UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ | Accelerated filer ◻ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
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As of May 4, 2022 there were
PART I. — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
JAGUAR HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||
(In thousands, except share and per share data) |
| 2022 |
| 2021 | ||
Assets | (unaudited) | |||||
Current assets: | ||||||
Cash | $ | $ | ||||
Accounts receivable | ||||||
Other receivable | ||||||
Inventory | ||||||
Prepaid expenses and other current assets | ||||||
Total current assets |
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Property and equipment, net | ||||||
Operating lease - right-of-use asset | ||||||
Intangible assets, net | ||||||
Other assets |
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Total assets | $ | $ | ||||
Liabilities and stockholders' equity | ||||||
Current liabilities: | ||||||
Accounts payable | $ | $ | ||||
Accrued liabilities | ||||||
Warrant liability | ||||||
Operating lease liability, current | ||||||
Notes payable, current |
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Series D perpetual preferred stock: $ | ||||||
Total current liabilities |
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Operating lease liability, net of current portion | ||||||
Notes payable, net of discount, net of current portion (includes hybrid instrument designated at Fair Value Option amounting to $ | ||||||
Total liabilities |
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Commitments and contingencies (See Note 7) | ||||||
Stockholders' equity | ||||||
Series B-2 convertible preferred stock: $ | ||||||
Series C perpetual preferred stock: | ||||||
Common stock - voting: $ |
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Common stock - non-voting: $ | ||||||
Additional paid-in capital |
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Noncontrolling interest | ||||||
Accumulated deficit |
| ( |
| ( | ||
Total stockholders' equity |
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Total liabilities and stockholders' equity | $ | $ | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
JAGUAR HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | ||||||
March 31, | ||||||
(In thousands, except share and per share data) |
| 2022 |
| 2021 | ||
Product revenue | $ | $ | ||||
Operating expenses | ||||||
Cost of product revenue | ||||||
Research and development |
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Sales and marketing | ||||||
General and administrative | ||||||
Series 3 warrants inducement expense | — | |||||
Total operating expenses |
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Loss from operations |
| ( |
| ( | ||
Interest expense |
| ( |
| ( | ||
Loss on extinguishment of debt | ( | ( | ||||
Change in fair value of financial instruments and hybrid instrument designated at Fair Value Option | ( | ( | ||||
Other income, net | ||||||
Loss before income tax | ( | ( | ||||
Income tax expense | — | — | ||||
Net loss and comprehensive loss | ( | ( | ||||
Net loss attributable to noncontrolling interest | ( | — | ||||
Net loss attributable to common shareholders | $ | ( | $ | ( | ||
Net loss per share, basic and diluted | ( | ( | ||||
Weighted-average common shares outstanding, basic and diluted |
| | | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
JAGUAR HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(Unaudited)
| ||||||||||||||||||||||
| Common | Common | Additional | Noncontrolling | Accumulated | Total | ||||||||||||||||
(In thousands, except share data) | Shares |
| Amount | Shares |
| Amount | paid-in capital | interest | deficit | Equity | ||||||||||||
Balances as of January 1, 2022 | | $ | | $ | — | $ | $ | $ | ( | $ | ||||||||||||
Shares issued in At the Market offering, net of issuance and offering costs of $ | | — | — | — | — | |||||||||||||||||
Shares issued to Iliad in exchange of notes payable and accrued interest | | — | — | — | — | |||||||||||||||||
Shares issued to third party for services | | — | — | — | — | — | ||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||
Net loss | — | — | — | — | — | ( | ( | ( | ||||||||||||||
Balances as of March 31, 2022 | | $ | | $ | — | $ | $ | $ | ( | $ | ||||||||||||
| ||||||||||||||||||||||
| Common | Common | Additional | Noncontrolling | Accumulated | Total | ||||||||||||||||
(In thousands, except share data) | Shares |
| Amount | Shares |
| Amount | paid-in capital | interest | deficit | Equity | ||||||||||||
Balances as of January 1, 2021 | | $ | | $ | — | $ | $ | — | $ | ( | $ | |||||||||||
Shares issued on exercise of Series 1, Series 2, and 2019 Bridge Note Warrants | | — | — | — | — | — | ||||||||||||||||
Shares issued in PIPE financing | | — | — | — | — | — | ||||||||||||||||
Shares issued in At the Market offering, net of issuance and offering costs of $ | | — | — | — | — | — | ||||||||||||||||
Shares issued in registered public offering, net of issuance and offering costs of $ | | — | — | — | — | — | ||||||||||||||||
Shares issued in extinguishment of Exchange Note 2 | | — | — | — | — | — | ||||||||||||||||
Shares issued on exercise of Series 3 warrants | | — | — | — | — | — | ||||||||||||||||
Shares issued on conversion of Napo merger common shares | | — | — | — | — | — | — | — | ||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||
Net loss | — | — | — | — | — | — | ( | ( | ||||||||||||||
Balances as of March 31, 2021 | | $ | | $ | — | $ | $ | — | $ | ( | $ | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
JAGUAR HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended | ||||||
March 31, | March 31, | |||||
(in thousands) |
| 2022 |
| 2021 | ||
Cash flows from operating activities | ||||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Amortization of debt issuance costs, debt discount, and non-cash interest expense | ||||||
Stock-based compensation |
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Change in fair value of financial instruments and hybrid instrument designated at Fair Value Option | ||||||
Depreciation and amortization expense |
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Series 3 warrants inducement expense | — | |||||
Loss on extinguishment of debt | ||||||
Amortization of operating lease - right-of-use-asset | — | |||||
Derecognition of debt discount on settlement of receivables secured borrowing | — | |||||
Shares issued in exchange for services | — | |||||
Changes in assets and liabilities |
| — |
| |||
Accounts receivable | ( | ( | ||||
Other receivable | ( | ( | ||||
Inventory |
|
| ( | |||
Prepaid expenses and other current assets |
|
| ( | |||
Other assets | ( | |||||
Accounts payable | ( | ( | ||||
Accrued liabilities |
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Operating lease liability | ( | — | ||||
Total cash used in operating activities |
| ( |
| ( | ||
Cash flows from financing activities |
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Proceeds from issuance of shares in registered public offering, net of issuance and offering costs of $ | — | |||||
Proceeds from issuance of notes payable, net of issuance costs of $ | — | |||||
Proceeds from issuance of shares in At the Market offering, net of issuance and offering costs of $ | ||||||
Proceeds from issuance of shares on conversion of Series 1, Series 2, and 2019 Bridge Note warrants, net of issuance and offering costs of $ | — | |||||
Repayment of receivables secured borrowing | — | ( | ||||
Proceeds from issuance of shares in PIPE financing | — | |||||
Repayment of insurance financing | ( | ( | ||||
Noncontrolling interest | ( | ( | ||||
Repayment of notes payable | ( | — | ||||
Total cash provided by financing activities | ||||||
Effects of foreign exchange rate changes on assets and liabilities | ( | — | ||||
Net increase in cash |
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Cash at beginning of period | ||||||
Cash at end of period | $ | $ | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
JAGUAR HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Three Months Ended | ||||||
March 31, | March 31, | |||||
2022 | 2021 | |||||
Supplemental schedule of cash flow information | ||||||
Cash paid for interest | $ | $ | ||||
Supplemental schedule of non-cash financing and investing activities | ||||||
Shares issued to Iliad in exchange of notes payable and accrued interest | $ | $ | — | |||
Recognition of operating lease - right-of-use asset and operating lease liability | $ | $ | — | |||
Shares issued in extinguishment of Exchange Note 2 | $ | — | $ | |||
Shares issued on exercise of Series 3 warrants | $ | — | $ | |||
Insurance financing | $ | — | $ | |||
Offering costs included in accounts payable and accrued liabilities | $ | — | $ | |||
Purchase of equipment | $ | — | $ | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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JAGUAR HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Jaguar Health, Inc. (“Jaguar” or the “Company”) is a San Francisco, California-based 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 a canine-specific formulation of crofelemer. Napo Therapeutics S.p.A. (f/k/a Napo EU 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 January 2022 to Napo Therapeutics S.p.A. “Napo Therapeutics”) based in Milan, Italy as a subsidiary of Napo. Napo Therapeutics’ core 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 (SBS) with intestinal failure, and congenital diarrheal disorders (CDD). On November 3, 2021, Napo Therapeutics merged with Dragon SPAC S.p.A. (“Dragon SPAC”).
On December 13, 2021, the European Medicines Agency (EMA) granted orphan-drug designation (ODD) for crofelemer for the short bowel syndrome (SBS) indication in the European Union following review of the ODD application Napo submitted to the EMA in September 2021. Following this decision from the EMA, Napo Therapeutics is initiating efforts to commence clinical development of crofelemer in both adult and pediatric SBS patients in support of the company’s key focus on leveraging the EMA’s accelerated conditional marketing authorization pathway in Europe for this rare disease. Napo Therapeutics has also agreed to support investigator-initiated trials (IITs), which are expected to provide proof of concept (POC) support for potential expanded access programs for crofelemer for patients with CDD and/or SBS patients with intestinal failure. The expanded access program will be initiated following completion of these studies and upon publication of POC results, potentially in 2023. Crofelemer previously received ODD in the U.S. from the FDA for SBS. 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.
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On December 21, 2021, we received conditional approval from the FDA for Canalevia-CA1 (crofelemer delayed-release tablets), our oral plant-based prescription drug and the only drug for the treatment of CID in dogs. Canalevia-CA1 is being commercialized as a prescription drug product under the Company’s Jaguar Animal Health tradename, and as announced April 27, 2022, Canalevia-CA1 is now available from multiple leading veterinary distributors in the U.S. to veterinarians.
Canalevia-CA1 is a tablet that can be given orally twice a day and can be used for home treatment of CID. Canalevia-CA1 is a canine-specific formulation of crofelemer that 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 a 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 currently 70,000 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.
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 (CTD). Napo’s pivotal OnTarget Phase 3 clinical trial of crofelemer for prophylaxis of 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, foals, and high value horses.
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 in development for multiple possible follow-on indications in addition to prophylaxis for cancer therapy related diarrhea (CTD), including 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 (SBS) with intestinal failure. As stated above, crofelemer has received orphan drug designation (ODD) for short bowel syndrome (SBS) in the EU, and crofelemer has also received ODD in the US for SBS. 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.
We believe Jaguar is poised to realize a number of synergistic, value adding benefits—and the above-referenced expanded pipeline of potential blockbuster human indications of crofelemer and lechlemer—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.
Nasdaq Communication and Compliance
Minimum Bid Price Requirement
On February 17, 2022, the Company received a letter from the Staff of Nasdaq indicating that the bid price of the Company’s common stock for the last consecutive business days had again closed below the minimum $
Under Nasdaq Listing Rule 5810(c)(3)(A), the Company has been granted a -calendar day grace period, or until August 16, 2022, to regain compliance with the minimum bid price requirement. The continued listing standard will be met if the Company evidences a closing bid price of at least $
7
consideration of an extension because the Company currently has stockholders’ equity of at least $
The Company is diligently working to evidence compliance with the minimum bid price requirement for continued listing on Nasdaq; however, there can be no assurance that the Company will be able to regain compliance or that Nasdaq will grant the Company a further extension of time to regain compliance, if necessary. If the Company fails to regain compliance with the Nasdaq continued listing standards, its common stock will be subject to delisting from Nasdaq.
Liquidity and Going Concern
The Company, since its inception, has incurred recurring operating losses and negative cash flows from operations and has an accumulated deficit of $
Although the Company plans to refinance its operations and cash flow needs through equity and/or debt financing, collaboration arrangements with either 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 unaudited condensed 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 unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Reverse Stock Split
On September 3, 2021, the Company filed the Certificate of Fifth Amendment to its Third Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware to effect a -for-3 reverse stock split of the Company’s issued and outstanding shares of voting common stock, effective September 8, 2021. The reverse split has been retrospectively reflected in all voting common stock, warrants, and common stock option shares disclosed in these condensed consolidated financial statements. The non-voting common stock and the convertible preferred stock were excluded from the reverse split.
2. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and on a basis consistent with the annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of the results to be expected for the year ending
December 31, 2022, or for any other future annual or interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the
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Annual Report on Form 10-K for the year ended December 31, 2021. The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date, but does not include all disclosures, including notes, required by U.S. GAAP for complete financial statements.
