Statements in this Form 10-K that are not strictly historical are forward-looking statements and include statements about products in development, results and analyses of pre-clinical studies, clinical trials and studies, research and development expenses, cash expenditures, and alliances and partnerships, among other matters. You can identify these forward-looking statements because they involve our expectations, intentions, beliefs, plans, projections, anticipations, or other characterizations of future events or circumstances. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements as a result of any number of factors. These factors include, but are not limited to, risks relating to our ability to conduct and obtain successful results from ongoing clinical trials, commercialize our technology, obtain regulatory approval for our product candidates, contract with third parties to adequately test and manufacture our proposed therapeutic products, protect our intellectual property rights and obtain additional financing to continue our development efforts. Some of these factors are more fully discussed in Part I, Item 1A, "Risk Factors" and in our consolidated financial statements and related notes, included elsewhere herein. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law. For further information regarding forward-looking statements, please refer to the "Information Regarding Forward-Looking Statements" at the beginning of Part I of this Form 10-K. 41
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Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows.
Overview We are a late-stage specialty pharmaceutical company focused on developing our clinically-validated and patent-protected PLxGuard delivery system to provide more effective and safer products. Our PLxGuard delivery system works by targeting the release of active pharmaceutical ingredients to various portions of the GI tract. We believe this has the potential to improve the absorption of many drugs currently on the market or in development, and to reduce the risk of stomach erosions, ulcers and bleeding associated with aspirin and ibuprofen, and potentially other drugs. The FDA approved our lead product, VAZALORE 325 mg, which is a novel formulation of aspirin using the PLxGuard delivery system intended to provide better antiplatelet effectiveness for vascular disease prevention and treatment as compared to the current standard of care, enteric-coated aspirin and significantly reduce gastric side effects as compared with immediate-release aspirin. VAZALORE 325 mg (formerly PL2200 Aspirin 325 mg and Aspertec 325 mg) was originally approved under the drug name aspirin, and the proprietary name 'VAZALORE' was granted subsequent to the FDA approval. A companion 81 mg dose of the same novel formulation,VAZALORE 81 mg, is in late-stage development and will be the subject of a sNDA, leveraging the already approved status of VAZALORE 325 mg. We are focused on collecting the data, including initiating a bioequivalence study, required for post-approval manufacturing changes which will be included in the sNDA filing for VAZALORE 325 mg and to support approval of low dose VAZALORE 81 mg. The Company will be able to better assess the timing of its product launch once the sNDA filings has been submitted. Our commercialization strategy will target both the OTC and prescription markets, taking advantage of the existing OTC distribution channels for aspirin while leveraging the FDA approval of VAZALORE 325 mg and anticipated approval for VAZALORE 81 mg for OTC and prescription use when recommended by physicians for vascular disease treatment and prevention. Given our clinical demonstration of better antiplatelet efficacy (as compared with enteric-coated aspirin) and better GI tolerability, we intend to market VAZALORE to the healthcare professional and the consumer through several marketing channels, including a physician-directed sales force. Our product pipeline also includes other oral NSAIDs using the PLxGuard delivery system that may be developed, including a clinical-stage, GI-safer ibuprofen, PL1200 Ibuprofen 200 mg, for pain and inflammation. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles inthe United States of America ("U.S. GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 3 of the Notes to Consolidated Financial Statements included elsewhere herein describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance withU.S. GAAP and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements: Use of Estimates The preparation of our consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not limited to, determining the fair value of tangible and intangible assets and liabilities acquired in business combinations, the fair value of warrant liability the fair value of stock-based compensation, allowance for inventory obsolescence, allowance for doubtful accounts, contingent liabilities, fair value and depreciable lives of long-lived assets, and deferred taxes and associated valuation allowance. Actual results could differ from those estimates. 42
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Table of Contents Fair Value Measurements Fair value is defined as the price that would be received in the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized all investments recorded at fair value based upon the level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
? Level 1: Quoted prices in active markets for identical assets or liabilities that the organization has the ability to access at the reporting date.
