 3,500 plant extracts, all from firsthand ethnobotanical investigation by Jaguar and members of the ETI Scientific Strategy Team, is a key asset we have generated over 30 years that bridges the knowledge of traditional healers and Western medicine. Magdalena holds an exclusive license to plants and plant extracts in Jaguar's library, not including any sources of crofelemer or NP-300, for specific indications and is in the process of identifying plant candidates in the library that may prove beneficial for addressing indications such as ADHD.
In December 2021 we received conditional approval from the FDA to market Canalevia-CA1 (crofelemer delayed-release tablets), our oral plant-based prescription drug and the only available veterinary drug for the treatment of chemotherapy-induced diarrhea (“CID”) in dogs, and Canalevia-CA1 is now available to multiple leading veterinary distributors in the U.S. Canalevia-CA1 is a tablet that is given orally and can be prescribed for home treatment of CID. Canalevia-CA1 is conditionally approved by the FDA under application number 141-552. Conditional approval allows for commercialization of the product while Jaguar Animal Health continues to collect the substantial evidence of effectiveness required for full approval. We have received Minor Use in a Major Species (“MUMS”) designation from the FDA for Canalevia-CA1 to treat CID in dogs. FDA has established a "small number" threshold for minor use in each of the seven major species covered by the MUMS act. The small number threshold is
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currently 80,000 for dogs, representing the largest number of dogs that can be affected by a disease or condition over the course of a year and still have the use qualify as a minor use.
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 by Phase 2 and proof of concept evidence from human clinical trials.
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 losses and comprehensive losses were $49.1 million and $52.6 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had total stockholders' deficit of $1.4 million, an accumulated deficit of $266.9 million, an accumulated other comprehensive loss of $680,000 and cash of $5.5 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 active pharmaceutical ingredient (“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 and specialty pharmacies.
● Revenues from the sale of our animal products branded as Canalevia-CA1, Neonorm Calf and Neonorm Foal. Our Canalevia-CA1, 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 Canalevia-CA1, Neonorm Calf or Neonorm Foal for the years ended December 31, 2022 and 2021.
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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.
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, 2022 and 2021
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, 2022 and 2021 together with the change in such items in dollars and as a percentage.
Year Ended
December 31,
(in thousands)
2022
2021
Variance
Variance %
Product revenue
$
11,956
$
4,335
$
7,621
175.8
%
Operating Expenses
Cost of product revenue
2,019
2,333
(314)
(13.5)
%
Research and development
17,647
15,079
2,568
17.0
%
Sales and marketing
8,837
8,894
(57)
(0.6)
%
General and administrative
17,868
17,103
765
4.5
%
Series 3 warrants inducement expense
—
1,462
(1,462)
(100.0)
%
ELOC warrants inducement expense
—
172
(172)
(100.0)
%
Total operating expenses
46,371
45,043
1,328
2.9
%
Loss from operations
(34,415)
(40,708)
6,293
(15.5)
%
Interest expense
(12,723)
(8,421)
(4,302)
51.1
%
Loss on extinguishment of debt
(2,187)
(753)
(1,434)
190.4
%
Change in fair value of financial instruments and hybrid instrument designated at Fair Value Option
(20)
(1,953)
1,933
(99.0)
%
Other income (expense)
950
(765)
1,715
(224.2)
%
Loss before income tax
(48,395)
(52,600)
4,205
(8.0)
%
Income tax expense
—
—
—
100.0
%
Net loss
(48,395)
(52,600)
4,205
(8.0)
%
Net loss attributable to noncontrolling interest
(941)
(5)
(936)
18,720
%
Net loss attributable to common stockholders
$
(47,454)
$
(52,595)
$
5,141
(9.8)
%
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 Mytesi across our third-party logistics warehouse, wholesalers, distributors, and retail stores. This significantly contributed to the decrease of $853,000 of Mytesi gross revenue and $1.5 million of wholesaler fees for the year 2022 compared to 2021.
Sales discounts were $1.2 million and $6.3 million for the years ended December 31, 2022, and 2021, respectively, a decrease of $5.1 million. In line with our switch to the closed Specialty Pharmacy distribution network. No wholesaler fees were recognized for the year ended December 31, 2022.