There has been no material change to the Company's significant accounting policies during the three months ended March 31, 2022, as compared to the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company's Annual Report on Form 10-K as of and for the year ended
December 31, 2021 which was filed to SEC on March 11, 2022.
Except as noted above, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly the financial position as of March 31, 2022, results of operations for the three months ended March 31, 2022 and 2021, changes in convertible preferred stock and stockholders' equity for the three months ended March 31, 2022 and 2021, and cash flows for the three months ended March 31, 2022 and 2021. The interim results are not necessarily indicative of the results for any future interim periods or for the entire year.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) and include the accounts of the Company and its wholly-owned subsidiary. All inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its unaudited condensed consolidated financial statements and the accompanying notes. The accounting policies that reflect the Company’s more significant estimates and judgments and that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results are the valuation of stock options, valuation of hybrid instruments designated at fair value option (“FVO”), valuation of warrant liabilities, acquired in-process research and development (“IPRD”), and useful lives assigned to long-lived assets; valuation adjustments for excess and obsolete inventory; allowance for doubtful accounts; deferred taxes and valuation allowances on deferred tax assets; evaluation and measurement of contingencies; and recognition of revenue, including estimates for product returns. Those estimates could change, and as a result, actual results could differ materially from those estimates.
In March 2020, the World Health Organization declared the COVID-19 outbreak to be a pandemic. During the period ended March 31, 2022, the Company’s financial results were not significantly affected by the COVID-19 outbreak. The Company has considered all information available as of the date of issuance of these financial statements and the Company is not aware of any specific events or circumstances that would require an update to its estimates or judgments, or a revision to the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information becomes available. The extent to which the COVID-19 outbreak affects the Company’s future financial results and operations will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak, and current or future domestic and international actions to contain and treat it. For a discussion of risks of COVID-19 relating to the Company’s business, see “Item 1A. - Risk Factors- Risks Related to Our Business- The novel coronavirus global pandemic could adversely impact our business, including our supply chain, clinical trials and commercialization of Mytesi and Canalevia.”
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Cash
The Company’s cash on deposit may exceed United States federally insured limits at certain times during the year. The Company maintain cash accounts with certain major financial institutions in the United States. The Company does not have cash equivalents as of March 31, 2022 and December 31, 2021.
Accounts Receivable
Accounts receivable is recorded net of allowances for discounts for prompt payment and credit losses. The Company estimates an allowance for credit losses by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The corresponding expense for the credit loss allowance is reflected in general and administrative expenses. The credit loss allowance was immaterial as of March 31, 2022 and December 31, 2021.
Concentrations
Cash is the financial instrument that potentially subjects the Company to a concentration of credit risk as cash is deposited with a bank and cash balances are generally in excess of Federal Deposit Insurance Corporation insurance limits.
For the three months ended March 31, 2022 and 2021, substantially all of the Company’s revenue was derived from the sale of Mytesi. In looking at sales by the Company to distributors whose net revenue percentage of total net revenue was equal to or greater than
Three Months Ended |
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March 31, |
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(unaudited) | |||||
| 2022 |
| 2021 |
| |
Customer 1 | — | % | | % | |
Customer 2 | | % | | % | |
Customer 3 | | % | — | % | |
Customer 4 | | % | — | % | |
The Company is subject to credit risk from its accounts receivable related to its sales. The Company generally does not perform evaluations of customers' financial condition and generally does not require collateral. As of
March 31, 2022 and December 31, 2021, the Company’s significant customers and their related accounts receivable balance as a percentage of total accounts receivable were as follows:
March 31, | December 31, | ||||
| 2022 | 2021 | |||
(unaudited) | |||||
Customer 1 | — | % | | % | |
Customer 2 | | % | | % | |
Customer 3 | | % | | % | |
The Company is subject to concentration risk from its suppliers. The Company sources raw material used to produce the active pharmaceutical ingredient (“API”) in Mytesi from
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Other Risks and Uncertainties
The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, rapid technological change, obtaining second source suppliers, regulatory approval from the FDA or other regulatory authorities, the results of clinical trials and the achievement of milestones, market acceptance of the Company’s product candidates, competition from other products and larger companies, protection of proprietary technology, strategic relationships and dependence on key individuals.
Fair Value
The Company’s financial instruments include accounts receivable, accounts payable, accrued liabilities, warrant liabilities, equity-linked financial instruments and debt. The recorded carrying amounts of accounts receivable, accounts payable and accrued liabilities reflect their fair value due to their short-term nature. Other financial liabilities are initially recorded at fair value, and subsequently measured at either fair value or amortized cost using the effective interest method. See Note 4 for the fair value measurements.
Fair Value Option
ASC 825-10, Financial Instruments, provides FVO election that allows companies an irrevocable election to use fair value as the initial and subsequent accounting measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to elect to measure eligible financial assets and liabilities at fair value on an ongoing basis. Unrealized gains and losses on items for which the FVO has been elected are reported in earnings. The decision to elect the FVO is determined on an instrument-by-instrument basis, must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to ASC 825-10 are required to be reported separately from those instruments measured using another accounting method. In accordance with the options presented in ASC 825-10, the Company elected to present the aggregate of fair value and non-fair-value amounts in the same line item in the condensed consolidated balance sheets and parenthetically disclose the amount measured at fair value in the aggregate amount.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Cost is initially recorded at the invoiced amount of raw materials or API, including the sum of qualified expenditures and charges in bringing the inventory to its existing condition and location. The Company calculates inventory valuation adjustments when conditions indicate that net realizable value is less than cost due to physical deterioration, usage, obsolescence, reductions in estimated future demand or reduction in selling price. Inventory write-downs are measured as the difference between the cost of inventory and net realizable value.
Property and Equipment
Land is stated at cost, reflecting the fair value of the property at July 31, 2017, the date of the Napo merger. Equipment is stated at cost, net of accumulated depreciation. Equipment begins to be depreciated when it is placed into service. Depreciation is calculated using the straight-line method over estimated useful lives ranging between
Expenditures for repairs and maintenance of assets are charged to expense as incurred. Costs of major additions and betterments are capitalized and depreciated on a straight-line basis over their estimated useful lives. Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in the unaudited condensed consolidated statements of operations.
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Long-lived Assets
The Company regularly reviews the carrying value and estimated lives of all of its long-lived assets, including property and equipment and definite-lived intangible assets, to determine whether indicators of impairment exist that warrant adjustments to carrying values or estimated useful lives. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flow in future periods as well as the strategic significance of the assets to the Company’s business objectives. If the Company determines that an impairment trigger has been met, the Company evaluates the realizability of its long-lived assets (asset group) based on a comparison of projected undiscounted cash flows from use and eventual disposition with the carrying value of the related asset. Any write-downs (which are measured based on the difference between the fair value and the carrying value of the asset) are treated as permanent reductions in the carrying amount of the assets (asset group). Based on this evaluation, the Company believes that, as of each of the balance sheet dates presented, none of the Company’s long-lived assets were impaired. The Company’s had
Indefinite-lived Intangible Assets
Acquired IPRD are intangible assets acquired in the July 2017 Napo merger. Under ASC 805, IPRD are initially recognized at fair value and classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. During the development period, these assets will not be amortized as charges to earnings; instead, these assets will be tested for impairment on an annual basis or more frequently if impairment indicators are identified. An impairment loss is measured based on the excess of the carrying amount over the asset’s fair value. The Company recorded
Leases
The Company accounts for its leases in accordance with ASC 842, Leases.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. Because the interest rate implicit in lease contracts is typically not readily determinable, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
Operating Lease
The Company entered into a sublease agreement with Peacock Construction Inc. (“Peacock”), a California corporation, for office space located in San Francisco, California. The term of the sublease began on August 31, 2020 and expired on May 31, 2021. The rent under the sublease is $
In April 2021, the Company entered into an office lease agreement with M E, LLC, a California Limited Liability Company, to lease approximately
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In October 2021, the Company entered into an agreement with Copernico Centrale for the lease of office premises from November 1, 2021 to April 30, 2022, subject to automatic renewal for subsequent periods until terminated by either party. Base rent amounted to €
In December 2021, the Company entered into an agreement with Arval Service Lease Italia SpA for the lease of two separate vehicles for
In December 2021, the Company entered into the first amendment to the lease with M E, LLC whereby the commencement date of one of the leased premises was modified to March 1, 2022. Accordingly, the expiration of the lease was extended to February 28, 2025. The base rent under the original agreement remained the same but will be due starting March 1, 2022. In addition, the rent for one of the leased premises being occupied by the Company will continue to be $
In January 2022, the Company entered into an agreement with Copernico Centrale for the lease of office premises from March 1, 2022 to December 31, 2023, subject to automatic renewal for subsequent periods until terminated by either party. Base rent amounted to €
Research and Development Expense
Research and development expense consists of expenses incurred in performing research and development activities including related salaries, clinical trials and related drug and non-drug product costs, contract services and other outside service expenses. Research and development expense is charged to operating expense in the period incurred.
Clinical Trial Accruals
Clinical trial costs are a component of research and development expenses. The Company accrues and expenses clinical trial activities performed by third parties based upon actual work completed in accordance with agreements established with clinical research organizations and clinical sites. The Company determines the costs to be recorded based upon validation with the external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”).
The Company’s 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 three 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.
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The Company recognizes revenue in accordance with the core principle of ASC 606 or when there is a transfer of control of promised goods or services to customers in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services.
The Company recognizes the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less.
The Company does not adjust the amount of consideration for the effects of a significant financing component if, at contract inception, the expected period between the transfer of promised goods or services and customer payment is one year or less.
The Company has elected to treat shipping and handling activities as fulfillment costs.
Additionally, the Company elected to record revenue net of sales and other similar taxes.
Contracts – Cardinal Health
Effective January 16, 2019, the Company engaged Cardinal Health as its exclusive third-party logistics distribution agent for commercial sales of the Company’s Mytesi product and to perform certain other services which include, without limitation, storage, distribution, returns, customer support, financial support, Electronic Data Interchange (“EDI”) and system access support (the “Exclusive Distribution Agreement”).
On September 3, 2021, the Company ended its engagement with Cardinal Health as its exclusive title model customer for commercial sales and fully implemented its limited distribution Specialty Pharmacy model. Cardinal Health continues to provide third-party logistics services for Mytesi.
The Company's Neonorm and botanical extract products are primarily sold to distributors, who then sell the products to the end customers. Since 2014, the Company has entered into several distribution agreements with established distributors such as Animart, Vedco, VPI, RJ Matthews, Covetrus, and Stockmen Supply to distribute the Company's products in the United States, Japan, and China. The distribution agreements and the related purchase order together meet the contract existence criteria under ASC 606-10-25-1. The Company sells directly to its customers without the use of an agent.
Performance obligations
For animal products sold by the Company, the single performance obligation identified above is the Company’s promise to transfer the Company’s animal products to distributors based on specified payment and shipping terms in the arrangement. Product warranties are assurance-type warranties that do not represent a performance obligation. For the Company’s human product, Mytesi, the single performance obligation identified above is the Company’s promise to transfer Mytesi to Cardinal Health, based on specified payment and shipping terms as outlined in the Exclusive Distribution Agreement.
Transaction price
For contracts with Cardinal Health, the transaction price is the amount of consideration to which the Company expects to collect in exchange for transferring the promised goods or services. The transaction price of Mytesi and Neonorm is the Wholesaler Acquisition Cost (“WAC”), net of discounts, returns, and price adjustments.
Allocate transaction price
For contracts with Cardinal Health, the entire transaction price is allocated to the single performance obligation contained in each contract.
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Revenue recognition
For contracts with Cardinal Health, a single performance obligation is satisfied at a point in time, upon the free on board (“FOB”) terms of each contract when control, including title and all risks, has transferred to the customer.
Disaggregation of Product Revenue
Human
Sales of Mytesi are recognized as revenue at a point in time when the products are delivered to the wholesaler. Net revenue from the sale of Mytesi were $
Animal
The Company recognized Neonorm revenues of $
Contracts – Specialty Pharmacies
Effective October 1, 2020, the Company engaged a private company as its third-party logistics distribution agent for commercial sales of the Company’s Mytesi product. Under the Specialty Product Distribution Agreement, the Company shall supply the products to the private company’s specialty pharmacies, through a designated wholesaler, in such amounts as may be ordered. There is no minimum purchase or inventory requirement. The specialty pharmacies were authorized distributors of record for all National Drug Codes (“NDCs”) of Mytesi.