? Level 2: Inputs other than quoted prices included in Level 1, which are
either observable or that can be derived from or corroborated by observable data as of the reporting date.
? Level 3: Inputs include those that are significant to the fair value of
the asset or liability and are generally less observable from objective
resources and reflect the reporting entity's assumptions about the assumptions market participants would use in pricing the asset or liability. The Company's financial instruments (cash and cash equivalents, receivables, accounts payable and accrued liabilities) are carried in the consolidated balance sheet at cost, which reasonably approximates fair value based on their short-term nature. The Company's warrant liability is recorded at fair value, with changes in fair value being reflected in the statements of operations for the period of change. The fair value of the term loan approximates its face value of$4,375,000 based on the Company's current financial condition and on the variable nature of term loan's interest feature as compared to current rates.
Research and Development Expenses
Costs incurred in connection with research and development activities are expensed as incurred. Research and development expenses consist of direct and indirect costs associated with specific projects, manufacturing activities, and include fees paid to various entities that perform research related services for the Company. Stock-Based Compensation The Company recognizes expense in the consolidated statements of operations for the fair value of all stock-based compensation to key employees, nonemployee directors and advisors, generally in the form of stock options and stock awards. The Company uses the Black-Scholes option valuation model to estimate the fair value of stock options on the grant date. Compensation cost is amortized on a straight-line basis over the vesting period for each respective award. The Company accounts for forfeitures as they occur. Adopted Accounting Guidance
For a discussion of significant accounting guidance recently adopted or unadopted accounting guidance that has the potential of being significant, see Note 3 of the Notes to Consolidated Financial Statements included elsewhere herein.
Results of Operations Revenue Total revenues were$0.6 million and$0.8 million for the years endedDecember 31, 2019 and 2018, respectively. All the revenue recognized in 2019 and 2018 is attributable to work performed under an award of aNational Institutes of Health grant. This grant is nearing completion. 43
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Table of Contents Operating Expenses Total operating expenses were$14.8 million during the year endedDecember 31, 2019 , a 26% increase from operating expenses of$11.7 million during the year endedDecember 31, 2018 . Operating expenses for the years endedDecember 31, 2019 and 2018 were as follows: Years Ended December 31, Increase (Decrease) 2019 2018 $ % Operating Expenses Research and development expenses$ 4,741,130 $ 3,922,665 $ 818,465 20.9 % General and administrative expenses 10,026,627 7,791,600 2,235,027 28.7 % Total operating expenses$ 14,767,757 $ 11,714,265 $ 3,053,492 26.1 %
Research and Development Expenses
Research and development expenses totaled$4.7 million in the year endedDecember 31, 2019 , compared to$3.9 million in the prior year, reflecting continued product development and manufacturing activities for VAZALORE. This increase was due to the manufacture, packaging, stability and analytical costs related to the registration batches, which provide data to be submitted in the Company's sNDA filings.
General and Administrative Expenses
General and administrative expenses totaled
Other income (expense), net Other income (expense), net totaled$6.3 million of net other expense for the year endedDecember 31, 2019 , compared to$11.9 million of net income in the prior year. The change is primarily attributable to the non-cash change in fair value of warrant liability primarily due to the fluctuation of the price of the Company's common stock ($5.7 million of other expense for the year endedDecember 31, 2019 , as compared to$12.7 million of other income in the prior year).
Liquidity and Capital Resources
The following table summarizes the primary uses and sources of cash for the periods indicated: Years Ended December 31, 2019 2018 Net cash used in operating activities$ (12,659,035 ) $ (9,499,231 ) Net cash used in investing activities$ (230,294 ) $ (654,870 ) Net cash provided by financing activities$ 12,640,366 $ -
Net cash used in operating activities of$12.7 million for the year endedDecember 31, 2019 primarily reflects our net loss for the period of$20.5 million adjusted for various non-cash charges and income, including (i)$5.7 million change in fair value of warrant liability reflected as other expense, (ii) net operating asset/liability changes of$0.9 million , (iii)$0.9 million of stock-based compensation, (iv) depreciation and amortization expense of$0.2 million and (v)$0.2 million of non-cash interest expense. Net cash used in operating activities of$9.5 million for the year endedDecember 31, 2018 primarily reflects our net income for the period of$0.9 million adjusted for various non-cash charges and income, including (i)$12.7 million change in fair value of warrant liability reflected as other income, partially offset by (ii) net operating asset/liability changes of$0.3 million , (iii)$0.8 million of stock-based compensation, (iv) an increase in the provision for obsolete inventory of$0.8 million , (v) depreciation and amortization expense of$0.2 million and (vii)$0.2 million of non-cash interest expense.