Medicaid and AIDS Drug Assistance Program (“ADAP”) rebates accounted for $1.8 million and $3.5 million for the years ended December 31, 2022 and 2021, respectively, a decrease of $1.6 million primarily due to the WAC
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increase implemented by the Company which resulted in higher government rebates from Medicaid, ADAP, public health services programs.
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, 2022 and 2021 are as follows:
Year Ended
December 31,
(in thousands)
2022
2021
Variance
Variance %
Gross product sales
Mytesi
$
14,804
$
15,657
$
(853)
(5.4)
%
Canalevia
167
—
167
100.0
%
Neonorm
48
62
(14)
(22.6)
%
Total gross product sales
15,019
15,719
(700)
(4.5)
%
Medicaid rebates
(1,836)
(3,484)
1,648
(47.3)
%
Sales discounts
(1,182)
(6,268)
5,086
(81.1)
%
Sales returns
(45)
(104)
59
(56.7)
%
Wholesaler fee
—
(1,528)
1,528
(100.0)
%
Net product sales
$
11,956
$
4,335
$
7,621
175.8
%
Our gross product revenues were $15.0 million and $15.7 million for the years ended December 31, 2022 and 2021, respectively. These figures reflect revenue from the sale of our human drug Mytesi, our animal products branded as Neonorm Calf and Neonorm Foal, and our new animal drug Canalevia that is designed for dogs released only this 2022 amounting to $167,000. The majority of the decrease were contributed from the decrease of $853,000 of Mytesi gross revenue for the year 2022 compared to 2021. Although Mytesi gross product sales decreased, net product sales increased by $7.6 million for the year 2022 compared to 2021 largely due to the transition from selling to the wholesalers to the closed Specialty Pharmacy distribution networks.
Our Neonorm product revenues were $48,000 and $62,000 for the years ended December 31, 2022 and 2021, respectively. Sales and marketing expenses for Neonorm products are not significant during 2022 compared to 2021.
Cost of Product Revenue
Year Ended
December 31,
(in thousands)
2022
2021
Variance
Variance %
Cost of Product Revenue
Material cost
$
1,011
$
998
$
13
1.3
%
Direct labor
755
996
(241)
(24.2)
%
Royalties
54
—
54
100.0
%
Distribution fees
15
199
(184)
(92.5)
%
Other
184
140
44
31.4
%
Total
$
2,019
$
2,333
$
(314)
(13.5)
%
The change in cost of product revenue of $314,000 for the year ended December 31, 2022 compared to 2021 was primarily due to:
● Direct labor decreased $241,000 from $996,000 for the year ended December 31, 2021 to $755,000 in 2022, due to decreased resources in manufacturing.
● Distribution fees decreased $184,000 from $199,000 for the year ended December 31, 2021, to $15,000 in 2022 anticipated as cost savings in line with our transition from Title model to Specialty Pharmacy distribution network.
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● Royalties increased $54,000 from a zero balance for the year ended December 31, 2021.
● Other costs increased $44,000 from $140,000 for the year ended December 31, 2021 to $184,000 in 2022 mainly consisting of $118,000 less in write-offs of non-conforming inventory, and an increase in equipment maintenance of $9,000 in 2022.
Research and Development Expense
The following table presents the components of research and development (“R&D”) expense for the years ended December 31, 2022 and 2021:
Year Ended
December 31,
(in thousands)
2022
2021
Variance
Variance %
Research and Development:
Clinical and contract manufacturing
$
8,326
$
6,257
$
2,069
33.1
%
Personnel and related benefits
5,543
3,954
1,589
40.2
%
Stock-based compensation
1,263
1,319
(56)
(4.2)
%
Materials expense and tree planting
309
361
(52)
(14.4)
%
Travel, other expenses
122
40
82
205.0
%
Other
2,084
3,148
(1,064)
(33.8)
%
Total
$
17,647
$
15,079
$
2,568
17.0
%
The change in R&D expense of $2.6 million for the year ended December 31, 2022 compared to 2021 was primarily due to:
● Clinical and contract manufacturing expenses increased $2.1 million from $6.3 million for the year ended December 31, 2021, to $8.3 million in 2022 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/NP-300 research expenses.