Effective April 20, 2021, the Company engaged another private company as an authorized specialty pharmacy provider of Mytesi. Under the Specialty Pharmacy Distribution and Services Agreement, the private company shall sell and dispense the Mytesi directly ordered from the Company at the agreed price to patients within the territories identified in the agreement.
The
Performance obligations
The single performance obligation is the Company’s promise to transfer Mytesi to specialty pharmacies, based on specified payment and shipping terms as outlined in the agreements.
Transaction price
The transaction price is the amount of consideration to which the Company expects to collect in exchange for transferring the promised goods or services. The transaction price of Mytesi is the WAC, net of estimated discounts, returns, and price adjustments.
Allocate transaction price
The entire transaction price is allocated to the single performance obligation contained in each contract.
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Revenue recognition
The single performance obligation is satisfied at a point in time, upon the free on board (“FOB”) terms of each contract when control, including title and all risks, has transferred to the customer.
Disaggregation of Product Revenue
Sales of Mytesi are recognized as revenue at a point in time when products are delivered to the specialty pharmacies. Net revenue from the sale of Mytesi to the specialty pharmacies were $
Collaboration Revenue
Revenue recognition for collaboration agreements requires significant judgment. The Company’s assessments and estimates are based on contractual terms, historical experience and general industry practice. Revisions in these values or estimations have the effect of increasing or decreasing collaboration revenue in the period of revision.
On September 24, 2018, the Company entered into a Distribution, License and Supply Agreement (“License Agreement”) with Knight Therapeutics (Knight). The License Agreement has a term of
Modifications to Liability-classified Instruments
In accounting for debt modifications and exchange transactions, it is the Company’s policy to first determine whether it qualifies as a troubled debt restructuring (“TDR”) pursuant to the guidance provided in ASC 470-60. A debt modification or exchange transaction that is not within the scope of the ASC 470-60 is accounted for under ASC 470-50 to determine if the transaction is a mere modification or an extinguishment.
In the three months ended March 31, 2022 and 2021, the Company amended the terms of its October 2020 Purchase Agreement and Exchange Note 2, respectively (see Note 8).
Modifications to Equity-classified Instruments
In accounting for modifications of equity-classified warrants, it is the Company’s policy to determine the impact by analogy to the share-based compensation guidance of ASC 718, Compensation - Stock Compensation (“ASC 718”). The model for a modified share-based payment award that is classified as equity and remains classified in equity after the modification is addressed in ASC 718-20-35-3. Pursuant to that guidance, the incremental fair value from the modification is recognized as an expense in the statements of operations to the extent the modified instrument has a higher fair value; however, in certain circumstances, such as when an entire class of warrants is modified, the measured increase in fair value may be more appropriately recorded as a deemed dividend, depending upon the nature of the warrant modification.
The Company did not modify any equity-classified warrants in the three months ended March 31, 2022 and 2021.
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In accounting for amendments to preferred stock, it is the Company’s policy to measure the impact by analogy to ASC 470-50 in determining if such an amendment is an extinguishment or a modification. If the amendment results in an extinguishment, the Company follows the SEC staff guidance in ASC 260-10-S99-2 and ASC 470-20. If the amendment results in a modification, the Company follows the model in either ASC 718 or ASC 470-50, depending on the nature of the amendment.
The Company did not modify any preferred stock in the three months ended March 31, 2022 and 2021.
Stock-based Compensation
The Company's Stock Incentive Plan (see Note 12) provides for the grant of stock options, restricted stock and restricted stock unit awards. The Company measures stock awards granted to employees, non-employees and directors at estimated fair value on the date of grant and recognizes the corresponding compensation expense of the awards, net of estimated forfeitures, over the requisite service periods, which correspond to the vesting periods of the awards. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company issues stock awards with only service-based vesting conditions, and records compensation expense for these awards using the straight-line method.
The Company uses the grant date fair market value of its common stock to determine the grant date fair value of options granted to employees, non-employees and directors. The Company measures and recognizes compensation expense for all stock options and restricted stock units (“RSUs”) granted to its employees and directors based on the estimated fair value of the award on the grant date. The Company uses the Black-Scholes valuation model to estimate the fair value of stock option awards. The fair value is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis. The Company believes that the fair value of stock options granted to non-employees is more reliably measured than the fair value of the services received. The determination of the grant date fair value of options using an option pricing model is affected by the Company’s estimated Common Stock fair value and requires management to make a number of assumptions including the expected life of the option, the volatility of the underlying stock, the risk-free interest rate and expected dividends.
The Company estimates the fair value of stock options using the Black-Scholes option valuation model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair market value of common stock is based on the closing price of the Company’s common stock as reported on the date of the grant.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company has adopted the provisions of ASC 740, Income Taxes Related to Uncertain Tax Positions. Under these principals, tax positions are evaluated in a two-step process. The Company first determines whether it is more-likely-than-not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to be recognized in the financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.
Foreign Currency Remeasurement and Translation
The functional currency of Napo Therapeutics is Euro. The Company follows ASC 830, Foreign Currency Matters (“ASC 830”). ASC 830 requires the assets, liabilities, and results of operations of a foreign operation to be
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measured using the functional currency of that foreign operation. Exchange gains or losses from remeasuring transactions and monetary accounts in a currency other than the functional currency are included in current earnings.
For certain subsidiaries, translation adjustments result from the process of translating the functional currency of subsidiary financial statements into the U.S. Dollar reporting currency. These translation adjustments are reported separately and accumulated in the consolidated balance sheets as a component of accumulated other comprehensive loss.
Comprehensive Loss
For the three months ended March 31, 2022, the comprehensive loss was equal to the net loss; therefore, a separate statement of comprehensive loss is not included in the accompanying unaudited condensed consolidated financial statements.
For the three months ended March 31, 2021, the amount of other comprehensive loss was only de minimis; hence, a separate statement of comprehensive loss was not included in the accompanying unaudited condensed consolidated financial statements.
Basic and Diluted Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss attributable to common stockholders for the year by the weighted-average number of common shares outstanding during the year. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the year by the weighted-average number of common shares, including potential dilutive shares of common stock assuming the dilutive effect of potential dilutive securities. For periods in which the Company reports a net loss, diluted net loss per common share is the same as basic net loss per common share, because the impact of the potential dilutive shares of common stock would be anti-dilutive to the calculation of net loss per common share. Diluted net loss per common share is the same as basic net loss per common share for the three months ended March 31, 2022 and 2021.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The Company adopted the standard on January 1, 2022. The adoption of this standard did not have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures.
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options – a consensus of the FASB Emerging Issues Task Force. The ASU provides a principles-based framework to determine whether an issue should recognize the modification or exchange as an adjustment to equity or an expense. The Company adopted the standard on January 1, 2022. The adoption of this standard did not have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The standard also removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. The Company adopted the standard on January 1, 2021. The adoption of this standard did not have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures.
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Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of the standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this standard replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective for the Company beginning January 1, 2023 with early adoption permitted. The Company is still evaluating the impact of the adoption of this standard.
Reclassification of Prior Period Presentation
Certain prior period amounts of cash flows from financing activities in the unaudited condensed consolidated statements of cash flows have been reclassified within the same category of cash flow activity to be consistent with the current period presentation. There were no reclassifications to other categories of cash flow activity and that the reclassification did not impact the profit or loss during the prior period.
3. Napo Therapeutics Subsidiary
As discussed in Note 1 – Organization and Business, Napo EU completed a merger with Dragon SPAC on November 3, 2021, with Dragon SPAC as the surviving entity. Dragon SPAC took over by operation of law all the assets, rights, reasons, and actions as well as liabilities, obligations, and commitments of Napo EU. The merged entity was named Napo Therapeutics. Napo Therapeutics now operates as a subsidiary of Napo, with Napo owning
4. Fair Value Measurements
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:
| ● | Level 1 – Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets. |
| ● | Level 2 – Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable. |
| ● | Level 3 – Unobservable inputs that reflect the reporting entity’s own assumptions. |
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The following tables set forth the fair value of the Company’s financial instruments that were measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021.
March 31, 2022 | ||||||||||||
(in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Warrant liability | $ | — | $ | — | $ | $ | ||||||
Streeterville note | — | — | ||||||||||
Total fair value | $ | — | $ | — | $ | $ | ||||||
December 31, 2021 | ||||||||||||
(in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Warrant liability | $ | — | $ | — | $ | $ | ||||||
Streeterville note | $ | — | $ | — | $ | $ | ||||||
Total fair value | $ | — | $ | — | $ | $ | ||||||
The change in the estimated fair value of Level 3 liabilities is summarized below:
Three Months Ended | ||||||
March 31, 2022 | ||||||
(in thousands) | Warrant liability |
| Streeterville note | |||
Beginning fair value of Level 3 liability |
| $ |
| $ | ||
Additions | — | — | ||||
Exercises | — | — | ||||
Change in fair value |
|
| — | |||
Ending fair value of Level 3 liability |
| $ |
| $ | ||
Warrant Liability
The warrants associated with the Level 3 warrant liability November 2016 Series A Warrants and the October 2018 Warrants, which, at March 31, 2022, were both valued at
The November 2016 Series A Warrants
The Series A warrant valuation of
The October 2018 Underwriter Warrants
The October 2018 Underwriter Warrants valuation of
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The May 2020 Series 3 Warrants
There were
Streeterville Note
The fair value of the Streeterville Note at January 13, 2021, date of issuance and as of March 31, 2022 amounting to $
The Company determined and performed the valuations of the Streeterville Note with the assistance of an independent valuation service provider. On a quarterly basis, the Company considers the main Level 3 inputs used derived as follows:
| ● | Discount rate for the Streeterville note which was determined using a comparison of various effective yields on bonds as of the valuation date |
| ● | Market indications for vouchers, which affect the Return Bonus from the sale of Tropical Disease Priority Review Voucher (“TDPRV”) |
| ● | Weighted probability of cash outflows which was estimated based on the entity's knowledge of the business and how the current economic environment is likely to impact the timing of the cash outflows, attributed to the different repayment features of the note |
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The following table summarizes the quantitative information about the significant unobservable inputs used in Level 3 fair value measurement:
Range of Inputs | ||||||
(probability-weighted average) | Relationship of unobservable inputs | |||||
Unobservable Inputs | 2022 | 2021 | to fair value | |||
Risk Adjusted Discount Rate |
| If discount rate is adjusted to total of additional | ||||
Sales Proceeds: Amount of comparable TDPRV | $ | $ | If expected cash flows by management considered the lowest amount of market indications for vouchers, FV would have decreased by $ | |||
Range of Probability for Timing of Cash Flows: | If expected cash flows by management considered the scenario with the least amount of indicated value, FV would have decreased by $ | |||||
Fair Value Option
Beginning January 1, 2021, the Company elected to apply the FVO accounting to selected financial instruments to align the measurement attributes of those instruments under U.S. GAAP and to simplify the accounting model applied to those financial instruments. The Company elected to apply FVO accounting to the entire class of hybrid instruments, including structured notes, of which there are assessed embedded derivatives that would be eligible for bifurcation. Changes in the fair value of FVO assets and liabilities as well as the mark-to-market adjustment on the entire class of hybrid instruments, including derivatives and the net realized gains or losses on these instruments are reported in the change in fair value of financial instruments in the unaudited condensed consolidated statements of operations.
As of March 31, 2022, the Company did not note any fair value movement on FVO liabilities attributable to any instrument-specific credit risk, which is recorded in other comprehensive income (loss).
Hybrid Instruments
The Company elected to apply FVO accounting to all of the hybrid instruments issued, including structured notes. The valuation of the hybrid instruments is predominantly driven by the derivative features embedded within the instruments. The Company determined and performed the valuations of the hybrid instruments with the assistance of an independent valuation service provider. The valuation methodology utilized is consistent with the income approach for estimating the fair value of the interest-bearing portion of the instrument and the related derivatives. Cash flows of the hybrid instruments in their entirety, including the embedded derivatives, are discounted at an appropriate rate for the applicable duration of the instrument. Interest on the interest-bearing portion of the instrument that is held to maturity is aggregated as gain (loss) on instruments designated at fair value and related derivatives in the change in fair value of
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financial instruments and hybrid instruments designated at FVO of the unaudited condensed consolidated statements of operations.
