Statements in this Quarterly Report on Form 10-Q (the "Quarterly Report") that are not strictly historical are forward-looking statements and include statements about products in development, results and analyses of pre-clinical studies, clinical trials and studies, research and development expenses, cash expenditures, and alliances and partnerships, among other matters. You can identify these forward-looking statements because they involve our expectations, intentions, beliefs, plans, projections, anticipations, or other characterizations of future events or circumstances. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements as a result of any number of factors. These factors include, but are not limited to, risks relating to our ability to conduct and obtain successful results from ongoing clinical trials, commercialize our technology, obtain regulatory approval for our product candidates, contract with third parties to adequately test and manufacture our proposed therapeutic products, protect our intellectual property rights and obtain additional financing to continue our development efforts. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law. We urge you to read this entire Quarterly Report, including the "Risk Factors" referenced under Part II. Item 1A, the financial statements, and related notes. The information contained herein is current as of the date of this Quarterly Report (September 30, 2022 ), unless another date is specified. We prepare our interim financial statements in accordance withU.S. Generally Accepted Accounting Principles ("GAAP"). Our financials and results of operations for the three and nine months endedSeptember 30, 2022 and 2021 are not necessarily indicative of our prospective financial condition and results of operations for the pending full fiscal year endingDecember 31, 2022 . The interim financial statements presented in this Quarterly Report as well as other information relating to the Company contained in this Quarterly Report should be read in conjunction and together with the reports, statements and information filed by us with theUnited States Securities and Exchange Commission (the "SEC"). Our Management's Discussion and Analysis of Financial Condition and Results of Operations is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. Overview We are a commercial-stage drug delivery platform technology company focused on improving how and where active pharmaceutical ingredients ("APIs") are absorbed in the GI tract via our clinically validated and patent protected PLxGuard™ technology. We believe this platform has the potential to improve the absorption of many drugs currently on the market or in development and to reduce the risk of stomach injury associated with certain drugs. VAZALORE is an FDA-approved liquid-filled aspirin capsule, available in 81 mg and 325 mg doses. VAZALORE delivers aspirin differently from plain and enteric coated aspirin products. The special complex inside the capsule allows for targeted release of aspirin, limiting its direct contact with the stomach lining. VAZALORE delivers fast, reliable absorption for pain relief plus the lifesaving benefits of aspirin. Our commercialization strategy targets the over-the-counter market, taking advantage of the existing distribution channels for aspirin. We market VAZALORE to the healthcare professional and the consumer through several sales and marketing channels. Our product pipeline also includes other oral NSAIDs using the PLxGuard drug delivery platform that may be developed, including PL1200 Ibuprofen 200 mg and PL1100 Ibuprofen 400 mg, for pain and inflammation. We are also screening additional compounds outside the NSAID category for possible development using our PLxGuard drug delivery platform. Recent Developments InAugust 2022 , the Company engagedRaymond James & Associates, Inc. ("Raymond James") as financial advisor to explore and evaluate its strategic alternatives with the goal of enhancing stockholder value. The strategic review process is underway, and the strategic alternatives to be considered may include, without limitation, exploring the potential for a possible merger, business combination, or investment into the Company. In conjunction with the exploration of strategic alternatives, the Company has been streamlining its sales and marketing plan in order to preserve its capital and cash resources.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 3 of the Notes to the Consolidated Financial Statements (unaudited) included elsewhere herein describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.
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A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with GAAP and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:
Impact of COVID-19 Pandemic on Financial Statements
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a "pandemic", or a worldwide spread of a new disease. Many countries imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus and have closed non-essential businesses. The Company has not experienced a significant disruption or delay in the development, manufacturing or sales of VAZALORE due to COVID-19, and has not otherwise experienced any significant negative impact on its financial condition, results of operations or cash flows. However, the extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the remaining duration of the pandemic, travel restrictions and social distancing inthe United States and other countries, business closures or business disruptions and the effectiveness of actions taken inthe United States and other countries to contain and treat the pandemic. The unaudited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Use of Estimates The preparation of our unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying unaudited consolidated financial statements, estimates are used for, but not limited to, the fair value of warrant liability, the fair value of stock-based compensation, trade promotional allowances and allowance for inventory obsolescence. Actual results could differ from those estimates. Fair Value Measurements Fair value is defined as the price that would be received in the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized all investments recorded at fair value based upon the level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
? Level 1: Quoted prices in active markets for identical assets or liabilities
that the organization has the ability to access at the reporting date.
? Level 2: Inputs other than quoted prices included in Level 1, which are either
observable or that can be derived from or corroborated by observable data as
of the reporting date.