● Personnel and related benefits increased $1.6 million for the year ended December 31, 2022, from $4.0 million in 2021 to $5.5 million in 2022 largely from the additional headcount.
● Other expenses decreased $1.1 million from $3.1 million for the year ended December 31, 2021, to $2.1 million in 2022 mainly due to decreased consulting fees.
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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, 2022 and 2021:
Year Ended
December 31,
(in thousands)
2022
2021
Variance
Variance %
Sales and Marketing:
Direct marketing fees and expense
$
3,596
$
3,415
$
181
5.3
%
Personnel and related benefits
3,415
3,916
(501)
(12.8)
%
Stock-based compensation
267
319
(52)
(16.3)
%
Other
1,559
1,244
315
25.3
%
Total
$
8,837
$
8,894
$
(57)
(0.6)
%
The change in S&M expense of $57,000 for the year ended December 31, 2022 compared to 2021 was primarily due to:
● Personnel and related benefits decreased $501,000 from $3.9 million for the year ended December 31, 2021 to $3.4 million in 2022 due to reduction in resources in Commercial Operations and Sales.
● Direct marketing fees and expense increased $181,000 from $3.4 million for the year ended December 31, 2021 to $3.6 million in 2022 due to an increase in marketing programs for Mytesi related to the expanding market access through Specialty Pharmacy channels.
● Other expenses increased $315,000 from $1.2 million for the year ended December 31, 2021 to $1.6 million in 2022 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, 2022 and 2021:
Year Ended
December 31,
(in thousands)
2022
2021
Variance
Variance %
General and Administrative:
Personnel and related benefits
$
5,582
$
3,390
$
2,192
64.7
%
Public company expense
2,692
2,270
422
18.6
%
Stock-based compensation
1,788
2,336
(548)
(23.5)
%
Legal services
1,225
2,303
(1,078)
(46.8)
%
Third-party consulting services
507
859
(352)
(41.0)
Audit, tax and accounting services
454
982
(528)
(53.8)
%
Rent and lease expense
629
282
347
123.0
%
Travel, other expenses
378
197
181
91.9
%
Other
4,613
4,484
129
2.9
%
Total
$
17,868
$
17,103
$
765
4.5
%
The change in G&A expenses of $765,000 for the year ended December 31, 2022 compared to 2021 was due primarily to:
● Personnel and related benefits increased $2.2 million from $3.4 million for the year ended December 31, 2021 to $5.6 million in 2022 due to increased number of hires for the year.
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● Legal services decreased $1.1 million from $2.3 million for the year ended December 31, 2021 to $1.2 million in 2022 primarily due to a decrease in fees related to legal proceedings and other regulatory filings.
● Stock-based compensation expense decreased $548,000 from $2.3 million for the year ended December 31, 2021 to $1.8 million in 2022 primarily due to lower expense incurred for options granted with immediate vesting to existing employees.
● Audit, tax and accounting services fees decreased $528,000 from $982,000 for the year ended December 31, 2021 to $454,000 in 2022, mostly due to the decreased audit fees related to complex debt and equity transactions.
● Public company expenses increased $422,000 from $2.3 million for the year ended December 31, 2021 to $2.7 million in 2022 largely attributable to the investor relations and communications consulting expenses, and expenses for the annual stockholder meeting.
● Third-party consulting services decreased $352,000 from $859,000 for the year ended December 31, 2021 to $507,000 in 2022, mostly due to the decrease in outsourced legal and accounting transactions.
● Rent and lease expense increased $347,000 from $282,000 for the year ended December 31, 2021 to $629,000 in 2022 as a result of the transfer to a higher-cost facility and the occupancy of more space, including office space in Italy.
● Travel, other expenses increased $181,000 from $197,000 for the year ended December 31, 2021 to $378,000 in 2022 due to other corporate and investor relations activities.
● Other general and administrative expenses increased $129,000 from $4.5 million for the year ended December 31, 2021 to $4.6 million in 2022 largely due to increase recruitment and insurance expense in 2022.
Series 3 Warrants Inducement Expense
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 2022, the value of Series 3 Warrants Inducement Expense is zero.