The following table summarizes the fair value and unpaid principal balance for items the Company accounts for under FVO:
(in thousands) | Fair value | Unpaid Principal Balance | Fair Value Over (Under) Unpaid Principal Balance | ||||||
At March 31, 2022 | |||||||||
Hybrid Instrument: | |||||||||
Streeterville note | $ | $ | $ | ||||||
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5. Balance Sheet Components
Inventory
Inventory at March 31, 2022 and December 31, 2021 consisted of the following:
March 31, | December 31, | |||||
| 2022 |
| 2021 | |||
(in thousands) | (unaudited) | |||||
Raw Material | $ | $ | ||||
Work in Process | ||||||
Finished Goods | ||||||
Inventory | $ | $ | ||||
Property and Equipment, net
Property and equipment at March 31, 2022 and December 31, 2021 consisted of the following:
March 31, | December 31, | |||||
| 2022 |
| 2021 | |||
(in thousands) | (unaudited) | |||||
Land | $ | $ | ||||
Lab equipment | ||||||
Clinical equipment |
|
| ||||
Software | ||||||
Furnitures and fixtures | ||||||
Computers and peripherals | ||||||
Total property and equipment at cost |
|
| ||||
Accumulated depreciation |
| ( |
| ( | ||
Property and equipment, net | $ | $ | ||||
Depreciation and amortization expense was $
March 31, 2022 and 2021, respectively.
Intangible Assets, net
Intangible assets at March 31, 2022 and December 31, 2021 consisted of the following:
March 31, | December 31, | |||||
| 2022 |
| 2021 | |||
(in thousands) | (unaudited) | |||||
Developed technology | $ | $ | ||||
Accumulated developed technology amortization |
| ( |
| ( | ||
Developed technology, net |
|
| ||||
In-process research and development | ||||||
In process research and development, net |
|
| ||||
Trademarks |
|
| ||||
Accumulated trademark amortization |
| ( |
| ( | ||
Trademarks, net |
|
| ||||
Total intangible assets, net | $ | $ | ||||
Amortization expense of finite-lived intangible assets was $
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The following table summarized the Company’s estimated future amortization expense of intangible assets with finite lives as of March 31, 2022:
(in thousands) |
| Amounts | |
Remainder of 2022 | $ | ||
2023 | |||
2024 | |||
2025 | |||
2026 | |||
Thereafter | |||
$ | |||
6. Related Party Transactions
Management Services Agreement
In March 2018, concurrent with the issuance of the Company’s Series A Convertible Preferred Stock to Sagard Capital Partners, L.P. (“Sagard Capital”), the Company entered into a Management Services Agreement with Sagard Capital. Under the agreement, Sagard Capital was to provide consulting and management advisory service to the Company from March 2018 through March 2021. These services include assistance with strategic planning regarding the Company’s commercial strategy, research and due diligence regarding human resource activities, and strategic advice in financial matters. In consideration for such services, the Company paid Sagard Capital an annual fee of $
BOD Cash Compensation
Effective May 2021, the Company’s BOD received cash compensation based on the Director Compensation Program for 2021 which will be paid quarterly. For the three months ended March 31, 2022, the Company paid approximately $
7. Commitments and Contingencies
Commitments
Leases
On August 28, 2018, the Company entered into an office lease extension agreement for approximately
On August 31, 2020, the Company entered into an office sublease of approximately
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beginning on October 1, 2020, which includes operating expenses and taxes. The Company recognizes rent expense on a straight-line basis over the non-cancelable lease period. Rent expense, included in general and administrative expenses in the unaudited condensed consolidated statements of operations, was
On April 6, 2021, the Company entered into an office lease agreement of approximately
The base rent under the lease were $
On October 7, 2021, the Company entered into an agreement for the lease of office premises from November 1, 2021 to April 30, 2022, subject to automatic renewal for subsequent periods until terminated by either party. Base rent amounted to €
On December 22, 2021, the Company entered into an agreement for the lease of two separate vehicles for
On December 24, 2021, the Company entered into the first amendment of the lease of office space in San Francisco. The expiration of the lease was extended to February 28, 2025 due to the change in the commencement date of one of the leased premises to March 1, 2022. The base rent under the lease amendment remained the same but will only be due starting March 1, 2022. The rent in one of the leased premises currently being occupied by the Company was and will still be $
On January 25, 2022, the Company entered into an agreement for the lease of office premises from March 1, 2022 to December 31, 2023, subject to automatic renewal for subsequent periods until terminated by either party. Base rent amounted to €
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The table below provided additional details of the office space lease presented in the condensed consolidated balance sheet as of March 31, 2022 and December 31, 2021:
March 31, | December 31 | ||||
2022 | 2021 | ||||
(in thousands) | (unaudited) | ||||
Operating lease - right-of-use asset | $ | $ | |||
Operating lease liability, current | |||||
Operating lease liability, net of current portion | |||||
Total | $ | $ | |||
Weighted-average remaining life (years) | |||||
Weighted-average discount rate | |||||
Lease cost included in the general and administrative expenses in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021 was approximately $
For the year three months ended March 31, 2022 and 2021, cash paid for operating lease liabilities recognized under operating cash flows amounted to $
The following table summarizes the undiscounted cash payment obligations for the operating lease liability as of March 31, 2022:
March 31, | December 31 | ||||
2022 | 2021 | ||||
(in thousands) | (unaudited) | ||||
2022 | |||||
2023 | |||||
2024 | |||||
2025 | |||||
Total undiscounted operating lease payments | |||||
Imputed interest expenses | ( | ( | |||
Total operating lease liability | |||||
Less: Operating lease liability, current | |||||
Operating lease liability, net of current portion | $ | $ | |||
On October 10, 2021, the Company also entered into a short-term office lease in Milan, Italy. The term of the lease began on November 1, 2021 and will expire on April 30, 2022, subject to automatic renewal equal to the present term until terminated by mutual agreement. The Company recognizes rent expense on a straight-line basis over the non-cancellable lease period. Rent expense, included in general and administrative expenses in the unaudited condensed consolidated statements of operations, was $
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Purchase Commitment
On September 3, 2020, the Company entered into a manufacturing and supply agreement (the “Agreement”) with Glenmark Life Sciences Limited (“Glenmark”), pursuant to which Glenmark will continue to serve as the Company’s manufacturer of crofelemer for use in Mytesi, the Company’s human prescription drug product approved by the U.S. Food and Drug Administration, and for other crofelemer-based products manufactured by the Company or its affiliates for human or animal use. The term of the Agreement is approximately
Master Services Agreement (“MSA”)
On June 24, 2019, the Company entered into an MSA for clinical research organization services (the “2019 MSA”) and a service order under such 2019 MSA with Integrium, LLC (“Integrium”). The service order supports the Company’s study to evaluate the effect of Mytesi on gastrointestinal microbiome in people living with HIV. The 2019 MSA will terminate upon the satisfactory performance of all services to be provided thereunder unless earlier terminated by the parties. As of March 31, 2022, there are
On October 5, 2020, the Company entered into another MSA for clinical research organization services (the “2020 MSA”) and a service order under such 2020 MSA with Integrium. The service order covers the Company’s planned upcoming pivotal Phase 3 clinical trial for cancer-therapy related diarrhea. As consideration for its services, the Company will pay Integrium a total amount of up to approximately $
Asset Transfer and Transition Commitment
On September 25, 2017, the Company entered into the Termination, Asset Transfer and Transition Agreement dated September 22, 2017 with Glenmark. As a result of the agreement, the Company now controls commercial rights for Mytesi for all indications, territories and patient populations globally, and also holds commercial rights to the existing regulatory approvals for crofelemer in Brazil, Ecuador, Zimbabwe and Botswana. In exchange, the Company agrees to pay Glenmark
Revenue Sharing Commitment Update
On December 14, 2017, the Company announced its entry into a collaboration agreement with Seed Mena Businessmen Services LLC (“SEED”) for Equilevia™, the Company's non-prescription, personalized, premium product for total gut health in equine athletes. According to the terms of the Agreement, the Company will pay SEED
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financial requirements. The agreement became effective on December 13, 2017 and will continue indefinitely until terminated by either party pursuant to the terms of the Agreement.
Legal Proceedings
On July 20, 2017, a putative class action complaint was filed in the United States District Court, Northern District of California, Civil Action No. 3:17 cv 04102, by Tony Plant (the “Plaintiff”).
The Company answered the complaint on August 2, 2019; the answer denied the material allegations of the second amended complaint. Following the completion of document discovery, the parties engaged in a mediation that resulted in an agreement in principle to settle the litigation on a class-wide basis for $
On May 27, 2021, the court gave the final approval to the proposed settlement and the entire settlement consideration will be provided by the Company’s director and officer liability insurance carrier. Under the loss recovery model in ASC 450 and in reference to ASC 410, the ultimate net income effect of the recognized loss and the insurance proceeds directly related to the recognized loss is
Settlement of Underwriter Fee
In August 2018, the Company entered into an agreement with an underwriter pursuant to which the underwriter would aid the Company in identifying certain financing transactions, in exchange for a percentage fee of any such financing and warrants. In the first quarter of 2020, the Company and the underwriter agreed on a final settlement for the underwriter services comprised of a cash payment, warrants and common stock. The cash payment amount totalled $
Severance Agreements
In June 2020, the Company entered into certain agreements relating to the payment of severance and other benefits to executive officers of the Company, the severance agreements provide for compensation and benefits if the executive officer is subject to (a) a termination of employment by the Company without cause or (b) a good reason termination, within three months following a change in control.
Contingencies
From time to time, the Company maybe a party to various legal actions, both inside and outside the U.S., arising in the ordinary course of its business or otherwise. The Company accrues amounts, to the extent they can be reasonably estimated, that the Company believes will result in a probable loss (including, among other things, probable settlement value), to adequately address any liabilities related to legal proceedings and other loss contingencies. A loss or a range of loss is disclosed when it is reasonably possible that a material loss will incur and can be estimated, or when it is reasonably possible that the amount of a loss, when material, will exceed the recorded provision. The Company did not have any material accruals for any currently active legal action in its consolidated balance sheets as of March 31, 2022, as the Company could not predict the ultimate outcome of these matters, or reasonably estimate the potential exposure.
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8. Debt
Notes payable at March 31, 2022 and December 31, 2021 consisted of the following:
March 31, | December 31, | |||||
2022 |
| 2021 | ||||
(in thousands) | (unaudited) | |||||
Royalty Interest | $ | $ | ||||
Streeterville Note | ||||||
Insurance Financing | — | |||||
Tempesta Note | ||||||
|
|
| ||||
Less: unamortized discount and debt issuance costs |
| ( |
|
| ( | |
Note payable, net of discount | $ |
| $ | |||
Notes payable - non-current, net | $ | $ | ||||
Notes payable - current, net | $ | $ | ||||
Future maturities of the notes payable not designated at FVO as of March 31, 2022 are as follows:
(in thousands) | Amounts | ||
As of March 31, | |||
2023 | $ | ||
2024 | |||
2025 | |||
2026 | |||
2027 | |||
Less: unamortized discount and debt issuance costs | ( | ||
Total | $ | ||
Future maturities are based on contractual minimum payments. Timing of maturities may fluctuate based on future revenue.