? Level 3: Inputs include those that are significant to the fair value of the
asset or liability and are generally less observable from objective resources
and reflect the reporting entity's subjective determinations regarding the
assumptions market participants would use in pricing the asset or liability. 20
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Table of Contents Revenue Recognition The Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers; (ii) identification of distinct performance obligations in the contract; (iii) determination of contract transaction price; (iv) allocation of contract transaction price to the performance obligations; and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation. The Company recognizes revenues upon the satisfaction of its performance obligations (upon transfer of control of promised goods or services to customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services. Deferred revenue results from cash receipts from or amounts billed to customers in advance of the transfer of control of the promised services to the customer and is recognized as performance obligations are satisfied. When sales commissions or other costs to obtain contracts with customers are considered incremental and recoverable, those costs are deferred and then amortized as selling and marketing expenses on a straight-line basis over an estimated period of benefit. The Company began generating revenue in theU.S. from its sales of VAZALORE in 81 mg and 325 mg doses in the third quarter of 2021 and recognizes revenue when control of a promised good is transferred to a customer in an amount that reflects consideration that the Company expects to be entitled to in exchange for that good. This occurs either when the finished goods are delivered to the customer or when a product is picked up by the customer or the customer's carrier. The Company recognized total revenue from sales of VAZALORE of$0.4 million with 58% of net sales for the 81 mg dose and 42% of net sales for the 325 mg dose for the three months endedSeptember 30, 2022 . The Company recognized total revenue from sales of VAZALORE of$3.0 million with 70% of net sales for the 81 mg dose and 30% of net sales for the 325 mg dose for the nine months endedSeptember 30, 2022 . For the three and nine months endingSeptember 30, 2021 , total revenue from sales of VAZALORE was$6.6 million with 81 mg dose representing 67% of the net sales.
Research and Development Expenses
Costs incurred in connection with research and development activities are expensed as incurred. Research and development expenses consist of direct and indirect costs associated with manufacturing and regulatory activities, and include fees paid to various entities that perform research-related services for the Company. Stock-Based Compensation The Company recognizes expense in the consolidated statements of operations for the fair value of all stock-based compensation to key employees, nonemployee directors and advisors, generally in the form of stock options. The Company uses the Black-Scholes option valuation model to estimate the fair value of stock options on the grant date. Compensation cost is amortized on a straight-line basis over the vesting period for each respective award. The Company accounts for forfeitures as they occur. Adopted Accounting Guidance For a discussion of significant accounting guidance recently adopted or unadopted accounting guidance that has the potential of being significant, see Note 3 of the Notes to the Unaudited Consolidated Financial Statements included elsewhere herein. Non-GAAP Financial Measures We prepare and publicly release quarterly unaudited financial statements prepared in accordance with GAAP. We also disclose and discuss certain non-GAAP financial measures in our public releases, investor conference calls and filings with theSEC . The non-GAAP financial measures that we disclose include adjusted non-GAAP loss attributable to common stockholders and adjusted non-GAAP net loss per common share. Non-GAAP net loss per share is defined as net loss per share excluding the change in the fair value of warrant liability and dividends related to our preferred stock. We consider adjusted non-GAAP net loss and adjusted non-GAAP net loss per basic and diluted earnings per share to be an important financial indicator of our operating performance, providing investors and analysts with a useful measure of operating results unaffected by the impact on the financial statements of the volatility of the change in the fair value of the warrant liability and non-cash and non-recurring dividends on our preferred stock. Management uses adjusted non-GAAP net loss and adjusted non-GAAP net loss per share when analyzing our performance. Adjusted non-GAAP net loss and adjusted non-GAAP net loss per share should be considered in addition to, but not in lieu of net loss or net loss per share reported under GAAP.
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A reconciliation of adjusted non-GAAP net loss per share to the most directly comparable GAAP finance measure is provided below.
Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (in thousands, except share and per share data) Net loss attributable to common stockholders - GAAP$ (8,497 ) $ (21,642 ) $ (31,140 ) $ (52,212 ) Adjustments: Change in fair value of warrant liability (2,223 ) 11,784 (12,282 ) 29,747 Preferred dividends - - - 2,525 Adjusted non-GAAP net loss attributable to common stockholders$ (10,720 ) $ (9,858 )
Adjusted non-GAAP net loss per common share - basic and diluted$ (0.37 ) $ (0.37 )
Weighted average shares of common shares - basic and diluted 28,603,426 26,911,855 27,949,292 22,342,538 RESULTS OF OPERATIONS
Comparison of Three Months Ended
Revenue Total revenues were$0.4 million and$6.6 million for the three months endedSeptember 30, 2022 and 2021, respectively. Net sales in the third quarter of 2022 included$0.3 million of unfavorable adjustments for additional trade allowances and incremental sales returns reserves. The increased trade allowances are used to promote sell through of existing retail inventory. The increased sales returns reserve reflected excess inventory at certain retailers. Net sales in the prior year period benefitted from the commercial launch and initial distribution of VAZALORE 81 mg and 325 mg dosage strengths to US retail channels. The VAZALORE 81 mg dose (consisting of 2 SKUs) represented 58% and 67% of the net sales for the three months endedSeptember 30, 2022 and 2021, respectively. Cost of Sales Cost of Sales for the three months endedSeptember 30, 2022 and 2021, were$1.5 million and$3.9 million , respectively, and reflected costs related to outsourced manufacturing and packaging, shipping, quality assurance and royalties. Cost of sales in the current period also included$1.0 million of incremental costs related to expired packaging materials, higher shipping costs, and inventory obsolescence for product not expected to be sold prior to its shelf-life date, which is 12 months prior to expiry. Operating Expenses Total operating expenses were$9.8 million for the three months endedSeptember 30, 2022 , compared to operating expenses of$12.6 million for the three months endedSeptember 30, 2021 . The prior year period reflected higher costs associated with the initial commercial launch of VAZALORE. In the third quarter of 2022, operating costs reflected the Company's disciplined spending approach, including reductions in sales and marketing expenses. Operating expenses for the three months endedSeptember 30, 2022 and 2021 were as follows: Three Months Ended September 30, (Decrease) 2022 2021 $ % (in thousands, except percentages) Operating Expenses Research and development expenses$ 623 $ 1,552 $ (929 ) (60 )% SM&A expenses 9,142 11,013 (1,871 ) (17 )% Total operating expenses$ 9,765 $ 12,565 $ (2,800 ) (22 )% 22
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Research and Development Expenses
Research and development expense consists of expenses incurred while performing research and development activities to discover, develop, or improve potential product candidates we seek to develop. This includes conducting preclinical studies and clinical trials, manufacturing and other development efforts, and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Our research and development expenses primarily consist of (i) direct and indirect costs associated with specific projects and manufacturing activities, and (ii) fees paid to various entities that perform research related services for us. Research and development expenses were$0.6 million for the three months endedSeptember 30, 2022 compared to$1.6 million for the three months endedSeptember 30, 2021 . The decrease reflects the non-recurrence of the prior year costs for clinical studies and pre-launch manufacturing related activities for VAZALORE.
Selling, Marketing and Administrative ("SM&A") Expenses
SM&A expenses include costs related to functions such as sales, marketing, corporate management, insurance, and legal costs. Broker commissions are incurred and expensed as SM&A costs in the underlying consolidated statements of operations when the underlying sales take place. SM&A expenses also include costs for advertising (excluding the costs of cooperative advertising programs, which are reflected in net sales), contract field force, and consumer promotion costs (such as on-shelf advertisements and displays). SM&A costs are expensed as incurred. SM&A expenses totaled$9.1 million for the three months endedSeptember 30, 2022 , compared to$11.0 million for the three months endedSeptember 30, 2021 . The prior year SM&A expenses included higher costs associated with extensive VAZALORE launch activities which commenced in the third quarter of 2021, including deployment of a cardiovascular specialty field force and a national media television campaign. In the third quarter of 2022, the Company's SM&A expenses reflected lower media spend and non-recurrence of launch related activity. Additionally, inAugust 2022 , the Company significantly reduced its cardiovascular care specialist team. Non-cash stock-based compensation was$1.1 million in the current period versus$0.7 million in the prior year period.
Other income (expense), net
Other income (expense), net totaled$2.3 million of other income and$11.8 million of other expense for the three months endedSeptember 30, 2022 and 2021, respectively. The variance is largely attributable to the non-cash change in fair value of warrant liability primarily due to the fluctuation of the price of the Company's common stock.
Comparison of Nine Months Ended
Revenue Total revenues were$3.0 million and$6.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Net sales for the nine months of 2022 included$0.7 million of unfavorable adjustments for additional trade allowances and incremental sales returns reserve. The increased trade allowances related to retailer programs to promote sell through of existing retail inventory. The increased sales returns reserve reflected excess inventory at certain retailers. Net sales in the prior year period benefitted from the commercial launch and initial distribution of VAZALORE 81 mg and 325 mg dosage strengths to US retail channels during the third quarter of 2021. The VAZALORE 81 mg dose (consisting of 2 SKUs) represented 70% and 67% of net sales for the nine months endedSeptember 30, 2022 and 2021, respectively. Cost of Sales Cost of Sales for the nine months endedSeptember 30, 2022 and 2021 were$3.4 million and$3.9 million , respectively, and reflected costs related to outsourced manufacturing and packaging, shipping, quality assurance and royalties. Cost of sales in the current period also included$1.6 million of incremental costs related to expired packaging materials, higher shipping costs, and inventory obsolescence for product not expected to be sold prior to its shelf-life date, which is 12 months prior to expiry.
