Statements in this Quarterly Report on Form 10-Q (the "Quarterly Report") that are not strictly historical are forward-looking statements and include statements about products in development, results and analyses of pre-clinical studies, clinical trials and studies, research and development expenses, cash expenditures, and alliances and partnerships, among other matters. You can identify these forward-looking statements because they involve our expectations, intentions, beliefs, plans, projections, anticipations, or other characterizations of future events or circumstances. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements as a result of any number of factors. These factors include, but are not limited to, risks relating to our ability to conduct and obtain successful results from ongoing clinical trials, commercialize our technology, obtain regulatory approval for our product candidates, contract with third parties to adequately test and manufacture our proposed therapeutic products, protect our intellectual property rights and obtain additional financing to continue our development efforts. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law. We urge you to read this entire Quarterly Report, including the "Risk Factors" referenced under Part II. Item 1A, the financial statements, and related notes. The information contained herein is current as of the date of this Quarterly Report (March 31, 2022 ), unless another date is specified. We prepare our interim financial statements in accordance withU.S. Generally Accepted Accounting Principles ("GAAP"). Our financials and results of operations for the three months endedMarch 31, 2022 and 2021 are not necessarily indicative of our prospective financial condition and results of operations for the pending full fiscal year endingDecember 31, 2022 . The interim financial statements presented in this Quarterly Report as well as other information relating to the Company contained in this Quarterly Report should be read in conjunction and together with the reports, statements and information filed by us with theUnited States Securities and Exchange Commission (the "SEC"). Our Management's Discussion and Analysis of Financial Condition and Results of Operations is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. Overview We are a commercial-stage drug delivery platform technology company focused on improving how and where APIs are absorbed in the GI tract via our clinically validated and patent protected PLxGuard™ technology. We believe this platform has the potential to improve the absorption of many drugs currently on the market or in development and to reduce the risk of stomach injury associated with certain drugs. VAZALORE is an FDA-approved liquid-filled aspirin capsule, available in 81 mg and 325 mg doses. VAZALORE delivers aspirin differently from plain and enteric coated aspirin products. The special complex inside the capsule allows for targeted release of aspirin, limiting its direct contact with the stomach lining. VAZALORE delivers fast, reliable absorption for pain relief plus the lifesaving benefits of aspirin. Our commercialization strategy targets the OTC market, taking advantage of the existing distribution channels for aspirin. We market VAZALORE to the healthcare professional and the consumer through several sales and marketing channels. Our product pipeline also includes other oral NSAIDs using the PLxGuard drug delivery platform that may be developed, including PL1200 Ibuprofen 200 mg and PL1100 Ibuprofen 400 mg, for pain and inflammation in Phase 1 clinical stage. We are also screening additional compounds outside the NSAID category for possible development using our PLxGuard drug delivery platform. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance withU.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 the Consolidated Financial Statements (unaudited) included elsewhere herein describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. 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: 17
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Impact of COVID-19 Pandemic on Financial Statements
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a "pandemic", or a worldwide spread of a new disease. Many countries imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus and have closed non-essential businesses. In response to COVID-19, the Company has not experienced a significant disruption or delay in the development, manufacturing or sale of VAZALORE, and has not otherwise experienced any significant negative impact on its financial condition, results of operations or cash flows. However, the extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, travel restrictions and social distancing inthe United States and other countries, business closures or business disruptions and the effectiveness of actions taken inthe United States and other countries to contain and treat the pandemic. The unaudited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company has not experienced any significant negative impact on its
Use of Estimates The preparation of our unaudited 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 unaudited consolidated financial statements, estimates are used for, but not limited to, the impairment assessment of goodwill, the fair value of warrant liability, the fair value of stock-based compensation, allowance for inventory obsolescence, and deferred taxes and associated valuation allowance. Actual results could differ from those estimates. Fair Value Measurements Fair value is defined as the price that would be received in the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized all investments recorded at fair value based upon the level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
? Level 1: Quoted prices in active markets for identical assets or liabilities
that the organization has the ability to access at the reporting date.
? Level 2: Inputs other than quoted prices included in Level 1, which are
either observable or that can be derived from or corroborated by observable
data as of the reporting date.
? Level 3: Inputs include those that are significant to the fair value of the
asset or liability and are generally less observable from objective resources
and reflect the reporting entity's subjective determinations regarding the
assumptions market participants would use in pricing the asset or liability.