Sale of Future Royalty Interest
October 2020 Purchase Agreement
On October 8, 2020, the Company entered into another royalty interest purchase agreement (the “October 2020 Purchase Agreement”) with Iliad, pursuant to which the Company sold to Iliad a royalty interest entitling Iliad to receive $
Until such time as the Royalty Repayment Amount has been paid in full, the Company will pay Iliad
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the actual Royalty Payment amount Iliad is entitled to for such month. Beginning on the 24-month anniversary of the Purchase Price Date and continuing until the Royalty Repayment Amount has been paid in full, the monthly Royalty Payment shall be the greater of (a) $
The Royalty Interest amount of $
Pursuant to the October 2020 Purchase Agreement, if the weekly volume weighted average price (“VWAP”) of the Company’s common stock is not equal or greater than the minimum VWAP of $
November 13, 2020, the Company concluded that the contingent clause has been met, warranting an additional $
On April 13, 2021, the Company entered into an exchange agreement with Iliad, pursuant to which the parties agreed to partition $
On February 22, 2022, the Company entered into an exchange agreement with Iliad, pursuant to which the parties agreed to partition $
On March 2, 2022, the Company entered into an exchange agreement with Iliad, pursuant to which the parties agreed to partition $
On March 4, 2022, the Company entered into an exchange agreement with Iliad, pursuant to which the parties agreed to partition $
On March 9, 2022, the Company entered into an exchange agreement with Iliad, pursuant to which the parties agreed to partition $
Because the period between the first and last exchanges occurred within a 12-month period and each was individually assessed as a modification, the debt terms that existed prior to the February 13 exchange was used in the application of the 10% test on the cumulative assessment performed. The exchanges were cumulatively accounted for as
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an extinguishment and resulted to a loss of $
Interest expense for the three months ended March 31, 2022 and 2021 was $
December 2020 Purchase Agreement
On December 22, 2020, the Company entered into a royalty interest purchase agreement (the “December 2020 Purchase Agreement”) with Irving Park Capital, LLC (“Irving”), a company affiliated with CVP, pursuant to which the Company sold to Irving a royalty interest entitling Irving to receive $
Until such time as the Royalty Repayment Amount has been paid in full, the Company will pay Irving
The Royalty Interest amount of $
Interest expense for the three months ended March 31, 2022 and 2021 was $
March 2021 Purchase Agreement
On March 8, 2021, the Company entered into a purchase agreement (the “March 2021 Purchase Agreement”) with Streeterville Capital, LLC (“Streeterville”), a company affiliated with CVP, pursuant to which the Company sold a royalty interest entitling Streeterville to $
The Company will be obligated to make minimum royalty payments on a monthly basis beginning at the earlier of (a) 36 months following the closing date or (b)
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been paid in full or the 18-month anniversary of the royalty payment start date, $
The Royalty Interest amount of $
Interest expense for the three months ended March 31, 2022 and 2021 was $
Streeterville Note
On January 13, 2021, the Company issued a secured promissory note to Streeterville in the original principal amount of $
At any time following the occurrence of a trial failure which refers to any of the following: (i) the Company abandons the clinical trial with lechlemer for an indication for the symptomatic relief of infectious diarrhea for cholera; (ii) the Company fails to start the Phase 1 clinical trial of lechlemer for the symptomatic relief of infectious diarrhea for cholera by July 1, 2022; or (iii) the Company fails to meet all primary endpoints in the pivotal trials of Lechlemer for the symptomatic relief if infectious diarrhea for cholera with statistical significance, Streeterville may elect to increase the outstanding balance as of the date of the trial failure by
Streeterville is entitled to a maximum of
Beginning on the earlier of (a)
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balance earlier than it is due. In the event the Company elects to prepay all or any portion of the outstanding balance, it shall pay to Streeterville
After Streeterville becomes aware of the occurrence of any default, Streeterville may accelerate the note, with the outstanding balance becoming immediately due and payable in cash at the Mandatory Default Amount (i.e., the outstanding balance following the application of the Default Effect). Streeterville reserves the right to declare the outstanding balance immediately due and payable at any time following the default. Default Effect means multiplying the outstanding balance as of the date of default by
In connection with the note issuance, the Company has entered into a security agreement with Streeterville, pursuant to which Streeterville will receive a first priority security interest in all existing and future lechlemer technology, and any TDPRV and the sale proceeds therefrom that may be granted to the Company by the FDA in connection with the development of lechlemer for the cholera indication. The Company also agreed, with certain exceptions, not to grant any lien on any of the collateral securing the note and not to grant any license under any of the intellectual property relating to such collateral. The grant of security interest has become effective upon the receipt of the Salix Waiver on April 6, 2021 in observance to the requirement of the settlement agreement previously entered by the Company with Salix Pharmaceuticals, Inc.
The Company irrevocably elected to initially and subsequently apply the FVO accounting to the entire note. The fair value at transaction date was equal to the cash proceeds received of $
Insurance Financing
March 2021 First Insurance Financing
In March 2021, the Company entered into a premium finance agreement for $
May 2021 First Insurance Financing
In May 2021, the Company entered into another premium finance agreement for $
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2019 Tempesta Note
In October 2019, the Company entered into a License Termination and Settlement Agreement with Dr. Michael Tempesta, pursuant to which certain royalty payment disputes between the Company and Tempesta were settled. Per the terms of the Agreement, Tempesta received $
Oasis Secured Borrowing
The Purchase Agreement
In May 2020, the Company, entered into a
In December 2020, the Company received cash proceeds of $
In February 2021, the Company made its final required payment to Oasis under Tranche #6 Secured Note, with total payments equaling the $
Exchange Note 2
In May 2019, CVP and the Company agreed to exchange
In September 2020, the Company and CVP also entered into a global amendment agreement, pursuant to which the maturity date of Exchange Note 2 is extended to December 31, 2021. In consideration of CVP’s grant of extension, together with the related fees and other accommodation set forth, principal debt was increased by
Pursuant to the global amendment agreement, the Company issued
35
be payable through the Company’s issuance of Series D Perpetual Preferred share by delivering to each record holder the calculated number of payment-in-kind (“PIK”) dividend shares. The Series D Perpetual Preferred shares were classified as liability and were measured at fair value using the income approach, which considered the weighted probability of discounted cash flows at various scenarios of redemption and perpetual holding of the shares. The Company determined the fair value of $
In December 2020, the Company and CVP entered into a note exchange agreement to which the Company made a prepayment of principal amounting to $
In January 2021, the Company and CVP entered into another note exchange agreement to which the Company made a prepayment of the remaining outstanding balance of Exchange Note 2 amounting to $
As of March 31, 2022 and December 31, 2021, the carrying value of Exchange Note 2, net of discount, was
8. Warrants
The following table summarizes information about warrants outstanding and exercisable into shares of the Company’s common stock as of March 31, 2022 and December 31, 2021:
March 31, | December 31 | |||
2022 | 2021 | |||
Warrants outstanding, beginning balance | | | ||
Issuances | — | | ||
Exercises | — | ( | ||
Expirations and cancelations | — | - | ||
Warrants outstanding, ending balance | | |
October 2018 Underwriter Warrants
In October 2018, the Company issued warrants to various service providers to purchase an aggregate of
36
April 2020 Underwriter Warrants
In April 2020, in consideration of the settlement of a dispute regarding underwriting fees (see Note 7), the Company issued warrants to purchase
March 2019 Ladenburg Warrants
In March 2019, the Company issued warrants to purchase an aggregate of
March 2019 LOC Warrant
In March 2019, the Company issued a warrant to purchase warrant shares equal to a fixed principal amount divided by a variable exercise price. On July 23, 2019, upon the exercise price of the warrants becoming fixed, the warrants became exercisable into
2019 Bridge Note Warrants
Between March 18, 2019 and June 26, 2019, the Company issued
A total of
July 2019 Series 1 Warrants
In July 2019, the Company entered into an underwriting agreement, relating to a public offering, which was comprised of (1)
The Series 1 Warrants had an exercise price of $
In the offering, the Company sold (i)
During the three months ended March 31, 2021, an aggregate of
A total of
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July 2019 Series 2 Warrants
The Series 2 Warrants have an exercise price of $
In the July 2019 offering, the Company sold (i)
During the three months ended March 31, 2021, an aggregate of
A total of
April 2021 ELOC Warrants
On April 7, 2021, in consideration for Oasis Capital’s entry into the March 2020 ELOC amendment, the Company issued Oasis Capital a common stock purchase warrant (“ELOC Warrants”) exercisable for
10. Preferred Stock
At March 31, 2022 and December 31, 2021, preferred stock consisted of the following:
Liquidation | ||||||||||||
(in thousands, except share and per share data) | Shares |
| Issued and |
| Carrying | Preference | ||||||
Series | Authorized | Outstanding | Value | per Share | ||||||||
B-2 | | — | $ | — | $ | — | ||||||
C | | — | — | | ||||||||
Total | | — | $ | — | ||||||||
Series B-2 Convertible Preferred Stock
In December 2019, the Company entered into an exchange agreement with Oasis Capital, pursuant to which Oasis Capital gave up (i) its remaining unexercised Prepaid Forward contracts exercisable for
Holders of the Series B-2 Convertible Preferred Stock are entitled to receive dividends on shares of Series B-2 Convertible Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock.
38
The shares of Series B-2 Convertible Preferred Stock have no voting rights. However, as long as any shares of Series B-2 Convertible Preferred Stock remain outstanding, the Company shall not, without the affirmative vote of holders of a majority of the then outstanding shares of Series B-2 Convertible Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series B-2 Convertible Preferred Stock or alter or amend the Series B-2 Certificate of Designation or (b) enter into any agreement with respect to any of the foregoing.
Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the Holders of the Series B-2 Convertible Preferred Stock were entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the Series B-2 Convertible Preferred Stock were fully converted to Common Stock which amounts shall be paid pari passu with all holders of common stock.
Each share of Series B-2 Convertible Preferred Stock is convertible at any time at the holder’s option into
In January 2020, a holder of the Series B-2 Convertible Preferred Stock converted
As of March 31, 2022 and December 31, 2021, there were
Series C Perpetual Preferred Stock
In September 2020, the Company entered into an exchange agreement with Iliad to issue
Holders of the Series C Perpetual Preferred Stock were not entitled to voting rights. However, as long as any Series C Perpetual Preferred share is outstanding, the Company is restricted to alter, change, or enter into an agreement to alter or change adversely the powers, preferences, or rights given to the shareholders.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or deemed liquidation event, the holders of Series C Perpetual Preferred shares then outstanding would be entitled to be paid in cash out of the assets of the Company before any payment shall be made to the holders of common stock or shares of any series or class of preferred or other capital stock then outstanding that by its terms is junior to the Series C Perpetual Preferred shares in respect of the preferences as to distributions and payments upon such liquidation event by reason of their ownership, an amount per share of Series C equal to one times the Series C original issue price.
The Series C Perpetual Preferred shares were redeemable upon the option or discretion of the Company.
The Series C Perpetual Preferred shares were entitled to receive
39
shall be payable through the Company’s issuance of Series C Perpetual Preferred share by delivering to each record holder the calculated number of PIK dividend shares.
The Series C Perpetual Preferred shares were initially measured at fair value using the income approach, which considered the weighted probability of discounted cash flows at various scenarios of redemption by the Company or liquidation event and perpetual holding of the shares. As of the date of exchange, total fair value of the Series C Perpetual Preferred shares amounted to $
The preferred stock has been classified as permanent stockholders' equity in accordance with authoritative guidance for the classification and measurement of perpetual shares without mandatory redemption period because the redemption option was ultimately in the control of the Company.
In October 2020, the Company entered into an exchange agreement with Iliad pursuant to which the Company agreed to issue a total of
As of March 31, 2022 and December 31, 2021, there were
11. Stockholders' Equity
As of March 31, 2022 and December 31, 2021, the Company had reserved shares of common stock, on an as-if converted basis, for issuance as follows:
|
| |||
March 31, | ||||
2022 | 2021 | |||
Options issued and outstanding |
| |
| |
Inducement options issued and outstanding | | | ||
Options available for grant under stock option plans |
| |
| |
Restricted stock unit awards issued and outstanding |
| |
| |
Warrants issued and outstanding |
| |
| |
Total |
| |
| |
Common Stock
The holders of common stock are entitled to
The holders of non-voting common stock are not entitled to vote, except on an as converted basis with respect to any change of control of the Company that is submitted to the stockholders of the Company for approval. Shares of the Company's non-voting common stock have the same rights to dividends and other distributions and are convertible into shares of the Company's common stock on a
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The Company is authorized to issue a total number of
Reverse Stock Split
On September 3, 2021, the reverse stock split of the Company’s issued and outstanding voting common stock at a ratio not less than -for-2 and not greater than -for-20 became effective. Upon effectivity, every shares of the Company’s issued and outstanding common stock immediately prior to the effective time shall automatically be reclassified into one share of common stock without any change in the par value. The reverse stock split reduces the number of shares of common stock issuable upon the conversion of the Company’s outstanding non-voting common stock and the exercise or vesting of its outstanding stock options and warrants in proportion to the ratio of the reverse stock split and causes a proportionate increase in the conversion and exercise prices of such non-voting common stock, stock options and warrants. In addition, the number of shares reserved for issuance under the Company’s equity compensation plans immediately prior to the effective time will be reduced proportionately. The reverse stock split did not change the total number of authorized shares of common stock or preferred stock.