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Table of Contents Operating Expenses Total operating expenses were$43.1 million for the nine months endedSeptember 30, 2022 , compared to operating expenses of$22.7 million for the nine months endedSeptember 30, 2021 . The prior year period reflected costs associated with the initial commercial launch of VAZALORE. Operating expenses for the nine months endedSeptember 30, 2022 and 2021 were as follows: Nine Months Ended September 30, Increase (Decrease) 2022 2021 $ % (in thousands, except percentages) Operating Expenses Research and development expenses$ 1,833 $ 3,494 $ (1,661 ) (48 )% SM&A expenses 41,243 19,147 22,096 115 % Total operating expenses$ 43,076 $ 22,641 $ 20,435 90 %
Research and Development Expenses
Research and development expense consists of expenses incurred while performing research and development activities to discover, develop, or improve potential product candidates we seek to develop. This includes conducting preclinical studies and clinical trials, manufacturing and other development efforts, and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Our research and development expenses primarily consist of (i) direct and indirect costs associated with specific projects and manufacturing activities, and (ii) fees paid to various entities that perform research related services for us. Research and development expenses were$1.8 million for the nine months endedSeptember 30, 2022 compared to$3.5 million for the nine months endedSeptember 30, 2021 . The decrease reflects the non-recurrence of the prior year costs for clinical studies and pre-launch manufacturing-related activities for VAZALORE. SM&A Expenses SM&A expenses include costs related to functions such as sales, marketing, corporate management, insurance, and legal costs. Broker commissions are incurred and expensed as SM&A costs in the underlying consolidated statements of operations when the underlying sales take place. SM&A expenses also include costs for advertising (excluding the costs of cooperative advertising programs, which are reflected in net sales), contract field force, and consumer promotion costs (such as on-shelf advertisements and displays). SM&A costs are expensed as incurred. SM&A expenses totaled$41.2 million for the nine months endedSeptember 30, 2022 , compared to$19.1 million for the nine months endedSeptember 30, 2021 . SM&A expenses included costs associated with extensive VAZALORE launch activities which commenced in the third quarter of 2021, including deployment of a cardiovascular specialty field force and a national media television campaign. Non-cash stock-based compensation was$3.2 million in the current period versus$1.9 million in the prior year period. Other income (expense), net Other income (expense), net totaled$12.4 million of other income and$29.7 million of other expense for the nine months endedSeptember 30, 2022 and 2021, respectively. The variance is largely attributable to the non-cash change in fair value of warrant liability primarily due to the fluctuation of the price of the Company's common stock. LIQUIDITY AND GOING CONCERN Financial Condition The following table summarizes the primary uses and sources of cash for the periods indicated: Nine Months EndedSeptember 30, 2022 2021
Net cash used in operating activities
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Net cash used in operating activities of$46.0 million and$18.8 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Higher sales and marketing related spending to support the launch of VAZALORE in August of 2021 contributed to the increase.
Net Cash Provided by Investing Activities
Net cash provided by investing activities of$0.09 million for the nine months endedSeptember 30, 2021 was generated from the disposal of various property and equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities totaled$2.4 million during the nine months endedSeptember 30, 2022 compared to$78.8 million during the nine months endedSeptember 30, 2021 . Financing activities included net proceeds from the ATM Offering of$2.4 million and$7.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The prior year period also included net proceeds of$66.9 million from the Offering (each as defined in Note 4 of the Notes to the Consolidated Financial Statements (unaudited)).
Future Liquidity and Going Concern
During the nine months endedSeptember 30, 2022 , the Company had a net loss of approximately$31.1 million and had used cash in operations of approximately$46.0 million . As ofSeptember 30, 2022 , the Company had an accumulated deficit of approximately$179.4 million . Due to the difficult macroeconomic environment that has put pressure on the rate of acceptance of VAZALORE in the marketplace and on our commercial resources, combined with restrictive capital markets, the Company has recently engaged Raymond James to explore and evaluate strategic alternatives. There is no assurance that such activities will result in any agreements or transactions that will enhance stockholder value or provide additional capital. The rate of acceptance of VAZALORE in the marketplace, together with the uncertainty with regards to completing a transaction or the ability to raise additional capital, creates substantial doubt about the Company's ability to continue as a going concern for at least one year from the date that the accompanying financial statements are issued. In conjunction with the exploration of strategic alternatives, the Company has been streamlining its sales and marketing plan in order to preserve its capital and cash resources. The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due. The unaudited consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
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