Revenue Recognition The Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers; (ii) identification of distinct performance obligations in the contract; (iii) determination of contract transaction price; (iv) allocation of contract transaction price to the performance obligations; and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation. The Company recognizes revenues upon the satisfaction of its performance obligations (upon transfer of control of promised goods or services to customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services. Deferred revenue results from cash receipts from or amounts billed to customers in advance of the transfer of control of the promised services to the customer and is recognized as performance obligations are satisfied. When sales commissions or other costs to obtain contracts with customers are considered incremental and recoverable, those costs are deferred and then amortized as selling and marketing expenses on a straight-line basis over an estimated period of benefit. The Company began generating revenue in theU.S. from its sales of VAZALORE in 81 mg and 325 mg doses in the third quarter of 2021 and recognizes revenue when control of a promised good is transferred to a customer in an amount that reflects consideration that the Company expects to be entitled to in exchange for that good. This occurs either when the finished goods are delivered to the customer or when a product is picked up by the customer or the customer's carrier. The Company recognized total revenue from sales of VAZALORE of$2.1 million with$1.7 million or 79% of net sales for the 81 mg dose and$0.4 million or 21% of net sales for the 325 mg dose for the three months endedMarch 31, 2022 . 18
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Research and Development Expenses
Costs incurred in connection with research and development activities are expensed as incurred. Research and development expenses consist of direct and indirect costs associated with manufacturing and regulatory activities, and include fees paid to various entities that perform research-related services for the Company. Stock-Based Compensation The Company recognizes expense in the consolidated statements of operations for the fair value of all stock-based compensation to key employees, nonemployee directors and advisors, generally in the form of stock options. The Company uses the Black-Scholes option valuation model to estimate the fair value of stock options on the grant date. Compensation cost is amortized on a straight-line basis over the vesting period for each respective award. The Company accounts for forfeitures as they occur. Adopted Accounting Guidance For a discussion of significant accounting guidance recently adopted or unadopted accounting guidance that has the potential of being significant, see Note 3 of the Notes to the Unaudited Consolidated Financial Statements included elsewhere herein. Non-GAAP Financial Measures We prepare and publicly release quarterly unaudited financial statements prepared in accordance with generally accepted accounting principles ("GAAP"). We also disclose and discuss certain non-GAAP financial measures in our public releases, investor conference calls and filings with theSEC . The non-GAAP financial measures that we disclose include adjusted non-GAAP loss attributable to common stockholders and adjusted non-GAAP net loss per common share. Non-GAAP net loss per share is defined as net loss per share excluding the change in the fair value of warrant liability and dividends related to our preferred stock. We consider adjusted non-GAAP net loss and adjusted non-GAAP net loss per basic and diluted earnings per share to be an important financial indicator of our operating performance, providing investors and analysts with a useful measure of operating results unaffected by the impact on the financial statements of the volatility of the change in the fair value of the warrant liability and non-cash and non-recurring dividends on our preferred stock. Management uses adjusted non-GAAP net loss and adjusted non-GAAP net loss per share when analyzing our performance. Adjusted non-GAAP net loss and adjusted non-GAAP net loss per share should be considered in addition to, but not in lieu of net loss or net loss per share reported under GAAP.
A reconciliation of adjusted non-GAAP net loss per share to the most directly comparable GAAP finance measure is provided below.