March 2020 ELOC (Equity Line of Credit)
In March 2020, the Company entered into an equity purchase agreement (the “March 2020 ELOC”) with Oasis Capital, which provides that Oasis Capital is committed to purchase up to an aggregate of $
Pursuant to the terms and conditions of the March 2020 ELOC, on any trading day selected by the Company (such date the “Put Date”), after the SEC has declared effective the registration statement registering the sale of the shares of common stock that may be issued to Oasis Capital under the March 2020 ELOC, the Company has the right, in its sole discretion, to present to Oasis Capital with a purchase notice (each a “Put Notice”), directing Oasis Capital to purchase up to the lesser of (i)
In addition, on any date on which Oasis Capital receives shares of common stock in connection with a Put Notice (the “Clearing Date”), the Company also has the right, in its sole discretion, to present to Oasis Capital with a Put Notice (each an “Option 2 Put”) directing Oasis Capital to purchase an amount of common stock equal to the lesser of (i) such amount that equals
On April 15, 2020, the SEC declared effective the registration statement registering the sale of the shares of common stock issued to Oasis Capital under the March 2020 ELOC. The Company will control the timing and amount of sales of common stock to Oasis Capital. Oasis Capital has no right to require any sales by the Company but is obligated to make purchases from the Company as directed by the Company in accordance with the March 2020 ELOC.
In connection with the equity line, the Company agreed to pay Oasis Capital a commitment fee and in April 2020, in settlement of the commitment fee, the Company issued to Oasis Capital
Per the terms of the equity purchase agreement, the Option Put 1 and Option Put 2 may be exercised only at a price that is always above the trading price of the underlying common stock at the exercise date, thereby rendering any exercise by the Company being out-of-the-money. At inception of the equity line on March 24, 2020, the Put Options
41
were classified as derivative assets with a fair value of
April 15, 2020, were reclassified to stockholders’ equity with a fair value of
In April 2020, the Company exercised a single Put Option Put 1 under which the Company sold
On April 7, 2021, the Company entered into an amendment to the March 2020 ELOC with Oasis Capital, pursuant to which the parties agreed to increase (i) the purchase price from $
At the Market Offering (“ATM”)
October 2020 ATM Agreement
On October 5, 2020, the Company entered into an ATM Agreement with Ladenburg, pursuant to which the Company may offer and sell, from time to time through Ladenburg, shares of common stock, subject to the terms and conditions of the ATM Agreement. The ATM Agreement will terminate upon the earlier of (i) October 5, 2022 and (ii) termination of the ATM Agreement as permitted therein. In 2020, the Company sold
In 2021, the Company issued an aggregate of
As of March 31, 2022 and December 31, 2021, all shares under the ATM Agreement have been issued.
December 2021 ATM Agreement
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 $
On February 2, 2022, the Company entered into an amendment to the December 2021 ATM Agreement, pursuant to which, the aggregate offering amount of the shares of the Company’s common stock which the Company may sell and issue through Ladenburg, as the sales agent, was increased from $
As of December 31, 2021, the Company has issued
During the three months ended March 31, 2022, the Company issued an aggregate of
Securities Purchase Agreement
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
42
an offering price of $
On April 29, 2021, the Company entered into another securities purchase agreement, pursuant to which the Company agreed to issue and sell, in a registered public offering through Ladenburg as the placement agent, an aggregate of
Subscription Agreement
On June 1, 2021, the Company entered into a subscription agreement with the SPAC and its sponsor, pursuant to which the SPAC agreed to issue and sell, in a private placement by the SPAC directly to the Company, units of the SPAC, with each unit consisting of
On November 3, 2021 and the SPAC issued
September 2021 PIPE Financing
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
Noncontrolling Interest
As a result of the merger last November 3, 2021 between Napo EU and Dragon SPAC, the Company assumed a non-controlling interest amounting to $
During the three months ended March 31, 2022, noncontrolling interest decreased by $
12. Stock-based Compensation
2013 Equity Incentive Plan
Effective November 1, 2013, the Company's BOD and sole stockholder adopted the Jaguar Health, Inc. 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan allows the Company's BOD to grant stock options, restricted stock awards and restricted stock unit awards to employees, officers, directors and consultants of the Company. Following the effective date of the IPO and after effectiveness of any grants under the 2013 Plan that were contingent on the IPO,
43
2014 Stock Incentive Plan
Effective May 12, 2015, the Company adopted the Jaguar Health, Inc. 2014 Stock Incentive Plan (“2014 Plan”). The 2014 Plan provides for the grant of options, restricted stock and restricted stock units to eligible employees, directors and consultants to purchase the Company's common stock. The term of an incentive stock option may not exceed
As of March 31, 2022, there were
2020 New Employee Inducement Award Plan
Effective June 16, 2020, the Company adopted the Jaguar Health, Inc. New Employee Inducement Award Plan (“2020 Inducement Award Plan”) and, subject to the adjustment provisions of the Inducement Award Plan, reserved
As of March 31, 2022, there were
Stock Options and Restricted Stock Units (“RSUs”)
The following table summarizes incentive plan activity for the three months ended March 31, 2022 (unaudited):
Weighted | Weighted Average | |||||||||||||
Shares | Stock | Average | Remaining | Aggregate | ||||||||||
Available | Options | RSUs | Stock Option | Contractual Life | Intrinsic | |||||||||
(in thousands, except share and per share data) |
| for Grant |
| Outstanding |
| Outstanding |
| Exercise Price |
| (Years) |
| Value* | ||
Outstanding at December 31, 2021 | | | | $ | | $ | ||||||||
Additional shares authorized | | — | — | — | — | |||||||||
Options granted | — | — | — | — | — | |||||||||
Options exercised | — | — | — | — | — | |||||||||
Options canceled | | ( | — | | — | |||||||||
RSUs granted | ( | — | | — | — | |||||||||
Outstanding at March 31, 2022 | | | | $ | | $ | — | |||||||
Exercisable at March 31, 2022 |
| | $ | |
| $ | — | |||||||
Vested and expected to vest at |
| | $ | |
| $ | — | |||||||
*Fair market value of JAGX common stock on March 31, 2022 was $
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The intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair market value of the Company's common stock for options that were in-the-money.
The number of options exercised during the three months ended March 31, 2022 and 2021 was
The weighted average grant date fair value of stock options granted was
The number of options that vested in the three months ended March 31, 2022 and 2021 was
Stock-Based Compensation
The following table summarizes stock-based compensation expense related to stock options, inducement stock options and RSUs for the three months ended March 31, 2022 and 2021, and are included in the unaudited condensed consolidated statements of operations as follows:
Three Months Ended | |||||||
March 31, | |||||||
(in thousands) |
| 2022 |
| 2021 | |||
Research and development expense | $ | $ | |||||
Sales and marketing expense |
|
| |||||
General and administrative expense |
|
| |||||
Total | $ | $ | |||||
As of March 31, 2022, the Company had $
45
The fair value of options granted during the three months ended March 31, 2022 and 2021, respectively, were calculated using the range of assumptions set forth below:
Three Months Ended | ||||
March 31, | ||||
| 2022 |
| 2021 | |
Volatility | — | |||
Expected term (years) | — |
| | |
Risk-free interest rate | — |
| ||
Expected dividend yield | — | — | ||
401(k) Plan
The Company sponsors a 401(k) defined contribution plan covering all employees. There were
13. Net Loss Per Share
The following table presents the calculation of basic and diluted net loss per share of common stock for the periods indicated:
Three Months Ended March 31, | ||||||
(In thousands, except share and per share data) |
| 2022 |
| 2021 | ||
Net loss attributable to common shareholders (basic and diluted) | ( | ( | ||||
Shares used to compute net loss per common share, basic and diluted | | | ||||
Net loss per share attributable to common shareholders, basic and diluted | ( | ( | ||||
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. The Company's potentially dilutive securities which include stock options, convertible preferred stock, RSUs and common stock warrants have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company's net loss position.
The following outstanding common stock equivalents have been excluded from diluted net loss per common share for the three months ended March 31, 2022 and 2021 because their inclusion would be anti-dilutive.
March 31, | December 31, | |||
| 2022 | 2021 | ||
Options issued and outstanding | | | ||
Inducement options issued and outstanding | | | ||
Restricted stock units issued and outstanding | | | ||
Warrants issued and outstanding | | | ||
Total | | |
As of May 4, 2022, there were
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14. Segment Information
The Company has
The Company's reportable segments net revenues and net loss for the three months ended March 31, 2022 and 2021 consisted of the following:
Three Months Ended | ||||||
March 31, | ||||||
(in thousands) |
| 2022 |
| 2021 | ||
Revenue from external customers |
|
|
|
| ||
Human Health | $ | $ | ||||
Animal Health |
|
| ||||
Consolidated Totals | $ | $ | ||||
Segment net loss |
|
|
|
| ||
Human Health | $ | ( | $ | ( | ||
Animal Health |
| ( |
| ( | ||
Consolidated Totals | $ | ( | $ | ( | ||
The Company's reportable segments assets consisted of the following:
March 31, | December 31, | |||||
(in thousands) |
| 2022 |
| 2021 | ||
Segment assets |
|
|
| |||
Human Health | $ | $ | ||||
Animal Health |
|
| ||||
Total | $ | $ | ||||
The reconciliation of segments assets to the consolidated assets is as follows:
March 31, | December 31, | |||||
(in thousands) |
| 2022 |
| 2021 | ||
Total assets for reportable segments | $ | $ | ||||
Less: Investment in subsidiary |
| ( |
| ( | ||
Less: Intercompany loan |
| ( |
| ( | ||
Consolidated Totals | $ | $ | ||||
47
15. Subsequent Events
Royalty Interest Amendment
On April 14, 2022, the Company entered into amendments (the “Royalty Interest Global Amendments”) to (i) the royalty interest in the original principal amount of $
Debt Amendment
On April 14, 2022, the Company and Napo Pharmaceuticals, Inc., the Company’s wholly-owned subsidiary (“Napo” and together with the Company, the “Borrower”), entered into an amendment (the “Note Global Amendment”) to the secured promissory note in the original principal amount of $
Plan Amendment
On April 13, 2022, the Board of Directors of the Company approved an amendment (the “Plan Amendment”) to the New Employee Inducement Award Plan (the “Inducement Award Plan”) to reserve an additional
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read together with the condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K as of and for the year ended December 31, 2021 which was filed to SEC on
March 11, 2022.
The discussion and analysis below includes certain forward-looking statements related to our research and development and commercialization of our products in the U.S., our future financial condition and results of operations and potential for profitability, the sufficiency of our cash resources, our ability to obtain additional equity or debt
48
financing or other means of accelerating the payment of accounts receivable, if needed, possible partnering or other strategic opportunities for the development of our products, as well as other statements related to the progress and timing of product development, present or future licensing, collaborative or financing arrangements or that otherwise relate to future periods, which are all forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements represent, among other things, the expectations, beliefs, plans and objectives of management and/or assumptions underlying our judgments concerning the future financial performance and other matters discussed in this document. The words “may,” “will,” “should,” “plan,” “believe,” “estimate,” “intend,” “anticipate,” “project,” and “expect” and similar expressions are intended to connote forward-looking statements. All forward-looking statements involve certain risks, uncertainties and other factors described in our Annual Report on Form 10-K, that could cause our actual commercialization efforts, financial condition and results of operations, and business prospects and opportunities to differ materially from these expressed in, or implied by, those forward-looking statements. We caution investors not to place significant reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise forward-looking statements.
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
49
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.