Net cash used in investing activities totaled$0.2 million in net uses in the year endedDecember 31, 2019 and primarily reflects$0.2 million of capital expenditures for equipment purchases, net of$11,000 of proceeds from the sale of equipment. 44
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Net cash used in investing activities totaled$0.7 million in net uses in the year endedDecember 31, 2018 and reflects capital expenditures for equipment purchases of$0.5 million and leasehold improvements of$0.2 million .
Net Cash Provided by Financing Activities
Net cash provided by financing activities totaled$12.6 million in the year endedDecember 31, 2019 , consisting of proceeds from the issuance of our common and preferred stock, offset by repayment of a portion of our long-term debt. We had no cash flows from financing activities in 2018.
Future Liquidity and Capital Needs
As ofDecember 31, 2019 , we had working capital of$8.2 million and cash and cash equivalents of$14.0 million . InMarch 2019 , we entered into the Equity Distribution Agreement with JMP to issue and sell shares of our common stock, having an aggregate offering price of up to$12.5 million , from time to time during the term of the Equity Distribution Agreement, through an "at-the-market" equity offering program at our sole discretion, under which JMP will act as our agent. As ofDecember 31, 2019 , we had sold approximately$2.3 million of shares of our common stock pursuant to the Equity Distribution Agreement, and received proceeds of$2.1 million , net of commissions and fees. In addition, inMarch 2020 we entered into a purchase agreement with certain investors, including funds affiliated withPark West Asset Management LLC and an affiliate ofMSD Partners, L.P. , pursuant to which the Company has agreed to issue 8,000 shares of Series B Convertible Preferred Stock for gross proceeds of$8.0 million (the "Series B Private Placement"). The closing of the Series B Private Placement is contingent on the Company obtaining stockholder approval. Based on the Company's expected operating cash requirements, we believe our cash on-hand atDecember 31, 2019 , in addition to the$8.0 million gross proceeds from the Series B Private Placement, is adequate to fund operations for at least twelve months from the date that these financial statements were issued. We have not generated any revenue from the sale of products, have generated minimal revenue from licensing activities, and have incurred losses in each year since we commenced operations. As ofDecember 31, 2019 , we had an accumulated deficit of$86.9 million . We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future as we continue the development and commercialization of VAZALORE and our other product candidates. Even if we do generate revenues, we may never achieve profitability, and even if we do achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders' equity and working capital. If we are unable to achieve and sustain profitability, the market value of our common stock will likely decline. Because of the numerous risks and uncertainties associated with developing biopharmaceutical products, we are unable to predict the extent of any future losses or when, if ever, we will become profitable. We anticipate that we will need to obtain substantial additional financing in the future, in addition to the proceeds from the Private Placement, the "at-the-market" program and the Series B Private Placement to fund our future operations. We may obtain additional financing through public or private equity offerings, debt financings (including related-party financings), a credit facility or strategic collaborations. Additional financing may not be available to us when we need it or it may not be available to us on favorable terms, if at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and technologies. We currently have no understandings, commitments or agreements relating to any of these types of transactions. If we are unable to raise additional funds when needed, we may be required to sell or license our technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves. Without additional funding - or, alternatively, a partner willing to collaborate and fund development - we will be unable to continue development of PL1200 Ibuprofen or any other development-stage products in our pipeline. Inflation
The Company believes that the rates of inflation in recent years have not had a significant impact on its operations.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements as of
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