Three Months EndedMarch 31 , (in thousands, except share and per share data) 2022
2021
Net loss attributable to common stockholders - GAAP$ (10,785 ) $ (11,862 ) Adjustments: Change in fair value of warrant liability (7,408 )
7,935
Preferred dividends -
322
Adjusted non-GAAP net loss attributable to common stockholders$ (18,193 ) $
(3,605 )
Adjusted non-GAAP net loss per common share - basic and diluted$ (0.66 ) $
(0.22 )
Weighted average shares of common shares - basic and diluted 27,539,229 16,361,583 RESULTS OF OPERATIONS
Comparison of Three Months Ended
Revenue Total revenues were$2.1 million for the three months endedMarch 31, 2022 , compared to no revenue for the three months endedMarch 31, 2021 , and reflected the launch of VAZALORE 81 mg and 325 mg dose strengths with initial distribution toU.S. retail channels in the third quarter of 2021. Net sales were led by the 81 mg dose strength (consisting of two SKUs), which represented 79% of total revenues in the first quarter of 2022. Gross Profit Gross profit for the three months endedMarch 31, 2022 of$0.9 million . Gross margin of 44% reflects outsourced manufacturing and packaging costs, shipping costs, quality assurance and royalties. Gross profit from our 325 mg dose is lower than our 81 mg dose due to the proportionally higher use of raw materials and the manufacturing of smaller batch sizes, notwithstanding a list price that is equal to the 81 mg 30 count bottle. We are working on expanding our manufacturing capacity by the end of 2022 which we expect will improve gross margin. 19
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Table of Contents Operating Expenses Total operating expenses were$19.1 million for the three months endedMarch 31, 2022 , increased from operating expenses of$3.6 million for the three months endedMarch 31 , 2021and reflected the promotional activities and associated expenses for the continued commercial launch of VAZALORE. Operating expenses for the three months endedMarch 31, 2022 and 2021 were as follows: Three Months Ended March 31, Increase (Decrease) 2022 2021 $ % (in thousands, except percentages) Operating Expenses Research and development expenses$ 654 $ 959 $ (305 ) (32 )% Selling, marketing and administrative expenses 18,456 2,636 15,820 600 % Total operating expenses$ 19,110 $ 3,595 $ 15,515 432 %
Research and Development Expenses
Research and development expense consists of expenses incurred while performing research and development activities to discover, develop, or improve potential product candidates we seek to develop. This includes conducting preclinical studies and clinical trials, manufacturing and other development efforts, and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Our research and development expenses primarily consist of (i) direct and indirect costs associated with specific projects and manufacturing activities, and (ii) fees paid to various entities that perform research related services for us. Research and development expenses were$0.7 million for the three months endedMarch 31, 2022 compared to$1.0 million for the three months endedMarch 31, 2021 . The decrease reflects the non-recurrence of the prior year costs for pre-commercial manufacturing-related activities such as validation and optimization work for VAZALORE.
Selling, Marketing and Administrative Expenses
SM&A expenses include costs related to functions such as sales, marketing, corporate management, insurance, and legal costs. Broker commissions are incurred and expensed as SM&A costs in the underlying consolidated statements of operations when the underlying sales take place. SM&A expenses also include costs for advertising (excluding the costs of cooperative advertising programs, which are reflected in net sales), contract field force, and consumer promotion costs (such as on-shelf advertisements and displays). SM&A costs are expensed as incurred. Selling, marketing and administrative expenses totaled$18.5 million for the three months endedMarch 31, 2022 , compared to$2.6 million for the three months endedMarch 31, 2021 . The increase primarily reflects higher sales and marketing expenses related to the VAZALORE launch. In the third quarter of 2021, a cardiovascular specialty field force and a national media television campaign were launched to raise awareness amongst healthcare professionals and consumers. Non-cash stock-based compensation was$1.1 million in the current period versus$0.6 million in the prior year period. Other income (expense), net Other income (expense), net totaled$7.4 million of other income and$7.9 million of other expense for the three months endedMarch 31, 2022 and 2021, respectively. The variance is largely attributable to the non-cash change in fair value of warrant liability primarily due to the fluctuation of the price of the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition The following table summarizes the primary uses and sources of cash for the periods indicated: Three Months EndedMarch 31, 2022 2021
Net cash used in operating activities
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Net cash used in operating activities of$16.9 million and$4.3 million for the three months endedMarch 31, 2022 and 2021, respectively, is higher in 2022 due to the combination of higher operating expenses primarily related to sales and marketing and increased inventory purchases to support the continued launch of VAZALORE, offset by the timing of expense payments.
Net Cash Provided by Financing Activities
Net cash provided by financing activities totaled$0 during the three months endedMarch 31, 2022 compared to$66.3 million during the three months endedMarch 31, 2021 . The prior year period reflects net proceeds from the Offering (as defined in Note 4 of the Notes to the Consolidated Financial Statements (unaudited)).
Future Liquidity and Capital Needs
Even though we are generating revenue, 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. Although the achievement of future profitable operations and the ability to generate sufficient cash from operations is uncertain at this time, based on the Company's plans, the Company has adequate cash on hand atMarch 31, 2022 to fund its obligations for at least one year from the date these financial statements were issued, which mitigates the substantial doubt consideration. Our future capital requirements will remain dependent upon a variety of factors, including cash flow from operations, the ability to increase sales, increasing our gross profits from current levels, reducing sales and administrative expenses as a percentage of net sales, continued development of customer relationships, and our ability to market our new products successfully. However, based on our results from operations, we may determine that we need to obtain additional financing in the future to further our commercialization plan. 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. 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.
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