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 flows, and we expect to continue to incur significant research and development and other expenses. Our net loss was $18.0 million and $12.0 million for the three months ended March 31, 2022 and 2021, respectively. As of
March 31, 2022, we had a total stockholders' equity of $8.1 million, an accumulated deficit of $237.5 million, and cash of $17.5 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 API manufacturing capabilities and begin additional commercialization activities.
Revenues
Our product and collaboration revenue consist 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 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.
50
Research and Development Expense
Research and development expenses consist primarily of clinical and contract manufacturing expense, personnel and related benefits 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 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 and we track 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 benefits 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 have significant marketing or promotional expenses related to Neonorm Calf or Neonorm Foal in the three months ended March 31, 2022 and 2021.
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 benefits expense, stock-based compensation expense, employee travel expense, legal and accounting fees, rent and facilities expense, and management consulting expense.
51
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 consolidated 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 consolidated 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. Our significant account policies are described in Note 2 of the condensed consolidated financial statements. Our critical accounting policies and estimates were described in Part II, Item 7, Critical Accounting Policies and Estimates, in our Annual Report on Form 10-K for the year ended
December 31, 2021.
52
Results of Operations
Comparison of the Three months Ended March 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 three months ended March 31, 2022 and 2021 together with the change in such items in dollars and as a percentage.
Three Months Ended |
| |||||||||||
March 31, | ||||||||||||
(in thousands) |
| 2022 |
| 2021 |
| Variance |
| Variance % | ||||
Product revenue | $ | 2,625 | $ | 1,241 | $ | 1,384 |
| 111.5 | % | |||
Total revenue |
| 2,625 |
| 1,241 |
| 1,384 |
| 111.5 | % | |||
Operating Expenses |
|
|
|
|
|
|
| |||||
Cost of product revenue |
| 455 |
| 583 |
| (128) |
| (22.0) | % | |||
Research and development |
| 4,945 |
| 2,414 |
| 2,531 |
| 104.8 | % | |||
Sales and marketing |
| 2,835 |
| 2,139 |
| 696 |
| 32.5 | % | |||
General and administrative |
| 6,144 |
| 3,409 |
| 2,735 |
| 80.2 | % | |||
Series 3 warrants inducement expense | — | 1,462 | (1,462) | (100.0) | % | |||||||
Total operating expenses |
| 14,379 |
| 10,007 |
| 4,372 |
| 43.7 | % | |||
Loss from operations |
| (11,754) |
| (8,766) |
| (2,988) |
| 34.1 | % | |||
Interest expense |
| (4,194) |
| (1,901) |
| (2,293) |
| 120.6 | % | |||
Loss on extinguishment of debt |
| (2,815) |
| (753) |
| (2,062) |
| 273.8 | % | |||
Change in fair value of financial instruments and hybrid instrument designated at Fair Value Option |
| (233) |
| (599) |
| 366 |
| (61.1) | % | |||
Other income, net |
| 832 |
| 10 |
| 822 |
| 8,220.0 | % | |||
Loss before income tax |
| (18,164) |
| (12,009) |
| (6,155) |
| 51.3 | % | |||
Income tax expense | — | — | — | 100.0 | % | |||||||
Net loss and comprehensive loss | (18,164) | (12,009) | (6,155) | 51.3 | % | |||||||
Net loss attributable to noncontrolling interest | $ | (178) | $ | — | $ | (178) | 100 | % | ||||
Net loss attributable to common shareholders | $ | (17,986) | $ | (12,009) | $ | (5,977) | 49.8 | % | ||||
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.
Sales of Mytesi are recognized as revenue when the products are delivered to the wholesalers and to specialty pharmacies. Our gross revenues from the sale of Mytesi were $3.5 million and $4.6 million in the three months ended
March 31, 2022 and 2021, respectively. The decrease of about $1.2 million is largely due to the transition from Title model to the Specialty Pharmacy distribution networks.
Though the transition
To a closed network of specialty pharmacies has resulted in fewer bottles sold, it generated significant reductions in distribution costs, a higher average net price, and assisted our market access strategy intended to help remove access barriers for patients prescribed Mytesi and includes services such as higher level of support for prior authorizations, appeals, adherence counseling, and home delivery options.
Medicaid and AIDS Drug Assistance Program (“ADAP”) rebates accounted for $504,000 and $1.1 million for the three months ended March 31, 2022 and 2021, respectively, a decrease of $593,000. Sales discounts and sales returns
53
were $330,000 and $1.8 million for the three months ended March 31, 2022 and 2021, respectively, a decrease of $1.4 million. The wholesaler fees were eliminated in the three months ended March 31, 2022 as compared to $501,000 in the three months ended March 31, 2021.
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 in the three months ended March 31, 2022 and 2021 were as follows:
Three Months Ended |
| |||||||||||
March 31, |
| |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| Variance |
| Variance % | ||||
Gross product sales |
| |||||||||||
Mytesi | $ | 3,395 | $ | 4,558 | $ | (1,163) |
| (25.5) | % | |||
Neonorm | 20 | 33 |
| (13) |
| (39.4) | % | |||||
Canalevia | 44 | — |
| 44 |
| 100.0 | % | |||||
Total gross product sales | 3,459 | 4,591 |
| (1,132) |
| (24.7) | % | |||||
Medicaid rebates | (504) | (1,097) |
| 593 |
| (54.1) | % | |||||
Sales discounts | (320) | (1,732) | 1,412 | (81.5) | % | |||||||
Sales returns | (10) | (20) | 10 | (50.0) | % | |||||||
Wholesaler fee | — | (501) | 501 | (100.0) | % | |||||||
Net product sales | $ | 2,625 | $ | 1,241 | $ | 1,384 |
| 111.5 | % | |||
Our gross product revenues were $3.5 million and $4.6 million for the three months ended March 31, 2022 and 2021, respectively. These periods reflect revenue from the sale of our human drug Mytesi and our animal products branded as Neonorm Calf and Neonorm Foal.
Our Neonorm product revenues were $20,000 and $33,000 for the three months ended March 31, 2022 and 2021, respectively. Sales and marketing expenses for Neonorm products are not significant during 2022 and during the same period in 2021.
Our Canalevia product revenues were $44,000 and zero for the three months ended March 31, 2022 and 2021, respectively. Sales and marketing expenses for Canalevia products are not significant during 2022.
Cost of Product Revenue
Three Months Ended |
| |||||||||||
March 31, |
| |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| Variance |
| Variance % | ||||
Cost of Product Revenue |
| |||||||||||
Material cost |
| $ | 250 |
| $ | 269 |
| $ | (19) |
| (7.1) | % |
Direct labor |
| 162 |
| 219 |
| (57) |
| (26.0) | % | |||
Royalties |
| 8 |
| — |
| 8 |
| 100.0 | % | |||
Distribution fees |
| 7 |
| 61 |
| (54) |
| (88.5) | % | |||
Other |
| 28 |
| 34 |
| (6) |
| (17.6) | % | |||
Total |
| $ | 455 |
| $ | 583 |
| $ | (128) |
| (22.0) | % |
Cost of product revenue decreased $128,000 from $583,000 in the three months ended March 31, 2021 to $455,000 for the same period in 2022. The decrease in the cost of product revenue period over period was largely attributable to lower sales volume resulting in less cost of materials for bottles sold in the three months ended March 31, 2021.
54
Research and Development
The following table presents the components of research and development (“RD”) expense for the three months ended March 31, 2022 and 2021 together with the change in such components in dollars and as a percentage:
Three Months Ended |
| |||||||||||
March 31, |
| |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| Variance |
| Variance % | ||||
Research and Development: |
|
|
|
|
|
|
|
| ||||
Personnel and related benefits | $ | 2,002 | $ | 434 | $ | 1,568 |
| 361.3 | % | |||
Clinical and contract manufacturing | 1,645 | 867 | 778 |
| 89.7 | % | ||||||
Stock-based compensation |
| 348 |
| 164 | 184 |
| 112.2 | % | ||||
Materials expense and tree planting |
| 71 |
| 73 | (2) |
| (2.7) | % | ||||
Travel, other expenses |
| 21 |
| — | 21 |
| 100.0 | % | ||||
Other |
| 858 |
| 876 | (18) |
| (2.1) | % | ||||
Total | $ | 4,945 | $ | 2,414 | $ | 2,531 |
| 104.8 | % | |||
The change in RD expense of $2.5 million in the three months ended March 31, 2022 compared to the same period in 2020 was largely due to:
| ● | Personnel and related benefits increased $1.6 million from $434,000 in the three months ended March 31, 2021 to $2.0 million in the same period in 2022 due to the additional headcount and accrued bonus. |
| ● | Clinical and contract manufacturing expenses increased $778,000 from $867,000 in the three months ended March 31, 2021 to $1.6 million in the same period 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/lechlemer research expenses. |
| ● | Stock-based compensation increased $184,000 from $164,000 in the three months ended March 31, 2021 to $348,000 in the same period in 2022 primarily due to new options and RSUs granted during the period. |
| ● | Travel, and other expenses increased $21,000 from zero in the three months ended March 31, 2021 to $21,000 in the same period in 2022 primarily due to more travel activities with the clinical trials. |
| ● | Other expenses consisting of consulting, formulation and regulatory fees decreased $18,000 from $876,000 in the three months ended March 31, 2021 to $858,000 in the same period in 2022. |
55
Sales and Marketing
The following table presents the components of sales and marketing (“SM”) expense for the three months ended March 31, 2022 and 2021 together with the change in such components in dollars and as a percentage:
Three Months Ended |
| |||||||||||
March 31, |
| |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| Variance |
| Variance % | ||||
Sales and Marketing: |
|
|
|
|
|
|
|
| ||||
Personnel and related benefits | $ | 1,157 | $ | 827 | $ | 330 |
| 39.9 | % | |||
Direct marketing fees and expense | 1,101 | 912 | 189 |
| 20.7 | % | ||||||
Stock-based compensation |
| 82 |
| 52 |
| 30 |
| 57.7 | % | |||
Other |
| 495 |
| 348 |
| 147 |
| 42.2 | % | |||
Total | $ | 2,835 | $ | 2,139 | $ | 696 |
| 32.5 | % | |||
The change in SM expense of $696,000 in the three months ended March 31, 2022 compared to the same period in 2022 was largely due to:
| ● | Personnel and related benefits increased $330,000 from $827,000 in the three months ended March 31, 2021 to $1.2 million in the same period in 2022 due additional headcount within the commercial operations and accrued commissions. |
| ● | Direct marketing fees and expenses increased $189,000 from $912,000 in the three months ended March 31, 2021 to $1.1 million in the same period in 2022 due to increased patient access programs and other Mytesi marketing initiatives. |
| ● | Stock-based compensation increased $30,000 from $52,000 in the three months ended March 31, 2021 to $82,000 in the same period in 2022 primarily due to new options and RSUs granted during the period. |
| ● | Other expenses increased $147,000 from $348,000 in the three months ended March 31, 2021 to $495,000 in the same period in 2022 largely due to additional marketing consulting costs and travel expenses. |
General and Administrative
The following table presents the components of general and administrative (“GA”) expense for the three months ended March 31, 2022 and 2021 together with the change in such components in dollars and as a percentage:
Three Months Ended |
| |||||||||||
March 31, |
| |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| Variance |
| Variance % | ||||
General and Administrative: |
|
|
|
|
|
|
|
| ||||
Personnel and related benefits | $ | 1,794 | $ | 602 | $ | 1,192 |
| 198.0 | % | |||
Public company expense |
| 748 |
| 98 |
| 650 |
| 663.3 | % | |||
Stock-based compensation |
| 633 |
| 418 |
| 215 |
| 51.4 | % | |||
Legal services |
| 522 |
| 498 |
| 24 |
| 4.8 | % | |||
Third-party consulting services |
| 378 |
| 202 |
| 176 |
| 87.1 | % | |||
Audit, tax and accounting services |
| 232 |
| 580 |
| (348) |
| (60.0) | % | |||
Travel, other expenses |
| 157 |
| 11 |
| 146 |
| 1,327.3 | % | |||
Rent and lease expense |
| 115 |
| 53 |
| 62 |
| 117.0 | % | |||
Other |
| 1,565 |
| 947 |
| 618 |
| 65.3 | % | |||
Total | $ | 6,144 | $ | 3,409 | $ | 2,735 |
| 80.2 | % | |||
The change in GA expenses of $2.7 million in the three months ended March 31, 2022 compared to the same period in 2022 was largely due to:
56
| ● | Personnel and related benefits increased $1.2 million from $602,000 in the three months ended March 31, 2021 to $1.8 million in the same period in 2022, due to additional headcount and accrued bonus. |
| ● | Other expenses increased $618,000 from $947,000 in the three months ended March 31, 2021 to $1.6 million in the same period in 2022 due to recruiting and additional IT support. |
| ● | Public company expense increased $650,000 from $98,000 in the three months ended March 31, 2021 to $748,000 in the same period in 2022, largely attributable to the investor relations and communications consulting expenses, and expenses for the annual shareholder meeting. |
| ● | Stock-based compensation increased $215,000 from $418,000 in the three months ended March 31, 2021 to $633,000 in the same period in 2022 primarily due to higher expense incurred for options granted with immediate vesting to existing employees. |
| ● | Third-party consulting services increased $176,000 from $202,000 in the three months ended March 31, 2021 to $378,000 in the same period in 2022 primarily due to support corporate and finance activities. |
| ● | Travel, and other expenses increased $146,000 from $11,000 in the three months ended March 31, 2021 to $115,000 in the same period in 2022 primarily due to higher travel activities related to administrative function. |
| ● | Rent and lease expense increased $62,000 from $53,000 in the three months ended March 31, 2021 to $157,000 in the same period in 2022 primarily due to increase in fees related to occupancy of new spaces. |
| ● | Audit, tax and accounting services fees decreased $348,000 from $580,000 in the three months ended March 31, 2021 to $232,000 in the same period in 2022 mostly due to change in accounting firm and fewer complex transactions |
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.