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 444 shares of common stock with an exercise price per share equal to $420.75 on the date of the amendment. These warrants were valued at $172,000 on the issuance date. In 2022, the value of ELOC Warrants Inducement Expense is zero.
Interest Expense, net
Interest expense increased $4.3 million from $8.4 million for the year ended December 31, 2021 to $12.7 million in 2022 primarily due to additional interest expense incurred on royalty interest agreements primarily as result of the change in the timing of payments due to exchanges and a new royalty interest purchase agreement.
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Loss on Extinguishment of Debt
The loss on extinguishment of debt increased $1.4 million from $753,000 for the year ended December 31, 2021 to $2.2 million in 2022 due to the extinguishment loss from the exchange of the outstanding balance of Iliad’s royalty agreements for shares of the Company’s common stock.
Change in Fair Value of Financial Instruments and Hybrid Instrument Designated at FVO
Change in fair value of financial instruments increased $1.9 million from a loss of $2.0 million for the year ended December 31, 2021, to a loss of $21,000 in 2022 primarily due to fair value adjustments in liability classified warrants and notes payable designated at FVO.
Other income (expenses)
Other income (expenses) increased $1.7 million from $765,000 other expense for the year ended December 31, 2021 to $950,000 other income in 2022 due to write-off of extinguished liabilities as a result of legal release and reversal of long outstanding accruals with reasonable uncertainty to not be incurred.
Liquidity and Capital Resources
Sources of Liquidity
We have incurred net losses since our inception. For the years ended December 31, 2022 and 2021, we had net losses and comprehensive losses of $49.1 million and $52.6 million, respectively, and we expect to incur additional losses in the near-term future. At December 31, 2022, we had an accumulated deficit of $266.9 million and accumulated comprehensive loss of $680,000. 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 $5.5 million as of December 31, 2022 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, joint ventures, 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 debt and equity securities, in addition to sales of our commercial products. Cash provided by financing activities for the year ended December 31, 2022 were generated from the issuance of an aggregate of 923,164 shares of common stock under the ATM Agreement for total net proceeds of $20.5 million.
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The Company also raised an additional net proceeds of $17.5 million from the issuance of 10,135,550 shares of common stock under the ATM agreement between January 1, 2023 to March 23, 2023.
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, 2022 compared to the Year Ended December 31, 2021
The following table shows a summary of cash flows for the years ended December 31, 2022 and 2021:
Year Ended December 31,
(in thousands)
2022
2021
Total cash used in operating activities
$
(33,104)
$
(34,970)
Total cash used in investing activities
(1,675)
(6)
Total cash provided by financing activities
23,181
43,937
Effects of foreign exchange rate changes on assets and liabilities
16
—
Net (decrease) increase in cash
$
(11,582)
$
8,961
Cash Used in Operating Activities
During the year ended December 31, 2022, net cash used in operating activities of $33.1 million resulted from our net loss and comprehensive loss of $49.1 million adjusted by amortization of debt issuance costs, debt discount, and non-cash interest expense of $11.8 million, stock-based compensation of $3.3 million, loss on extinguishment of debt of $2.2 million, depreciation and amortization expenses of $2.0 million, shares issued in exchange for services of $823,000, amortization of operating lease right-of-use assets of $311,000, change in fair value of financial instruments and hybrid instruments designated at FVO of $21,000, and net changes in operating assets and liabilities of $4.4 million.
During the year ended December 31, 2021, net cash used in operating activities of $35.0 million resulted from our net loss and comprehensive loss of $52.6 million adjusted by amortization of debt discounts, debt issuance costs, 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 expense of $1.6 million, a 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 of 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.
Cash Used in Investing Activities
During the year ended December 31, 2022, cash used in investing activities was $1.7 million which consisted of cash used in software development activities of $1.6 million and cash used to purchase property and equipment of $77,000.
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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.
Cash Provided by Financing Activities
During the year ended December 31, 2022, net cash provided by financing activities of $23.2 million consisted of $20.5 million in net proceeds from shares issued in an At the Market offering, $4.0 million in net proceeds from notes payable with Streeterville, offset by $1.2 million repayment of insurance financing and $100,000 payment of Tempesta Note.
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.
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.