Interest Expense
Interest expense increased $2.3 million from $1.9 million in the three months ended March 31, 2021 to $4.2 million for the same period in 2022 primarily due to interest expense incurred on royalty interest agreements and Exchange Note 2.
Loss on Extinguishment of Debt
The increase in the loss on extinguishment of debt from $753,000 in the three months ended March 31, 2021 to $2.8 million in the same period in 2022 is due to the $2.8 million extinguishment loss from the exchange of the outstanding balance of Iliad’s royalty agreements for shares of the Company’s common stock.
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Change in Fair Value of Financial Instruments and Hybrid Instrument Designated at FVO
Change in fair value of financial instrument and hybrid instrument designated at FVO decreased $366,000 from a loss of $599,000 in the three months ended March 30, 2021 to a loss of $233,000 for the same period in 2022 primarily due to fair value adjustments in liability classified warrants and notes payable designated at FVO.
Liquidity and Capital Resources
Sources of Liquidity
We have incurred net losses since our inception. For the three months ended March 31, 2022 and 2021, we had net losses of $18.2 million and $12.0 million, respectively. We expect to incur additional losses in the near-term future. At March 31, 2022, we had an accumulated deficit of $237.5 million. To date, we have generated only limited revenue, and we may never achieve revenue sufficient to offset our expenses.
We had cash of $17.5 million as of March 31, 2022. We do not believe our current capital is sufficient to fund our operating plan through one year from the issuance of these unaudited condensed consolidated financial statements.
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 in the three months ended March 31, 2022 were generated from the issuance of an aggregate of 20,046,463 shares of common stock under the ATM Agreement for total net proceeds of $9.1 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 the Three months Ended March 31, 2022 Compared to the Three months Ended March 31, 2021
The following table shows a summary of cash flows for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | |||||||
(in thousands) |
| 2022 |
| 2021 |
| ||
Total cash used in operating activities | $ | (7,695) | $ | (6,708) | |||
Total cash provided by financing activities |
| 8,150 |
| 30,868 | |||
Effects of foreign exchange rate changes on assets and liabilities |
| (50) |
| — | |||
Net increase in cash | $ | 405 | $ | 24,160 | |||
Cash Used in Operating Activities
During the three months ended March 31, 2022, net cash used in operating activities of $7.7 million resulted from our net loss of $18.2 million adjusted by the amortization of debt discounts and debt issuance costs of $3.4 million, loss on extinguishment of debt of $2.8 million, stock-based compensation of $1.1 million, depreciation and amortization expenses of $426,000, change in fair value of financial instrument and hybrid instrument designated at FVO of
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$233,000, amortization of operating lease right-of-use asset of $29,000, and changes in operating assets and liabilities of $2.5 million.
During the three months ended March 31, 2021, net cash used in operating activities of $6.7 million resulted from our net loss of $12.0 million adjusted by the Series 3 Warrants inducement expense of $1.5 million, amortization of debt discounts and debt issuance costs of $1.2 million, loss on extinguishment of debt of $753,000, stock-based compensation of $634,000, change in fair value of financial instrument and hybrid instruments designated at FVO of $599,000, depreciation and amortization expenses of $431,000, derecognition of debt discount on the settlement of receivables secured borrowing of $49,000, and changes in operating assets and liabilities of $175,000.
Cash Provided by Financing Activities
During the three months ended March 31, 2022, net cash provided by financing activities of $8.2 million consisted of $9.1 million in net proceeds from shares issued in an At the Market offering, offset by $335,000 repayment of insurance financing, and $447,000 in principal payments of the notes payable.
During the three months ended March 31, 2021, net cash provided by financing activities of $30.9 million consisted of $13.5 million in net proceeds received from 4,437,870 shares of common stock issued in registered public offering, $11.0 million in net proceeds received from issuance of notes payable, $5.4 million in net proceeds from 2,009,554 shares of common stock issued in an At the Market offering, $2.0 million in net proceeds received from 4,150,600 shares of common stock issued on conversion of Series 1, Series 2, and 2019 Bridge Note Warrants, $975,000 in net proceeds received from 1,250,000 shares of common stock issued in PIPE financing, offset by $1.8 million repayment of receivables secured borrowing, $95,000 repayment of insurance premium financing, and $50,000 in principal payments of the notes payable
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, Chief Executive Officer and Principal Financial and Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or15d-15(e) under the Exchange Act, of 1934, as mended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Office and Principal Financial and Accounting Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(c) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of the effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2022 using the criteria established in Internal Control-Integrated Framework (“2013 Framework”) issued by the Committee of Sponsoring Organization of the Treadway Commission (“COSO”). Based on our evaluation using those criteria, our management has concluded that, as of March 31, 2022, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the
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preparation of financial statements for external purposes in accordance with generally accepted accounting principles for the reasons discussed above.
This Quarterly Report on Form 10-Q does not include an attestation report of our registered public accounting firm on our internal control over financial reporting because we are an SRC and are not subject to auditor attestation requirements under applicable SEC rules.
Changes in Internal Control over Financial Reporting
There was no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. — OTHER INFORMATION
Item 1. Legal Proceedings
May 2020 Letter from the Committee on Oversight and Reform of the U.S. House of Representatives
On May 4, 2020, Jaguar Health, Inc. received a letter from the Committee on Oversight and Reform of the U.S. House of Representatives (the “Committee”) regarding the list price adjustment of Mytesi. Among other things, the Committee expressed an interest in understanding whether the price adjustment was connected to the Company’s
expectation that it could market crofelemer to treat coronavirus patients given the Company’s submission of a request to the U.S. Food and Drug Administration for Emergency Use Authorization (“EUA”) for crofelemer for the symptomatic relief of diarrhea and other gastrointestinal symptoms in patients with COVID-19 and for patients with COVID-19 who have diarrhea associated with certain antiviral treatments, which submission was denied by the FDA on April 7, 2020 as previously disclosed.
The Company intends to cooperate with the Committee’s inquiry and has prepared a public statement regarding the price adjustment, which is available on the Company’s website at https://jaguarhealth.gcs-web.com/company-statement. In its statement, the Company explains that the decision to adjust the price for crofelemer was made in December 2019 as part of expanding the Company’s comprehensive patient access program, and had the Company received EUA, it would have deferred the price adjustment until after the emergency use period ended.
Other than as described above, there are currently no claims or actions pending against us, the ultimate disposition of which could have a material adverse effect on our results of operations, financial condition or cash flows.
Item 1A. Risk Factors
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited condensed consolidated financial statements and related notes, before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risk and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the events or circumstances described in the following risk factors actually occur, our business, operating results, financial condition, cash flows, and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results, and stock price.
Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Our royalty interests require us to make minimum royalty payments, even if we do not sell a sufficient amount of products to cover such payments, which may strain our cash resources.
Since March 2020, we have sold royalty interests to certain lenders that entitle such lenders to receive future royalties on sales of our products. These royalty interests require us to make minimum royalty payments beginning 2021, even if we do not sell a sufficient amount of product to cover such payments, which may strain our cash resources. The
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total minimum royalty payments will be zero in 2021, $6.0 million in 2022, $18.0 million in 2023, $13.9 million in 2024, $7.1 million in 2025, and $3.9 million in 2026.
The reverse split of our common stock effected on September 8, 2021 could decrease our total market capitalization and may increase the volatility of our stock price.
At a special meeting of our stockholders on December 9, 2020 and reconvened on December 22, 2020, our stockholders approved a reverse split of our outstanding common stock at a ratio in the range of 1-for-2 to 1-for-20. Following such special meeting, our board of directors approved a 1-for-3 reverse split of our issued and outstanding shares of common stock. We filed with the Secretary of State of the State of Delaware a Certificate of Amendment to our Certificate of Incorporation to effect the reverse stock split. The reverse stock split was effective as of 12:01 am Eastern Time on September 8, 2021, and our common stock began trading on a split-adjusted basis on The Nasdaq Capital Market on September 8, 2021.
There can be no assurance that the total market capitalization of our common stock after the reverse stock split will be equal to or greater than the total market capitalization before the reverse stock split or that the per share market price of our common stock following the reverse stock split will increase in proportion to the reduction in the number of shares of common stock outstanding before the reverse stock split. Furthermore, a decline in the market price of our common stock after the reverse stock split may result in a greater percentage decline than would occur in the absence of a reverse stock split, and the liquidity of our common stock could be adversely affected following such a reverse stock split.
The reverse stock split increased the Company’s authorized but unissued shares of common stock, which could negatively impact a potential investor.
Because the number of authorized shares of the Company’s common stock was not reduced proportionately, the reverse stock split increased our board of directors’ ability to issue authorized and unissued shares without further stockholder action. The issuance of additional shares of common stock or securities exercisable or convertible into common stock may have a dilutive effect on earnings per share and relative voting power and may cause a decline in the trading price of the common stock. The Company could use the shares that are available for future issuance in equity financing transactions, or to oppose a hostile takeover attempt or delay or prevent changes in control or changes in or removal of management, including transactions that are favored by a majority of the stockholders or in which the stockholders might otherwise receive a premium for their shares over then-current market prices or benefit in some other manner.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 1, 2021, pursuant to a letter agreement dated September 1, 2021, the Company agreed to issue 14,000 shares of the Company’s common stock to Corporate Profile LLC as partial consideration for investor relations services, which shares are issuable in three tranches: 4,000 shares were issued on September 22, 2021, 5,000 shares will be issued on December 1, 2021 and 5,000 shares will be issued on April 1, 2022.
The offers, sales, and issuances of the securities described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act, Regulation D or Regulation S promulgated thereunder as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited or sophisticated person and had adequate access, through employment, business or other relationships, to information about us.
Other than equity securities issued in transactions disclosed above and on our Current Report on Form 8-K filed with the SEC on September 17, 2021, there were no unregistered sales of equity securities during the period.
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Item 3. Defaults upon senior securities
None.
Item 4. Mine safety disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. | Description | |
3.1 | ||
10.1# | ||
10.2 | ||
31.1* | ||
31.2* | ||
32.1** | Certification Pursuant to 18 U.S.C. § 1350 (Section 906 of Sarbanes-Oxley Act of 2002). | |
32.2** | Certification Pursuant to 18 U.S.C. § 1350 (Section 906 of Sarbanes-Oxley Act of 2002). | |
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* Filed herewith.
** In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34 47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10 Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933 except to the extent that the registrant specifically incorporates it by reference.
# | Portions of this exhibit have been omitted pursuant to Item 601 of Regulation S-K promulgated under the Securities Act because the information (i) is not material and (ii) would be competitively harmful if publicly disclosed. |
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